MADONNA UNIVERSITY. Financial Statements. June 30, 2004 and (With Independent Auditors Report Thereon)

Transcription

1 Financial Statements (With Independent Auditors Report Thereon)

2 Table of Contents Page Independent Auditors Report 1 Statements of Financial Position 2 Statement of Activities Year ended June 30, Statement of Activities Year ended June 30, Statements of Cash Flows 5 6

3 KPMG LLP Suite West Jefferson Detroit, MI Independent Auditors Report The Board of Trustees Madonna University: We have audited the accompanying statements of financial position of Madonna University (the University) as of, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the University s management. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Madonna University as of, 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. September 3, 2004 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.

4 Statements of Financial Position Assets Cash and cash equivalents $ 364, ,110 Investments (note 3) 28,533,538 25,811,773 Student accounts receivable, less allowance of $30,000 in both years, respectively 1,768,887 1,273,534 Other receivables 894, ,913 Student loans receivable, less allowance of $3,000 in both years, respectively 24,403 27,348 Pledges receivable, net (note 4) 1,045, ,893 Inventories, prepaid expenses, and other assets 443, ,121 Bond issuance costs 113, ,905 Land, buildings, and equipment, net (note 5) 25,338,618 25,131,067 Total assets $ 58,526,559 54,700,664 Liabilities and Net Assets Accounts payable $ 809, ,301 Deferred revenue 20,174 67,105 Accrued expenses 1,420,845 1,175,782 Deposits held for others 394, ,618 Loans payable (note 7) 15, ,000 Annuities payable 314, ,456 Bonds payable, net of unamortized premiums of $51,444 and $55,776 in 2004 and 2003, respectively (note 9) 5,541,444 5,870,776 Government grants refundable 24,663 27,314 Total liabilities 8,541,982 8,304,352 Net assets: Unrestricted 40,436,182 38,443,212 Temporarily restricted (note 12) 1,842,036 1,390,533 Permanently restricted (note 12) 7,706,359 6,562,567 Total net assets 49,984,577 46,396,312 Commitments and contingencies (note 15) Total liabilities and net assets $ 58,526,559 54,700,664 See accompanying notes to financial statements. 2

5 Statement of Activities Year ended June 30, 2004 Temporarily Permanently Unrestricted restricted restricted Total Operating revenue: Revenues and gains: Tuition and fees $ 26,492,536 26,492,536 University-sponsored financial aid (1,415,775) (1,415,775) Donor-sponsored financial aid (789,542) (789,542) Net tuition and fees 24,287,219 24,287,219 Government grants and contracts 926, ,738 Nongovernmental grants and contracts 212,865 79, ,293 Contributions 622,744 1,330,730 1,953,474 Investment income 9, ,022 Endowment earnings designated for current operations 1,638, ,464 1,869,457 Auxiliary enterprises 789, ,848 Other sources 681, ,753 Net assets released from restrictions 1,355,891 (1,355,891) Total operating revenue 30,526, ,779 30,810,804 Expenses and losses: Instruction 15,372,025 15,372,025 Public service 127, ,673 Academic support 3,765,472 3,765,472 Student services 3,864,053 3,864,053 Institutional support 5,080,243 5,080,243 Auxiliary enterprises 1,290,546 1,290,546 Total operating expenses 29,500,012 29,500,012 Increase in net assets from operating activities 1,026, ,779 1,310,792 Nonoperating: Government grants and contracts 15,500 15,500 Contributions for capital purposes 44,035 1,148,574 1,192,609 Endowment investment return, reduced by earnings used for current operations 1,118, ,182 1,442,787 Loss on disposition of assets (350,968) (350,968) Change in value of split-interest agreements (17,673) (4,782) (22,455) Net assets released from restrictions 216,993 (216,993) Increase in net assets from nonoperating activities 966, ,724 1,143,792 2,277,473 Change in net assets 1,992, ,503 1,143,792 3,588,265 Net assets at beginning of year 38,443,212 1,390,533 6,562,567 46,396,312 Net assets at end of year $ 40,436,182 1,842,036 7,706,359 49,984,577 See accompanying notes to financial statements. 3

6 Statement of Activities Year ended June 30, 2003 Temporarily Permanently Unrestricted restricted restricted Total Operating revenue: Revenues and gains: Tuition and fees $ 21,581,525 21,581,525 University-sponsored financial aid (777,900) (777,900) Donor-sponsored financial aid (728,463) (728,463) Net tuition and fees 20,075,162 20,075,162 State appropriation 434, ,043 Government grants and contracts 1,104,849 1,104,849 Nongovernmental grants and contracts 90, , ,408 Contributions 755, ,470 1,080,121 Investment income 17, ,611 Endowment earnings designated for current operations 1,643, ,869 1,871,260 Auxiliary enterprises 771, ,890 Other sources 594, ,219 Net assets released from restrictions 629,443 (629,443) Total operating revenue 26,116, ,678 26,526,563 Expenses and losses: Instruction 13,524,972 13,524,972 Public service 62,443 62,443 Academic support 3,401,184 3,401,184 Student services 3,574,448 3,574,448 Institutional support 4,437,237 4,437,237 Auxiliary enterprises 1,257,450 1,257,450 Total operating expenses 26,257,734 26,257,734 Increase (decrease) in net assets from operating activities (140,849) 409, ,829 Nonoperating: Government grants and contracts 18,000 18,000 Contributions for capital purposes 60,006 9, , ,621 Investment income earned on project funds held by trustee 2,511 2,511 Endowment investment return, reduced by earnings used for current operations (1,728,356) 278,788 (1,449,568) Loss on disposition of assets (134,560) (134,560) Change in value of split-interest agreements (85,812) (35,428) (121,240) Net assets released from restrictions 266,720 (266,720) Increase (decrease) in net assets from nonoperating activities (1,622,002) 41, ,118 (1,212,236) Change in net assets (1,762,851) 451, ,118 (943,407) Net assets at beginning of year 40,206, ,207 6,194,449 47,339,719 Net assets at end of year $ 38,443,212 1,390,533 6,562,567 46,396,312 See accompanying notes to financial statements. 4

7 Statements of Cash Flows Years ended Cash flows from operating activities: Change in net assets $ 3,588,265 (943,407) Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Nonoperating items: Contributions restricted for long-term investment (1,214,402) (494,522) Realized (gain) loss on investment (3,444,589) 3,038,009 Noncash items: Amortization of bond premium/issuance costs 5,205 5,205 Actuarial adjustment to annuity obligations 22, ,239 Depreciation 1,538,700 1,581,926 Loss on disposition of assets 350, ,560 Unrealized (gain) loss on investments 677,435 (2,868,879) (Increases) decreases in operating assets: Student accounts receivable (495,353) (393,193) Other receivables (150,353) 239,364 Accrued interest and dividends receivable 700 Student loans receivable 2, Pledges receivable (362,921) 108,349 Inventories, prepaid expenses, and other assets (113,436) (83,668) Increases (decreases) in operating liabilities: Accounts payable 357,100 (380,366) Deferred revenue (46,931) (174,380) Accrued expenses 245,063 46,039 Deposits held for others 119,983 (120,453) Annuities payable 6,085 (66,030) Net cash provided by (used in) operating activities 1,086,219 (248,809) Cash flows from investing activities: Purchase of land, buildings, and equipment (2,112,942) (1,048,786) Project funds on deposit with bond trustee 651,658 Proceeds from sale of equipment 15,723 3,125 Purchase of investments (36,030,938) (20,984,375) Proceeds from sale of investments 36,076,327 21,851,426 Net cash provided by (used in) investing activities (2,051,830) 473,048 Cash flows from financing activities: Contributions restricted for long-term investment 1,214, ,522 Principal repayment of loans (134,142) (250,000) Principal repayment of bonds (325,000) (305,000) Increase (decrease) in government grants refundable (2,651) 1,695 Net cash provided by financing activities 752,609 (58,783) Net increase (decrease) in cash and cash equivalents (213,002) 165,456 Cash and cash equivalents, beginning of year 577, ,654 Cash and cash equivalents, end of year $ 364, ,110 Supplemental disclosure of cash flow information: Cash paid for interest $ 299, ,390 See accompanying notes to financial statements. 5

8 (1) Nature of Organization Madonna University, founded and sponsored by the Felician Sisters of Livonia, Michigan, maintains fidelity to the teaching authority of the Catholic Church through its academic curriculum, promotes an appreciation and openness for other religious traditions, and encourages an atmosphere of respect and sensitivity to all persons. The enduring values of the liberal arts, with its curriculum based on history, culture, and traditions as the foundation, combined with critical and creative thinking and decision making, prepare students for responsible careers in a contemporary work environment. The diverse student body is drawn mainly from the Great Lakes region and 22 foreign countries. (2) Summary of Significant Accounting Policies The financial statements of the University have been prepared on the accrual basis. Significant accounting policies followed by the University are described below. (a) Basis of Presentation To ensure observance of limitations and restrictions placed on the use of resources available, the University maintains its accounts in accordance with the principles and practices of fund accounting. Fund accounting is the procedure by which resources for various purposes are classified for accounting purposes into funds that are maintained in accordance with activities or objectives of the University. For external reporting purposes, however, the University s financial statements have been prepared to focus on the organization as a whole and to present balances and transactions classified in accordance with the existence or absence of donor-imposed restrictions. Net assets and related activity are classified as unrestricted, temporarily restricted, and permanently restricted, as follows: Unrestricted Net assets that are not subject to donor-imposed restrictions. Temporarily Restricted Net assets that are subject to donor-imposed restrictions that will be met either by actions of the University or the passage of time. Permanently Restricted Net assets that are subject to donor-imposed restrictions to be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes. (b) Revenue Revenue is reported as an increase in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or law. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between applicable classes of net assets. 6 (Continued)

9 Private gifts, including unconditional pledges, are recognized in the period received. Conditional pledges are not recognized until the conditions on which they depend are substantially met. Pledges to be received after one year are discounted at an appropriate rate commensurate with the risks involved. Amortization of the discount is recorded as additional contribution revenue in accordance with donor-imposed restrictions, if any, on the contributions. An allowance for doubtful pledges receivable is provided based upon administration s judgment, considering such factors as the creditworthiness of the donor, prior collection history, type of contribution, and nature of fund-raising activity. Contributions of land, building, and equipment without donor-imposed restrictions concerning the use of such long-lived assets are reported as revenue of the unrestricted net asset class. Contributions of cash or other assets to be used to acquire land, building, and equipment with donor-imposed use restrictions are reported as revenue of the temporarily restricted net asset class; the restrictions are considered to be released at the time of acquisition of such long-lived assets. Contributions of assets other than cash are recorded at estimated fair value. Revenue from government grant and contract agreements is recognized as it is earned through expenditure, in accordance with the agreement. (c) (d) (e) (f) Cash and Cash Equivalents Cash and cash equivalents include money market funds of $358,671 and $560,352 at June 30, 2004 and 2003, respectively. The University considers all highly liquid investments with original maturity of three months or less to be cash equivalents. Investments Investments are stated at fair value based on quoted market prices. The net realized gains and losses and net appreciation and depreciation in investments are reflected in the statements of activities. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Land, Buildings, and Equipment Land, buildings, and equipment are stated at cost or, if contributed, at fair market value at the date of gift. The threshold for capitalization of land, buildings, and equipment is $2,500. The University calculates depreciation for plant and equipment using the straight-line method over the estimated useful life of the assets. Bulk purchases of like tangible personal items are also capitalized if the total acquisition cost is in excess of $25, (Continued)

10 (g) Impairment of Long-lived Assets The University adopted FASB Statement 144, Accounting for Impairment or Disposal of Long-Lived Assets, on July 1, The adoption of Statement 144 did not affect the University s financial statements. In accordance with Statement 144, long-lived assets, such as property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. (h) (i) (j) (k) (l) Contributed Services Contributed services are reflected in the financial statements at the fair value of the services rendered if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills that are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. The services rendered are typically instructional in nature and are provided by faculty employees. The value of the services rendered in 2003 and 2002 is $9,789 and $0, respectively. In addition, the University receives contributed services from volunteers that assist the advancement office in its various fund-raising activities, for which no value has been assigned. Income Taxes The University has received a determination letter from the Internal Revenue Service indicating that the University is a tax-exempt organization as provided in Section 501(c)(3) of the Internal Revenue Code and, except for taxes pertaining to unrelated business income, is exempt from Federal and state income taxes. No provision has been made for income taxes in the accompanying financial statements, as the University has had no significant unrelated business income. Use of Estimates Management of the University has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. Nonoperating Activities Nonoperating activities reflect transactions that are capital in nature, which are determined by management to be contributions to be used for facilities, true and term endowments, as well as investment returns in excess of the board of trustees-approved total return endowment spending rate for operating purposes. In accordance with the University s endowment spending policy, 4.5% of restricted endowment and 6% of quasi-endowment of the average market value for the 12 quarters ended June 30, 2003 was available for operating expenditures in fiscal year Reclassification Certain reclassifications have been made to 2003 amounts to conform to the 2004 presentation. 8 (Continued)

11 (3) Investments Cost and fair value of investments as of June 30 are as follows: Fair Fair Cost value Cost value Common and preferred stocks $ 16,712,293 17,551,966 14,138,690 15,185,747 Real estate trust investment 1,656,285 1,828,047 U.S. Government securities 3,840,311 3,926,288 2,925,350 3,163,266 Mutual funds equity 2,072,279 2,168,803 20,000 14,420 Corporate bonds 2,797,555 2,793,200 3,692,503 3,936,602 Money market securities 2,093,281 2,093,281 1,683,691 1,683,691 $ 27,515,719 28,533,538 24,116,519 25,811,773 Investment income is presented net of brokerage and consultant fees of $217,588 and $240,299 for 2004 and 2003, respectively. (4) Contributions Receivable The following table is a summary of the expected timing of collection of unconditional pledges receivable outstanding as of June 30, 2004: Amount Fiscal year ending: 2005 $ 714, ,000 1,139,500 Less unamortized discount (based on imputed interest rate of 6%) 93,686 Net book value $ 1,045,814 9 (Continued)

12 (5) Land, Buildings, and Equipment A summary of land, buildings, and equipment as of June 30 is as follows: Land $ 295, ,000 Land improvements 2,129,439 1,578,413 Library books 2,431,134 2,277,245 Building and building improvements 32,784,168 32,712,764 Equipment 7,119,614 6,724,846 Construction in progress 419, ,920 45,178,408 43,787,188 Less accumulated depreciation (19,839,790) (18,656,121) $ 25,338,618 25,131,067 (6) Transactions with the Felician Sisters The Felician Sisters, O.S.F. of Livonia, Michigan, the sponsoring body of Madonna University, is compensated at lay equivalent rates for services performed as administrators, faculty, and staff. Payment to the Felician Sisters, principally for Sisters services, was approximately $535,000 and $520,000 at, respectively. (7) Loans Payable The University has an unsecured revolving line of credit, primarily to provide working capital, which allows the University to borrow up to $2,000,000 payable on demand. There were no outstanding borrowings at June 30, 2004, and $150,000 was outstanding at June 30, Interest is payable monthly and is computed on the unpaid balance at the bank s prime rate, which was 4% at June 30, 2004, less 1%. In addition, an auto loan in the amount of $15,858 is outstanding at June 30, 2004, with payments due monthly through June 30, 2007 at 0% interest. (8) Retirement Plan Retirement benefits are provided for the University s staff through Teachers Insurance and Annuity Association (TIAA), a national organization used to fund retirement benefits for educational institutions. All full-time employees, excluding the Felician Sisters, are eligible to participate in this plan the first of the month following the date of their employment. Madonna University and plan participants make contributions to TIAA to purchase retirement annuity contracts. The University s retirement benefit expense was approximately $1,265,000 and $1,027,000 for 2004 and 2003, respectively. 10 (Continued)

13 (9) Long-term Debt During fiscal 2001, the University issued $6,455,000 of Limited Obligation Revenue and Revenue Refunding Bonds, with an average coupon rate of 5.25%, with interest ranging from 4.4% to 6.1%, for capital improvements and to advance refund $2,350,000 of outstanding Limited Obligation Revenue Bonds Series 1995, with an average coupon rate of 5.49%. Bond proceeds of $2,455,001 were placed with an escrow agent to purchase U.S. Treasury State and Local Government Series obligations (SLUGS) to provide for all future debt service payments on the refunded bonds. Aggregate maturities of long-term debt are summarized as follows: Amount Fiscal year ending: 2005 $ 345, , , , , ,570,000 Total $ 5,490,000 The bonds are secured by interest in the University s accounts receivable, contract rights, and general intangibles arising from tuition and fee revenue. (10) Program, Supporting Services, and Fund Raising Expenses The University considers the following functional classifications of expenses to be program expenses: instruction, public service, academic support, student services, and auxiliary enterprises. Institutional Support, which includes fund-raising costs, is considered a supporting activity Program support $ 24,419,769 21,820,497 Supporting services 4,304,355 3,765,584 Fund raising 775, ,653 Total operating expenses $ 29,500,012 26,257, (Continued)

14 (11) Operating Expenses Operating expenses, by natural classification, for the years ended June 30 were: Operating: Salaries and wages $ 17,338,326 15,323,234 Employee benefits 4,539,434 3,917,842 Depreciation 1,538,700 1,581,926 Supplies, materials and other purchased services 2,821,117 2,404,536 Communication and information expenses 1,037, ,673 Repairs and maintenance of building and equipment 765, ,218 Utilities 516, ,335 Travel and related expense 419, ,089 Interest 309, ,926 Insurance 214, ,955 Total operating expenses $ 29,500,012 26,257,734 (12) Net Assets The composition of the unrestricted, temporarily, and permanently restricted net assets of the University for the years ended June 30 was as follows: Unrestricted net assets: Available for operating needs $ 559, ,957 Reserved for purchase commitments 60,554 46,206 Funds functioning as quasi-endowment and accumulated gains on permanent endowment whose income is unrestricted 19,860,763 18,579,043 Annuity remainder unrestricted 106,477 76,939 Investment in plant, net of long-term debt 19,848,618 19,316,067 $ 40,436,182 38,443,212 Temporarily restricted net assets: Scholarships $ 505, ,961 Instruction and other support 1,325, ,830 Renovations and capital projects 11,513 12,742 $ 1,842,036 1,390,533 Permanently restricted net assets: Permanent endowments for scholarships $ 5,619,618 4,483,328 Permanent endowments for other 2,070,981 2,064,105 Annuity remainder available for scholarships 15,760 15,134 $ 7,706,359 6,562, (Continued)

15 (13) Endowment Investment Return The University utilizes the total return concept in allocating endowment income and follows the Uniform Management of Institutional Funds Act, as adopted by the State of Michigan, which allows the University to expend net appreciation, subject to a standard of business care and prudence. In accordance with the University s endowment spending policy, 4.5% of restricted endowment and 6% of quasi-endowment of the average market value for the 12 quarters ended June 30, 2003 were available for operating expenditures in fiscal year Interest income earned (interest and dividends) was $539,511 and $590,822 at, respectively. If endowment income earned is not sufficient to support the spending policy, the balance is provided from realized gains. Gains appropriated were $1,329,946 and $1,280,438 at, respectively. Net appreciation or depreciation, in the absence of a donor s explicit or clear, implicit restriction, is reported as unrestricted. At, losses on the investment of donor-restricted endowment funds have reduced the fair value of the funds assets below the historic dollar amount by approximately $521,000 and $673,000, respectively. The following schedules summarize the investment return and its classification in the statements of activities: June 30, 2004 Temporarily Permanently Unrestricted restricted restricted Total Dividends and interest income (net of fees of $217,588) $ 434, , ,511 Realized gain from investments 2,807, ,550 3,444,589 Unrealized loss from investments (484,138) (187,718) (671,856) Total return on investment 2,757, ,646 3,312,244 Investment return designated for current operations (1,638,993) (230,464) (1,869,457) Investment gain, less amounts designated for current operations $ 1,118, ,182 1,442, (Continued)

16 June 30, 2003 Temporarily Permanently Unrestricted restricted restricted Total Dividends and interest income (net of fees of $240,299) $ 487, , ,822 Realized loss from investments (2,929,218) (108,791) (3,038,009) Unrealized gain from investments 2,356, ,317 2,868,879 Total return on investment (84,965) 506, ,692 Investment return designated for current operations (1,643,391) (227,869) (1,871,260) Investment gain (loss), less amounts designated for current operations $ (1,728,356) 278,788 (1,449,568) (14) Split-interest Agreements The University s split-interest agreements consist of irrevocable charitable gift annuities. A charitable gift annuity is a type of split-interest agreement where the University pays benefits to the donor or another beneficiary for the life of the specified annuitant. The University records the assets received from charitable gift annuities at their fair value. The fair value of the contribution revenue is estimated based on the present value of the future amounts to be paid to the specified beneficiary over the life of the agreement. The discount rate used, ranging from 3.6% to 8.0%, is the published IRS discount rate for the month of the gift or for one of the two previous months. Contribution revenue is the difference between the fair value of the assets and the life-income obligation. Annuities payable, with payout rates ranging from 7.0% to 11.7%, are adjusted annually to reflect changes in the life expectancy of annuitants, amortization of the discount, and other actuarial assumptions using the IRS discount rate assigned to each gift at the time of receipt. The change in value of the annuities payable recorded as a loss was $22,455 and $121,240 at, respectively. The University has recorded in investments assets related to charitable gift annuities of $437,234 and $378,529, with corresponding life-income obligations of $314,996 and $286,456, at June 30, 2004 and 2003, respectively. The contribution revenue is recorded as increases in unrestricted net assets unless the donor has restricted the University s use of its interest in the asset. If the donor has temporarily or permanently restricted the University s use of its interest, the contribution is recorded as an increase in temporarily or permanently restricted net assets. 14 (Continued)

17 (15) Commitments and Contingencies On July 28, 2004, the University obtained an unsecured, nonrevolving specific advance from Comerica Bank that allows the University to borrow up to $3,000,000. Interest is payable monthly and is computed on the unpaid balance at the bank s prime rate minus 1%. The University has entered into several noncancelable operating leases, primarily for computer equipment, software, copiers, and vehicles. Lease expense under these agreements was approximately $116,000 and $97,000 for the years ended, respectively. At June 30, 2004, future minimum rental payments required under noncancelable operating leases with initial or remaining lease terms in excess of one year are as follows: Future lease payments Year ending June 30: 2005 $ 57, , , ,000 $ 122,000 15