ASSOCIATION FOR RESEARCH AND ENLIGHTENMENT, INC.

Transcription

1 ASSOCIATION FOR RESEARCH AND ENLIGHTENMENT, INC. CONSOLIDATED FINANCIAL REPORT DECEMBER 31, 2016

2 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT 1 2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position 3 4 Consolidated Statement of Activities 5 Consolidated Statements of Cash Flows 6 7 Consolidated Statement of Functional Expenses 8 Notes to Consolidated Financial Statements 9 21 CONSOLIDATING SUPPLEMENTARY INFORMATION Consolidating Statement of Financial Position 22 Consolidating Statement of Activities 23 Consolidating Statement of Cash Flows Consolidating Statement of Functional Expenses 26 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Page

3 INDEPENDENT AUDITOR'S REPORT To the Board of Trustees Association for Research and Enlightenment, Inc. and Affiliates Virginia Beach, Virginia Report on the Financial Statements We have audited the accompanying consolidated financial statements of the Association for Research and Enlightenment, Inc., and Affiliates (the Organization ) which comprise the consolidated statement of financial position as of December 31, 2016, and the related consolidated statements of activities, cash flows, and functional expenses for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Organization'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 Organization'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. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of December 31, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying supplemental information as listed in the table of contents is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Report on Summarized Comparative Information We have previously audited the Organization s 2015 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated April 15, In our opinion, the summarized comparative information presented herein as of and for the year ended December 31, 2015, is consistent, in all material respects, with the audited financial statements from which it has been derived. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated May 11, 2017 on our consideration of the Organization 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 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 Organization s internal control over financial reporting and compliance. Norfolk, Virginia May 11,

5 CONSOLIDATED FINANCIAL STATEMENTS

6 CONSOLIDATED STATEMENT OF FINANCIAL POSITION December 31, 2016 with Comparative Totals for December 31, ASSETS Current Assets Cash and cash equivalents $ 1,353,958 $ 1,864,441 Trade accounts receivable, net of allowance 316, ,736 Pledges and bequests receivable, net 56, ,719 Inventory, net of allowance 323, ,385 Prepaid expenses 185, ,646 Due from affiliates 2,859 1,826 Total current assets 2,238,809 2,966,753 Net Property and Equipment 8,383,104 8,464,978 Investments Split interest agreements 1,721,528 2,310,646 Cash and securities 3,262,729 3,042,229 Total Investments 4,984,257 5,352,875 Other Assets Donated assets Real estate 890, ,949 Other 72, ,563 Intangibles, net of amortization 80,405 80,405 Pledges and bequests receivable, net 12,799 51,077 Total other assets 1,057,102 1,341,994 Total assets $ 16,663,272 $ 18,126,600 See Notes to Consolidated Financial Statements. 3

7 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Continued) December 31, 2016 with Comparative Totals for December 31, LIABILITIES AND NET ASSETS Current Liabilities Current portion of notes payable $ 115,264 $ 167,005 Current portion of split interest agreements payable 247, ,600 Current portion of capital lease obligation 18,094 26,489 Line of credit 500, ,000 Accounts payable, trade 242, ,270 Accrued salaries, wages and employee benefits 114, ,587 Deferred income 409, ,374 Other current liabilities 37,977 43,291 Total current liabilities 1,685,967 1,754,616 Long-Term Liabilities, net of current portions Deferred income 670, ,266 Notes payable 2,192,386 2,499,712 Capital lease obligation 53,169 - Split interest agreements payable 1,449,140 1,744,399 Total long-term liabilities 4,365,206 4,948,377 Total liabilities 6,051,173 6,702,993 Net Assets Unrestricted: Board designated 3,700,914 3,643,996 Undesignated 2,709,227 2,811,472 Temporarily restricted 2,794,598 3,587,219 Permanently restricted 1,407,360 1,380,920 Total net assets 10,612,099 11,423,607 Total liabilities and net assets $ 16,663,272 $ 18,126,600 See Notes to Consolidated Financial Statements. 4

8 CONSOLIDATED STATEMENT OF ACTIVITIES Year ended December 31, 2016 with Comparative Totals for the Year Ended December 31, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Total Revenues, Gains and Other Support Sales $ 1,143,422 $ - $ - $ 1,143,422 $ 1,330,431 Cost of sales 508, , ,390 Gross profit from sales 634, , ,041 Contributions Donors 1,349, ,621 26,440 1,712,310 3,336,173 Bequests 758, ,250 1,012,053 Net noncash 2, , ,172 Change in value of split-interest agreements 52,255 33,755-86,010 20,038 Dues Life membership 127, , ,878 Other categories 805, , ,106 Fees for services Conference fees 601, , ,292 Health services fees 841, , ,424 Tour fees 394, , ,442 All other fees for services 362, , ,906 Gain (loss) on sale of property and equipment (95,033) - - (95,033) 141,410 Gains on sale of other assets 23, ,768 24,034 Investment income (loss) Dividends and interest 61,159 36,193-97, ,495 Gains (losses) on investments Realized 47,533 (8,333) - 39, ,879 Unrealized 42, , ,356 (340,550) Rental income 90, ,490 90,200 Other income 45, , ,908 Postage and handling 10, ,941 12,109 Royalty income 25, ,172 34,892 Tuition 786, , ,960 Net assets released from restriction 1,290,891 (1,290,891) Total revenues, gains and other support 8,260,399 (792,621) 26,440 7,494,218 10,255,862 Program services 7,318, ,318,497 7,645,822 Support services 442, , ,316 Fund raising 544, , ,145 Total expenses 8,305, ,305,726 8,839,283 Changes in Net Assets (45,327) (792,621) 26,440 (811,508) 1,416,579 Net Assets, beginning of year 6,455,468 3,587,219 1,380,920 11,423,607 10,007,028 Net Assets, end of year $ 6,410,141 $ 2,794,598 $ 1,407,360 $ 10,612,099 $ 11,423,607 See Notes to Consolidated Financial Statements. 5

9 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 2016 with Comparative Totals for the Year Ended December 31, Cash Flows From Operating Activities Change in net assets $ (811,508) $ 1,416,579 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Realized and unrealized (gains) losses on investments (181,556) 207,671 Dividends and interest reinvested (97,352) (129,495) Depreciation and amortization 442, ,588 Contributions restricted for property and equipment and other long-term purposes (215,432) (1,695,625) Non-cash contributions Fair market value when received (17,728) (1,352,015) Cash proceeds from sales 263,639 1,174,393 Uncollectible accounts 6,242 10,516 Provision for pledge discount (2,872) (23,415) Gain (loss) on sale of property and equipment 95,033 (141,410) Gains on sale of other assets 703 (24,034) Provision for inventory obsolescence (500) (500) (Increase) decrease in operating assets Trade accounts receivable 36,513 (128,860) Pledges and bequests receivable 115, ,773 Inventory 26,659 23,549 Prepaid expenses 88,309 (54,210) Due from affiliate (1,033) (1,826) Increase (decrease) in operating liabilities Accounts payable 65,368 (12,232) Accrued salaries, wages and employee benefits (5,907) 4,219 Deferred income (96,415) 89,583 Annuities payable (295,259) (171,497) Other current liabilities (5,314) 11,090 Net cash provided by (used in) operating activities (590,851) 623,842 Cash Flows From Investing Activities Net proceeds (purchases) of investments 647,526 (874,112) Proceeds from sale of assets 921, ,147 Purchases of property and equipment (1,302,383) (324,502) Net cash provided by (used in) investing activities 266,209 (1,007,467) See Notes to Consolidated Financial Statements. 6

10 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Year ended December 31, 2016 with Comparative Totals for the Year Ended December 31, Cash Flows From Financing Activities Proceeds from notes payable $ - $ 202,009 Repayments on notes payable (359,067) (357,420) Collection of contributions restricted for property and equipment and other long-term purposes 202,767 1,699,105 Principal payments on capital lease obligations (29,541) (37,301) Net cash provided by (used in) financing activities (185,841) 1,506,393 Net increase (decrease) in cash and cash equivalents (510,483) 1,122,768 Cash and Cash Equivalents, beginning of year 1,864, ,673 Cash and Cash Equivalents, end of year $ 1,353,958 $ 1,864,441 Supplemental Disclosure of Cash Flow Information Interest paid $ 348,701 $ 294,594 Supplemental Disclosure of Non-Cash Investing and Financing Activities Property and equipment acquired through capital lease 74,315 - See Notes to Consolidated Financial Statements. 7

11 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Year ended December 31, 2016 with Comparative Totals for the Year Ended December 31, 2015 Program Support Fund Services Services Raising Total Total Advertising and promotion $ 131,954 $ 90 $ 2,363 $ 134,407 $ 174,688 Bank charges 144, , , ,271 Board expense 20, ,907 8,779 Books and tapes 37, ,015 50,285 Contracted services 1,179,259 39,500 9,950 1,228,709 1,369,874 Copyright expense Cost of obsolescence 1, ,000 6 Curriculum development 6, ,264 8,260 Damaged goods expense 4, ,893 3,357 Depreciation and amortization 442, , ,588 Dues and subscriptions 9,779 1, ,121 7,388 Employee training 33, ,970 31,194 Employee welfare and recreation 280, , ,372 Equipment rental 66, ,716 78,809 External storage 18,674 1,166-19,840 20,171 General insurance 275, , ,750 Interest expense 351, , ,637 Licenses and fees 44,232 5, ,237 54,324 Mail service 80,784-27, , ,200 Materials 7, ,627 11,046 Miscellaneous expense ,403 Office supplies and expense 152,962 14,699 6, , ,717 Organizational giving 1, ,755 1,465 Payroll services 44,139 20,928-65,067 56,552 Payroll taxes 190,302 19,443 39, , ,723 Postage 199, , , ,730 Preservation expense 21, ,097 1,137 Printing 97, ,041 96,380 Professional services 42,059 15,816-57,875 67,071 Program expense 509,154-91, , ,516 Repairs and maintenance 190,134 26, , ,237 Salaries 2,465, , ,159 3,051,752 3,139,747 Telephone 45,086 11,022-56,108 57,332 Travel and entertainment 89, , , ,105 Uncollectible accounts 6, ,242 10,516 Utilities and fuel 125,696 4, , ,148 Total expense $ 7,318,497 $ 442,340 $ 544,889 $ 8,305,726 $ 8,839,283 See Notes to Consolidated Financial Statements. 8

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 1. Nature of Organization and Significant Accounting Policies Nature of Organization: The Association for Research and Enlightenment, Inc. (A.R.E.), Edgar Cayce Foundation (E.C.F.) and Atlantic University (A.U.) (collectively "the Organization") are nonstock, notfor-profit organizations headquartered in Virginia Beach, Virginia. Founded in 1931, A.R.E. offers conferences; educational activities, including publishing; and fellowship through programs and publications which focus on such topics as holistic health, dreams, reincarnation, ESP, the power of the mind, meditation, and personal spirituality. E.C.F. was established to preserve and disseminate the readings of Edgar Cayce. A.U. is an accredited, non-profit, multi-degree-granting, non-credit and graduate-level institution of higher education. Its purpose is to create a learning environment that will help individuals transform their lives as they learn to better understand themselves and their relationship to all life. The Organization receives the majority of its support from sales, contributions, fees for services, membership dues and tuition. A.R.E. is affiliated with E.C.F. and A.U., which require that all members of their respective Boards of Trustees be members of the Board of Trustees of A.R.E. Use of Estimates: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of A.R.E., E.C.F. and A.U. All significant intercompany accounts and transactions have been eliminated. The financial statements of A.R.E., E.C.F. and A.U. have been consolidated pursuant to accounting standards which require organizations to present consolidated statements when an economic interest and control exists. Economic interest and control exists when one organization controls the related nonprofit entity through a majority voting interest in the board of the related entity, and has an economic interest in the related entity. Basis of Presentation: The Organization is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Support that is restricted by the donor is, however, reported as an increase in unrestricted net assets if the restriction expires or is otherwise satisfied in the reporting period in which the support is recognized. All other donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a temporary restriction expires or is otherwise satisfied, temporarily restricted net assets are reclassified to unrestricted net assets. Details related to temporarily and permanently restricted net assets are included in Note 3 and Note 13. The consolidated financial statements include certain prior-year summarized comparative information as totals only. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Organization's consolidated financial statements for the year ended December 31, 2015, from which the summarized information was derived. 9

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 1. Nature of Organization and Significant Accounting Policies Cash and Cash Equivalents: Cash and cash equivalents in the consolidated statements of financial position and cash flows are defined as demand deposits, overnight investments at banks, and all highly liquid debt instruments purchased with an original maturity of three months or less. However, money market accounts that are part of managed investment accounts are reported as investments. Trade Accounts Receivable: The Organization routinely extends its members and customers trade credit, most of which is not collateralized or otherwise secured. At December 31, 2016 management has reviewed all accounts receivable for collectability and written off all accounts deemed uncollectible. There was an allowance for uncollectible accounts receivable of $11,222 as of December 31, A trade account receivable is deemed past due if payments are not received by the due date stated on the billing statement, which may vary for each customer. Past due accounts are not charged a finance charge on the past due balance. Past due receivables may only be charged off upon approval by management. Pledges and Bequests Receivable: Pledges are recognized when a donor makes a promise to give to the Organization that is, in substance, unconditional. Unconditional pledges to give are reported at net realizable value if at the time the promise is made payment is expected to be received in one year or less. Unconditional promises that are expected to be collected in more than one year are reported at fair value initially and at net realizable value thereafter. Bequests are recognized when a legally enforceable document is received or will have been validated after a donor s passing. The Organization uses the allowance method to determine uncollectible pledges receivable. The allowance is based on prior years collection experience and management s analysis of specific promises made. There was an allowance for uncollectible pledges and bequests receivable of $6,150 as of December 31, Inventory: Inventory, principally publications held for sale, is stated at the lower of specific cost or market, using the average cost method. The Organization has established an allowance for obsolete inventory of $7,500 as of December 31, Property and Equipment: Property and equipment are reported at cost or, if donated, at the approximate fair market value at the date of donation. Depreciation is computed by the straight-line method, based on the following useful lives: Automobiles Building and improvements Computer equipment and software General equipment Land improvements 2-5 years 3-50 years 3-10 years 3-15 years 5-21 years 10

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 1. Nature of Organization and Significant Accounting Policies (Continued) Impairment of Long-lived assets: In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic , Accounting for the Impairment or Disposal of Long-Lived Assets, management reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of an asset may not be recoverable, a write-down to fair value is recorded. Fair values are determined based on the discounted cash flows, quoted market values, or external appraisals, as applicable. Long-lived assets are reviewed for impairment at the individual asset or the asset group level for which the lowest level of independent cash flows can be identified. Investments: The Organization reports investments in marketable equity securities with readily determinable fair values and all investments in debt securities at their fair values in the consolidated statement of financial position in accordance with FASB ASC Topic 958, Accounting for Certain Investments Held by Not-for-Profit Organizations and FASB ASC Topic 820, Fair Value Measurements and Disclosures. Unrealized gains and losses are included in the change in net assets in the accompanying consolidated statement of activities. Investment related expenses netted against investment revenues in 2016 were $32,320. This guidance requires expanded disclosures surrounding the Organization s investments and has been included in Note 5. Donated Assets: Noncash contributions are recorded at fair value on the date of donation and analyzed for potential impairment thereafter. Included in donated real estate is $874,000 of retained life estate gifts that cannot be sold until the death of certain specified beneficiaries in accordance with the agreements and is therefore temporarily restricted. Included among other assets are interests in other real estate, collections, and trust interests. Edgar Cayce Readings: The Organization owns the transcribed collection of Edgar Cayce s readings. The value of these readings is not reported in these consolidated financial statements since it is not susceptible to objective measurement or valuation. Split-Interest Agreements: Split-interest agreements are contributions to be shared by the Organization and other beneficiaries. The contributions of this type received by the Organization are unconditional, irrevocable split-interest agreements and consist of two basic types: charitable gift annuities received and administered by the Organization and gifts to a pooled (life) income fund administered by a third-party trustee. Charitable gift annuities are contributions of assets directly to the Organization in exchange for distributions of a fixed amount for a specified period of time to the donor or other beneficiary. The contributed assets are considered general unrestricted assets of the Organization, and the related annuity liability is recorded as an unrestricted general obligation. 11

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 1. Nature of Organization and Significant Accounting Policies (Continued) Donations made to the Organization s pooled life income fund are received by a third-party trustee and used to purchase investment units in the fund. The fair value of any donation to this fund is compared to the fair value of the investment pool at the date of the donation to determine the number of units acquired. During the term of these life income gifts, the donors, or beneficiaries specified by the donor, if any, receive the actual income earned on the donor s units in the pooled fund. Upon the death of the donor, the donor s units revert to the Organization. Until that time, the assets in the pooled income fund are considered to be temporarily restricted. When the assets are received, they are recognized at fair value. Contribution revenue is recorded at the present value of the assets expected to be received upon the death of the donor using life expectancies specified in publications of the Internal Revenue Service. The difference between the fair value of the assets received and the contribution recognized represents the amount of discount associated with the gift, and is presented in the accompanying consolidated statement of financial position as deferred income. During the term of the agreement, amortization of this discount as well as re-valuations based on changes in life expectancy and other actuarial assumptions are recognized as a change in the value of split-interest agreements in the consolidated statement of activities. All assets recognized from either charitable gift annuities or pooled life income fund donations are recorded at their fair value at the date of donation. Thereafter, investments are adjusted to their fair market value in accordance with U.S. generally accepted accounting principles. Donations structured as gift annuities and pooled life income agreements are discounted at various rates and are also calculated using life expectancies specified in publications of the Internal Revenue Service. Deferred Income: In addition to the deferred income from pooled life income agreements explained above, deferred income results from membership dues, tuition and similar payments received in advance. This income is recognized in subsequent years as services are rendered. Advertising: Advertising costs are expensed to operations when incurred. Contributed Services: A substantial number of unpaid volunteers have made significant contributions of their time to the Organization. The value of this contributed time is not reported in these consolidated financial statements since it is not susceptible to objective measurement or valuation nor meets the criteria for recognition in accordance with generally accepted accounting principles. Expense Allocation: The costs of providing various programs and other activities have been summarized on a functional basis in the consolidated statements of activities and functional expenses. Directly identifiable expenses are charged to program services, support services and fund raising. Expenses related to more than one function are charged to program services, support services, and fund raising on the basis of time and expense estimates made by management. Support services include those expenses that are not directly identifiable with any other specific function but provide for the overall support and direction of the Organization. 12

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 1. Nature of Organization and Significant Accounting Policies (Continued) Income Taxes: A.R.E. and its affiliates, E.C.F. and A.U., are exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code, except on net income, if any, resulting from unrelated business taxable income. FASB ASC Topic 740, Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Organization s management has evaluated the impact of the standard to its consolidated financial statements. The Organization s income tax returns are subject to examination by taxing authorities, generally for a period of three years from the date the returns are filed. The Organization s policy is to classify income tax related interest and penalties in interest expense and other expenses, respectively. Accounting Standards Update: In August 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which simplifies and improves how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows. Among other changes, the ASU replaces the three current classes of net assets with two new classes, net assets with donor restrictions and net assets without donor restrictions, and expands disclosures about the nature and amount of any donor restrictions. ASU is effective for annual periods beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018, with early adoption permitted. The Organization is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU , which defers the effective date of ASU one year making it effective, for private companies, for annual reporting periods beginning after December 15, The core principle of the ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity is expected to be entitled for those goods or services. ASU defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. Generally Accepted Accounting Principles, including identifying performance obligations in the contract; estimating the amount of variable consideration to include in the transaction price; and allocating the transaction price to each performance obligation. The Organization is currently evaluating the impact the adoption of this guidance may have on its consolidated financial statements. 13

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 1. Nature of Organization and Significant Accounting Policies (Continued) In February 2016, the FASB issued ASU , Leases (Topic 842). The guidance in this ASU supersedes the lease guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the statement of financial position for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of activities. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Organization is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements. Note 2. Pledges and Bequests Receivable As noted in Note 5, FASB Accounting Standards Codification No. 820, Fair Value Measurements, established a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Long-term pledges and bequests receivables are initially recorded by the Organization at fair value using level 3 inputs and at net realizable thereafter. The present value technique is the primary input for this valuation and other inputs include an analysis of the donor's payment history, relationship with the donor, the donor's creditworthiness and other factors. In addition, a provision for uncollectible pledges is recorded as appropriate. An average discount rate of 3% was used in calculating the present value of long-term pledges for the year ended December 31, The table below presents information about the Organization s changes in pledges and bequests receivable for the year ended December 31, 2016: Beginning balance $ 180,019 New promises received 1,861,097 Collections (1,963,518) Ending balance $ 77,598 The Organization s estimated future pledge and bequest collections for the years subsequent to December 31, 2016 are as follows: Due in less than one year $ 62,598 Due in one to five years 15,000 Gross unconditional pledges and bequest receivable 77,598 Less allowance for uncollectible receivables (6,150) Less discounts to net present value (2,201) Net unconditional pledges and bequest receivable $ 69,247 14

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 3. Restrictions on Net Assets Net assets included in the temporarily restricted net asset classification have been received from donors that have restricted the use of the funds for a specific purpose and/or future period. The restrictions expire when obligations are incurred to fulfill the specified purpose or when time restrictions are satisfied. Temporarily restricted net assets at December 31, 2016 consisted of the following: Retained life estate gifts $ 874,000 Pooled income 908,031 Endowment earnings 72,522 Visitor s Center renovations 230,278 Tarsia Center 332,200 Summer camp 21,065 UK outreach 4,640 Scholarships 10,820 Prayer and meditation upkeep 10,000 Copeland prison books 1,000 Reilly School 111,585 Search for God study group 41,226 Other programs 117,024 Atlantic University 14,250 Edgar Cayce Foundation 45,957 $ 2,794,598 Note 4. Property and Equipment Property and equipment at December 31, 2016 is summarized below. Depreciation expense for 2016 was $442,473. As of December 31, 2016, $1,864,000 of the Organization s land and improvements was board designated for the endowment. See Note 13 for more information on the endowment. Automobiles $ 14,778 Building and improvements 7,939,338 Computer equipment and software 1,515,125 General equipment 1,717,835 Land and improvements 1,285,416 Construction in progress 675,884 13,148,376 Less accumulated depreciation 4,765,272 Net property and equipment $ 8,383,104 15

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 5. Investments Investments are presented in the consolidated financial statements at their fair value and are summarized below at December 31, 2016: Cost Market Split interest agreements: Corporate bonds $ 894,222 $ 901,117 Stocks and mutual funds 558, ,260 Money market funds 56,057 56,057 Commodities 40,596 33,042 Real estate investment trust 38,582 46,052 Total split interest agreements 1,587,708 1,721,528 Other securities: Corporate debt bonds 1,067,930 1,080,149 Stock and mutual funds 1,937,271 2,182,580 Total cash and securities 3,005,201 3,262,729 Total investments $ 4,592,909 $ 4,984,257 Investments at December 31, 2016 consist of the following: Permanently restricted $ 1,353,206 Temporarily restricted 1,639,195 Unrestricted 1,991,856 Total investments $ 4,984,257 Fair market value is determined using different valuation inputs. Pursuant to FASB ASC Topic 820, the three levels of valuation hierarchy are as follows: Level 1 - Valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 - Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. 16

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 5. Investments (Continued) Level 3 - Valuation is based on unobservable inputs that are significant to the fair value measurement. As of December 31, 2016, assets measured at fair value on a recurring basis are as follows: Level 1 Level 2 Level 3 Total Corporate bonds $ 1,136,467 $ 844,799 $ - $ 1,981,266 Stocks and mutual funds 2,269, ,611-2,867,840 Commodities - 33,042-33,042 Real estate investment trust - 46,052-46,052 Money market funds 56, ,057 Total $ 3,461,753 $ 1,522,504 $ - $ 4,984,257 Note 6. Intangibles Intangible assets for the Organization at December 31, 2016 are summarized below. Trademarks are being amortized by the straight-line method over the related terms. In addition, management reviews intangible assets for potential impairment annually. No impairments were identified by management for Amortization Net Book Description Term Expiration Cost To Date Value Trademarks 180 months 06/2015 $ 11,081 $ 11,081 $ - Domain name indefinite N/A 80,405 N/A 80,405 $ 91,486 $ 11,081 $ 80,405 Note 7. Operating Leases The Organization leases office equipment under several operating leases expiring at various dates through October Equipment rental expense attributable to these operating leases in 2016 was $66,716. Minimum future annual rent commitments under these agreements for the next four years are: $ 83,673 $ 69,693 $ 69,693 $ 52,270 17

21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 8. Capital Lease The Organization acquired a phone system under a capital lease expiring in September This phone system replaced the existing phone system that was acquired under a capital lease which ended in August The new equipment had an original cost of $74,315 which has been recorded in property and equipment. The amortization of the cost of this equipment is included in depreciation and amortization expense. Total future lease payments under the lease are as follows: 2017 $ 18, , , , ,584 Less amount representing interest (14,885) Present value of minimum lease payments $ 74,075 Note 9. Employee Benefit Plan The Organization offers a defined contribution benefit plan available to all qualifying employees. Employees are not required to complete any number of hours of service to receive credit for eligibility to the plan. Discretionary employer based contributions are permitted in accordance with the plan document. The Organization did not contribute to the plan in the year ended December 31, Note 10. Concentration of Credit Risk At December 31, 2016, and at various times during the year, the Organization had on deposit with a single financial institution more than $250,000, which is the limit currently insured by the Federal Deposit Insurance Corporation. Note 11. Line Of Credit The Organization has a $500,000 line of credit with Branch Banking and Trust Company (BB&T or the Bank). The line is secured by specified real property and improvements of the Organization and bears interest at the Bank s prime rate (3.25% at December 31, 2016). At December 31, 2016 there was an outstanding balance of $500,000. The line of credit matures on November 5,

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 12. Notes Payable The Organization had two loans from BB&T. The first loan had an initial balance of $1,995,000 and required monthly payments of $14,714, including interest at the lender s prime rate plus.15% with a minimum rate of 3.75%. This loan s maturity date was to be in April The second loan provided for borrowings up to $1 million and required monthly payments of $7,229 based on a 15 year amortization of principal and interest at the lender s prime rate with a minimum of 3.75%. This loan s maturity date was to be in January Both loans were secured by the Organization s property and equipment and included a financial covenant requiring a debt service coverage ratio of 1.35 to 1. In May 2016, the Organization consolidated the two loans with BB&T into one loan in the amount of $2,375,831. The loan is payable in 60 consecutive monthly installments of $18,365 based on a 15 year amortization of principal and bears interest at 4.59%. The loan matures May 5, The loan is collateralized by real property, improvements and equipment owned by the Organization. The loan contains certain financial covenants. The Organization did not meet the covenants as of December 31, 2016 but acquired a waiver from BB&T. Notes payable and related current maturities consist of the following as of December 31, 2016: Notes payable $ 2,307,650 Less current maturities 115,264 Future aggregate maturities required on principal are as follows: $ 2,192, $ 115, , , , ,794 And thereafter 1,674,096 $ 2,307,650 Note 13. Endowment FASB ASC which, among other things, provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) and additional disclosures about an organization's endowment funds. The Commonwealth of Virginia adopted UPMIFA on July 1, The adoption of UPMIFA required reclassifications between board designated unrestricted and permanently restricted net assets. There were no other resulting effects on accounting for the Organization s endowment. The following disclosures are made as required by FASB ASC

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 13. Endowment (Continued) The Organization s endowment consists of various individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor imposed restrictions. The Board of Trustees of the Organization has interpreted the UPMIFA as requiring the preservation of the historic value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Organization 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 the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organizations in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted funds: (1) The duration and preservation of the fund (2) The purposes of the Organization 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 Organization (7) The investment policies of the Organization As of December 31, 2016, the Board of Trustees had designated $3,700,914 of unrestricted net assets as a general endowment fund to specifically support general operations, expenses, outreach, and staffing, essentially those infrastructure costs that are not directly supported by sales, fundraising, fees and general contributions. Since that amount resulted from an internal designation and is not donor-restricted, it is classified and reported as unrestricted net assets. The Organization has a spending policy of appropriating for distribution each year 5% of its endowment fund's market value as of June 30 of the previous year. In establishing this policy, the Organization considered the long-term expected investment return on its endowment. Accordingly, over the long term, the Organization expects the current spending policy to allow its general endowment fund to grow at an average of 4% annually. This is consistent with the Organization's objective to maintain the purchasing power of the endowment assets as well as to provide additional real growth through investment return. 20

24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 Note 13. Endowment (Continued) To achieve that objective, the Organization has adopted an investment policy that attempts to maximize total return consistent with an acceptable level of risk. Endowment assets are invested in a welldiversified asset mix, which includes equity and debt securities, that is intended to result in a consistent inflation-protected rate of return that has sufficient liquidity to make an annual distribution of 5%, while growing the fund if possible. Accordingly, the Organization expects its endowment assets, over time, to produce an average rate of return of approximately 9% annually. Actual returns in any given year may vary from this amount. Investment risk is measured in terms of the total endowment fund; investment assets and allocation between asset classes and strategies are managed to not expose the fund to unacceptable levels of risk. Composition of and changes in endowment net assets for the year ended December 31, 2016 are as follows: Donor- Donor- Board- Designated Designated Designated Temporarily Permanently Unrestricted Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 3,643,996 $ (14,454) $ - $ 1,380,920 $ 5,010,462 Investment income 65,265-35, ,136 Contributions 25, ,440 51,530 Net appreciation 56,586 14,454 39, ,168 Amounts appropriated for Expenditure (90,023) - (2,477) - (92,500) Endowment net assets, end of year $ 3,700,914 $ - $ 72,522 $ 1,407,360 $ 5,180,796 Note 14. Related Party Transactions The Organization is affiliated with other independently controlled nonprofit organizations that promote its missions in various locations throughout the United States. These organizations, referred to as Regions, are similarly exempt from income taxes as a group under Section 501(c)(3) of the Internal Revenue Code. The financial information for these Regions are not included in these consolidated financial statements, thus the activity has not been eliminated. Note 15. Subsequent Events The Organization has evaluated all events subsequent to December 31, 2016 through May 11, 2017, which is the date these consolidated financial statements were available to be issued. Management has determined that there are no subsequent events that are required to be disclosed pursuant to the FASB Accounting Standards Codification. 21

25 SUPPLEMENTAL INFORMATION

26 CONSOLIDATING STATEMENT OF FINANCIAL POSITION December 31, 2016 with Comparative Totals for December 31, 2015 ASSETS Consolidated A.R.E. E.C.F. A.U. Eliminations Current Assets Cash and cash equivalents $ 1,295,176 $ 45,956 $ 12,826 $ - $ 1,353,958 $ 1,864,441 Trade accounts receivable, net of allowance 282,010-34, , ,736 Pledges and bequests receivable, net 56, , ,719 Inventory, net of allowance 323, , ,385 Prepaid expenses 184,263 1, , ,646 Due from affiliates 235, (233,007) 2,859 1,826 Total current assets 2,376,989 47,030 47,797 (233,007) 2,238,809 2,966,753 Net Property and Equipment 8,365,327-17,777-8,383,104 8,464,978 Investments Split interest agreements 1,721, ,721,528 2,310,646 Cash and securities 2,946, ,637-3,262,729 3,042,229 Total investments 4,667, ,637-4,984,257 5,352,875 Other Assets Donated assets Real estate 890, , ,949 Other 66,559-6,390-72, ,563 Intangibles, net of amortization 80, ,405 80,405 Pledges and bequests receivable, net 12, ,799 51,077 Total other assets 1,050,712-6,390-1,057,102 1,341,994 Total assets $ 16,460,648 $ 47,030 $ 388,601 $ (233,007) $ 16,663,272 $ 18,126,600 LIABILITIES AND NET ASSETS Current Liabilities Current portion of notes payable $ 115,264 $ - $ - $ - $ 115,264 $ 167,005 Current portion of split interest agreements payable 247, , ,600 Current portion of capital lease obligation 18, ,094 26,489 Line of credit 500, , ,000 Accounts payable, trade 242, , ,270 Accrued salaries, wages and employee benefits 107,939-6, , ,587 Deferred income 316,220-93, , ,374 Due to affiliate ,007 (233,007) - - Other current liabilities 35,118 2, ,977 43,291 Total current liabilities 1,582,873 2, ,242 (233,007) 1,685,967 1,754,616 Long-Term Liabilities, net of current portions Deferred income 670, , ,266 Notes payable 2,192, ,192,386 2,499,712 Capital lease obligation 53, ,169 - Split interest agreements payable 1,449, ,449,140 1,744,399 Total long-term liabilities 4,365, ,365,206 4,948,377 Total liabilities 5,948,079 2, ,242 (233,007) 6,051,173 6,702,993 Net Assets Unrestricted: Board designated 3,444, ,456-3,700,914 3,643,996 Undesignated 2,991,731 (684) (281,820) - 2,709,227 2,811,472 Temporarily restricted 2,734,410 44,855 15,333-2,794,598 3,587,219 Permanently restricted 1,341,970-65,390-1,407,360 1,380,920 Total net assets 10,512,569 44,171 55,359-10,612,099 11,423,607 Total liabilities and net assets $ 16,460,648 $ 47,030 $ 388,601 $ (233,007) $ 16,663,272 $ 18,126,600 22

27 CONSOLIDATING STATEMENT OF ACTIVITIES Year Ended December 31, 2016 with Comparative Totals for the Year Ended December 31, 2015 Consolidated A.R.E. E.C.F. A.U. Eliminations Revenues, Gains and Other Support Sales $ 1,143,422 $ - $ - $ - $ 1,143,422 $ 1,330,431 Cost of sales 510, (1,912) 508, ,390 Gross profit from sales 632, , , ,041 Contributions Donors, unrestricted 1,339, ,536-1,349,249 1,453,943 Donors, temporarily restricted 288,389 15,120 33, ,621 1,415,465 Donors, permanently restricted 20,050-6,390-26, ,765 Bequests, unrestricted 758, ,250 1,012,053 Net noncash, unrestricted 2, , ,463 Net noncash, temporarily restricted ,754 Net noncash, permanently restricted ,955 Change in value of split-interest agreements Unrestricted 52, ,255 - Temporarily restricted 33, ,755 20,038 Dues Life membership 127, , ,878 Other categories 805, , ,106 Fees for services Conference fees 601, , ,292 Health services fees 841, , ,424 Tour fees 394, , ,442 All other fees for services 362, , ,906 Gain (loss) on sale of property and equipment (95,033) (95,033) 141,410 Gains (losses) on sale of other assets 23,950 (243) 61-23,768 24,034 Investment income (loss) Dividends and interest, unrestricted 54,483-6,676-61,159 93,073 Dividends and interest, temporarily restricted 34,671-1,522-36,193 36,422 Gains (losses) on investments Realized, unrestricted 44,624-2,909-47, ,352 Realized, temporarily restricted (8,333) (8,333) 10,527 Unrealized, unrestricted 35,602-6,720-42,322 (222,385) Unrealized, temporarily restricted 97,996-2, ,034 (118,165) Rental income 90, ,490 90,200 Other income 37,946 1,609 6,200-45, ,908 Postage and handling 10, ,941 12,109 Royalty income 25,172 1,912 - (1,912) 25,172 34,892 Tuition 548, , , ,960 Total revenues, gains and other support 7,161,639 19, ,366-7,494,218 10,255,862 Program services 6,967,801 44, ,822-7,318,497 7,645,822 Support services 405,184-37, , ,316 Fund raising 526,312-18, , ,145 Total expenses 7,899,297 44, ,555-8,305,726 8,839,283 Changes in Net Assets (737,658) (25,661) (48,189) - (811,508) 1,416,579 Net Assets, beginning of year 11,250,227 69, ,548-11,423,607 10,007,028 Net Assets, end of year $ 10,512,569 $ 44,171 $ 55,359 $ - $ 10,612,099 $ 11,423,607 Change in Net Assets Accounted for as Follows: Unrestricted $ 20,206 $ (18,731) $ (46,802) $ - $ (45,327) $ 271,236 Temporarily restricted (777,914) (6,930) (7,777) - (792,621) 673,623 Permanently restricted 20,050-6,390-26, ,720 Change in net assets $ (737,658) $ (25,661) $ (48,189) $ - $ (811,508) $ 1,416,579 23

28 CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended December 31, 2016 with Comparative Totals for the Year Ended December 31, 2015 Consolidated A.R.E. E.C.F. A.U. Eliminations Cash Flows From Operating Activities Change in net assets $ (737,658) $ (25,661) $ (48,189) $ - $ (811,508) $ 1,416,579 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Realized and unrealized gains (losses) on investments (169,889) - (11,667) - (181,556) 207,671 Dividends and interest reinvested (89,154) - (8,198) - (97,352) (129,495) Depreciation and amortization 442, , ,588 Contributions restricted for property and equipment and other long-term purposes (215,432) (215,432) (1,695,625) Non-cash contributions Fair market value when received (17,728) (17,728) (1,352,015) Cash proceeds from sales 230,147 29,887 3, ,639 1,174,393 Uncollectible accounts 6, ,242 10,516 Provision for pledge discount (2,872) (2,872) (23,415) Gain (loss) on sale of property and equipment 95, ,033 (141,410) (Gains) Losses on sale of other assets (61) (24,034) Provision for inventory obsolescence (500) (500) (500) (Increase) decrease in operating assets Trade accounts receivable 38,829 - (2,316) - 36,513 (128,860) Pledges and bequests receivable 115, , ,773 Inventory 26, ,659 23,549 Prepaid expenses 88,734 (425) ,309 (54,210) Due from affiliate (35,875) ,842 (1,033) (1,826) Increase (decrease) in operating liabilities Accounts payable 65, ,368 (12,232) Accrued salaries, wages and employee benefits (4,820) - (1,087) - (5,907) 4,219 Deferred income (136,480) - 40,065 - (96,415) 89,583 Due to/from affiliate ,842 (34,842) - - Annuities payable (295,259) (295,259) (171,497) Other current liabilities (8,173) 2, (5,314) 11,090 Net cash provided by (used in) operating activities (604,505) 6,660 6,994 - (590,851) 623,842 Cash Flows From Investing Activities Net proceeds (purchases) of investments 644,520-3, ,526 (874,112) Proceeds from sale of assets 921, , ,147 Purchases of property and equipment (1,284,606) - (17,777) - (1,302,383) (324,502) Net cash provided by (used in) investing activities 280,980 - (14,771) - 266,209 (1,007,467) 24

29 CONSOLIDATING STATEMENT OF CASH FLOWS (Continued) Year Ended December 31, 2016 with Comparative Totals for the Year Ended December 31, 2015 Consolidated A.R.E. E.C.F. A.U. Eliminations Cash Flows From Financing Activities Proceeds from notes payable $ - $ - $ - $ - $ - $ 202,009 Repayments on notes payable (359,067) (359,067) (357,420) Collection of contributions restricted for property and equipment and other long-term purposes 202, ,767 1,699,105 Principal payments on capital lease obligations (29,541) (29,541) (37,301) Net cash provided by (used in) financing activities (185,841) (185,841) 1,506,393 Net increase (decrease) in cash and cash equivalents (509,366) 6,660 (7,777) - (510,483) 1,122,768 Cash and Cash Equivalents, beginning of year 1,804,542 39,296 20,603-1,864, ,673 Cash and Cash Equivalents, end of year $ 1,295,176 $ 45,956 $ 12,826 $ - $ 1,353,958 $ 1,864,441 Supplemental Disclosure of Cash Flow Information Interest paid $ 348,701 $ - $ - $ - $ 348,701 $ 294,594 Supplemental Disclosure of Non-Cash Investing and Financing Activities Property and equipment acquired through capital lease 74,

30 CONSOLIDATING STATEMENT OF FUNCTIONAL EXPENSES Year Ended December 31, 2016 with Comparative Totals for the Year Ended December 31, 2015 A.R.E. E.C.F. A.U. Program Support Fund Program Program Support Fund Consolidated Services Services Raising Total Services Services Services Raising Total Eliminations Advertising and promotion $ 107,058 $ 90 $ 2,363 $ 109,511 $ - $ 24,896 $ - $ - $ 24,896 $ - $ 134,407 $ 174,688 Bank charges 143, , , , ,271 Board expense 20, , ,907 8,779 Books and tapes 37, , ,015 50,285 Contracted services 1,080,036 39,500 9,950 1,129,486-99, ,223-1,228,709 1,369,874 Copyright expense Cost of obsolescence 1, , ,000 6 Curriculum development , ,264-6,264 8,260 Damaged goods expense 4, , ,893 3,357 Depreciation and amortization 442, , , ,588 Dues and subscriptions 9,779 1, , ,121 7,388 Employee training 6, ,554-27, ,416-34,970 31,194 Employee welfare and recreation 280, , , ,372 Equipment rental 66, , ,716 78,809 External storage 17,265 1,166-18, ,840 20,171 General insurance 275, , , ,750 Interest expense 351, , , ,637 Licenses and fees 33,735 5, ,740-10, ,497-50,237 54,324 Mail service 80,784-27, , , ,200 Materials 7, , ,627 11,046 Miscellaneous expense ,403 Office supplies and expense 151,527 14,699 6, , , , , ,717 Organizational giving 1, , ,755 1,465 Payroll services 42,487 20,928-63,415-1, ,652-65,067 56,552 Payroll taxes 178,518 16,574 37, ,773 1,743 10,041 2,869 1,434 14, , ,723 Postage 198, , , , ,730 Preservation expense , ,097 1,137 Printing 97, , ,041 96,380 Professional services 42,059 15,816-57, ,875 67,071 Program expense 508,332-91, , , ,516 Repairs and maintenance 190,134 26, , , ,237 Salaries 2,326, , ,016 2,861,788 18, ,003 34,287 17, ,433-3,051,752 3,139,747 Telephone 45,086 11,022-56, ,108 57,332 Travel and entertainment 86, , ,978 1,305 1, , , ,105 Uncollectible accounts 6, , ,242 10,516 Utilities and fuel 125,696 4, , , ,148 Total expense $ 6,967,801 $ 405,184 $ 526,312 $ 7,899,297 $ 44,874 $ 305,822 $ 37,156 $ 18,577 $ 361,555 $ - $ 8,305,726 $ 8,839,283 26

31 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Trustees Association for Research and Enlightenment, Inc. and Affiliates Virginia Beach, Virginia We have audited, in accordance with the 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 consolidated financial statements of Association for Research and Enlightenment, Inc. and Affiliates (the Organization ) which comprise the consolidated statement of financial position as of December 31, 2016, and the related consolidated statements of activities, cash flows and functional expenses for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated May 11, Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the Organization 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 consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization 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 Organization s consolidated 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 over financial reporting 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. 27