CLAFLIN UNIVERSITY FINANCIAL STATEMENTS AND COMPLIANCE SECTION. June 30, 2016 and And Independent Auditor s Report

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1 FINANCIAL STATEMENTS AND COMPLIANCE SECTION June 30, 2016 and 2015 And Independent Auditor s Report

2 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT.1-2 FINANCIAL STATEMENTS Statements of Financial Position... 3 Statements of Activities Statements of Cash Flows... 6 Notes to Financial Statements SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards COMPLIANCE SECTION Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor s Report on Compliance For Each Major Federal Program; Independent Auditor s Report on Internal Control Over Compliance Required by Uniform Guidance Schedule of Findings and Questioned Costs

3 Independent Auditor s Report The Board of Trustees Claflin University Orangeburg, South Carolina Report on the Financial Statements We have audited the accompanying financial statements of Claflin University (the University ) (a non-profit organization), which comprise the statements of financial position as of June 30, 2016 and 2015, and the related statements of activities and cash flows for the years then ended and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the University s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University as of June 30, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

4 Other Matters Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal and state awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 20, 2016, on our consideration of the University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and on compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the University s internal control over financial reporting and compliance. Charlotte, North Carolina October 20,

5 STATEMENTS OF FINANCIAL POSITION JUNE 30, 2016 AND ASSETS Cash and cash equivalents: Operating $ 1,313,290 $ 1,693,717 Perkins loan program 37, ,609 Capital improvements 296, ,500 Deposits held in custody for others 259, ,560 Accounts receivable - students, net 122, ,958 Pledges receivable, net 3,774,695 4,520,303 Other receivables 1,930,395 2,106,541 Grants receivable, net 802, ,963 Prepaid expense 407, ,067 Receivable from U.S. Department of Education - 551,889 Restricted assets 2,703,086 2,295,586 Long-term investments 24,597,296 25,295,126 Beneficial interest trusts 399, ,951 Other Assets 360,442 - Property, plant, and equipment, net 62,089,096 61,564,352 Total Assets $ 99,093,927 $ 100,633,122 LIABILITIES AND NET ASSETS Trade accounts payable $ 1,217,267 $ 1,286,730 Taxes payable and accrued expenses 3,929,334 3,910,006 Deferred revenue 1,726,645 2,390,704 Line of credit 1,677,000 1,763,000 Deposits held in custody for others 764,592 1,192,183 Obligations under capital lease 801,773 1,052,347 Notes payable 701, ,326 Bonds payable 27,748,273 26,880,749 Other liabilities 591, ,055 Total Liabilities 39,157,827 39,576,100 Net assets: Unrestricted 30,687,995 32,821,300 Temporarily restricted 6,298,895 5,805,761 Permanently restricted 22,949,210 22,429,961 Total Net Assets 59,936,100 61,057,022 Total Liabilities and Net Assets $ 99,093,927 $ 100,633,122 The accompanying notes to financial statements are an integral part of these statements. 3

6 STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2016 Unrestricted Temporarily Restricted Permanently Restricted Revenues: Tuition and fees $ 28,798,797 $ - $ - $ 28,798,797 Less tuition discounts (7,177,045) - - (7,177,045) Net tuition and fees 21,621, ,621,752 Contributions 2,127, , ,734 3,500,072 Auxiliary sales and services 11,256, ,256,497 Federal and state grants 8,475, ,475,016 Other sources 1,364, ,364,770 Net assets released from restrictions and reclassifications 887,895 (887,895) - - Total Total revenues 45,733,772 (58,399) 542,734 46,218,107 Expenses and losses: Instruction 16,845, ,845,588 Library 837, ,457 Academic support 1,964, ,964,966 Research 2,108, ,108,784 Student services 3,932, ,932,797 Public services 529, ,081 Institutional support 14,122, ,122,349 Auxiliary enterprises 6,399, ,399,396 Total expenses 46,740, ,740,418 Loss on Perkins Loan Program Liquidation (695,789) - - (695,789) Total expenses and losses 47,436, ,436,207 Change in net assets from operations (1,702,435) (58,399) 542,734 (1,218,100) Non-operating items: Investment income on long-term investments, net (430,870) 551,533 (23,485) 97,178 Change in net assets (2,133,305) 493, ,249 (1,120,922) Net assets at beginning of year 32,821,300 5,805,761 22,429,961 61,057,022 Net assets at end of year $ 30,687,995 $ 6,298,895 $ 22,949,210 $ 59,936,100 The accompanying notes to financial statements are an integral part of these statements. 4

7 STATEMENT OF ACTIVITIES (CONTINUED) YEAR ENDED JUNE 30, 2015 Unrestricted Temporarily Restricted Permanently Restricted Revenues: Tuition and fees $ 27,185,550 $ - $ - $ 27,185,550 Less tuition discounts (6,431,629) - - (6,431,629) Net tuition and fees 20,753, ,753,921 Contributions 3,322, , ,645 4,524,093 Auxiliary sales and services 10,225, ,225,269 Federal and state grants 7,792, ,792,445 Other sources 1,591, ,591,450 Net assets released from restrictions and reclassifications 989,648 (989,648) - - Total Total revenues 44,675,658 (669,125) 880,645 44,887,178 Expenses: Instruction 15,479, ,479,559 Library 831, ,692 Academic support 1,865, ,865,103 Research 1,413, ,413,269 Student services 3,675, ,675,250 Public services 674, ,709 Institutional support 13,544, ,544,093 Auxiliary enterprises 6,842, ,842,587 Total expenses 44,326, ,326,262 Change in net assets from operations 349,396 (669,125) 880, ,916 Non-operating items: Investment income on long-term investments, net (180,496) 535,764 9, ,400 Change in net assets 168,900 (133,361) 889, ,316 Net assets at beginning of year 32,652,400 5,939,122 21,540,184 60,131,706 Net assets at end of year $ 32,821,300 $ 5,805,761 $ 22,429,961 $ 61,057,022 The accompanying notes to financial statements are an integral part of these statements. 5

8 STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2016 AND Cash flows from operating activities: Change in net assets $ (1,120,922) $ 925,316 Adjustments to reconcile change in net assets to net cash from operating activities: Noncash items: Depreciation 3,429,664 3,445,912 Interest expense on deferred financing costs 29,189 29,190 Provisions for uncollectible accounts 106,108 (9,886) Non-operating items: Net realized and unrealized gain on long-term investments 260,194 (97,402) Contributions restricted for long-term purposes (542,734) (880,645) Change in operating assets and liabilities: Tuition, contributions and grants receivable 779, ,931 Other receivables 728,035 (1,430,885) Prepaid expenses (39,248) (128,888) Other Assets (360,442) - Accounts payable and accrued liabilities (1,361,980) (3,982,536) Deposits held in custody for others (427,591) 69,261 Deferred revenue (664,059) 672,596 Other liabilities 381,085 55,388 Net cash from operating activities 1,196,617 (1,193,648) Cash flows from investing activities: Proceeds of loans from students, net - 82,476 Purchases of property and equipment (2,626,308) (5,037,075) Purchases of investments (7,817,037) (7,342,664) Proceeds from sales of investments 8,300,810 6,939,845 Net cash from investing activities (2,142,535) (5,357,418) Cash flows from financing activities: Proceeds from contributions restricted for investment in endowment 542, ,645 Proceeds from line of credit 13,929,000 11,393,000 Payments to line of credit (14,015,000) (9,940,000) Proceed from long-term debt borrowings 1,547,821 5,859,784 Net deposits to bond escrow reserves (407,500) (657,774) Principal repayments - note payable (204,778) (12,219) Principal repayments - bonds payable (709,486) (693,362) Principal repayments - capital lease obligations (250,574) (137,534) Net cash from financing activities 432,217 6,692,540 Net increase(decrease) in cash and cash equivalents (513,701) 141,474 Cash and cash equivalents at beginning of year 2,420,386 2,278,912 Cash and cash equivalents at end of year $ 1,906,685 $ 2,420,386 Supplemental Information: Interest paid $ 425,946 $ 438,679 Non cash transactions: Property and equipment acquisition included in accounts payable $ 1,311,845 $ 1,041,775 Equipment acquired through issuance of capital lease $ - $ 1,151,083 Property renovations acquired through issuance of note payable $ 16,255 $ 871,261 The accompanying notes to financial statements are an integral part of these statements. 6

9 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 1 Summary of significant accounting policies Nature of Activities Claflin University (the University ) is located in Orangeburg, South Carolina. The University is a comprehensive, co-educational, residential institution affiliated with the United Methodist Church that is committed to providing students with access to educational opportunities in undergraduate, graduate, and continuing education programs while seeking to foster a community who work to nurture and develop the skills and character needed for engaged citizenship and visionary and effective leadership. Basis of Presentation The financial statement presentation follows the Financial Accounting Standards Board ( FASB ) Accounting Standards Codification topic on Financial Statements of Not-for-Profit Organizations. Under the Accounting Standards Codification, the University is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Unrestricted Net assets that are free of donor-imposed restrictions: all revenues, expenses, gains and losses that are not changes in permanently or temporarily restricted net assets. This category includes realized and unrealized gains on long-term investments that are not restricted for use by explicit donor s stipulations or by law. Unrestricted net assets also include assets required to be reserved under the terms of the University s bond agreements. Temporarily Restricted Net assets resulting from contributions restricted by outside sources, that may or will be met either by actions of the University or the passage of time, are reported as temporarily restricted and are distinguished from unrestricted net assets allocated to specific purposes by action of the governing board. Externally restricted net assets may only be utilized in accordance with the purposes established by the source of net assets and are in contrast with unrestricted net assets over which the governing board retains full control for use in achieving any of its institutional purposes. Federal Title III term endowments in which the fund principal is required to be maintained inviolate for a period of twenty years are also classified as temporarily restricted. Permanently Restricted Net assets arising from contributions, which are required to be invested and maintained in perpetuity, are classified as permanently restricted. Net investment income on assets pledged for permanently restricted net assets is classified as temporarily restricted earnings or gains, based on restrictions placed on the use of net appreciation by the donor or applicable time restrictions. Cash and Cash Equivalents Cash and cash equivalents consist of cash in banks and short-term investments primarily constituting demand-type accounts, however, cash does not include cash with investment brokers and cash in restricted assets. Accounts Receivable Student accounts receivable are stated at cost less an allowance for doubtful accounts. Management s determination of the allowance for doubtful accounts is based on an evaluation of the accounts receivable, past experience, current economic conditions and other risks inherent in the accounts receivable portfolio. The allowance for doubtful accounts was $2,491,235 and $2,267,673 at June 30, 2016 and 2015, respectively. Contributions Receivable Pledges receivable are comprised primarily of unconditional capital campaign and annual fund promises to give. Pledges to be received over periods of more than one year are discounted to their net present value, using the Federal Treasury Constant Maturities rate adjusted for a 1.5% credit risk. An allowance for uncollectible pledges is provided, based on past collection experience, when the allowance is material. Conditional promises to give are not included as support until such time as the conditions are substantially met or when the revenue is received. 7

10 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 1 Summary of significant accounting policies (continued) Investments Investments in debt and equity securities are presented at fair value, as determined from quoted security prices. When quoted security prices are not available, discounted cash flow and other estimation methods are utilized. Changes in fair value of securities are reflected as investment income in the accompanying statements of activities. Land held for investment purposes is presented at the fair value determined at the date the land is contributed or at cost if purchased. Property, Plant, and Equipment These assets are stated at cost at date of acquisition for assets purchased or fair value at date of donation in the case of gifts, less an allowance for accumulated depreciation. Acquisitions of property and equipment in excess of $5,000 are capitalized. Expenditures for new construction, major renewals and replacements are capitalized. Expenditures for maintenance, repairs and minor renewals and replacements of minor non-depreciable equipment are charged to expense as incurred. Depreciation is provided primarily using the straight-line method over the estimated useful lives of the related assets. Interest costs incurred on borrowed funds during the construction of capital assets, net of investment income on proceeds of borrowings that are held by a Trustee, are capitalized as a component of the cost of acquiring the assets. When an asset is disposed of, the cost of the asset and the related accumulated depreciation are removed from the books. Any gain or loss on disposition is reflected in the earnings for the period. Long-lived assets held and used by the University are reviewed for impairment whenever changes in circumstances indicate the carrying value of an asset may not be recoverable. Deferred Revenue Deferred revenue consists primarily of state and federal grants that have been awarded but for which the University has not incurred expenses, tuition revenue collected for a portion of the summer 2016 term occurring after June 30, 2016, and an advance from the University s food service provider that is being earned ratably over the life of the food service contract. Revenues The University receives grants primarily from Federal Student Aid, the Department of Education and Department of Health and Human Services and other state and federal agencies. Grants which qualify as exchange transactions are recognized as revenue when the conditions required under the grant are met. Certain federal and state funds, which are received by the University for the benefit of students, are not exchange transactions, as the University has no discretion over the application of the funds to student accounts. These funds are agency funds and are excluded from the revenues and expenses of the University. Contributions and Grants All unconditional contributions and grants are considered to be available for unrestricted use unless specifically restricted by the donor or grantor. Amounts received that are designated for future periods or restricted by the donor or grantor for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net asset classes. When a temporary restriction expires or a purpose restriction is met, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Contributions and grants that are restricted by the donor or grantor are reported as increases in unrestricted net assets if the restrictions expire in the fiscal year in which the contributions are recognized. Contributions of long-lived assets are reported as unrestricted revenue and are reported at fair value. Gifts specified for the acquisition or construction of long-lived assets are reported as unrestricted net assets when the assets are placed in service. Tuition Tuition is recognized as revenue in the year during which the instruction term is completed, which generally coincides with the University s fiscal year. 8

11 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 1 Summary of significant accounting policies (continued) Concentrations of Credit Risk Financial instruments that potentially expose the University to concentrations of credit risk consist primarily of cash and cash equivalents, pledges receivable and student receivables. The University grants credit to its students for tuition and fees based upon the amount of financial aid available to the students. The majority of students come from the states of South Carolina and Georgia. However, the University attracts students from throughout the country. Approximately 40% of total undiscounted pledges receivable, or $2,537,000, is due from two private donors as of June 30, Approximately 52% of gross undiscounted pledges receivable, or $4,793,074, is due from three private donors as of June 30, The University places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation ( FDIC ) covers $250,000 for substantially all depository accounts. The University from time to time may have amounts on deposit in excess of the insured limits. Amounts in excess of the FDIC coverage totaled $1,197,900. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The University is exempt from federal and state income taxation under Section 501(c)(3) of the Internal Revenue Code. Management believes that the University continues to satisfy the requirement of a tax-exempt organization and is not subject to unrelated business income tax. Accordingly, no provision for income taxes has been reflected in the accompanying financial statements. Management has evaluated the effect of FASB guidance on accounting for uncertainty in income taxes. The guidance clarified the accounting for uncertainty in income taxes recognized in an entity s financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The University s policy is to record a liability for any tax position taken that is beneficial to the University, including any related interest and penalties, when it is more likely than not the position taken by management with respect to a transaction or class of transactions will be overturned by a taxing authority upon examination. Management believes there are no such positions as of June 30, 2016 and, accordingly, no liability has been accrued. New Pronouncements In May of 2015, the FASB issued ASU , Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The amendments in ASU remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Instead, the amounts measured using the net asset value per share (or its equivalent) must be provided to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. During the year ended June 30, 2016, the University has adopted ASU and has removed all investments from the fair value hierarchy for which fair value is measured using the net asset value per share practical expedient. The ASU has been applied retrospectively to all periods. 9

12 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 1 Summary of significant accounting policies (continued) New Pronouncements (continued) In August of 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. This standard changes presentation and disclosure requirements of not-for-profit entities. The primary changes are decrease in the number of net asset classes from three to two, reporting of the underwater amounts of donor-restricted endowment funds in net assets with donor restrictions, continues to allow preparers to choose between the direct method and indirect method for presenting operating cash flows, requires disclosures of qualitative information on how the not-for-profit entity manages its liquid available resources and liquidity risks and requires reporting of expenses by function and nature, as well as an analysis of expenses by both function and nature. This standard is effective for all fiscal years beginning after December 15, Note 2 Contributions receivable Unconditional promises to give are included in the financial statements as contributions receivable and revenue of the appropriate net asset category. Contributions are recorded at the present value of the estimated future cash flow using a risk adjusted rate of 2.99%. Unconditional promises to give at June 30, 2016 and 2015 are expected to be realized in the following periods: In one year or less $ 4,007,863 $ 5,745,502 Between one year and five years 2,378,989 3,265,196 More than five years 11, ,320 6,398,277 9,136,018 Less: discount to present value (241,434) (405,579) Less: allowance for doubtful pledges (2,382,148) (4,210,136) $ 3,774,695 $ 4,520,303 Contributions receivable from Trustees amounted to 12% and 28% of gross contributions receivable as of June 30, 2016 and 2015, respectively. Note 3 Restricted assets The following assets are restricted for debt service reserve, construction and collateral as of June 30: Dormitory Bond of 1961 $ 2,167 $ 2,177 HBCU Series A Escrow 1,745,844 1,745,099 HBCU Series A Escrow 955, ,310 $ 2,703,086 $ 2,295,586 10

13 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 3 Restricted assets (continued) The aforementioned funds were invested as follows as of June 30: Cash $ 2,167 $ 2,177 U.S. Treasury notes 2,700,919 2,293,409 $ 2,703,086 $ 2,295,586 Note 4 Long term investments Composition of long-term investments, including funds held in trusts, set aside to meet temporary and permanent restrictions as of June 30, 2016, is as follows: Fair Value Historical Cost Merrill Lynch: Money funds $ 784,632 $ 784,632 Corporate stocks 6,833,462 6,053,595 Corporate bonds 6,813,609 6,542,283 Government bonds 1,066,283 1,027,300 Mutual funds 6,019,927 5,807,723 Alternative Investments 107, ,500 UMC Board of Higher Education Black College Fund Appropriations Endowment 344, ,119 UMC Board of Higher Education General Investment Pool 1,038,360 1,014,900 Money market funds and passbook savings 1,588,817 1,588,817 Long-term investments $ 24,597,296 $ 23,255,869 Funds held in trusts $ 399,814 $ 422,066 Composition of long-term investments, including funds held in trusts, set aside to meet temporary and permanent restrictions as of June 30, 2015, is as follows: Fair Value Historical Cost Merrill Lynch: Money funds $ 886,741 $ 886,741 Corporate stocks 6,058,455 4,817,198 Corporate bonds 6,848,659 6,734,020 Government bonds 3,226,903 3,221,751 Mutual funds 5,102,279 4,683,447 UMC Board of Higher Education Black College Fund Appropriations Endowment 363, ,541 UMC Board of Higher Education General Investment Pool 1,080, ,843 Money market funds and passbook savings 1,727,350 1,727,350 Long-term investments $ 25,295,126 $ 23,358,891 Funds held in trusts $ 445,951 $ 481,821 11

14 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 4 Long term investments (continued) Investment return is comprised of the following for the years ended June 30, 2016 and 2015: Interest and dividends $ 549,992 $ 478,456 Realized and unrealized gains (losses), net (268,286) 97,402 Investment advisory fees (184,528) (211,458) Net investment return $ 97,178 $ 364,400 Note 5 Credit quality of notes receivable On October 12, 2012, the University received notification from the Department of Education that, as the result of its cohort default rate being at or above 50% for the third consecutive award year, the University was no longer eligible to participate in the Perkins Loan Program from the date of the notification through June 30, The University was required to liquidate its Perkins revolving student loan fund and assign its Perkins Loan portfolio to the Department of Education. As of June 30, 2016, the University had completed the liquidation process of the Perkins Loan program. At June 30, notes receivables consisted of the following: Perkins Program $ - $ 79,329 Less allowance for doubtful accounts: Beginning of year (79,329) (161,807) Decreases 79,329 82,478 Write offs - - End of year - (79,329) Notes Receivables - Perkins Loan Program, net $ - $ - For the year ended June 30, 2016, the cost of loan principal and interest accepted by the U.S. government totaled approximately $2,035,000. Outstanding loans cancelled under the program result in a reduction of the funds available for loan and a decrease in the liability to the government. The University purchased loans with cost of loan principal and interest totaling $156,543. The loans purchased by the University are reported in student s accounts receivable, net in the statement of financial position and a corresponding allowance for doubtful accounts has been established. Allowances for doubtful accounts are established based on prior collection experience and current economic factors which, in management s judgment, could influence the ability of loan recipients to repay the amounts per the loan terms. A loss on Perkins Loan Program liquidation of $695,789 was recorded in the statement of activities for the year ended June 30,

15 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 6 Beneficial interest in trusts and beneficial interest in wills The University has been named as a beneficiary in several charitable trusts in which the University is not the Trustee. When the University is notified of the existence of a trust, a receivable and contribution revenue are recorded at the present value of the estimated future cash receipts from the University s percentage of the trust s assets. The University is also named as a beneficiary in several wills. However, these wills involve amounts that are currently indeterminable and therefore have not been reflected in the statements of financial position. Note 7 Property, plant, and equipment Net property, plant, and equipment at June 30, 2016 and 2015, consists of the following: Land $ 2,941,481 $ 2,226,865 Land improvements 1,595,967 1,238,579 Buildings and improvements 75,493,051 75,054,550 Furniture and equipment 24,217,392 23,665,570 Library books 2,225,247 2,225,247 Vehicles 1,362,924 1,362,924 Construction-in-progress 1,892, ,728, ,773,735 Less: accumulated depreciation (47,639,048) (44,209,383) $ 62,089,096 $ 61,564,352 Depreciation expense was $3,429,664 and $3,445,912 for the years ended June 30, 2016 and 2015, respectively. Note 8 Deferred revenue Deferred revenue consists primarily of state and federal grants that have been awarded but for which the University has not incurred expenses. Deferred revenue related to state and federal grants totaled $1,172,346 and $1,586,600 as of June 30, 2016 and 2015, respectively. The University also defers tuition, room and board revenue for the portion of the summer term that occurs after year end. Deferred tuition, room and board revenue was $324,219 and $492,614 as of June 30, 2016 and 2015, respectively. The University entered into an agreement with a commissary service (the service ) whereby the service would provide $500,000 of reimbursement for the University s dining hall renovation in exchange for an increase in dining fees to be passed on to the students. The agreement calls for the improvements to be earned by the University ratably over the life of the contract starting with the first date the improvements were started and serve to offset dining hall expenses. Accordingly, the University has included in deferred revenue the amount yet to be earned under the agreement. Deferred revenue related to this agreement was $96,246 and $120,308 as of June 30, 2016 and 2015, respectively. 13

16 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 8 Deferred revenue (continued) The University entered into a new agreement with the service in 2010 whereby the service would provide an additional $444,234 to be used in the construction of additional food service facilities and the renovation of the existing dining hall. The agreement calls for the improvements to be earned by the University ratably over 10 years starting with the first date the improvements were started. Accordingly, the University has included in deferred revenue the amount yet to be earned under the agreement. Deferred revenue related to this agreement was $133,834 and $191,182 as of June 30, 2016 and 2015, respectively. Note 9 Capital leases The University leases certain publishing equipment, copiers, technology equipment and musical instruments under agreements classified as capital leases. The net present value and accumulated amortization is included in property, plant and equipment and accumulated depreciation. The leases are detailed as follows at June 30, 2016 and 2015: Lease arrangement for mobile production equipment, requiring monthly payments of $2,147 through February 2016, amortized using a rate of %. Lease is collateralized by equipment that has a book value net of accumulated amortization of $22,257 and $34,975 at June 30, 2016 and Lease arrangement for copiers, requiring monthly payments of $13,606 through March Lease is collateralized by equipment that has a book value net of accumulated amortization of $598,679 and $761,954 at June 30, 2016 and Lease arrangement for technology equipment, requiring monthly payments of $2,088 through June Lease is collateralized by equipment that has a book value net of accumulated amortization of $100,202 and $125,252 at June 30, 2016 and $ - $ 16, , ,561 96, ,252 Lease arrangement for musical equipment, requiring annual payments of $52,363 through September 2017, amortized using a rate of 7.93%. Lease is collateralized by equipment that has a book value net of accumulated amortization of $284,212 and $323,766 at June 30, , ,109 $ 801,773 $ 1,052,347 14

17 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 9 Capital leases (continued) Future minimum lease payments under the agreements are: 2017 $ 240, , , , ,038 Less: amount representing interest (11,265) 801,773 Less: current portion (240,689) Long-term portion $ 561,084 Note 10 Note Payable Notes payable at June 30, 2016 and 2015 consists of the following: Note payable to a financing company, collateralized by vehicle, $1,083 payable monthly including fixed interest at 3.00%, due December Note payable to a campus facilities management services company with $14,783 payable monthly, due July $ 6,469 $ 19, , ,262 Long-term portion $ 701,803 $ 890,326 Future minimum payments under the agreements are: 2017 $ 183, , , , ,853 Less: amount representing interest (50) 701,803 Less: current portion (183,869) Long-term portion $ 517,934 15

18 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 11 Line of credit The University entered into an agreement with a bank for an unsecured line of credit in the amount of $1,000,000 in the months of October and November and $2,000,000 in all remaining months. The line of credit expires on January 31, The line of credit bears interest at a variable interest rate of 2.50% plus the daily LIBOR floating rate (2.905% at June 30, 2016). The amount outstanding on the line of credit at June 30, 2015 and 2014 was $1,677,000 and $1,763,000, respectively. The line of credit agreement provides for certain restrictive covenants and reporting requirements. The University was in compliance with the covenants at June 30, Note 12 Bonds payable Bond payable at June 30, 2016 and 2015 consists of the following: Fixed Rate Future Advance Project Funding Bond, Series A (Claflin University Project) (Long-Term Fixed-Rate Bond) (the Series A Bond). This bond issue has, as collateral, a first mortgage on certain real property and restricted assets established by the bond indenture, issued June 13, 2013, in the maximum amount of $17,460,000. The bonds mature serially in increasing annual amounts through October, Interest is fixed at a rate of 2.467%. $ 15,716,178 $ 16,425,664 Fixed Rate Future Advance Project Funding Bond, Series A (Claflin University Project) (Long-Term Fixed-Rate Bond) (the Series A Bond). This bond issue has, as collateral, a first mortgage on certain real property and restricted assets established by the bond indenture, issued June 13, 2013, in the maximum amount of $12,540,000. The bonds mature April Interest is fixed at a rate of 2.927%. 12,538,047 10,990,227 Total maturities $ 28,254,225 $ 27,415,891 Total maturities $ 28,254,225 $ 27,415,891 Less: deferred financing costs (505,952) (535,142) 27,748,273 26,880,749 Less: current portion (740,965) (709,485) Long-term portion $ 27,007,308 $ 26,171,264 The HBCU Loan Series and provide for certain restrictive covenants and reporting requirements. The University was in compliance with these terms, covenants, provisions, and conditions as of June 30,

19 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 12 Bonds payable (continued) As of June 30, 2016, future principal maturities for each subsequent twelve-month period of the above bonds payable are: 2017 $ 740, , ,013, ,123, ,168,823 Thereafter 23,366,541 $ 28,254,225 During the years ended June 30, 2016 and 2015, the University incurred total interest costs of $425,946 and $469,105, respectively. Note 13 Fair value measurements of assets and liabilities The University is a party to various financial instruments which are carried at fair value. In accordance with the provisions of the Fair Value Measurements topic of the FASB Accounting Standards Codification, fair value measurements are classified and disclosed in one of the following three categories ( Fair Value Hierarchy ): Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges for identical investments as of the reporting date. The types of investments which would generally be included in Level 1 are listed equity securities, mutual funds and money market funds. Level 2: Financial instruments valued using pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Fixed income securities are valued on the basis of valuations provided by pricing services, which determines valuations using methods based upon market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. If market quotations are not readily available for valuations, assets may be valued by a method the Trustee of the fund believes accurately reflects fair value. The types of investments which would generally be included in Level 2 are governmental and corporate bonds and loans. Level 3: Financial instruments that are not actively traded on a market exchange and require using significant unobservable inputs in determining fair value. The inputs into the determination of fair value require significant judgment or estimation. The income approach is used for valuing beneficial interest in trusts and pledges receivable, which generally consists of adjusting the value using a credit adjusted discount rate as of the net present value, of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors, respectively. The University s interest in pooled investments, which includes funds held at the United Methodist Church ( UMC ), is considered by the University to be Level 3 investments because it represents a receivable to be paid from the pooled investments managed by UMC. The University has no ownership interest in the underlying investment and the fair value of the investments is used by management of UMC to determine the fair value of the payable to the University. 17

20 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 13 Fair value measurements of assets and liabilities (continued) The following table summarizes the valuation of the University s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016, based on the level of input utilized to measure fair value: Fair Value Measurements at 06/30/16 Using: Assets 6/30/2016 Level 1 Level 2 Level 3 Investments: Money market funds: Cash $ 784,632 $ 784,632 $ - $ - Money Market 1,588,817 1,588, Mutual Funds: Domestic Fixed Income 967, , Domestic Equity 3,071,437 3,071, International Equity 1,981,448 1,981, Equities (Corporate Stocks): Health Care 998, , Consumer Staples 672, , Information Technology 1,423,731 1,423, Consumer Discretionary 881, , Industrials 680, , Materials 236, , Financials 1,110,195 1,110, Telecommunications 150, , Utilities 187, , Energy 491, , Fixed Income: U. S Treasuries 316, ,707 - Agency Securities 749, ,576 - Corporate Bonds 6,813,609-6,813,609 - UMC Board of Higher Education Black College Fund 344, ,938 UMC Board of Higher Education General Investment Pool 1,038, ,038,360 24,490,028 $ 15,226,838 $ 7,879,892 $ 1,383,298 Private Equity Fund * 107,268 Total investments recurring basis $ 24,597,296 Beneficial interest in trusts $ 399,814 $ - $ - $399,814 Pledges receivable $ 3,774,695 $ - $ - $ 3,774,695 *In accordance with ASC Subtopic , certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statements of financial position. 18

21 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 13 Fair value measurements of assets and liabilities (continued) The following table summarizes the valuation of the University s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015, based on the level of input utilized to measure fair value: Fair Value Measurements at 06/30/15 Using: Assets 6/30/2015 Level 1 Level 2 Level 3 Investments: Money market funds: Cash $ 886,711 $ 886,711 $ - $ - Money Market 1,727,350 1,727, Mutual Funds: Domestic Fixed Income 862, , Domestic Equity 2,361,072 2,361, International Equity 1,878,568 1,878, Equities (Corporate Stocks): Health Care 848, , Consumer Staples 586, , Information Technology 1,274,753 1,274, Consumer Discretionary 619, , Industrials 709, , Materials 206, , Financials 928, , Telecommunications 190, , Utilities 145, , Energy 547, , Fixed Income: U. S Treasuries 1,531,282-1,531,282 - Agency Securities 1,695,621-1,695,621 - Corporate Bonds 6,848,659-6,848,659 - UMC Board of Higher Education Black College Fund 363, ,855 UMC Board of Higher Education General Investment Pool 1,080, ,080,883 Total investments recurring basis $ 25,295,126 $ 13,774,826 $ 10,075,562 $ - Beneficial interest in trusts $ 445,951 $ - $ - $ 445,951 Pledges receivable $ 4,520,303 $ - $ - $ 4,520,303 19

22 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 13 Fair value measurements of assets and liabilities (continued) For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, the following table provides a reconciliation of beginning and ending balances for the years ended June 30, 2016 and 2015: Beneficial Investments interest in trusts Pledges receivable July 1, 2014 $ 1,475,770 $ 481,821 $ 4,731,632 Investment return: Investment income 32,669 1,279 - Realized and unrealized gains (21,818) (30,155) - Withdrawals (41,903) (6,994) - Payments on pledges - - (669,715) Write-offs - - (51,309) Discounts and allowances - - (170,362) Contributions ,057 June 30, ,444, ,951 4,520,303 Investment return: Investment income 28,562 1,306 - Realized and unrealized gains (52,821) (46,287) - Withdrawals (37,249) (1,156) - Payments on pledges - - (754,744) Write-offs - - (2,172,713) Discounts and allowances - - 1,991,973 Contributions ,876 June 30, 2016 $ 1,383,298 $ 399,814 $ 3,774,695 For entities that calculate NAV per share (or its equivalent), the following table provides information about the probability of investments being sold at amounts different from NAV per share for the year ended June 30, 2016: Unfunded Fair Value Commitments Blackstone Alternatives Solution 2015 Trust (Tax Exempt) $ 107,268 $ 584,500 Blackstone Alternatives Solution 2015 Trust Fund (Tax Exempt) invests in private equity, real asset, credit and opportunistic alternative asset management strategies. The fair value of the investments in this category has been estimated using the net asset value per share of the underlying investments. Investors cannot withdraw funds without the prior written consent of the General Partner. 20

23 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2016 AND 2015 Note 14 Net assets Net assets were released during the year from donor restrictions by incurring expenses satisfying the restricted purpose of scholarships or by occurrence of other events specified by donors. Net assets at June 30, 2016 and 2015 are temporarily restricted for the following purposes or time periods: Endowment net appreciation $ 704,276 $ 994,886 Other 10,392 4,993 Contributions receivable 1,218,891 1,218,871 Capital projects (including pledges receivable) 4,066,338 3,242,262 Faculty development (including pledges receivable) 12,243 12,243 Charitable remainder trust 286, ,506 $ 6,298,895 $ 5,805,761 At June 30, 2016 and 2015, $22,949,210 and $22,429,961, respectively, was included in permanently restricted net assets to provide income to fund scholarships and programs of the University. Note 15 Endowments The University s endowment consists of approximately 320 individual funds established for a variety of purposes based on donor-imposed restrictions in the relative gift instrument. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the donor-imposed restrictions. Interpretation of Relevant Law - The Board of Trustees of the University has interpreted the Uniform Prudent Management of Institutional Funds Act of 2007 (the Act ) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulation to the contrary. As a result of this interpretation, the University classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by the Act. In accordance with the Act, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowments funds: 1. The duration and preservation of the fund 2. The purposes of the University and the donor-restricted endowment fund 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the University 7. The investment policies of the University 21