ASSE INTERNATIONAL, INC. (A California Nonprofit Corporation)

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 with INDEPENDENT AUDITORS REPORT THEREON

2 INDEPENDENT AUDITORS REPORT Board of Directors ASSE International, Inc. We have audited the accompanying consolidated financial statements of ASSE International, Inc., a California nonprofit corporation (the Company ), which comprise the consolidated statements of financial position as of August 31, 2016 and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated 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 entity 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 consolidated financial statements. p f Anton Blvd Suite 1000 Costa Mesa CA kmjpartnerscpa.com p f Ventura Blvd Suite 160 Woodland Hills CA p f Loker Avenue West Suite 101 Carlsbad CA 92010

3 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of ASSE International, Inc. as of August 31, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards we have also issued our report dated February 3, 2017 on our consideration of the Company 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 compliance and the results of that testing, and not to provide an opinion on the 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 Company s internal control over financial reporting and compliance. KMJ Corbin & Company LLP Costa Mesa, California November 7, 2016, except for Other Reporting Required by Government Auditing Standards, for which the date is February 3, 2017

4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION August 31, ASSETS Current assets: Cash and cash equivalents $ 1,195,130 $ 327,800 Investments 7,179,310 9,221,760 Grant revenue receivable 903, ,200 Accounts and other receivables 189, ,820 Prepaid expenses and other current assets 236, ,790 Total current assets 9,703,550 10,601,370 Long-term investments 2,999,730 1,348,550 Office furniture and equipment, net 2,850 3,850 Deposits 12,610 11,030 Investment in affiliate 0 9,370 Total assets $ 12,718,740 $ 11,974,170 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and accrued expenses $ 2,116,610 $ 1,443,400 Accrued tuition 2,165,240 1,441,500 Accrued area representative fees 1,691,910 1,569,400 Student insurance premiums payable 615, ,440 Accrued pension plan payable 0 1,959,130 Payable to EurAupair International, Inc ,630 Total current liabilities 6,589,470 7,374,500 Commitments and contingencies Net assets: Unrestricted 6,129,270 4,599,670 Total liabilities and net assets $ 12,718,740 $ 11,974,170 See accompanying notes to consolidated financial statements 3

5 CONSOLIDATED STATEMENTS OF ACTIVITIES For The Years Ended August 31, Revenues: Program fees, including $2,954,740 and $2,832,330 of grant revenue in 2016 and 2015, respectively $ 17,321,220 $ 15,419,200 Expenses: Direct program expenses 9,338,010 7,364,650 Indirect costs and administrative expenses 6,907,300 8,096,880 16,245,310 15,461,530 Increase (decrease) in unrestricted net assets from operations 1,075,910 (42,330) Other income (expense): Net investment income 42,740 43,800 Equity in loss of affiliate (1,100) (7,630) Contribution to EurAupair International, Inc. 0 (400,000) Other income 1,220 1,140 Pension-related charges other than net periodic pension cost 424,390 1,195,510 Loss on foreign currency exchange (13,560) (6,990) Increase in unrestricted net assets 1,529, ,500 Net assets, beginning of year 4,599,670 3,816,170 Net assets, end of year $ 6,129,270 $ 4,599,670 See accompanying notes to consolidated financial statements 4

6 CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended August 31, Cash flows from operating activities: Increase in unrestricted net assets $ 1,529,600 $ 783,500 Adjustments to reconcile increase in unrestricted net assets to net cash provided by operating activities: Depreciation 1,000 1,010 Equity in loss of affiliate 1,100 7,630 Net unrealized investment (gain) loss (1,800) 5,900 Pension-related charges other than net periodic pension costs (424,390) (1,195,510) Loss on foreign currency exchange 13,560 6,990 Changes in operating assets and liabilities: Grant revenue receivable (172,080) (265,340) Accounts and other receivables 230 (27,500) Prepaid expenses and other current assets (105,450) 8,990 Deposits (1,580) (800) Accounts payable and accrued expenses 673, ,010 Accrued tuition 723,740 53,000 Accrued area representative fees 122,510 (87,970) Student insurance premiums payable 65, ,900 Accrued pension plan payable (1,534,740) 1,159,130 Payable to EurAupair International, Inc. (410,630) (217,080) Net cash provided by operating activities 479, ,860 Cash flows from investing activities: Purchases of investments (12,762,930) (10,449,000) Sales/maturities of investments 13,156,000 9,636,610 Cash received from investment in affiliate 8,270 0 Net cash provided by (used in) investing activities 401,340 (812,390) Effect of foreign exchange rate changes on cash and cash equivalents (13,560) (6,990) Net increase (decrease) in cash and cash equivalents 867,330 (172,520) Cash and cash equivalents, beginning of year 327, ,320 Cash and cash equivalents, end of year $ 1,195,130 $ 327,800 Supplemental disclosure of non-cash investing activity: Transfer of investment to satisfy payable to EurAupair International, Inc. $ 0 $ 249,470 See accompanying notes to consolidated financial statements 5

7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 1 BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ASSE International, Inc. ( ASSE ) was founded in 1976 as a California nonprofit corporation. ASSE is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. In May 2016, ASSE formed a wholly owned subsidiary in Germany, ASSE Germany GmbH, a German corporation ( ASSE Germany ). ASSE is based in Laguna Beach, California, and is in the business of providing international educational and cultural exchange programs for high school students of the United States of America ( U.S. ), Canada, Mexico and Germany desiring to visit other countries and of providing host country services for high school students of certain other countries desiring to visit the U.S., Canada, Mexico and Germany. ASSE also provides work experience programs in the U.S. for university students and young professionals from other countries. Revenues consist principally of production fees from cooperating foreign organizations, program fees from North American students, and U.S. government grants. The ASSE exchange visitor programs are subject to the regulations of the Bureau of Educational and Cultural Affairs of the U.S. Department of State ( DOS ). The following is a summary of significant accounting policies: Principles of Consolidation The accompanying consolidated financial statements include the accounts of ASSE and ASSE Germany (collectively referred to as the Company ). Intercompany balances and transactions have been eliminated in consolidation. Basis of Accounting The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ). The Company reports information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted, depending on the presence of donor restrictions. As of and for the years ended August 31, 2016 and 2015, the Company did not have temporarily restricted or permanently restricted net assets or contributions. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses. Significant estimates embodied in these consolidated 6

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 1 BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued financial statements include the valuation of investments, collectability of receivables, and future expenses related to programs. Actual results could differ from those estimates. Cash and Cash Equivalents Temporary, short-term and highly liquid investments that mature in less than three months from the date they are acquired are classified as cash and cash equivalents. The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation ( FDIC ) up to $250,000 for U.S. dollar denominated accounts and the Canadian Deposit Insurance Company ( CDIC ) up to $100,000 for Canadian dollar denominated accounts. As of August 31, 2016, the Company did not have cash balances in excess of FDIC or CDIC limits. Management believes that it has invested in high credit quality institutions for which the Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to these accounts. Receivables Accounts receivable are owed primarily from participating foreign organizations and North American students. The Company s grant revenue receivable consists of reimbursements due under several U.S. government grants. The Company provides for an allowance for uncollectable receivables based on historical experience. As of August 31, 2016 and 2015, there was no allowance for uncollectable receivables. Office Furniture and Equipment Office furniture and equipment are stated at cost. Significant additions or improvements, which extend asset lives, are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation is provided using the straight-line method over five years. Recognition of Exchange Program Revenues and Expenses Exchange program revenues and estimated expenses for the high school programs (including host family recruitment costs) are recognized at the beginning of the academic year. Revenues and estimated expenses for the work experience programs are recognized at the time exchange program participants arrive in the U.S. 7

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 1 BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Foreign Currency Transactions ASSE from time to time enters into transactions in the local currency in the countries in which it conducts business. These transactions are subject to changes in currency exchange rates upon settlement when translated to U.S. dollars. Gains or losses which result are recognized in the consolidated statements of activities in the year of occurrence. The financial statements of ASSE Germany are measured using the local currency as the functional currency. In accordance with accounting guidance, assets and liabilities of ASSE Germany are translated at their current exchange rates and revenues and expenses are translated at weighted average rates of exchange in effect during the year. The resulting translation adjustments are recorded in other income (expense) in the accompanying consolidated statements of activities. Area Representative Fees Fees are paid to area representatives who represent ASSE in connection with student and host family recruitment and supervision for services they perform on behalf of ASSE. These fees, which range from $150 to $1,000 per student, are recorded at the beginning of the corresponding student s program period and are paid upon completion of certain required program events over the course of the student s program period. Contributed Services Contributions of services are recognized in the consolidated financial statements if the services enhance or create non-financial assets or require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. A number of unpaid volunteers have made contributions of their time to act on behalf of ASSE. The value of this contributed time is not reflected in these consolidated financial statements since it is not recognizable. Risks and Uncertainties Certain of the Company s revenues are governed by contracts with governmental agencies. All such contracts to which the Company currently is a party are for fixed terms and expire at the end of those terms. There can be no assurances that the Company will be able to obtain future contracts as deemed necessary by management. The loss of some of the current contracts or the inability to obtain future contracts could have an adverse effect on the Company s consolidated financial position and results of activities. Failure of the Company to comply with applicable regulatory requirements can result in, 8

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 1 BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued among other things, loss of funding, warning letters, fines, injunctions, and civil penalties which could have an adverse effect on the Company s consolidated financial position and activities. Subsequent Events The Company has evaluated and determined that no events have occurred subsequent to the consolidated statement of financial position date and through November 7, 2016, the date of issuance of these consolidated financial statements, which would require inclusion or disclosure in its consolidated financial statements. Reclassifications Certain amounts in the 2015 consolidated financial statements have been reclassified to conform with the current year presentation. NOTE 2 INVESTMENTS The Company measures fair value of its investments in accordance with Financial Accounting Standards Board Accounting Standards Codification 820 ( ASC 820 ). ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market, or in the absence of a principal market, the most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs in priority that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities; Level 2 Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates and yield curves, credit risks, and default rates) or other inputs that are principally derived from or corroborated by observable market data by correlation or by other means; and 9

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 2 INVESTMENTS, continued Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such investments pursuant to the valuation hierarchy. United States Treasury Notes The fair value of United States treasury notes is based on interest rate differentials from current market rates, which is an input other than quoted prices that are observable for the asset. Therefore, these investments are classified as Level 2 investments. Certificates of Deposit Certificates of deposit are classified as held-to-maturity and the fair value of these investments is based on interest rate differentials from current market rates, which is an input other than quoted prices that are observable for the asset. Therefore, these investments are classified as Level 2 investments. As of August 31, 2016, the Company s investments measured at fair value on a recurring basis were as follows: Quoted Prices in Active Markets for Identical Assets (Level 1) August 31, 2016 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. treasury notes $ 0 $ 104,800 $ 0 Certificates of deposit 0 10,074,240 0 $ 0 $ 10,179,040 $ 0 10

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 2 INVESTMENTS, continued As of August 31, 2015, the Company s investments measured at fair value on a recurring basis were as follows: Quoted Prices in Active Markets for Identical Assets (Level 1) August 31, 2015 Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. treasury notes $ 0 $ 103,180 $ 0 Certificates of deposit 0 10,467,130 0 $ 0 $ 10,570,310 $ 0 Net investment income (loss) consists of net unrealized gains (losses) of $1,800 and $(5,900), and net realized gains and interest income of $40,940 and $49,700 during the years ended August 31, 2016 and 2015, respectively. NOTE 3 OFFICE FURNITURE AND EQUIPMENT Office furniture and equipment is as follows: Office furniture and equipment $ 31,410 $ 46,200 Accumulated depreciation (28,560) (42,350) $ 2,850 $ 3,850 NOTE 4 INVESTMENT IN AFFILIATE Beginning in August 2014, ASSE had a 33% interest in Go Campus Thailand, LLC, an entity formed to provide post-secondary school study opportunities in the United States for qualified students from Thailand. In December 2015, Go Campus Thailand, LLC was dissolved and ASSE received $8,270 as final distribution from Go Campus Thailand, LLC. This investment was recorded on the equity method of accounting and was reported as a non-current asset in the accompanying consolidated statements of financial position. During the years ended August 31, 2016 and 2015, ASSE recorded a loss from Go Campus Thailand, LLC of $1,100 and $7,630 respectively, in equity in loss of affiliate in the accompanying consolidated statements of activities. The balance sheet of this affiliate is not material to ASSE s consolidated statements of financial position. 11

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 5 CONTRIBUTION During the year ended August 31, 2015, ASSE recorded contributions of $400,000 to EurAupair International, Inc., a California nonprofit corporation. NOTE 6 TRANSACTIONS WITH ASSE CANADA, INC. ASSE has entered into an agency agreement with ASSE Canada, Inc. ( ASSE Canada ), a Canadian nonprofit corporation which is engaged in the business of providing international educational and cultural exchange program services to Canadian students desiring to visit other countries and students from other countries desiring to visit Canada. In connection with this agency agreement, ASSE pays ASSE Canada a fee for acting on its behalf in Canada. During the years ended August 31, 2016 and 2015, ASSE paid ASSE Canada $368,800 and $310,400, respectively, in connection with this agreement, which is recorded in direct program expenses. ASSE Canada has a separate agreement with ASSE whereby ASSE provided administrative support services to ASSE Canada, totaling $47,740 and $56,790 for the years ended August 31, 2016 and 2015, respectively, which reduced indirect costs and administrative expenses in the accompanying statements of activities. At August 31, 2016 and 2015, ASSE has receivables from ASSE Canada of $2,550 and $16,400, respectively, which are recorded in accounts and other receivables in the accompanying consolidated statements of financial position. NOTE 7 TRANSACTIONS WITH WORLD HERITAGE INTERNATIONAL STUDENT EXCHANGE PROGRAMS, INC. World Heritage International Student Exchange Programs, Inc. ( World Heritage ) is a New York nonprofit corporation that is engaged in the business of providing international educational and cultural exchange program host country services for students from certain other countries desiring to visit the U.S. ASSE has entered into an agency agreement with World Heritage under which the administration of the World Heritage exchange program is conducted by ASSE. In connection with this agreement, ASSE recorded income of $817,000 and $1,041,440 during the years ended August 31, 2016 and 2015, respectively, which is reported in program fees. At August 31, 2016, ASSE has a receivable from World Heritage of $6,760, which is recorded in accounts and other receivables in the accompanying consolidated statements of financial position. At August 31, 2015, ASSE has a payable to World Heritage of $10,850, which is recorded in accounts payable and accrued expenses in the accompanying consolidated statements of financial position. 12

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 8 ADMINISTRATIVE SUPPORT The Company has entered into agreements with other corporations to provide administrative support services. In connection with these agreements, the Company reduced indirect costs and administrative expenses in total by $554,320 and $436,650 for the years ended August 31, 2016 and 2015, respectively. At August 31, 2016 and 2015, the Company has receivables of $9,310 and $950, respectively, from one of these corporations, which is included in accounts and other receivables in the accompanying consolidated statements of financial position. In addition, the Company has entered into an agreement with a nonprofit corporation to receive administrative support services. In connection with this agreement, the Company recorded indirect costs and administrative expenses of $472,700 and $471,250 for the years ended August 31, 2016 and 2015, respectively. NOTE 9 401(K) RETIREMENT PLAN ASSE has a qualified 401(k) Retirement Plan (the 401(k) Plan ) for all full-time permanent employees. Under the 401(k) Plan, eligible employees may contribute and defer taxation on a portion of their compensation. ASSE contributes up to 12% of each 401(k) Plan participant s compensation. During the years ended August 31, 2016 and 2015, the Company contributed $331,380 and $283,590, respectively, to the 401(k) Plan. NOTE 10 DEFINED BENEFIT PENSION PLAN ASSE had a noncontributory defined benefit pension plan (the Pension Plan ) that covered substantially all of its employees. On June 17, 2015, the Company notified the Pension Plan participants that it was terminating the Pension Plan, which concluded in Plan participants received vested benefits from the plan assets by electing either a lump-sum distribution (in cash, a roll-over to an individual retirement account, or a roll-over to another qualified retirement plan) or an annuity contract with a third-party insurance company. The Company contributed $1,534,740 to the Pension Plan during 2016 to fund the final distributions, which totaled $7,877,270. The amount paid by the Company to the Pension plan was $424,390 less than the amount accrued in fiscal 2015, which is recorded in other income in the accompanying consolidated statement of activities. As a result of the termination and pay-out, all pension-related balances have been reduced to $0. 13

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 10 DEFINED BENEFIT PENSION PLAN, continued The change in the benefit obligation is as follows for the years ended August 31: Benefit obligation, beginning of year $ 8,302,710 $ 7,536,200 Service cost 0 793,240 Interest cost 0 357,690 Actuarial (gain) loss during year (1,050) 443,820 Settlement of benefits due to plan termination (424,390) (819,560) Benefits paid (7,877,270) (8,680) Benefit obligation, end of year $ 0 $ 8,302,710 The change in the plan assets is as follows for the years ended August 31: Fair value of plan assets, beginning of year $ 8,302,710 $ 6,340,690 Actual return on plan assets (1,050) 11,570 Employer contributions (424,390) 1,959,130 Benefits paid (7,877,270) (8,680) Fair value of plan assets, end of year $ 0 $ 8,302,710 Pension-related charges other than net periodic pension cost consist of the following for the years ended August 31: Amortization of transition obligation $ 0 $ 0 Amortization of prior service cost 0 10,650 Change in net actuarial gain (loss) 424,390 1,184,860 $ 424,390 $ 1,195,510 14

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 10 DEFINED BENEFIT PENSION PLAN, continued As of August 31, 2015, the Company s Pension Plan assets measured at fair value on a recurring basis were as follows: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Interest-bearing cash $ 75,980 $ 0 $ 0 Employer contribution receivable 1,959, U.S. treasury notes 0 466,690 0 Certificates of deposit 0 5,697,860 0 Mutual funds 103, Total plan assets $ 2,138,160 $ 6,164,550 $ 0 NOTE 11 GRANT REVENUE Grant revenue is deemed to be earned and is recognized when ASSE has incurred expenditures in compliance with grant restrictions. Amounts earned under grants but not yet received are included in grant revenue receivable. Grant income relates to expenditures for educational and cultural exchange programs which include students from the U.S. visiting Germany, students from Germany visiting the U.S., students from the Newly Independent States (formerly the Soviet Union) visiting the U.S. and students from Islamic countries visiting the U.S. At August 31, 2016 and 2015, the balance available under grant awards is as follows: Balance of grant awards, beginning of year $ 2,170,330 $ 2,124,810 Grants awarded 3,240,480 2,887,150 Grant revenue recognized (2,954,740) (2,832,330) Unused grants expired (13,390) (9,300) Balance of grant awards, end of year $ 2,442,680 $ 2,170,330 If grant revenue was recognized in the same manner as non-grant revenue, both program fees and direct program expenses would increase $285,740 and $54,820 for the years ended August 31, 2016 and 2015, respectively. 15

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 12 PROGRAM FEES AND DIRECT PROGRAM EXPENSES Program fees and direct program expenses are as follows: For The Year Ended August 31, 2016 Totals For The Year High School Programs Work Experience Programs Ended August 31, Work and Inbound Program Outbound Program Travel Program Intern Program Training Program 2016 (summarized) 2015 Program fees $ 13,241,030 $1,537,160 $1,575,570 $ 568,170 $ 399,290 $ 17,321,220 $ 15,419,200 Direct program expenses: Tuition and student expense 4,167,950 5,100 17, ,191,680 3,234,560 Area representative fees 1,623, ,500 28, ,781,340 1,635,410 Fees to cooperating foreign agencies 332, , ,049, ,770 Participant insurance 200,100 82, , , , , ,130 Host family recruitment 735, , ,910 Job finding fees , , ,310 Airfare 0 266, , ,010 Field trip costs 92,490 24, , ,730 Other 41,930 2,390 24,970 1, ,490 65,820 7,194,540 1,227, , , ,460 9,338,010 7,364,650 Excess of program fees over direct program expenses $ 6,046,490 $ 309,540 $ 958,110 $ 452,240 $ 216,830 $ 7,983,210 $ 8, NOTE 13 RELATED PARTY TRANSACTIONS A member of management is a principal in a limited liability company ( LLC ). The Company has an agreement with the LLC to share 55% of the increase in unrestricted net assets from operations of its work experience programs. For the years ended August 31, 2016 and 2015, the Company reduced revenue by $247,960 and $16,210, respectively, for this agreement. At August 31, 2016 and 2015, the Company owed the LLC $247,960 and $16,210, respectively, which are recorded in accounts payable and accrued expenses in the accompanying consolidated statements of financial position. The spouse of one of the Company s directors is a principal in a nonprofit entity. During the years ended August 31, 2016 and 2015, the Company recorded program fee revenues of $867,130 and $895,680, respectively, from that nonprofit entity. At August 31, 2016 and 2015, ASSE has receivables from that nonprofit entity of $33,670 and $14,120, respectively, which are recorded in accounts and other receivables in the accompanying consolidated statements of financial position. 16

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 14 INDIRECT COSTS AND ADMINISTRATIVE EXPENSES Indirect costs and administrative expenses are as follows for the years ended August 31: Personnel and related $ 4,300,310 $ 3,991, (k) plan 331, ,590 Rent and facilities 309, ,190 Staff and contractor meetings 266, ,400 Scholarships granted 263,680 49,100 Travel 168, ,020 Postage and shipping 157, ,300 Telephone 132, ,850 Legal services 130, ,750 Insurance 116, ,220 Promotional material 112, ,830 Supplies 103,980 80,890 Staff conference 69, ,080 Audit and accounting 58,260 53,150 Computer supplies and services 53,030 27,520 Printing 49,690 41,500 Maintenance and cleaning 49,010 13,820 Employee development 45,630 28,830 Trade conventions 33,670 31,490 Membership dues 28,970 33,670 Database development 23,860 29,720 Instructional material 19,480 44,960 Licenses and registrations 15,250 13,590 Bank charges 14,100 14,490 Newsletter 11,760 11,770 Business development meetings 10,810 6,810 Photocopying 8,030 5,210 Telefacsimile 6,790 8,520 Payroll service fees 4,550 4,150 Board of directors 3,390 4,830 Media, labels and lists 2,560 1,900 Subscriptions 2,420 2,070 Depreciation 1,000 1,010 Property tax Net periodic pension cost and fees 0 1,868,610 $ 6,907,300 $ 8,096,880 17

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 15 TAX STATUS The Company is a not-for-profit organization as described in Section 501(c)(3) of the Internal Revenue Code ( IRC ) and is exempt from federal income taxes pursuant to the applicable sections of the IRC. The Company received favorable determination letters from the Internal Revenue Service, dated March 30, 1993 and March 27, 2000, indicating that it qualifies for tax exempt status. Management believes that the Company currently operates such that it qualifies for continued exemption from income taxes. Accordingly, no provision for federal income tax has been recorded in the accompanying financial statements. The Company is subject, however, to Federal and California income taxes on net unrelated business income as stipulated in IRC Section 511 and Regulation Section During the years ended August 31, 2016 and 2015, the Company had no unrelated business income. The Company annually evaluates tax positions as part of the preparation of its exempt tax return. This process includes an analysis of whether tax positions the Company takes with regard to a particular item of income or deduction would meet the definition of an uncertain tax position under current accounting guidance. The Company believes its tax positions are appropriate based on current facts and circumstances. The Company s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. At August 31, 2016, the Company did not have any unrecognized tax benefits. The Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before NOTE 16 COMMITMENTS AND CONTINGENCIES Litigation The Company may become involved from time to time in claims, lawsuits, disputes with third parties, actions involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business. The Company is currently not involved in any such litigation or disputes which management believes could have a material adverse effect on its financial position or results of operations. Indemnities and Guarantees The Company has made certain indemnities under which it may be required to make payments to a guaranteed or indemnified party in relation to certain actions or transactions. The Company indemnifies its directors, officers, employees and agents, as permitted under the laws of the State of California. The duration of the indemnities varies, and is generally tied to the life of the respective agreement. These indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been 18

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended August 31, 2016 and 2015 NOTE 16 COMMITMENTS AND CONTINGENCIES, continued obligated nor incurred any payments for these obligations and, the Company has not incurred significant costs related to these guarantees and indemnifications, and the Company generally believes that it has adequate insurance to cover many different types of liabilities. No liability has been recorded in the financial statements for guarantees and indemnities as of August 31, Lease Commitments ASSE leases office space in several locations. The leases require monthly payments ranging from $480 to $2,780 and expire at various dates through March Future minimum lease payments pursuant to these leases are $63,800 in fiscal year 2017, $36,210 in fiscal year 2018, $25,500 in fiscal year 2019, $25,500 in fiscal year 2020, and $14,880 in fiscal year Rent expense (including payments under month-to-month or other short-term arrangements) totaled $336,620 and $304,070 for the years ended August 31, 2016 and 2015, respectively. 19

21 SUPPLEMENTAL INFORMATION REQUIRED BY THE UNIFORM GUIDANCE For The Year Ended August 31, 2016

22 TABLE OF CONTENTS Independent Auditors 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 Auditors Report on Compliance for Each Major Federal Program and Report on Internal Control over Compliance in Accordance with the Uniform Guidance Schedule of Expenditures of Federal Awards...6 Notes to Schedule of Expenditures of Federal Awards...7 Schedule of Findings and Questioned Costs

23 INDEPENDENT AUDITORS 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 To the Management of ASSE International, Inc. We have audited, 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, the financial statements of ASSE International, Inc. (the Company ), which comprise the statement of financial position as of August 31, 2016, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 7, We have not performed any procedures with respect to the audited financial statements subsequent to November 7, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Company s internal control over financial reporting to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Accordingly, we do not express an opinion on the effectiveness of the Company s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. p f Anton Blvd Suite 1000 Costa Mesa CA kmjpartnerscpa.com p f Ventura Blvd Suite 160 Woodland Hills CA p f Loker Avenue West Suite 101 Carlsbad CA

24 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Company s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Company s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Company s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Costa Mesa, California February 3, 2017 KMJ Corbin & Company LLP 2

25 INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH THE UNIFORM GUIDANCE To the Management of ASSE International, Inc. Report on Compliance for Each Major Federal Program We have audited the compliance of ASSE International, Inc. (the Company ) with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended August 31, The Company s major federal programs are identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of the Company s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ( Uniform Guidance ). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Company's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However our audit does not provide a legal determination of the Company s compliance. p f Anton Blvd Suite 1000 Costa Mesa CA kmjpartnerscpa.com p f Ventura Blvd Suite 160 Woodland Hills CA p f Loker Avenue West Suite 101 Carlsbad CA

26 Opinion on Each Major Federal Program In our opinion, ASSE International, Inc. complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended August 31, Report on Internal Control over Compliance Management of the Company is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Company s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Company s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. 4

27 Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the financial statements of ASSE International, Inc. as of and for the year ended August 31, 2016, and have issued our report thereon dated November 7, 2016, which contained an unmodified opinion on those financial statements. We have not performed any procedures with respect to the audited financial statements subsequent to November 7, 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 awards is presented for purposes of additional analysis as required by the Uniform Guidance 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 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 schedule of expenditures of federal awards is fairly stated in all material respects in relation to the financial statements as a whole. Costa Mesa, California February 3, 2017 KMJ Corbin & Company LLP 5

28 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended August 31, 2016 Federal Grantor/ Pass-Through Grantor/ Program Title Grant Number Catalog of Federal Domestic Assistance Number Federal Awards Expenditures U.S. Department of State: Congress Bundestag Youth Exchange (CBYX) Program Program S-ECAGD-15-CA $ 304,264 Program S-ECAGD-16-CA ,071 Future Leaders Exchange (FLEX) Program Program S-ECAGD-13-CA ,458,589 Program S-ECAGD-16-CA ,266 Kennedy-Lugar Youth Exchange & Study Program (YES) Program S-ECAGD-13-GR ,950 Program S-ECAGD-13-GR ,601 Total expenditures of federal awards $ 2,954,741 See accompanying notes to schedule of expenditures of federal awards 6

29 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For The Year Ended August 31, 2016 NOTE 1 BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards ( SEFA ) includes the federal grant activity of ASSE International, Inc. (the Company ) under programs of the federal government for the year ended August 31, The information in the SEFA is presented in accordance with the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States of America, and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ( Uniform Guidance ). Because the SEFA presents only a selected portion of the operations of the Company, it is not intended to and does not present the financial position, changes in net assets or cash flows of the Company. Federal awards received directly from federal agencies as well as federal awards passed through state and local agencies are included in the SEFA. NOTE 2 BASIS OF ACCOUNTING The SEFA is presented using the accrual basis of accounting which is described in the notes to the Company s financial statements. Such expenditures are recognized following the cost principles contained in the Uniform Guidance (or OMB Circular A-122, Cost Principles for Non- Profit Organizations, as applicable), where certain types of expenditures are not allowable or are limited as to reimbursement. NOTE 3 RELATIONSHIP TO FEDERAL AWARDS REPORTS Amounts reported in the SEFA agree with the amounts reported in the related federal financial reports for all major federal programs. NOTE 4 INDIRECT COSTS The SEFA includes both direct and indirect costs expended for all grant programs. The indirect costs expended under federal awards are based on actual indirect costs incurred prorated over the total actual number of students participating in all Company programs. 7