SAE International Core Business Operations Consolidated Financial Statements December 31, 2014 and 2013 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.
Contents Independent Auditor s Report 3-4 Consolidated Financial Statements Consolidated Statements of Financial Position 5-6 Consolidated Statements of Activities and Changes in Net Assets 7-8 Consolidated Statements of Cash Flows 9-10 Notes to the Consolidated Financial Statements 11-37 2
Tel: 412-281-2501 Fax: 412-471-1996 www.bdo.com 339 Sixth Avenue, 8th Floor Pittsburgh, PA 15222 Independent Auditor s Report Board of Directors SAE International Warrendale, Pennsylvania We have audited the accompanying consolidated financial statements of SAE International Core Business Operations, which comprise the consolidated statements of financial position of SAE International and its subsidiaries, SAE Global, LLC, ABP International, Inc. and Effective Training, Inc., as of December 31, 2014 and 2013, and the related consolidated statements of activities and changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. As discussed in Note 2, these financial statements do not include the accounts of all of SAE International s subsidiaries. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from 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 misstatements of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 3
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the SAE International Core Business Operations as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Report on the Consolidated Financial Statements We have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated financial statements of SAE International and Subsidiaries as of and for the years ended December 31, 2014 and 2013, and our report thereon dated April 20, 2015, expressed an unmodified opinion on those financial statements. April 20, 2015 4
Consolidated Statements of Financial Position December 31, 2014 2013 Assets Current Assets Cash and cash equivalents $ 4,567 $ 5,863 Accounts receivable - net 4,405 2,727 Pledges receivable - current portion - Note 5 370 881 Inventories and supplies 305 369 Prepaid expenses and other current assets - Note 15 3,124 2,377 Other receivables 3,531 4,059 Total Current Assets 16,302 16,276 Investments - Note 4 45,057 43,698 Pledges Receivable - Long Term - Note 5 142 18 Property and Equipment - Note 6 12,064 12,060 Intangible Assets - Note 7 10,372 9,532 Deferred Tax Asset - Long Term - Note 15 80 31 Note Receivable - Long Term - Note 16 843 771 Total Assets $ 84,860 $ 82,386 5
Consolidated Statements of Financial Position December 31, 2014 2013 Liabilities and Net Assets Current Liabilities Accounts payable $ 5,334 $ 5,597 Accrued expenses - Note 15 3,461 3,707 Deferred revenue 8,636 6,919 Line of credit - Note 8 1,213 - Current portion of notes payable - Note 8 1,100 4,314 Total Current Liabilities 19,744 20,537 Long-term Portion of Notes Payable - Note 8 1,375 2,475 Accrued Pension Costs - Note 9 32,528 22,740 Charitable Gift Annuity 95 107 Total Liabilities 53,742 45,859 Net Assets - Note 10 Unrestricted 21,251 26,610 Temporarily restricted 6,829 7,087 Permanently restricted 3,038 2,830 Total Net Assets 31,118 36,527 Total Liabilities and Net Assets $ 84,860 $ 82,386 See accompanying independent auditor's report and notes to the consolidated financial statements. 6
Consolidated Statement of Activities and Changes in Net Assets Temporarily Permanently 2014 2013 For the Year Ended December 31, 2014 Unrestricted Restricted Restricted Total Total Operating Activities Revenues and Public Support Magazines and publications $ 40,134 $ - $ - $ 40,134 $ 38,067 Meetings and conferences 10,900 - - 10,900 9,392 Educational activities 7,601 - - 7,601 5,279 Technical standards 5,216 - - 5,216 4,540 Contributed services - Note 13 3,932 - - 3,932 3,657 Membership and sections 3,082 - - 3,082 3,111 Other products and services 2,057 - - 2,057 1,944 Contributions and pledges 652 1,297 208 2,157 1,169 Net assets released from restrictions 2,066 (2,066) - - - Total Revenues and Public Support 75,640 (769) 208 75,079 67,159 Expenses - Note 11 Magazines and publications 16,856 - - 16,856 16,068 Administrative services 13,667 - - 13,667 12,676 Meetings and conferences 10,727 - - 10,727 10,460 Educational activities 9,770 - - 9,770 7,482 Other products and services 7,561 - - 7,561 7,225 Technical standards 7,424 - - 7,424 6,437 Contributed services - Note 13 3,932 - - 3,932 3,657 Membership and sections 2,077 - - 2,077 1,937 Total Expenses 72,014 - - 72,014 65,942 Increase (Decrease) in Net Assets From Operations 3,626 (769) 208 3,065 1,217 Nonoperating Activities Investment activities - Note 4 1,838 511-2,349 5,434 Interest expense - Note 8 (84) - - (84) (188) Acquisition related expenses (201) - - (201) (521) Income taxes - Note 15 (243) - - (243) (428) Pension adjustment - Note 9 (10,295) - - (10,295) 6,854 Total Nonoperating Activities (8,985) 511 - (8,474) 11,151 Increase (Decrease) in Net Assets (5,359) (258) 208 (5,409) 12,368 Net Assets - beginning of year 26,610 7,087 2,830 36,527 24,159 Net Assets - end of year $ 21,251 $ 6,829 $ 3,038 $ 31,118 $ 36,527 See accompanying independent auditor's report and notes to the consolidated financial statements. 7
Consolidated Statement of Activities and Changes in Net Assets Temporarily Permanently 2013 For the Year Ended December 31, 2013 Unrestricted Restricted Restricted Total Operating Activities Revenues and Public Support Magazines and publications $ 38,067 $ - $ - $ 38,067 Meetings and conferences 9,392 - - 9,392 Educational activities 5,279 - - 5,279 Technical standards 4,540 - - 4,540 Contributed services - Note 13 3,657 - - 3,657 Membership and sections 3,111 - - 3,111 Other products and services 1,944 - - 1,944 Contributions and pledges 662 169 338 1,169 Net assets released from restrictions 1,402 (1,402) - - Total Revenues and Public Support 68,054 (1,233) 338 67,159 Expenses - Note 11 Magazines and publications 16,068 - - 16,068 Administrative services 12,676 - - 12,676 Meetings and conferences 10,460 - - 10,460 Educational activities 7,482 - - 7,482 Other products and services 7,225 - - 7,225 Technical standards 6,437 - - 6,437 Contributed services - Note 13 3,657 - - 3,657 Membership and sections 1,937 - - 1,937 Total Expenses 65,942 - - 65,942 Increase (Decrease) in Net Assets From Operations 2,112 (1,233) 338 1,217 Nonoperating Activities Investment activities - Note 4 4,835 599-5,434 Interest expense - Note 8 (188) - - (188) Acquisition related expenses (521) - - (521) Income taxes - Note 15 (428) - - (428) Pension adjustment - Note 9 6,854 - - 6,854 Total Nonoperating Activities 10,552 599-11,151 Increase (Decrease) in Net Assets 12,664 (634) 338 12,368 Net Assets - beginning of year 13,946 7,721 2,492 24,159 Net Assets - end of year $ 26,610 $ 7,087 $ 2,830 $ 36,527 See accompanying independent auditor's report and notes to the consolidated financial statements. 8
Consolidated Statements of Cash Flows For the Years Ended December 31, 2014 2013 Cash Provided by (Used for) Operating Activities Increase (decrease) in net assets $ (5,409) $ 12,368 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation 3,059 2,897 Net appreciation in fair value of investments (1,808) (4,804) Deferred income tax benefit (2) (88) Changes in Accounts receivable (1,670) (411) Pledges receivable 387 972 Accounts payable (270) 1,192 Accrued pension costs 9,788 (7,233) Deferred revenue 1,717 286 Other current assets and liabilities (553) (52) Net Cash Provided by Operating Activities 5,239 5,127 Cash Provided by (Used for) Investing Activities Purchase of equipment (2,420) (4,303) Purchase of investments (821) (876) Proceeds from sale of investments 1,270 4,665 Notes receivable 57 (900) Acquisition of TechAmerica - (100) Acquisition of ETI - net of cash received (1,520) - Net Cash Used for Investing Activities (3,434) (1,514) Cash Provided by (Used for) Financing Activities Net proceeds from line of credit 1,213 - Payments on long-term debt (4,314) (2,529) Net Cash Used for Financing Activities (3,101) (2,529) Increase (Decrease) in Cash and Cash Equivalents (1,296) 1,084 Cash and Cash Equivalents - beginning of year 5,863 4,779 Cash and Cash Equivalents - end of year $ 4,567 $ 5,863 See accompanying independent auditor's report and notes to the consolidated financial statements. 9
Consolidated Statements of Cash Flows (Continued) For the Years Ended December 31, 2014 2013 Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest $ 68 $ 168 See accompanying independent auditor's report and notes to the consolidated financial statements. 10
Notes to the Consolidated Financial Statements 1. Organization Nature of Organization SAE International Core Business Operations consist of SAE International (SAE) and its wholly owned subsidiaries, SAE Global, LLC, ABP International, Inc. and Effective Training, Inc. SAE is a not-for-profit corporation originally organized in 1905 and incorporated in 1909 under the laws of New York and re-incorporated in 1985 under the laws of Pennsylvania. SAE is a technical society aimed at developing, collecting and disseminating, on a worldwide basis, the knowledge of mobility technologies in order to advance these fields and their practitioners in a manner which serves humanity. SAE Foundation (the Foundation) is an unincorporated division of SAE and is included in the accompanying financial statements. ABP International, Inc. d/b/a Tech Briefs Media Group (TBMG) is a for-profit S Corporation that was incorporated in 1988 under the laws of New York. TBMG is a media company specializing in print and electronic information products and events for engineers, scientists and technical managers. Effective Training, Inc. (ETI) is a Michigan for-profit C Corporation that provides geometric dimensioning and tolerancing learning training, products and services. SAE Global, LLC (SAE Global) is a Pennsylvania limited liability company, of which SAE is the sole member. The purpose of SAE Global is to engage in activities that further the purpose of SAE as an exempt organization in areas of the world other than the United States. In January 2012, SAE Global obtained the appropriate business licenses to operate a Wholly Owned Foreign Subsidiary (WOFE) in the Republic of China. The WOFE engages in and provides industrial technology consulting services, business and commercial consulting services, and marketing planning services. The financial statements presented here represent only the activity of the entities noted above. In addition, consolidated financial statements of SAE International and Subsidiaries have been prepared, which include the entities noted above and two other affiliated not-for-profit entities of SAE, Performance Review Institute, Inc. (PRI) and SAE Industries Technology Consortia (SAE ITC). PRI and SAE ITC are excluded from these financial statements as they are not considered to be a part of SAE s core business operations. Accordingly, these statements of SAE International Core Business Operations are not intended to be a complete presentation, under accounting principles generally accepted in the United States of America (U.S. GAAP), of the financial position and results of operations of SAE International and Subsidiaries. 11
2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements of SAE International Core Business Operations include only the assets, liabilities, net assets and financial activities of SAE and the accounts of its wholly owned subsidiaries, SAE Global, TBMG and ETI. All significant intercompany transactions have been eliminated. Collectively, the consolidated group is referred to as the Organization. Basis of Accounting The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Net asset classifications and changes in each of those classes are reported in the financial statements, and detailed information regarding the purpose of temporarily and permanently restricted net assets are disclosed in Note 10. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the statement of cash flows, the Organization considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. The Organization s cash balances are allocated to numerous banking institutions. From time to time, the balance may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. Accounts Receivable Accounts receivable are stated at the amount management expects to collect from balances outstanding at year end. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Any balance that is still outstanding after management has used reasonable collection efforts is written off through a charge to the valuation allowance and a credit to trade accounts receivable. The allowance for uncollectible accounts was approximately $449,000 at December 31, 2014 and $371,000 at December 31, 2013. 12
2. Summary of Significant Accounting Policies (Continued) Pledges Receivable Unconditional promises to give are recognized as revenues or gains in the period received as assets, decreases of liabilities, or expenses depending on the form of the benefits received. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Pledges receivable are stated at the amount management expects to collect from outstanding balances. Management has established an allowance for uncollectible pledges based on its evaluation of the individual pledge. Investments Investments are presented at fair value as measured by quoted market prices. Those investments received as gifts or donations are recorded at their fair value on the date received. Investment activity includes unrealized and realized gains and losses on investments (net appreciation/depreciation), interest and dividends. The Organization s investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with these investments and the level of uncertainty related to changes in the value of these investments, it is at least reasonably possible that changes in the near term could materially affect the amounts reported in the financial statements. The Organization records returns on SAE s liquidity investment fund, an investment pool that is held in cash and cash equivalents, in operating activities. These returns are included in the accompanying statements of activities as part of other products and services. All other investment activity is reflected as a component of non-operating activities. SAE has received contributions that are permanently restricted by the donors, for the purpose of granting scholarships and awards. The income from certain permanently restricted contributions is required to be spent in predetermined amounts as specified by the donor. The income from other permanently restricted donations does not have specified spending amounts. During 2012, SAE s Board of Directors elected to follow a total return policy with respect to its permanently restricted funds, where no specified spending amount has been stipulated by the donor, in accordance with Pennsylvania law. As such, SAE has adopted a total return investment policy seeking to achieve for the investments held in SAE s restricted accounts a reasonable longterm total return, consistent with acceptable investment risk, derived both from appreciation of capital and from earnings and distributions with respect to capital. The Board of Directors has documented an investment spending policy consistent with state law. Under this policy, where there is no stipulated spending amount from the donor, SAE may annually transfer up to 5.5% of the three-year rolling average market value of total invested funds to operating funds. 13
2. Summary of Significant Accounting Policies (Continued) Investments (Continued) The original contributions are maintained in permanently restricted net assets. Net appreciation or depreciation in the fair value of investments is reflected in temporarily restricted investment income (loss). Unrealized gains and losses on permanently restricted investments are reflected in temporarily restricted revenues and gains as described above. In years when the income transfer is greater than the actual earnings, or when there is a loss, the excess is charged to temporarily restricted net assets to the extent of accumulated prior year earnings. Any excess is charged to unrestricted net assets. Inventories Inventories and supplies are stated at the lower of cost (determined on the first-in, first-out or average cost method) or market. Property and Equipment Property and equipment acquired is recorded at cost. Depreciation is provided by the straightline method over the estimated useful lives of the assets ranging from 3-10 years for furniture and equipment, 10-15 years for building improvements and 30-40 years for buildings. Maintenance and repairs which are not considered to extend the useful lives of assets are charged to operations as incurred. Expenditures exceeding $5,000 for additions and improvements are capitalized. Upon sale or retirement, the cost of assets and related allowances are removed from the accounts and any resulting gains or losses are included in income (expense) for the year. Intangible Assets Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Indefinite-lived intangible assets not subject to amortization are tested for impairment at least annually. The Organization first assesses qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If based on its qualitative assessment the Organization concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if the Organization concludes otherwise, quantitative impairment testing is not required. Amortization is calculated on the straight-line basis over the estimated life of the intangible assets with finite lives. The estimated lives are 6-10 years for customer relationships, 5 years for subscription lists, and 10 years for both domain names and copyrights. 14
2. Summary of Significant Accounting Policies (Continued) Goodwill Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more frequently if impairment indicators arise. In conducting its impairment testing, the Organization determines if qualitative or quantitative factors are to be used to evaluate the potential impairment in the carrying value of the Organization s goodwill. The Organization has the option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that goodwill is impaired. If, based on its qualitative assessment, the Organization concludes that it is more likely than not that goodwill is impaired, quantitative impairment testing is required. However, if the Organization concludes otherwise, quantitative impairment testing is not required. The Organization measures the amount of any goodwill impairment based upon the estimated fair value of the underlying assets and liabilities of the reporting unit, including any unrecognized intangible assets, and estimates the implied fair value of goodwill. An impairment charge is recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill. The Organization chose to perform a qualitative impairment test for goodwill at December 31, 2014 and 2013. At December 31, 2014 and 2013, the Organization determined that the recorded value for goodwill was not impaired. Revenue Recognition Revenue is recognized when earned. Revenues received in advance of the year to which they relate, such as membership dues and meeting and conference attendance fees, are deferred and recognized over the periods to which the income relates. Magazines and publications revenue includes print advertising revenue; book, CD-ROM and print sales; royalty revenue; and subscription revenue. Print advertising revenue is recognized when the advertisement is run. Book, CD-ROM and print sales are recognized when the products ship to the customer. Royalty revenues received under contract from a third party that sells SAE s standards and related documents are recognized at the point of sale. Subscription revenue is recognized ratably over the term of the subscription. Contractual revenue, included in technical standards on the statement of activities, is recognized when earned under the terms of the contracts. Advance receipts from grants and contracts are reflected as deferred revenue until earned. Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence or nature of any donor restrictions. Support that is restricted by the donor is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. 15
2. Summary of Significant Accounting Policies (Continued) In-kind Donations Donated materials and services meeting the requirements of accounting principles generally accepted in the United States of America are reflected as contributions at fair value at date of receipt. Derivative Financial Instruments The Organization uses derivatives to manage risk related to interest rate movements. The Organization s interest rate risk management strategy is to stabilize cash flow requirements by maintaining interest rate contracts to convert variable-rate debt to a fixed rate. The Organization is exposed to credit losses from counterparty (its lending bank) non-performance, but does not anticipate any losses from its agreements, which are with a major financial institution. Derivative financial instruments are to be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments used for hedging purposes by non-profit organizations are recognized periodically in income. Changes in the fair value of the Organization s interest rate swap are included in interest expense on the consolidated statement of activities. Fair Value Measurements The Organization defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Organization considers the principal or most advantageous market in which the Organization would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. The Organization applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Inputs that are generally unobservable and typically reflect management s estimates of assumptions that market participants would use in pricing the asset or liability. The fair value measurements of the Organization s investments are disclosed in Note 17. 16
2. Summary of Significant Accounting Policies (Continued) Income Taxes SAE is exempt from federal and state income tax under Section 501(c)(3) of the IRC. However, certain activities, primarily consisting of advertising income and income from a pass-through entity, are considered unrelated business income and are subject to federal income taxes. SAE Global, LLC is a limited liability company and, as such, considered a disregarded entity for tax purposes. TBMG has elected, under the applicable provisions of the IRC and various state tax laws, to be treated as an S Corporation. Under this election, any federal or state income taxes due on TBMG s income are the responsibility of SAE as the stockholder. New York City does not permit this treatment and, accordingly, TBMG is subject to the New York City Corporation Tax. ETI is treated as a C Corporation under the applicable provisions of the IRC and various state tax laws. ETI provides for income taxes in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accounting principles generally accepted in the United States of America require the Organization s management to evaluate tax positions taken by the Organization and recognize a tax liability (or asset) if the Organization has taken a position that is uncertain. An uncertain position is defined as one in which there is a 50% or greater likelihood that the position will not be sustained upon examination by a taxing authority. Management has analyzed the tax positions taken by the Organization and has concluded that, as of December 31, 2014, there are no uncertain tax positions taken or expected to be taken. The Organization has recognized no interest or penalties related to uncertain tax positions. The Organization is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes the Organization is no longer subject to income tax examinations for years prior to 2011. 17
2. Summary of Significant Accounting Policies (Continued) Recently Issued Accounting Pronouncement In May 2014, the Financial Accounting Standards Board released updated guidance regarding the recognition of revenue from contracts with customers. The guidance was issued to remove inconsistencies in revenue recognition requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provide more useful information to users of financial statements through improved disclosure requirements, and simplify the preparation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. To achieve that core principle, an entity should apply the following steps: 1) identify the controls with the customer; 2) identify the performance obligations in the contract; 3) determine the contract price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this update are effective for nonpublic entities for annual reporting periods beginning after December 15, 2017. Earlier adoption is permitted, subject to certain limitations. The amendments in this update are required to be applied retrospectively to each prior reporting period presented or with the cumulative effect being recognized at the date of initial application. Management is currently evaluating the impact of the guidance on the Organization s financial position and results of operations. Consideration of Subsequent Events The Financial Audit Committee of the Board of Directors evaluated subsequent events and transactions for potential recognition or disclosure in the consolidated financial statements through April 20, 2015, the day the consolidated financial statements were approved and authorized for issue. 3. Acquisitions Technology Association of America On July 1, 2013, SAE purchased the assets of Technology Association of America d/b/a TechAmerica, a Virginia not-for-profit corporation, in order to increase its standards portfolio. The purchase price of $100,000 was allocated entirely to goodwill. 18
3. Acquisitions (Continued) Effective Training, Inc. On January 1, 2014, SAE entered into a Stock Purchase Agreement with Effective Training, Inc. (ETI), a Michigan corporation, in an effort to enhance its engineering fundamentals portfolio of geometric dimensioning and tolerancing learning products. The aggregate purchase price for the shares was approximately $1,524,000 of which $924,000 was paid to the seller in cash and $600,000 was placed in escrow to be paid within 3 days of the one-year anniversary date. The purchase price was allocated as follows: 19 Assets Acquired Cash $ 4 Other tangible assets 54 Intangibles, other than goodwill 416 Goodwill 1,057 Assets acquired 1,531 Less: Liabilities assumed (7) Purchase Price $ 1,524 4. Investments Investments at fair value consist of the following at: December 31, 2014 2013 Cash $ 163 $ 242 Equity Large value 4,241 4,070 Large core 6,524 5,121 Large growth 4,242 4,175 Mid value 1,391 1,171 Mid growth 1,520 1,125 Small value 1,321 1,097 Small growth 1,249 1,038 Developed international 2,545 2,691 Emerging markets 4,037 3,859 Total equity 27,070 24,347
4. Investments (Continued) December 31, 2014 2013 Fixed income - domestic 12,876 15,926 Alternatives Managed futures 3,544 3,183 Special onshore feeder fund 745 - Real estate income fund 659 - Total alternatives 4,948 3,183 Investments $ 45,057 $ 43,698 The following schedules summarize the investment return and its classification in the consolidated statements of activities at: December 31, 2014 Unrestricted Temporarily Restricted Total Nonoperating activities Interest and dividend income $ 617 $ 151 $ 768 Net appreciation in fair values 1,403 405 1,808 Subtotal investment return 2,020 556 2,576 Less: Investment expenses (182) (45) (227) Investment Return From Nonoperating Activities $ 1,838 $ 511 $ 2,349 December 31, 2013 Unrestricted Temporarily Restricted Total Operating activities Interest and dividend income $ 41 $ - $ 41 Nonoperating activities Interest and dividend income $ 625 224 $ 849 Net appreciation in fair values 4,369 435 4,804 Subtotal investment return 4,994 659 5,653 Less: Investment expenses (159) (60) (219) Investment Return From Nonoperating Activities $ 4,835 $ 599 $ 5,434 20
5. Pledges Receivable Pledges receivable consist of the following at: December 31, 2014 2013 Unrestricted pledges $ 237 $ 311 Temporarily restricted pledges 344 733 Permanently restricted 12 15 Gross pledges receivable 593 1,059 Less: Unamortized discount (6) (2) Less: Allowance for doubtful accounts (75) (159) Pledges Receivable $ 512 $ 898 Amounts due in Less than one year $ 370 $ 881 One to five years 142 18 $ 512 $ 899 Unconditional promises to give due in more than one year are reflected at the present value of estimated future cash flows using discount rates ranging from 1.7% to 4%. At December 31, 2014, 58% of pledges receivable were due from three donors. Pledges receivable from two of these donors represent 66% of total pledge income in 2014. Pledges receivable from these three donors comprised 16% of total pledges receivable at December 31, 2013. There were no concentrations of pledge income in 2013. Conditional pledges receivable consist of the following at: December 31, 2014 2013 Conditioned upon Matching funds $ 20 $ 20 Subject to annual review and approval 73 98 $ 93 $ 118 21
6. Property and Equipment Property and equipment consists of the following at December 31: December 31, 2014 2013 Land $ 686 $ 686 Buildings and building improvements 20,427 20,101 Leasehold improvements 308 217 Furniture and equipment 19,042 18,286 40,463 39,290 Less: Accumulated depreciation (28,399) (27,230) Property and Equipment $ 12,064 $ 12,060 7. Intangible Assets December 31, 2014 2013 Intangible assets with finite lives Customer relationships $ 2,246 $ 1,980 Subscription list 1,310 1,310 Domain names 60 - Copyrights 90-3,706 3,290 Less: Accumulated amortization (1,670) (1,036) Net intangible assets with finite lives 2,036 2,254 Intangible assets with indefinite lives Trademarks and trade name 780 780 Goodwill 7,556 6,498 Intangible assets with indefinite lives 8,336 7,278 Intangible Assets $ 10,372 $ 9,532 Amortization expense was approximately $675,000 in 2014 and $592,000 in 2013. 22
7. Intangible Assets (Continued) Estimated amortization expense for each of the next five years is: Year Ending December 31, 2015 $ 675 2016 $ 675 2017 $ 478 2018 $ 166 2019 $ 83 8. Notes Payable Notes payable consist of the following at: December 31, 2014 2013 SunTrust Bank term note, monthly payments, including interest at 3.6%, matured March 2014 $ - $ 3,214 PNC Bank term note - see below 2,475 3,575 $ 2,475 $ 6,789 The SunTrust Bank term note matured on March 19, 2014. The note was repaid in 59 equal installments of $119,048 plus interest at 3.6% with a final balloon payment of $2,976,168 paid at maturity. SAE financed the balloon payment with its line of credit with Morgan Stanley (as described below.) Management intends to continue to make monthly payments of $119,048 plus interest as repayment on the line of credit. In 2012, SAE entered into a $5,500,000 term note with PNC Bank to finance the acquisition of TBMG (Note 3). The term note requires monthly payments of $91,667 including interest and matures on March 30, 2017. The loan is collateralized by marketable securities held in custody at PNC Bank, which are valued at approximately $8,900,000 at December 31, 2014 and are included in investments on the consolidated statement of financial position. In connection with the term note agreement, SAE also entered into an interest rate swap contract with PNC Bank. Under the swap, the Organization pays a fixed rate of interest of 1.61% and receives a variable rate based upon LIBOR plus an applicable margin (0.91% at December 31, 2014) on approximately $2,475,000 notional amount of indebtedness. The contract matures on March 31, 2017. 23
8. Notes Payable (Continued) SAE entered into a line of credit with Morgan Stanley in December 2011. Outstanding borrowings bear interest at 30-day LIBOR plus 0.75% (0.92% at December 31, 2014). The line of credit is collateralized by certain investments held with the lender. The maximum borrowings cannot exceed the value of the eligible securities held in SAE s Morgan Stanley accounts. Outstanding borrowings were approximately $1,213,000 at December 31, 2014. No amount was outstanding at December 31, 2013. The future annual principal payments on long-term debt are approximately: Year Ending December 31, Amount 2015 $ 1,100 2016 1,100 2017 275 Total $ 2,475 9. Employee Benefit Plans Defined Benefit Pension Plan The Organization maintains a noncontributory defined benefit pension plan covering certain employees of SAE and PRI. The Organization s policy is to fund the pension costs as determined by actuarial valuation. Effective January 1, 2008, the Organization froze its defined benefit pension plan. Employees hired prior to January 1, 2008 will continue to earn benefits under the plan. Employees hired on or after January 1, 2008 will not be eligible to participate in the plan. The following table sets forth the funded status and obligations of the plan at December 31: 2014 2013 Projected benefit obligation $ (82,080) $ (69,742) Fair value of pension plan assets 49,552 47,002 Underfunded Pension Liability $ (32,528) $ (22,740) The funded status of the plan was measured as of December 31. The increase in the underfunded pension liability is primarily a result of actuarial losses. 24
9. Employee Benefit Plans (Continued) Defined Benefit Pension Plan (Continued) The following are the weighted-average assumptions used to determine benefit obligations at: December 31, 2014 2013 Discount rate 4.00% 4.75% Rate of increase in compensation levels 4.00% 4.00% Other required disclosures consisted of the following: December 31, 2014 2013 Net periodic pension costs $ 2,780 $ 3,922 Benefits paid $ 2,069 $ 1,947 Contributions $ 2,000 $ 2,000 Components of pension adjustment recognized in non-operating activities in the consolidated statements of activities consisted of the following: December 31, 2014 2013 Net gain (loss) $ (10,209) $ 7,147 Amortization of net loss 1,201 2,008 Pension expense in excess of 8.5% of salaries (1,287) (2,301) Pension Adjustment $ (10,295) $ 6,854 The Organization considers pension expense of 8.5% of salaries a normal expenditure and includes this amount in operating activities. Pension expense in excess of this percentage is included in nonoperating activities. The following are the weighted-average assumptions used to determine net periodic pension cost for the years ended: December 31, 2014 2013 Discount rate 4.75% 4.25% Expected long-term rate of return on assets 8.00% 8.00% 25
9. Employee Benefit Plans (Continued) Defined Benefit Pension Plan (Continued) The plan s investment assets are held at various financial institutions and brokers. The Finance Committee has established a formal investment policy. The policy was amended in September 2013. Under the current policy and investment guidelines, the Organization uses a liability-driven investment strategy to maximize returns and minimize risk of the portfolio relative to the liabilities that the portfolio is intended to cover. As the funding ratio of the retirement plan improves, the asset allocation will move away from equities and toward longer duration fixed income. The following table sets forth the fair value of the plan assets at December 31: 2014 2013 Cash $ 798 $ 867 Equity Large value 5,922 5,721 Large core 4,831 3,207 Large growth 5,967 5,562 Mid value 1,666 1,360 Mid growth 1,711 1,298 Small value 1,607 1,216 Small growth 1,471 1,099 Developed international 2,702 2,788 Emerging markets 4,332 3,929 Total equity 30,209 26,180 Fixed income Domestic 13,742 16,763 Alternatives Managed futures 3,686 3,192 Real estate income fund 1,117 - Total alternatives 4,803 3,192 Investments $ 49,552 $ 47,002 26
9. Employee Benefit Plans (Continued) Defined Benefit Pension Plan (Continued) The fair value of plan assets within the fair value hierarchy is as follows at: December 31, 2014 Level 1 Level 2 Level 3 Total Cash $ 1,359 $ - $ - $ 1,359 Equity investments 27,454 - - 27,454 Fixed income investments Domestic 14,851 997 88 15,936 Alternative investments Managed futures - 3,686-3,686 Special onshore feeder fund - - 1,117 1,117 Total $ 43,664 $ 4,683 $ 1,205 $ 49,552 December 31, 2013 Level 1 Level 2 Level 3 Total Cash $ 867 $ - $ - $ 867 Equity investments 26,180 - - 26,180 Fixed income investments Domestic 12,284 4,479-16,763 Alternative investments Managed futures - 3,192-3,192 Total $ 39,331 $ 7,671 $ - $ 47,002 The fair value of cash and equivalents and equities is determined on the basis of quoted prices in an active market (Level 1 inputs). Fixed income investments for which a quoted price in an active market is available are valued based on their quoted fair value by independent pricing vendors (Level 1 inputs). Other fixed income investments that are not actively traded are valued using quotes from independent pricing vendors based on recent trading activity and other relevant information, including market interest rate curves, referenced credit spreads, and estimated prepayment rates for similar instruments (Level 2 inputs). The investment in managed futures is valued using the partnership s net asset per unit value at the balance sheet date (Level 2 inputs.) The investment in real estate income fund is valued using the net asset value per share. Because of redemption restrictions on the investment in the income fund, the inputs are considered to be Level 3 inputs. 27
9. Employee Benefit Plans (Continued) Defined Benefit Pension Plan (Continued) The changes in the fair value of Level 3 plan assets are summarized as follows: 2014 Fixed Income - Domestic Special Onshore Feeder Fund Total Changes in Level 3 assets Net realized and unrealized gains (losses) $ (10) $ 97 $ 87 Purchases 98 1,020 1,118 Less: Sales - - - Net increase in Level 3 assets 88 1,117 1,205 Balance - January 1, 2014 - - - Balance - December 31, 2014 $ 88 $ 1,117 $ 1,205 Contributions of $2,000,000 were made to the plan in March 2015. The following estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated: Year Ending December 31, Amount 2015 $ 2,370 2016 $ 2,520 2017 $ 2,750 2018 $ 2,920 2019 $ 3,170 2020-2024 $ 19,170 28
9. Employee Benefit Plans (Continued) Defined Contribution Plans The Organization has a group tax deferred annuity plan under Section 403(b) of the Internal Revenue Code (IRC) which covers substantially all SAE employees. The Organization matches up to 100% of covered employees voluntary contributions up to 6% of their annual salary. For employees hired after January 1, 2008 (those not eligible to participate in the defined benefit plan), SAE contributes 6.5% of the employee s base compensation. The Organization has a 401(k) plan that covers eligible employees. Covered employees may make pre-tax voluntary matched contributions in a range of 1% to 6% (subject to maximums allowed by the IRC) and the Organization will match up to 100% of the contributions, subject to forfeiture provisions. In addition, employees can elect to make pre-tax contributions up to 75% of their compensation, subject to maximums allowed by the IRC that are not matched by the Organization. The Organization has a 401(k) plan that covers eligible employees of TBMG. Covered employees may make pre-tax voluntary contributions up to 75% of the employee s annual compensation (subject to maximums allowed by the IRC). The Organization will match the employee s contribution up to a maximum of 2% of annual compensation, subject to forfeiture provisions. In addition, the Organization may make a discretionary profit sharing contribution to the TBMG plan. The Organization s benefit plan expense for contributions to these plans was approximately $1,304,000 in 2014 and $1,205,000 in 2013. Supplemental Executive Retirement Plan The Organization has a 457(b) supplemental executive retirement plan which allows members of the executive team to defer a percentage of compensation until retirement. SAE s contributions to this plan approximated $62,000 for December 31, 2014 and $36,000 for December 31, 2013. 29
10. Net Assets Temporarily restricted net assets are available for the following purposes as of: December 31, 2014 2013 Program support funds $ 3,172 $ 3,562 Award funds 2,509 2,294 Scholarship funds 1,118 1,207 Engineering activity support 30 24 Total $ 6,829 $ 7,087 Permanently restricted net assets are available for the following purposes as of: December 31, 2014 2013 Program support funds $ 80 $ 79 Award funds 1,665 1,535 Scholarship funds 1,189 1,112 Engineering activity support 104 104 Total $ 3,038 $ 2,830 11. Expenses Expenses by functional classifications were as follows: December 31, 2014 2013 Program service $ 53,976 $ 49,729 General and administrative 17,903 16,077 Fundraising 135 136 Expenses $ 72,014 $ 65,942 30
12. Operating Leases The Organization leases off-site office space through noncancelable operating leases that expire at various dates through September 2022. Rental expenses aggregated approximately $932,000 for 2014 and $865,000 for 2013. Future minimum lease payments as of December 31, 2014 are approximately: Year Ending December 31, Amount 2015 $ 935 2016 $ 889 2017 $ 759 2018 $ 426 2019 $ 442 Thereafter $ 797 SAE also leases office space to tenants in its Thornhill Road properties. Rental income is included in other products and services on the consolidated statements of activities. Future minimum lease payments to be received under noncancelable operating leases as of December 31, 2014 are approximately: Year Ending December 31, Amount 2015 $ 631 2016 $ 129 13. Contributed Services Contributed services consist of donated services and expertise related to developing, reviewing, revising, and updating technical standards for the ground vehicle and aerospace industries. The value of these services was approximately $3,932,000 at December 31, 2014 and $3,657,000 at December 31, 2013. In addition, a substantial number of SAE members have made significant contributions of their time to SAE s programs. The value of this contributed time is not reflected in the accompanying financial statements since it does not meet the criteria for recognition under accounting principles generally accepted in the United States of America. 31
14. Self Insurance The Organization self-insures the medical and prescription drug benefits provided to all of its current and retired employees and their families. This plan is administered by a third party that processes, adjudicates and pays claims on behalf of the Organization. The Organization maintains stop-loss coverage based on a $120,000 deductible per participant and an annual aggregate deductible of approximately $3,240,000 to limit its liability for large specific and aggregate losses. The Organization has recorded a liability for estimated future costs of incurred claims of approximately $260,000 at December 31, 2014 and 2013. The liability is included in accrued expenses in the consolidated statements of financial position. SAE accrues for its self-insured unemployment compensation based on actual and expected claims outstanding at year end. SAE accrued approximately $94,000 at December 31, 2014 and $33,000 at December 31, 2013 for unpaid claims. SAE recognized unemployment compensation expense of approximately $91,000 in 2014 and $47,000 in 2013. 15. Income Taxes As the sole stockholder of TBMG, SAE reports all of TBMG s taxable income as unrelated business income. In addition, ETI is taxed as a corporation under provisions of the IRC and comparable state regulations. The Organization s income tax expense consists of the following for the years ended: December 31, 2014 2013 Taxes currently payable Federal $ 228 $ 464 State and City 17 52 Deferred income tax benefit (2) (88) Income Tax Expense $ 243 $ 428 32