Sistema Universitario Ana G. Méndez, Incorporado As of and For the Years Ended July 31, 2017 and 2016 With Report of Independent Auditors

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1 CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATING SCHEDULES Sistema Universitario Ana G. Méndez, Incorporado As of and For the Years Ended July 31, 2017 and 2016 With Report of Independent Auditors

2 Consolidated Financial Statements Years Ended July 31, 2017 and 2016 Contents Report of Independent Auditors... 1 Consolidated Financial Statements Consolidated Statements of Financial Position July 31, 2017 and Consolidated Statement of Activities Year Ended July 31, Consolidated Statement of Activities Year Ended July 31, Consolidated Statements of Cash Flows Years Ended July 31, 2017 and Notes to Consolidated Financial Statements... 7 Supplementary Information Consolidating Statement of Financial Position July 31, Consolidating Statement of Activities Year Ended July 31, Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards

3 Ernst & Young LLP Plaza 273, 10 th Floor 273 Ponce de León Avenue San Juan, PR Tel: Fax: ey.com Report of Independent Auditors The Board of Directors of Sistema Universitario Ana G. Méndez, Incorporado Report on the Financial Statements We have audited the accompanying consolidated financial statements of Sistema Universitario Ana G. Méndez, Incorporado (the Institution ), which comprise the consolidated statements of financial position as of July 31, 2017 and 2016, 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 financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free of 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 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 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 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 entity 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sistema Universitario Ana G. Méndez, Incorporado as of July 31, 2017 and 2016, and the consolidated changes in their net assets and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying consolidating statement of financial position and consolidating statement of activities are presented for purposes of additional analysis and are 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 consolidated 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. 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 also have issued our report dated November 30, 2017, on our consideration of Sistema Universitario Ana G. Méndez, Incorporado 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 Sistema Universitario Ana G. Méndez, Incorporado s internal control over financial reporting and compliance. November 30, 2017 Stamp No. E affixed to original of this report. ey A member firm of Ernst & Young Global Limited

5 Consolidated Statements of Financial Position July Assets Cash and cash equivalents $ 5,672,074 $ 3,118,515 Accounts receivable, net 11,171,013 13,990,072 Inventories 1,278,922 1,316,500 Prepaid expenses and deferred charges 3,025,704 3,669,475 Deposits held in trust 8,748,826 8,945,375 Investments 65,151,720 59,724,808 Cash restricted to investment in property and equipment 1,058,348 1,030,611 Property, plant and equipment, net 280,407, ,396,689 Other assets 2,557,040 2,703,388 Assets for pension benefits 2,812,821 Total assets $ 381,883,872 $ 386,895,433 Liabilities and net assets Liabilities: Accounts payable and other liabilities $ 31,637,610 $ 38,658,895 Obligations under capital leases 2,816,347 4,070,611 Notes payable 70,513,353 67,562,801 Loans payable 91,436,437 98,370,346 Liability for other employee benefit 4,211,452 4,030,744 Liability for pension benefits 5,323,107 Total liabilities 200,615, ,016,504 Net assets: Unrestricted 170,553, ,340,524 Temporarily restricted 729,695 1,690,480 Permanently restricted 9,985,498 9,847,925 Total net assets 181,268, ,878,929 Total liabilities and net assets $ 381,883,872 $ 386,895,433 See notes to the consolidated financial statements

6 Consolidated Statement of Activities Year Ended July 31, 2017 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains and other support: Tuition and fees $ 263,048,201 $ $ $ 263,048,201 Less scholarships 19,013,129 19,013,129 Net tuition and fees 244,035, ,035,072 Grants and contracts 30,893,556 30,893,556 Private gifts and grants 926,722 80, ,573 1,144,295 Investment income 1,207,203 19,379 1,226,582 Net appreciation of investments 4,319,321 (7,582) 4,311,739 Auxiliary enterprises 3,304,237 3,304,237 Other sources 12,895,119 12,895,119 Net assets released from restrictions 1,052,582 (1,052,582) Total revenues, gains and other support 298,633,812 (960,785) 137, ,810,600 Expenses and other deductions: Educational and general expenses: Instruction 120,721, ,721,723 Research 8,892,644 8,892,644 Public service 17,993,423 17,993,423 Academic support 14,117,039 14,117,039 Student services 28,838,942 28,838,942 Institutional support 100,184, ,184,153 Total educational and general expenses 290,747, ,747,924 Auxiliary enterprises 2,614,878 2,614,878 Total expenses and other deductions 293,362, ,362,802 Change in net assets from operating activities 5,271,010 (960,785) 137,573 4,447,798 Nonoperating: Pension-related changes other than net periodic pension cost 7,941,946 7,941,946 Changes in net assets 13,212,956 (960,785) 137,573 12,389,744 Net assets at beginning of year 157,340,524 1,690,480 9,847, ,878,929 Net assets at end of year $ 170,553,480 $ 729,695 $ 9,985,498 $ 181,268,673 See notes to the consolidated financial statements

7 Consolidated Statement of Activities Year Ended July 31, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains and other support: Tuition and fees $ 268,828,324 $ $ $ 268,828,324 Less scholarships 21,591,867 21,591,867 Net tuition and fees 247,236, ,236,457 Grants and contracts 32,577, ,162 32,787,456 Private gifts and grants 1,218, , ,288 2,139,644 Investment income 1,292,355 18,500 1,310,855 Auxiliary enterprises 3,560,688 3,560,688 Other sources 13,793,288 13,793,288 Net assets released from restrictions 1,906,166 (1,906,166) Total revenues, gains and other support 301,584,604 (1,367,504) 611, ,828,388 Expenses and other deductions: Educational and general expenses: Instruction 122,778, ,778,424 Research 8,908,867 8,908,867 Public service 19,226,763 19,226,763 Academic support 14,071,444 14,071,444 Student services 29,123,342 29,123,342 Institutional support 101,936, ,936,954 Net depreciation of investments 3,483,284 7,109 3,490,393 Total educational and general expenses 299,529,078 7, ,536,187 Auxiliary enterprises 4,211,412 4,211,412 Total expenses and other deductions 303,740,490 7, ,747,599 Change in net assets from operating activities (2,155,886) (1,374,613) 611,288 (2,919,211) Nonoperating: Pension-related changes other than net periodic pension cost (1,547,410) (1,547,410) Changes in net assets (3,703,296) (1,374,613) 611,288 (4,466,621) Net assets at beginning of year 161,043,820 3,065,093 9,236, ,345,550 Net assets at end of year $ 157,340,524 $ 1,690,480 $ 9,847,925 $ 168,878,929 See notes to the consolidated financial statements

8 Consolidated Statements of Cash Flows Year Ended July Cash flows from operating activities Change in net assets $ 12,389,744 $ (4,466,621) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 23,774,673 24,151,275 Bad debt expense 4,608,585 5,250,513 Net (appreciation) depreciation of investments (4,311,739) 3,490,393 Amortization of debt issue costs (68,909) (68,918) Loss on disposal of property, plant and equipment 28, ,066 Changes in: Accounts receivable (6,846,994) (5,599,427) Inventories 37, ,970 Prepaid expenses and deferred charges 643,771 (516,158) Other assets 146,348 (15,366) Accounts payable and other liabilities (1,963,817) (2,692,826) Liability for other employee benefit 180,708 (131,876) Liability for pension benefits (8,135,928) 2,278,345 Total adjustments 8,093,189 26,697,991 Net cash provided by operating activities 20,482,933 22,231,370 Cash flows from investing activities Purchase of property, plant and equipment (11,438,156) (15,350,892) Purchase of investments (59,679,975) (29,400,172) Proceeds from sales and redemptions of investments 58,564,802 29,406,086 Change in deposits held in trust 196, ,719 Net cash used in investing activities (12,356,780) (14,992,259) Cash flows from financing activities Change in cash restricted to investment in property and equipment (27,737) 906,512 Payments of loans and notes payable (116,640,840) (106,592,114) Proceeds from loans and notes payable 112,726,392 97,500,000 Change in advances from federal government for student loans (224,222) Payments of obligations under capital leases (1,630,409) (1,581,123) Net cash used in financing activities (5,572,594) (9,990,947) Net change in cash and cash equivalents 2,553,559 (2,751,836) Cash and cash equivalents at beginning of year 3,118,515 5,870,351 Cash and cash equivalents at end of year $ 5,672,074 $ 3,118,515 Supplemental disclosure of cash flow information Cash paid for interest $ 6,846,477 $ 6,969,503 Property, plant, and equipment acquired through capital leases $ 376,146 $ 1,196,746 Contributions restricted for construction of long-lived assets not collected during the year $ 90,000 $ 470,000 See notes to the consolidated financial statements

9 Notes to Consolidated Financial Statements July 31, Organization and Summary of Significant Accounting Policies Sistema Universitario Ana G. Méndez, Incorporado (the Institution or SUAGM ) is a private, nonprofit, educational institution incorporated under the laws of the Commonwealth of Puerto Rico. The Institution operates four educational institutions: Universidad Metropolitana, Universidad del Este, Universidad del Turabo, and Universidad Ana G. Méndez. In addition, SUAGM owns and operates a public television station: WMTJ-TV/Channel 40, also known as Sistema TV, the fifth operational unit under SUAGM. The Institution derives revenue primarily from tuition, fees, grants received from federal and state government agencies, and income earned on investments. As a nonprofit organization, SUAGM is exempt from the payment of income taxes under Federal and Commonwealth of Puerto Rico laws and from taxes on property devoted to education. AGMUS Ventures, Inc. ( AVI ), a wholly owned subsidiary of the SUAGM, is a Delaware, forprofit corporation engaged in the development of accelerated adult degree programs, the application of a proprietary learning system, and the use of bilingual education methodology for delivery of services of those programs to adult learners through SUAGM institutions. AVI provides services on behalf of SUAGM according to the terms of an Administrative Service Agreement dated August 1, 2013, and in accordance with the applicable laws, rules and regulations of the United States ( U.S. ) Department of Education. A summary of the significant accounting policies followed by the Institution are set forth below: Principles of Consolidation As of and for the years then ended July 31, 2017 and 2016, the consolidated financial statements include the accounts of the Institution and its wholly owned subsidiary, AVI. All material intercompany balances and transactions have been eliminated in consolidation. Accrual Basis The consolidated financial statements of the Institution have been prepared on the accrual basis of accounting

10 1. Organization and Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates. Basis of Presentation Net assets and revenues, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Institution and changes therein are classified as follows: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations. Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of the Institution and/or the passage of time. Permanently restricted net assets Net assets subject to donor-imposed stipulations that must be maintained permanently by the Institution. Generally, the donors of these assets permit the Institution to use all or part of the income earned on related investments for general or specific purposes. Revenues from sources other than contributions are reported as increases in unrestricted net assets. Contributions are reported as increases in the appropriate category of net assets, except contributions that impose restrictions that are met in the same fiscal year they are received, which are included in unrestricted revenues. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporary restrictions recognized on net assets (i.e., the donor stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications from temporarily restricted net assets to unrestricted net assets. Temporary restrictions on gifts to acquire long-lived assets are considered met in the period in which the assets are acquired or placed in service

11 1. Organization and Summary of Significant Accounting Policies (continued) Change in Accounting Principle Effective August 1, 2015, SUAGM elected to change its method of presentation relating to debt issuance costs in accordance with the Accounting Standards Update , Interest-Imputation of Interest (Subtopic ) Simplifying the Presentation of Debt Issuance (ASU ). Under this new guidance, debt issuance costs related to term loans should be presented as a direct deduction from the carrying amount of the associated debt. Prior to the issuance of the new standard, the Institution presented its debt issuance costs paid to parties other than lenders as a deferred charge on the balance sheet rather than a direct reduction of the carrying value of the debt as is the case with a debt discount and costs paid to lenders. ASU relates only to the presentation of debt issuance costs; it does not affect the recognition and measurement of such amounts. Liquidity Assets are presented in the accompanying consolidated statement of financial position according to their nearness of conversion to cash. Liabilities are presented according to the nearness of their maturity and resulting use of cash. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable (net), inventories, deposits held in trust, cash restricted to investment in property and equipment, accounts payable and other liabilities, and obligations under capital leases approximate fair value because of the short-term maturity of these financial instruments. The carrying amounts of contributions receivable are recorded using the applicable discount rates in effect at the date of the gifts. The carrying amount of long-term debt approximates fair value because these financial instruments bear interest at rates that approximate current market rates for notes with similar maturities and credit quality. Contributions of assets other than cash are recorded at their estimated fair value at the date of the gift. Estimates of fair value involve assumptions and estimation methods that are uncertain and, therefore, the estimates could differ from actual results

12 1. Organization and Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments (continued) The fair values for investments and other financial instruments recorded at fair value on a recurring basis are included in Notes 3 and 12. Cash and Cash Equivalents The Institution considers all highly liquid instruments purchased with an original maturity of three months or less from the date of acquisition to be cash equivalents. Accounts Receivable Accounts receivable are reported at the estimated net realizable amount. An allowance for doubtful accounts is provided, if necessary, based upon management s judgment including factors such as prior collection history and nature of accounts receivable. Contributions Contributions, including unconditional promises to give, are recorded as revenue in the period received. Contributions received with donor-imposed restrictions that are met in the same fiscal year are reported as revenue from unrestricted net assets. Conditional promises to give are not recognized as revenue until they become unconditional, that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value at the date of gift. Contributions to be received after one year are discounted, if practicable, at an appropriate discount rate commensurate with the risk involved. An allowance for uncollectible contributions receivable is provided, if necessary, based upon management s judgment including factors such as prior collection history, type of contribution and nature of fund-raising activity. Inventories Inventories, which consist principally of books and other merchandise for resale, are stated at the lower of average cost or market

13 1. Organization and Summary of Significant Accounting Policies (continued) Investments The Institution accounts for its investments in equity securities with readily determinable fair values and all investments in debt securities under the provisions of ASC , Investments Debt and Equity Securities, which requires that investments be stated at fair value with unrealized gains and losses, as applicable, included in the consolidated statement of activities. The estimated fair value of these investments is based on quoted market prices or recognized pricing sources. At July 31, 2017 and 2016, the Institution had alternative investments (hedge funds and private equity investments) amounting to $11,724,431 and $11,350,059, respectively, whose fair values have been estimated by management in the absence of readily determinable fair values. The estimated fair value of alternative investments is based on valuations provided by the external investment manager as of July 31. Because alternative investments are not readily marketable, their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed. Premium or Discount on Loans Payable and Debt Issue Costs Premium or discount on loans payable and debt issue costs are deferred and amortized over the term of the debt using a method which approximates the effective interest method. Property, Plant and Equipment Property, plant and equipment is stated at cost at the date of acquisition or fair value at the date of donation in the case of gifts. Equipment held under capital leases is amortized over the useful life of the asset or the lease term, whichever is shorter. All construction in progress is carried in a temporary account until the construction is completed; at which time, a transfer is made to the appropriate property, plant or equipment account

14 1. Organization and Summary of Significant Accounting Policies (continued) Property, Plant and Equipment (continued) Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the respective assets as follows: Leases Useful Life Buildings 50 years Building improvements 15 years Leasehold improvements Up to 15 years Software 7 years Equipment, including computers 5 years Library books 5 years Vehicles 5 years A lease which transfers substantially all of the benefits and risk incidental to ownership of property is classified as a capital lease and recorded as the acquisition of an asset and the assumption of an obligation. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred. Impairment Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and exceed its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the long-lived assets exceeds its fair value

15 1. Organization and Summary of Significant Accounting Policies (continued) Goodwill As a result of applying the acquisition method, the Institution recognized as goodwill the consideration transferred for AVI s stocks less the assets acquired and liabilities assumed from AVI on September 30, Goodwill amounted to $728,885 as of July 31, 2017 and This balance is presented within other assets in the accompanying consolidated statements of financial position. Goodwill is tested annually for impairment. An impairment loss is recognized if the carrying amount of the assets exceeds its recoverable amount. Tuition and Fees Student tuition and fees are recorded as revenues on a pro-rata daily basis over the term of the related academic services are rendered. U.S. Government Grants and Contracts Revenue Revenue from U.S. government grants and contracts is recognized upon incurring allowable expenditures in accordance with the grant agreements. Functional Expense Allocation Expenses are reported in the consolidated statements of activities in categories recommended by the National Association of College and University Business Officers. The Institution s primary program services are instruction and public service. Expenses reported as academic support, student services and auxiliary enterprises are incurred in support of the Institution s primary program. Institutional support mainly includes management and general expenses. Certain expenses such as operation and maintenance of plant, depreciation, amortization and interest costs, which are related to more than one category, are allocated among the appropriate categories based primarily on equipment usage and building square footage, as appropriate

16 1. Organization and Summary of Significant Accounting Policies (continued) Financial Aid Programs The Institution participates in various federal Financial Aid Programs ( FAP ). Funds from FAP, for which the Institution is responsible for determining student eligibility and disbursing, are recorded as revenue when awarded to students. The Institution acts as an agent for the Federal Pell Grant Program and Federal Family Direct Loan Program. Funding from these programs totaled $349,479,172 and $342,800,570 for the years ended July 31, 2017 and 2016, respectively. Since these are direct grants and loans to the students, the Institution does not include these amounts as revenues or expenses in its consolidated financial statements. Advertising Costs Advertising costs are charged to operations as incurred. Advertising costs for 2017 and 2016 amounted to $5,175,639 and $8,166,226, respectively. Income Taxes The Institution is exempt from the payment of federal and state income taxes under the U.S. Internal Revenue Code Section 501(c)(3) and the Puerto Rico Internal Revenue Code Section (a)(2). SUAGM is also exempt from the payment of taxes on property devoted to education. The Institution follows the guidance contained in ASC Topic , Accounting for Uncertainty in Income Taxes. ASC Topic prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken. Based upon its evaluation, the Institution concluded that there are no significant uncertain tax positions requiring recognition in its consolidated financial statements

17 1. Organization and Summary of Significant Accounting Policies (continued) Subsequent Events SUAGM evaluates subsequent events and reviews conditions existing at the date of the consolidated statement of financial position as well as conditions that arose after the consolidated statement of financial position date, but before the consolidated financial statements are issued. The effects of conditions that existed at the date of the consolidated statement of financial position date are recognized in the consolidated financial statements. Events and conditions arising after the consolidated statement of financial position date, but before the consolidated financial statements are issued, are evaluated to determine if disclosure is required to keep the consolidated financial statements from being misleading. To the extent such events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. For purposes of preparing the accompanying consolidated financial statements and the following notes to these consolidated financial statements, SUAGM evaluated subsequent events through the date the consolidated financial statements were issued. 2. Accounts receivable Accounts receivable at July 31, 2017 and 2016, consist of the following: Students $ 6,941,897 $ 8,304,152 Puerto Rico government agencies 470, ,089 Contributions 787, ,353 Grants 7,735,276 9,396,754 Other 260, ,379 16,195,630 19,845,727 Less allowance for doubtful accounts 5,024,617 5,855,655 Accounts receivable, net $ 11,171,013 $ 13,990,

18 2. Accounts receivable (continued) Contributions Receivable Contributions receivable are recorded at the net present value (based on a weighted average imputed interest rate of 5%) of the estimated future cash flows from the contributions. Most unconditional promises are restricted by donors for scholarships and support of academic instruction and are due as follows: Less than one year $ 224,143 $ 325,000 More than one year and thereafter 576, , , ,033 Less present value discount 13,483 4,680 Contributions receivable, gross 787, ,353 Less allowance for doubtful contributions 548, ,033 Contributions receivable, net $ 238,738 $ 245,320 Pledges from three donors comprise approximately 48% of undiscounted contributions receivable as of July 31, 2017 and Investments The fair value of investments as of July 31, 2017 and 2016, is as follows: U.S. Government securities $ 5,198,771 $ 4,858,099 Corporate bonds 1,119,026 2,093,288 Equity securities 33,041,876 Shares of registered investment companies (mutual funds) 2,848,904 8,381,486 Money market funds 44,260,588 Hedge funds and private equity investments 11,724,431 11,350,059 $ 65,151,720 $ 59,724,

19 3. Investments (continued) Hedge funds and private equity investments include hedge funds of $7,187,993 and $9,933,266 and private equity investments of $4,535,766 and $1,416,793 as of July 31, 2017 and 2016, respectively. The Institution is obligated under certain investment contracts to periodically advance additional funding up to contractual levels. At July 31, 2017, the commitment to make such additional investments is approximately $3,584,808. The composition of total investment return for the years ended July 31, 2017 and 2016, is as follows: Interest and dividends $ 1,634,043 $ 1,786,369 Less investment expenses 407, ,514 1,226,582 1,310,855 Net appreciation/(depreciation) of investments 4,311,739 (3,490,393) Total investment return/(loss) $ 5,538,321 $ (2,179,538) Current economic conditions and recent events affecting the domestic and global financial markets could have a significant adverse impact on the Institution s investment portfolio due to the nature of the investments

20 4. Property, Plant and Equipment Property, plant and equipment at July 31, 2017 and 2016, are summarized as follows: Land $ 35,615,926 $ 35,615,926 Buildings and improvements 328,209, ,302,151 Leasehold improvements 22,569,890 20,186,416 Equipment 143,559, ,566,569 Library books 18,111,634 17,860,651 Vehicles 4,434,870 4,296,401 Software 7,943,561 7,909,328 Works of art 2,558,449 2,151,529 Construction in progress 6,592,494 9,794, ,596, ,683,487 Less accumulated depreciation and amortization 289,188, ,286,798 Property, plant and equipment, net $ 280,407,404 $ 292,396, Leases The Institution is obligated under various capital leases for equipment that expire at various dates during the next five years. At July 31, 2017 and 2016, the gross amount of equipment and the related accumulated amortization recorded under capital leases and included in property, plant and equipment in the accompanying consolidated statements of financial position is as follows: Equipment $ 7,856,384 $ 7,726,239 Less accumulated amortization 4,981,338 3,738,129 Equipment, net $ 2,875,046 $ 3,988,

21 5. Leases (continued) Amortization of equipment under capital leases amounted to approximately $2,373,000 and $1,365,000 for the years ended July 31, 2017 and 2016, respectively. Such amount is included within depreciation expense in the accompanying consolidated statements of activities. Future minimum capital lease payments as of July 31, 2017, are as follow: 2018 $ 1,232, , , , ,251 Total minimum lease payments 2,976,752 Less amount representing interest (at rates up to 13%) 160,405 Net minimum capital lease payments $ 2,816,347 The Institution has various operating leases, for certain properties and facilities, some of which include escalation clauses. For the years ended July 31, 2017 and 2016, rent expense amounted to $8,598,767 and $8,216,784, respectively. At July 31, 2017, the future minimum lease payments, under noncancelable operating leases related to certain properties and facilities, are as follow: 2018 $ 6,004, ,195, ,911, ,908, and thereafter 8,504,267 Total minimum lease payments $ 29,524,

22 6. Notes Payable Notes payable at July 31, 2017 and 2016, are as follow: Unsecured revolving credit agreement with a commercial bank permitting borrowings up to $21,000,000, bearing interest at 1.80% over 3-month LIBOR at July 31, 2017 (1.31%) and 2016 (.59%). $ 21,000,000 $ 21,000,000 Unsecured revolving credit agreement with a commercial bank permitting borrowings up to $14,000,000, bearing interest at 3.00% over 3-month LIBOR at July 31, 2017 (1.23%) and 2016 (.62%). 14,000,000 14,000,000 Unsecured revolving credit agreement with a commercial bank permitting borrowings up to $10,000,000, bearing interest at 2.75% over 1-month LIBOR at July 31, 2017 (1.31%) and 2016 (.48%). 10,000,000 10,000,000 Unsecured revolving credit agreement with a commercial bank permitting borrowings up to $10,000,000, bearing interest at 2.15% over 3-month LIBOR at July 31, 2017 (1.31%) and 2016 (.69%). 10,000,000 3,500,000 Unsecured non-revolving promissory note with a commercial bank, payable in sixty (60) consecutive monthly principal payments, computed on the basis of eighty-four (84) months amortization schedule, beginning on June 11, 2015, plus interest at 3.00% over 3- month LIBOR (1.31% and.69% at July 31, 2017 and 2016, respectively), with a minimum all-in rate of 3.50% and a lump-sum payment for the outstanding balance. 742, ,190 Unsecured non-revolving promissory note with a commercial bank, payable in sixty (60) consecutive monthly principal payments, computed on the basis of eighty-four (84) months amortization schedule, beginning on April 27, 2015, plus interest at 3.30% over 3- month LIBOR (1.31% and.69% at July 31, 2017 and 2016, respectively), with a minimum all-in rate of 3.75% and a lump-sum payment for the outstanding balance. 13,333,333 16,190,476 Unsecured non-revolving promissory note with a commercial bank, bearing interest at 4.25%, payable in thirty-six (36) consecutive monthly installments of $88,985, including interest, through August ,927 1,133,575 Notes payable to the U.S. Department of Agriculture's Farmers Home Administration, bearing interest at 5%, payable in aggregate semi-annual installments of $146,000, including interest, through 2021, and secured with first mortgages on two properties. 615, ,560 Secure revolving credit agreement with a commercial bank permitting borrowings up-to $1,500,000, bearing interest at 5.31% and collaterized by AVI's assets. 184,304 Notes payable to a commercial bank, bearing interest at 5.59% payable in thirty-six (36) consecutive monthly principal payments beginning on August 1, 2017 and collaterized by AVI's assets. 200,000 Notes payable to a commercial bank, bearing interest at 5.06% payable in thirty-six (36) consecutive monthly principal payments beginning on August 1, 2017 and collaterized by AVI's assets. 342,089 TOTAL $ 70,513,353 $ 67,562,

23 6. Notes Payable (continued) The Institution has available $1,315,696 of unused lines of credit for its operations at July 31, The lines of credit contain various covenants which, among other things, require the Institution to comply with certain affirmative and negative covenants. At July 31, 2017, the Institution was in compliance with the required covenants. Aggregate maturities on notes payable are summarized as follow: 2018 $ 58,615, ,350, ,901, , and thereafter 250,950 Total $ 70,513, Loans Payable The Institution has entered into various loan agreements with the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Financing Authority ( AFICA ). The net proceeds of these loans were used to acquire, construct and improve the facilities and equipment of the Institution, to refinance certain outstanding indebtedness, to create certain reserve accounts and to pay for bond issuance costs. On February 1, 2002, the Institution entered into a loan agreement with AFICA in connection with the issuance of Higher Education Revenue Bonds amounting to $20,365,000 ( AFICA 2002 ). The net proceeds from this loan have been and are being used to: (a) redeem the $16,337,512 principal amount of AFICA 1985, which represents all of the series bonds outstanding on the date of issuance of the bonds; (b) pay a note payable to a commercial bank; (c) deposit monies to the credit of the Reserve Account; and (d) pay certain expenses of the offering of the bonds

24 7. Loans Payable (continued) The maturity dates and interest rates of these bonds are as follow: 4.000% due December 1, 2002 through December 1, 2004 $ 935, % due December 1, 2005 through December 1, ,065, % due December 1, 2010 through December 1, ,225, % due December 1, 2012 through December 1, ,575, % due December 1, 2022 through December 1, ,565,000 20,365,000 Less amounts matured as of July 31, 2017 $ 6,330,000 14,035,000 In April 2006, the Institution entered into a loan agreement with AFICA in connection with the issuance of Higher Education Revenue Bonds amounting to $29,890,000 ( AFICA 2006 ). The AFICA 2006 consists of $3,015,000 serial bonds and $26,875,000 term bonds. The net proceeds from this loan have been and are being used to: (a) pay interim financing for the acquisition, construction, remodeling, improving and equipping of certain educational facilities of the Institution; (b) deposit monies to the credit of the Reserve Account; and (c) pay certain expenses of the offering of the bonds. The maturity dates and interest rates of these bonds are as follows: 5.000% due March 1, 2009 through March 1, 2012 $ 3,015, % due March 1, 2016 through March 1, ,875,000 29,890,000 Less amounts matured as of July 31, 2017 $ 6,355,000 23,535,000 In June 27, 2012, the Institution entered into a loan agreement with AFICA under which AFICA issued $78,380,000 in Higher Education Revenue Bonds ( AFICA 2012 ). The net proceeds from these loans have been and are being used to: (a) provide financing for the construction, improvement and equipping of certain educational facilities owned by the Institution; (b) refund all of AFICA 1998 bonds, of which $15,100,000 were outstanding at the refund date, and all of AFICA 1999 bonds, of which $31,620,000 were outstanding at the refund date; (c) fund a deposit to AFICA 2012 Reserve Account in satisfaction of the Reserve Requirement; (d) pay capitalized interest on a portion of AFICA 2012 for a period of 24 months; and (e) pay certain expenses of the offering of the bonds

25 7. Loans Payable (continued) The maturity dates and interest rates of these bonds are as follow: 3.000% due April 1, 2012 through April 1, 2013 $ 4,140, % due April 2, 2013 through April 1, ,305, % due April 2, 2014 through April 1, ,060, % due April 2, 2015 through April 1, ,255, % due April 2, 2016 through April 1, ,540, % due April 2, 2017 through April 1, ,155, % due April 2, 2018 through April 1, ,265, % due April 2, 2019 through April 1, ,385, % due April 2, 2020 through April 1, ,475, % due April 2, 2021 through April 1, ,595, % due April 2, 2022 through April 1, ,060, % due April 2, 2027 through April 1, ,640, % due April 2, 2032 through April 1, ,505,000 78,380,000 Less amounts matured as of July 31, 2017 $ 24,300,000 54,080,000 All of the AFICA bonds are solely payable from payments made by the Institution to AFICA under the loan agreement. Under the trust agreement, the Institution is required to maintain construction and reserve fund accounts with the trustee that holds the proceeds from the issuance. The funds deposited with the trustee are restricted and, currently, are reserved for debt service (principal and interest). The funds held in the reserve accounts are presented in the accompanying consolidated statements of financial position dated as deposits held in trust of $8,748,826 and $8,945,375 as of July 31, 2017 and 2016, respectively. For the years ended July 31, 2017 and 2016, the interest expense was $4,969,986 and $5,295,464, respectively. These amounts are included in the accompanying consolidated statements of activities

26 7. Loans Payable (continued) Aggregate maturities of the loan agreements, unamortized original issue (discount) premium, and debt issuance costs as of July 31, 2017, are as follows: AFICA AFICA AFICA Year Ending July 31, Total 2018 $ 620,000 $ 770,000 $ 2,155,000 $ 3,545, , ,000 2,265,000 3,730, , ,000 2,385,000 3,930, , ,000 2,475,000 4,095, , ,000 2,595,000 4,300,000 Thereafter 10,565,000 19,280,000 42,205,000 72,050,000 14,035,000 23,535,000 54,080,000 91,650,000 Unamortized original issue (discount)/premium (127,806) 350, ,716 1,022,120 Less debt issuance cost 217, , ,963 1,235,683 $ 13,689,477 $ 23,520,207 $ 54,226,753 $ 91,436,437 The loan and reimbursement agreements contain various covenants, which, among other things, require the Institution to comply with certain affirmative and negative covenants. At July 31, 2017, the Institution was in compliance with the required covenants. 8. Employee Benefit Plans The Institution has a contributory defined benefit pension plan covering several of its employees. The plan covers, on a voluntary basis, employees over 21 years of age, with at least one year as a regular employee. Effective April 20, 2004, the entrance of new participants to the plan was frozen. This includes entrance for any new hires, re-hires and current employees. The participating employees are required to contribute to the plan 3% of the first $7,800 of their annual compensation plus 5% of their annual compensation in excess of $7,800 without any ceiling. The Institution makes all additional contributions necessary to provide the benefits under the plan. The benefits are based on years of participation in plan and the employee s average compensation during the last five years of employment

27 8. Employee Benefit Plans (continued) Information related to the plan as of July 31, 2017 and 2016, and the related changes during the years then ended, is as follows: Measurement Date: August 1 Change in Benefit Obligation: At beginning of year $ 60,755,638 $ 60,771,509 Service cost 535, ,484 Interest cost 2,141,578 2,622,892 Actuarial gain (1,930,673) (206,354) Benefits paid (3,241,652) (3,115,893) At end of year 58,260,091 60,755,638 Change in Plan Assets: Fair value of plan assets at beginning of year 55,432,531 57,726,747 Actual expenses paid (26,257) (26,741) Actual return on plan assets 7,519, ,408 Employer contributions 1,137,205 Participants contributions 251, ,010 Benefits paid (3,241,652) (3,115,893) Fair value of plan assets at end of year 61,072,912 55,432,531 Funded status $ 2,812,821 $ (5,323,107) The accumulated benefit obligation for the plan was $57,063,843 and $59,441,965 at July 31, 2017 and 2016, respectively. The vested benefit obligation for the plan equals the accumulated benefit obligation at July 31, 2017 and

28 8. Employee Benefit Plans (continued) The assumptions used to determine the benefit obligation and the net benefit cost are shown in the following table: Actuarial assumptions: Discount rate 3.88% 3.65% Expected return on plan assets 5.40% 5.10% Salary increase rate 0.00% 0.00% The following table provides the components of net periodic benefit cost for the plan for 2017 and 2016: Components of net periodic benefit cost: Service Cost $ 535,200 $ 683,484 Interest Cost 2,141,578 2,622,892 Expected return on plan assets (2,769,356) (3,463,605) Amortization of loss 1,035, ,164 Net periodic benefit cost $ 943,223 $ 730,935 Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants. At July 31, the funded status of the plan is reported in the accompanying consolidated statements of financial position as follows: Prepaid pension cost $ 8,092,729 $ 7,898,747 Liability for pension benefits (5,279,908) (13,221,854) Net asset/(liability) for pension benefits $ 2,812,821 $ (5,323,107)

29 8. Employee Benefit Plans (continued) The Institution does not expect to contribute for the plan year ending July 31, As of July 31, 2017, the following benefit payments, which reflect expected future service (as appropriate), are expected to be paid: Year Ending July 31, Amount 2018 $ 3,801, ,795, ,764, ,977, ,009, $ 19,853,294 39,201,057 No amounts from the plan s assets are expected to be returned to the Institution during the next fiscal year. The plan s assets overall objective is to provide adequate retirement benefits to the beneficiaries through the investment of contributions and other assets based on a long-term investment horizon defined as greater than 5 years. The Institution s portfolio pool is diversified so as to seek to minimize the risk of large losses or not meeting plan objectives. All assets other than alternative investments should have readily ascertainable market value and must be marketable. To protect the plan s capital, the plan s Investment Committee defines risk tolerance as moderate (i.e., modest tolerance for short term market fluctuation, a moderate need for current income and moderate expectations for growth, as well as for losses, over a market cycle (5-7 years)). The moderate risk tolerance includes an expected return between 5.50% and 6.50%, an expected volatility between 7.50% and 11.00%, as measured by Standard Deviation. The Performance Expectations, the desired rolling five-year average total rate of return, should not be less than 4.75% net of expenses. Emphasis is placed on the long-term capital growth and income

30 8. Employee Benefit Plans (continued) Permitted Investments the following asset classes provide the highest probability of meeting or exceeding the return objective at the lowest possible risk: Cash Equivalents US Large, Mid and Small Capitalization Equities Non-US Developed and Emerging Market Equities US and Non-US Fixed Income Alternative Investments: Real Estate Investment Trusts Natural Resources Risk Management Strategies Yield Enhancement Strategies Community Development Alternatives Private Equity The risk associated with each fund s/manager s portfolio, as measured by the variability of quarterly returns (standard deviation), must not exceed that of the benchmark index and the peer group without a corresponding increase in performance above the benchmark and peer group. The managers are responsible for providing historical quarterly performance numbers calculated on a time-weighted basis, based on a composite of all fully discretionary accounts of similar investment style, and reported net and gross of fees

31 8. Employee Benefit Plans (continued) The following table presents the plan s investments that are measured at fair value on a recurring basis by the ASC 820, Fair Value Measurements and Disclosures, as of July 31, 2017 and 2016: 2017 Total Level 1 Level 2 Level 3 Cash equivalents $ 2,823,792 $ 2,823,792 $ $ Equity securities 36,081,282 36,081,282 Fixed income securities 14,443,207 14,443,207 Alternative investments 7,724,631 7,724,631 $ 61,072,912 $ 38,905,074 $ 14,443,207 7,724, Total Level 1 Level 2 Level 3 Cash equivalents $ 2,269,872 $ 2,269,872 $ $ Equity securities 38,836,231 38,836,231 Fixed income securities 7,149,178 7,149,178 Alternative investments 7,177,250 7,177,250 $ 55,432,531 $ 41,106,103 $ 7,149,178 7,177,250 The following methods and assumptions were used to estimate the fair value for each class of financial instrument measured at fair value: Equity securities Investments in equity securities are measured at fair value using quoted market prices. They are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. Fixed income securities Investments in fixed income securities are comprised of corporate bonds. They are classified as Level 2 based on multiple sources of information, which include market data and/or quoted market prices from either market that are not active or are for the same or similar assets in active market

32 8. Employee Benefit Plans (continued) Alternative investments These investments are essentially funds of funds for which there is no readily determinable fair value and are classified as Level 3 as the valuation is based on significant unobservable inputs. In some cases, the investee has provided its investors with a net asset value per share that has been calculated in accordance with the AICPA Audit and Accounting Guide, Investment Companies, and within the guidance provided in ASC 820. The Institution has estimated its fair value by using the net asset value provided by the investee as of July 31, 2017 and While the Institution believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following table presents a reconciliation of the fair value measurements of plan assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended July 31, 2017 and 2016: Balance at July 31, 2016 Investment Income Net Realized and Unrealized Losses Purchases and Sales Balance at July 31, 2017 Assets: Alternative investments $ 7,177,250 $ $ 391,935 $ (3,899,264) $ 3,669,921 Balance at July 31, 2015 Investment Income Net Realized and Unrealized Gains Purchases and Sales Balance at July 31, 2016 Assets: Alternative investments $ 7,257,956 $ 217,634 $ 234,082 $ (532,422) $ 7,177,

33 8. Employee Benefit Plans (continued) Asset Allocation Restrictions Total equity investments may not exceed 72% of the fund s investment at any time. The maximum commitment to bonds for the overall assets of the plan is set at 80%. The portfolio is run with a total return orientation. The average credit quality of the portfolio should be maintained at a level of A or better. Money market securities including, but not limited to, Treasury bills and notes, Federal Agency issues, commercial paper, banker s acceptances, certificate of deposit, money market funds, asset-backed securities, Eurodollar securities and debentures, and mortgages with less than one year remaining to maturity. Alternative investments would be employed to pursue higher returns, reduced volatility, and diversification benefits resulting from low correlation with the plan s core equity and fixed income investments. Permitted alternative investments include private equity, hedge strategies, event driven strategies, natural resources, real estate and venture capital. If market conditions warrant it, the Investment Committee reserves the right to adjust the asset allocation if deemed prudent to do so. Target Allocation Actual Allocation Percentages Investment Type Percentages Cash equivalents 5.0% 4.6% 4.1% Equity securities 35.0% 59.4% 70.1% Fixed income securities 50.0% 30.0% 12.9% Alternative investments 10.0% 6.0% 12.9% Total 100.0% 100.0% 100.0%

34 8. Employee Benefit Plans (continued) Asset Allocation Restrictions (continued) The expected long-term rate of return on assets has been determined by the Institution in consultation with their financial advisors, investment managers and benefit consultants. The rate chosen reflects the plan s current asset allocation and the future anticipated asset allocation based on the plan s expected future liability structure and expected future cash flow needs. The expected rates of return used in this analysis for each asset class are based on prevailing market conditions and generally accepted reasonable current expectations of future economic and market conditions. Historical returns on the plan s asset portfolio are used only as an indication of the plan s investment performance within an asset class relative to the overall market and are not used as, or considered to be, a reasonable estimate of future investment returns. The Institution also sponsors a defined contribution savings and investment plan in which every employee is eligible on or after the date the employee completes one year of service. Each participant may elect to contribute up to 10% of his/her compensation. The Institution contributes an amount equal to 35% of each participant s contribution, not to exceed 1% of the participant s compensation. The Institution recognized $658,746 and $716,423 during the years ended July 31, 2017 and 2016, respectively, as expense under the savings and investment plan. The Institution is also committed, per contract, to provide a perpetual pension to its President equal to 90% of his base salary at the time of retirement. The benefit is partially funded with an annuity purchased by the Institution, the remaining amount, as estimated by an external actuary, will be funded by the Institution. 9. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets mainly consist of federal grants received from the U.S. Department of Education under the Title III Program, Endowment Challenge Grant together with the income earned on that amount. The Institution matches these grants dollar for dollar. The federal grants and the Institution s contribution constitute the Endowment Fund Corpus. The Institution must invest and shall not expend the Endowment Fund Corpus for a period of 20 years. Afterwards, the Endowment Fund Corpus can be used for any educational purpose

35 9. Temporarily and Permanently Restricted Net Assets (continued) The temporarily restricted net assets as of July 31, 2017 and 2016, are divided as follows: Federal contributions - time restricted $ 500,000 $ 500,000 Other contributions - time restricted 274,343 1,122,830 Investment income and net appreciation (44,648) 67,650 $ 729,695 $ 1,690,480 Permanently restricted net assets consist of private gifts and grants invested in perpetuity. The majority of the income from these investments is expendable for scholarships. Permanently restricted net assets consist of the following at July 31: Endowment funds $ 7,167,127 $ 7,041,554 Contributed land 2,153,431 2,153,431 Works of art 656, ,100 Other 8,840 8,840 $ 9,985,498 $ 9,847, Net Assets Released from Restrictions Net assets totaling $1,052,582 and $1,906,166 were released from donor restrictions during the years ended July 31, 2017 and 2016, respectively, by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors. 11. Endowment The Institution has an endowment fund a pool of investable wealth that has a perpetual investment horizon and is tax exempt. Its main purpose is to generate a stream of earnings that will grow in real or inflation adjusted terms

36 11. Endowment (continued) The endowment fund consists of donations from approximately 94 individuals, private corporations and the U.S. government. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Directors to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donorimposed restrictions. The Institution classifies as permanently net restricted 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 of the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets. The Institution considers the following factors in making a determination to accumulate donorrestricted funds: 1) The duration and preservation of the fund 2) The purposes of the Institution 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 Institution 7) The investment policies of the Institution The Institution has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Institution must hold in perpetuity or for a donor-specific period(s) as well as board-designated funds. Under this policy, as approved by the Board of Directors, the endowment assets are invested in a manner that is intended to produce a real return, net of investment management costs, of at least equivalent to inflation (as measured by the Consumer Price Index) plus no less than 4% over the long term. Actual returns in any given year may vary from this amount

37 11. Endowment (continued) To satisfy its long-term rate-of-return objectives, the Institution relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Institution targets a diversified asset allocation and provides its managers appropriate guidelines to achieve its long-term objective within prudent risk constraints. The preferred asset mix is 60% stocks, 35% fixed income and 5% cash equivalents. The Board may also allocate up to 20% of the Endowment Fund to alternative investments. The Institution has a spending policy that establishes specific terms under which endowment funds can be spent. SUAGM s Investment Committee must consider the use of funds for spending on a year to year basis, except expenses for administrative and scholarship costs as determined by the scholarship programs. On average, the Institution has spent from 1% to 2% annually. In establishing this policy, the Institution considered the long-term expected return on its endowment. Accordingly, over the long term, the Institution expects the current spending policy to allow its endowment to grow at an average of the long-term rate of inflation. This is consistent with the Institution s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specific term as well as to provide additional real growth through new gifts and investment return. At July 31, 2017 and 2016, the endowment net asset composition by type of fund consisted of the following: Unrestricted Temporarily Restricted 2017 Permanently Restricted Total Donor-restricted funds $ 12,785,395 $ 566,988 $ 7,167,127 $ 20,519,510 Board-designated fund 44,439,740 44,439,740 Total funds $ 57,225,135 $ 566,988 $ 7,167,127 $ 64,959,250 Unrestricted Temporarily Restricted 2016 Permanently Restricted Total Donor-restricted funds $ 10,452,503 $ 2,372,757 $ 7,041,554 $ 19,866,814 Board-designated fund 40,320,125 40,320,125 Total funds $ 50,772,628 $ 2,372,757 $ 7,041,554 $ 60,186,

38 11. Endowment (continued) Changes in endowment funds for the fiscal years ended July 31, 2017 and 2016, consisted of the following: Unrestricted Temporarily Restricted 2017 Permanently Restricted Total Endowment net assets at beginning of year $ 50,772,628 $ 2,372,757 $ 7,041,554 $ 60,186,939 Investment return: Investment income, net 1,075,894 21,366 1,097,260 Net appreciation (depreciation) (realized and unrealized) 4,319,322 (7,583) 4,311,739 Total investment return, net 5,395,216 13,783 5,408,999 Contributions 125, ,573 Appropriation of endowment assets for expenditure (1,299,366) (1,299,366) Gain on subsidiary 531, ,738 Miscellaneous Income 5,367 5,367 Other changes: Net assets released and adjustments 1,819,552 (1,819,552) Endowment net assets at end of year $ 57,225,135 $ 566,988 $ 7,167,127 $ 64,959,

39 11. Endowment (continued) Unrestricted Temporarily Restricted 2016 Permanently Restricted Total Endowment net assets at beginning of year $ 54,415,594 $ 2,361,366 $ 6,951,565 $ 63,728,525 Investment return: Investment income, net 1,147,678 18,500 1,166,178 Net depreciation (realized and unrealized) (3,483,284) (7,109) (3,490,393) Total investment return, net (2,335,606) 11,391 (2,324,215) Contributions 89,989 89,989 Appropriation of endowment assets for expenditure (1,469,636) (1,469,636) Gain on subsidiary 161, ,076 Other changes: Transfers to create Board-designated 1,200 1,200 Endowment net assets at end of year $ 50,772,628 $ 2,372,757 $ 7,041,554 $ 60,186,

40 12. Fair Value Measurements Fair Value of Financial Instruments The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair values can vary from period to period based on changes in a wide range of assumptions and factors, including interest and market perceptions of values and as existing assets and liabilities run off and new items are generated. Management, using appropriate market information and other available information, has determined the estimated fair value amounts of the Institution s financial instruments. Considerable judgment is required to develop the estimated fair values; thus, the estimates provided herein are not necessarily indicative of the amounts that could be realized in the current market exchange. The following table presents the carrying amounts and estimated fair values of the Institution s financial instruments at July 31, 2017 and 2016: Carrying Amount Estimated Fair Carrying Estimated Fair Value Amount Value Financial Assets: Cash and cash equivalents $ 5,672,074 $ 5,672,000 $ 3,118,515 $ 3,119,000 Accounts receivable, net 11,171,013 11,171,000 13,990,072 13,990,000 Inventories 1,278,922 1,279,000 1,316,500 1,317,000 Deposits held in trust 8,748,826 8,749,000 8,945,375 8,945,000 Cash restricted to investment in property and equipment 1,058,348 1,058,000 1,030,611 1,031,000 Financial Liabilities: Accounts payables and other liabilities $ 31,637,610 $ 31,637,000 $ 38,658,895 $ 38,659,000 Obligations under capital leases 2,816,347 2,816,000 4,070,611 4,071,000 Notes payable 70,513,353 70,513,000 67,562,801 67,563,000 Loans payable 91,436,437 91,436,000 98,370,346 98,370,

41 12. Fair Value Measurements (continued) Fair Value Hierarchy ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data. Level 3 Inputs are unobservable for the asset or liability. Unobservable inputs reflect the reporting entity s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement

42 12. Fair Value Measurements (continued) Fair Value Hierarchy (continued) The following table presents financial instruments that are measured at fair value on a recurring basis by the ASC 820 hierarchy as of July 31, 2017 and 2016: 2017 Total Level 1 Level 2 Level 3 Fixed income securities $ 1,119,026 $ - $ 1,119,026 $ Alternative investments 11,724,431 11,724,431 Shares of registered investment companies (mutual funds) 8,047,675 8,047,675 Money market funds 44,260,588 44,260,588 Total $ 65,151,720 $ 52,308,263 $ 1,119,026 $ 11,724, Total Level 1 Level 2 Level 3 Equity securities $ 33,041,876 $ 33,041,876 $ $ Fixed income securities 6,951,387 6,951,387 Alternative investments 11,350,059 11,350,059 Shares of registered investment companies (mutual funds) 8,381,486 8,381,486 Total $ 59,724,808 $ 48,374,749 $ $ 11,350,059 The following methods and assumptions were used to estimate the fair value for each class of financial instrument measured at fair value: Equity securities Investments in equity securities are measured at fair value using quoted market prices. They are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. Fixed income securities Investments in fixed income securities are classified as Level 2, since their pricing is based on multiple sources of information that include market data and/or quoted prices from either market that are not active or are for the identical or similar assets in an active market

43 12. Fair Value Measurements (continued) Fair Value Hierarchy (continued) Alternative investments The Institution invests in certain alternative investments that are essentially funds of funds for which there is no readily determinable fair value and are classified as Level 3 as the valuation is based on significant unobservable inputs. In some cases, the investee has provided its investors with a net asset value per share that has been calculated in accordance with the AICPA Audit and Accounting Guide, Investment Companies, and within the guidance provided in ASC 820. The Institution has estimated its fair value by using the net asset value provided by the investee as of July 31, 2017 and Shares of registered investment companies (mutual funds) Investments in shares of registered investment companies are measured at fair value using quoted market price. They are classified as Level 1 as they are traded in an active market for which market prices are readily available. While the Institution believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following table presents a reconciliation of the consolidated statement of financial position amounts for financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended July 31, 2017 and 2016: Net Realized and Purchases, Unrealized Sales, Losses included Issuances and Balance at in Change in Net Settlements, Balance at July 31, 2016 Assets Net July 31, 2017 Assets: Alternative investments $ 11,350,059 $ 328,876 $ 45,496 $ 11,724,

44 12. Fair Value Measurements (continued) Fair Value Hierarchy (continued) Net Realized and Purchases, Unrealized Sales, Losses included Issuances and Balance at in Change in Net Settlements, Balance at July 31, 2015 Assets Net July 31, 2016 Assets: Alternative investments $ 12,417,743 $ (1,602,590) $ 534,906 $ 11,350, Significant Group Concentration of Credit Risk Approximately 90% of the Institution s students participate in student financial assistance programs under Title IV of the Higher Education Act of 1965, as amended, ( Title IV Programs ) of the U.S. Department of Education. Financial instruments, which potentially expose the Institution to concentrations of credit risk, consist primarily of cash and cash equivalents, investments in marketable equity and debt securities and receivables. The Institution s cash and cash equivalents and investment in securities are placed with a wide array of institutions with high credit ratings. The investment portfolio is diversified and includes high quality securities. Concentration of credit risk with respect to receivables is limited because a substantial portion of these balances is due from U.S. government agencies. Regarding student accounts receivable, this consists of a large volume of small balances. The Institution has provided an allowance for doubtful accounts for expected losses, based on historical trends and other information. Management believes that the above concentrations of credit risk do not represent a material risk of loss with respect to its financial position as of July 31, 2017 and

45 14. Commitments and Contingencies The Institution has incurred commitments to develop a capital improvement program with the purpose of acquiring, constructing, improving and equipping their educational facilities. Commitments for construction under the program as of July 31, 2017 amounted to $226,358 and sources of funding have been retained. In addition, the Institution is a defendant in various lawsuits arising from its normal operations. In the opinion of management and its legal counsels, an appropriate provision has been made for probable losses and the ultimate resolution of these matters. 15. Composite Score Section 498(c) of the Higher Education Act of 1965, as amended, requires for-profit and non-profit institutions to annually submit audited financial statements to the U.S. Department of Education ( USDE ) to demonstrate they are maintaining the standards of financial responsibility necessary to participate in the Title IV programs. One of many standards, which the USDE utilizes to gauge the financial responsibility of an institution, is a composite of three ratios derived from an institution's audited financial statements: primary reserve ratio, equity ratio, and net income ratio. The composite score reflects the overall relative financial health of institutions along a scale from negative 1.0 to positive 3.0. A score greater than or equal to 1.5 indicates the institution is considered financially responsible. Schools with scores of less than 1.5 but greater than or equal to 1.0 are considered financially responsible, but require additional oversight. A school with a score less than 1.0 is considered not financially responsible. However, a school with a score less than 1.0 may continue to participate in the Title IV programs under provisional certification. Since the financial factors that influence composite scores can fluctuate from year to year, the USDE provides schools with alternative methods to demonstrate their financial responsibility. These alternative measures allow schools to demonstrate their financial responsibility while offering protection to taxpayers and students. It should be noted that composite scores are only one of several factors that the USDE uses to assess an institution's financial responsibility compliance. The other factors include sufficient institutional cash reserves to make the required refunds, including the return of Title IV funds, the school is meeting all of its financial obligations, and the school is current in its debt payments. As of July 31, 2017, the Institution is considered by the USDE financially responsible

46 16. Subsequent Events In connection with the preparation of the consolidated financial statements and in accordance with ASC 855, Subsequent Events, management has evaluated and reviewed the affairs of the Institution for subsequent events that would impact the consolidated financial statements for the year ended July 31, 2017, through November 30, 2017, the date the consolidated financial statements were issued. Management is not aware of any subsequent event, other than the transaction describe below, that could significantly impact the consolidated financial statements, other than the event disclosed below. On August 22, 2017, AVI commenced a corporate restructuring process. In connection with the restructuring, AVI and SUAGM entered into a stock purchase agreement whereby AVI agreed to redeem its shares of common stock from SUAGM in exchange for $1,775,000. In addition, AVI restated its articles of incorporation to become organized as a nonprofit corporation. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane. The storm surge and high winds caused widespread damage to the overall island, classifying it as a federal disaster zone. The Institution sustained losses as a result of the damages to its property and business interruptions. The Institution expects to recoup most of the costs associated with repair or replacement of assets damaged by the storm over the next several months. As of the date of these financial statements the Institution is in the process of assessing damages in order to proceed with corresponding claims

47 Supplementary Information

48 and AGMUS Ventures, Inc. Consolidating Statement of Financial Position As of July 31, 2017 Sistema Universitario Ana G. Méndez, AGMUS Eliminating Incorporado Ventures, Inc. Entries Consolidated Assets Cash and cash equivalents $ 4,445,672 $ 1,226,402 $ $ 5,672,074 Accounts receivable, net 12,180,057 5,113,135 (6,122,179) 11,171,013 Inventories 1,278,922 1,278,922 Prepaid expenses and deferred charges 2,583, ,824 3,025,704 Deposits held in trust 8,748,826 8,748,826 Investments 65,151,720 65,151,720 Investment in AGMUS Ventures, Inc. 2,128,695 (2,128,695) Cash restricted to investment in property and equipment 1,058,348 1,058,348 Property, plant and equipment, net 275,861,192 4,546, ,407,404 Other assets 2,241, ,095 2,557,040 Assets for pension benefits 2,812,821 2,812,821 Total assets $ 378,492,078 $ 11,642,668 $ (8,250,874) $ 381,883,872 Liabilities and net assets Liabilities: Accounts payable and other liabilities $ 29,546,636 $ 8,213,153 $ (6,122,179) $ 31,637,610 Obligations under capital leases 2,241, ,427 2,816,347 Notes payable 69,786, ,393 70,513,353 Loans payable 91,650,002 91,650,002 Advances from federal government for student loans (213,565) (213,565) Liability for other employee benefit 4,211,452 4,211,452 Total liabilities 197,223,405 9,513,973 (6,122,179) 200,615,199 Net assets: Unrestricted 170,553,480 2,128,695 (2,128,695) 170,553,480 Temporarily restricted 729, ,695 Permanently restricted 9,985,498 9,985,498 Total net assets 181,268,673 2,128,695 (2,128,695) 181,268,673 Total liabilities and net assets $ 378,492,078 $ 11,642,668 $ (8,250,874) $ 381,883,

49 and AGMUS Ventures, Inc. Consolidating Statement of Activities Year Ended July 31, 2017 Sistema Universitario Ana G. Méndez, AGMUS Eliminating Incorporado Ventures, Inc. Entries Consolidated Revenues, gains and other support: Tuition and fees $ 263,048,201 $ $ $ 263,048,201 Less scholarships 19,013,129 19,013,129 Net tuition and fees 244,035, ,035,072 Grants and contracts 30,893,556 30,893,556 Private gifts and grants 1,144,295 1,144,295 Investment income 1,226,582 1,226,582 Net appreciation of investments 4,311,739 4,311,739 Auxiliary enterprises 3,304,237 3,304,237 Other sources 14,439,357 39,250,763 (40,795,001) 12,895,119 Total revenues, gains and other support 299,354,838 39,250,763 (40,795,001) 297,810,600 Expenses and other deductions: Educational and general expenses: Instruction 120,721, ,721,723 Research 8,892,644 8,892,644 Public service 17,993,423 17,993,423 Academic support 14,117,039 14,117,039 Student services 28,838,942 28,838,942 Institutional support 101,728,391 38,719,025 (40,263,263) 100,184,153 Total educational and general expenses 292,292,162 38,719,025 (40,263,263) 290,747,924 Auxiliary enterprises 2,614,878 2,614,878 Total expenses and other deductions 294,907,040 38,719,025 (40,263,263) 293,362,802 Change in net assets from operating activities 4,447, ,738 (531,738) 4,447,798 Nonoperating: Pension-related changes other than net periodic cost 7,941,946 7,941,946 Change in net assets 12,389, ,738 (531,738) 12,389,744 Net assets at beginning of year 168,878,929 1,596,957 (1,596,957) 168,878,929 Net assets at end of year $ 181,268,673 $ 2,128,695 $ (2,128,695) $ 181,268,

50 Ernst & Young LLP Plaza 273, 10 th Floor 273 Ponce de León Avenue San Juan, PR Tel: Fax: ey.com Report of Independent Auditors 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 The Board of Directors of Sistema Universitario Ana G. Méndez, Incorporado We have audited, in accordance with auditing standards generally accepted in the United States 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 Sistema Universitario Ana G. Méndez, Incorporado ( the Institution ), which comprise the (consolidated) statement of financial position as of July 31, 2017, and the related (consolidated) 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 30, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Institution s internal control over financial reporting (internal control) 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 Institution s internal control. Accordingly, we do not express an opinion on the effectiveness of the Institution 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 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 A member firm of Ernst & Young Global Limited

51 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Institution s financial statements are free of 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 result of that testing, and not to provide an opinion on the entity 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 entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. November 30, 2017 Stamp No. E affixed to original of this report. ey A member firm of Ernst & Young Global Limited

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