Air Force Academy Athletic Corporation. Financial Report June 30, 2014

Air Force Academy Athletic Corporation Financial Report June 30, 2014

Contents Independent Auditor s Report 1-2 Financial Statements Statement of Financial Position 3 Statement of Activities 4 Statement of Functional Expenses 5 Statement of Cash Flows 6 Notes to Financial Statements 7-13

To the Board of Directors Air Force Academy Athletic Corporation USAFA, Colorado Report on the Financial Statements Independent Auditor s Report We have audited the accompanying financial statements of the Air Force Academy Athletic Corporation, (AFAAC), which comprise the statement of financial position as of June 30, 2014, and the related statements of activities, functional expenses and cash flows for the year then ended, and the related notes to 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 the 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 from 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 entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the AFAAC as of June 30, 2014, and the changes in its net assets, its functional expenses and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 15, 2014 on our consideration of the AFAAC 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 AFAAC s internal control over financial reporting and compliance. Denver, Colorado December 15, 2014

Statement of Finanical Position June 30, 2014 Assets Cash and cash equivalents $ 7,360,349 Accounts and other receivables 488,314 Pledges receivable, net (Note 2) 107,125 Inventory 734,344 Prepaid expenses and other assets 37,342 Short-term investments 512,290 Deferred annuity contract 643,183 Property and equipment, net (Note 3) 304,121 Total assets $ 10,187,068 Liabilities and Net Assets Accounts payable $ 669,003 Wages and benefits payable 176,087 Accrued expenses 644,787 Deferred revenue 1,807,777 Deferred benefit payable 1,110,793 Total liabilities 4,408,447 Net Assets: Unrestricted (deficit) (Note 4) (43,431) Temporarily restricted (Note 4) 5,822,052 Total net assets 5,778,621 Total liabilities and net assets $ 10,187,068 See Notes to Financial Statements. 2

Statement of Activities Year Ended June 30, 2014 Temporarily Unrestricted Restricted Total Revenue and support Contributions $ 1,820,225 $ 1,183,607 $ 3,003,832 Grants - 8,448,579 8,448,579 Program service fees 838,463 21,211 859,674 Ticket sales and admissions 3,313,804 3,945,498 7,259,302 Merchandising 2,055,568-2,055,568 Rental Income 103,399 253 103,652 Commercial sponsorships and royalties 1,167,074-1,167,074 Other revenue 138,117 24,164 162,281 Total revenue and support 9,436,650 13,623,312 23,059,962 Net assets released from restrictions: Satisfaction of program restrictions (Note 5) 7,801,260 (7,801,260) - Total revenue, support and net assets released from restrictions 17,237,910 5,822,052 23,059,962 Expenses: Program services 16,989,771-16,989,771 Support services: Management and general 1,075,669-1,075,669 Fundraising 594,467-594,467 Total support services 1,670,136-1,670,136 Total expenses 18,659,907-18,659,907 Increase (decrease) in net assets (1,421,997) 5,822,052 4,400,055 Net assets, beginning of year 1,378,566-1,378,566 Net assets (deficit), end of year $ (43,431) $ 5,822,052 $ 5,778,621 See Notes to Financial Statements. 3

Statement of Functional Expenses Year Ended June 30, 2014 Program Management Services and General Fundraising Total Salaries and wages $ 6,959,137 $ 424,223 $ 249,165 $ 7,632,525 Staff benefits 1,085,727 81,754 52,193 1,219,674 Payroll taxes 482,930 32,185 18,524 533,639 Professional services 288,682 56,274 6,849 351,805 Advertising and promotion 907,705 - - 907,705 Office/general supply expenses 1,541,057 127,579 110,951 1,779,587 Information technology 285,147 97,705 1,767 384,619 Occupancy 836,996 47,539 63,886 948,421 Travel 497,862 129,121 22,411 649,394 Depreciation 71,217 34,930-106,147 Insurance 55,497 11,701 5,556 72,754 Other expense: Uniforms/equipment 1,901,313 - - 1,901,313 Campus visits 345,882 252 193 346,327 Recruiting 407,299-320 407,619 Game expense 557,543 187-557,730 Sports camp 181,610 - - 181,610 Miscellaneous 584,167 32,219 62,652 679,038 Total $ 16,989,771 $ 1,075,669 $ 594,467 $ 18,659,907 See Notes to Financial Statements. 4

Statement of Cash Flows Year Ended June 30, 2014 Cash flows from operating activities Increase in net assets $ 4,400,055 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation 106,147 Donations of property and equipment from AFA (176,788) Assumption of assets and liabilities from AFA, net (223,017) Changes in operating assets and liabilities: Accounts receivable (488,392) Pledges receivable (107,125) Inventory 108,817 Prepaid expenses and other assets (29,975) Accounts payable 594,499 Deferred revenue 1,807,777 Wages and benefits payable 176,815 Accrued expenses 387,970 Deferred benefit payable 102,000 Net cash provided by operating activities 6,658,783 Cash flow from investing activities Change in value of deferred annuity contract 2,283 Purchase of short-term investments (512,290) Purchases of property and equipment (203,863) Net cash used in investing activities (713,870) Increase in cash 5,944,913 Cash and cash equivalents Beginning of year 1,415,436 End of year $ 7,360,349 See Notes to Financial Statements. 5

Notes to Financial Statements Note 1. Nature of Operations and Summary of Significant Accounting Policies Nature of operations: The Air Force Academy Athletic Corporation (the AFAAC), a Colorado not-for-profit corporation, operates under the administrative jurisdiction of the United States Air Force Academy (AFA). A cooperative agreement was entered into between the AFAAC and the AFA that seeks to ensure cooperative and substantial interaction between the two parties in the performance of objectives, leadership decisions (such as personnel, management, coaching staff and selection, scheduling, National Collegiate Athletic Association (NCAA) compliance, conference affiliation, recruiting, etc.), goals concerning various individual sports programs, and the promotion and execution of an ethical athletic program as perceived and experienced by cadets, AFA personnel, the United States Air Force, recipient personnel and the general public. The AFAAC operates all athletic programs at the AFA in facilities that are owned by the AFA. The primary source of revenues and support for the program are grant funds, athletic event ticket sales and contributions. The purpose of the AFAAC is to assist the AFA in the development, funding, operation and management of its athletic program that is in direct support of the AFA s athletic department s mission to build future Air Force leaders of character by providing a realistic leadership experience in a mentally and physically challenging environment. A summary of AFAAC s significant accounting policies follows: Financial statement presentation: The accompanying financial statements are presented using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Net assets and revenues and expenses are required to be classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the AFAAC and changes therein are classified and reported as follows: Unrestricted net assets net assets that are not subject to donor-imposed stipulations. Temporarily restricted net assets net assets subject to donor-imposed stipulations that may or will be met either by actions of the AFAAC and/or the passage of time. Permanently restricted net assets net assets subject to donor-imposed stipulations that they be maintained permanently by the AFAAC. Generally, the donors of these assets permit the AFAAC to use all or part of the income earned on related investments for general or specific purposes. AFAAC reported no amounts of permanently restricted net assets as of June 30, 2014. Restricted and unrestricted revenue and support: Contributions and grants received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence or nature of any donor/grantor restrictions. Support that is restricted by the donor/grantor is reported as an increase in unrestricted net assets if the restriction expires in the reporting period in which the support is recognized. All other donor/grantorrestricted support 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 statement of activities as net assets released from restrictions. 6

Notes to Financial Statements Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued) The AFAAC reports gifts of land, buildings, and equipment as unrestricted support unless explicit donor/grantor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used, and gifts of cash or other assets that must be used to acquire long-lived assets, are reported as restricted support. Absent explicit donor/grantor stipulations about how long those long-lived assets must be maintained, the AFAAC reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Cash and cash equivalents: Cash and cash equivalents include cash and certificates of deposit with an initial maturity of three months or less. From time to time, the AFAAC maintains balances in excess of federally insured limits. AFAAC has not experienced any losses in such accounts. Short-term investments: Short-term investments consist of certificates of deposit with an initial maturity of more than three months. Short-term investments are carried at cost. Inventory: Inventory consists of merchandise held in the AFAAC s sales outlets and the storeroom and is stated at the lower of cost (first-in, first-out) or market (net realizable value). Approximately $840,000 of inventory was transferred from the AFA to the AFAAC on July 1, 2013. Accounts receivable: Accounts receivable are stated at the amount management expects to collect from balances outstanding. The majority of accounts receivable are related to season ticket sales or membership dues to the Pride Club. Management provides an allowance for doubtful accounts, if necessary, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. There is no allowance for uncollectible accounts that management has reported as of June 30, 2014. Pledges receivable: Unconditional contributions expected to be collected within one year are reported at their net realizable value. Based upon a review of outstanding pledge receivables and historical collection information, management has reported an allowance for uncollectible pledges of $5,638 as of June 30, 2014. A present value discount has not been reported by the AFAAC as management has determined that it is not material. Conditional contributions depend on the occurrence of a specified future and uncertain event to bind the potential donor and are recognized as assets and revenue when the conditions are substantially met and the contribution becomes unconditional. Property and equipment: Property and equipment are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful life of each asset. The estimated useful lives for each major depreciable classification of property and equipment are as follows: Furniture and equipment 3-7 years Vehicles and aircraft 3-7 years Computer software 3-7 years 7

Notes to Financial Statements Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued) The statement of financial position of the AFAAC includes only the equipment that remains property of the AFAAC. Improvements made on buildings owned by the AFA are capitalized by the AFAAC and recorded as construction in process until the project is complete. As a project is completed, the related asset is contributed to the AFA and treated as a transfer of a long-lived asset. While reported by the AFAAC, these assets are not depreciated. There were no transfers of long-lived assets from the AFAAC to the AFA during the year ended June 30, 2014, but there was $12,458 of construction in process reported by AFAAC as of June 30, 2014 relating to improvements on facilities owned by the AFA. Once this project is complete, the total cost of the project will be transferred to the AFA. Deferred Revenue: Revenue from advance ticket sales, Blue and Silver membership dues and sports camps that are to be held at a future date is included in deferred revenue. Revenue is recognized in the year the athletic event is held. Deferred benefit payable and deferred annuity contract: The AFAAC has a contract in place with a former employee to provide minimum lifetime benefit payments as a result of their years of employment service. Payments of $102,000 were made under this contract during the year ended June 30, 2014. The present value of the future benefits payable is reported on the statement of financial position as deferred benefits payable and totals $1,110,793 as of June 30, 2014. As a mechanism of funding this deferred benefit payable in future years, the AFAAC owns four deferred variable annuity contracts which contain minimum living and death benefits that will be made available for payments to the former employee. The deferred annuity contracts are reported at contract value, which approximates the fair value. The contract value of these assets as of June 30, 2014 is $643,183. The net balance of the deferred benefit payable and the deferred annuity contract as of July 1, 2013 was transferred from the AFA to the AFAAC In-kind contributions: The AFAAC receives in-kind contributions from the AFA for the use of certain facilities owned by the AFA, including office and warehouse space. The AFAAC is not charged rent for the use of this space. The estimated fair value of the utilization of this space has been computed by management using comparable market data. The estimated value of use of this space for the year ended June 30, 2014 is $639,932 and has been reported on the statement of activities as unrestricted contribution revenue and expense. Revenue and expense related to in-kind services are only recorded when the services received create or enhance nonfinancial assets or require specialized skills possessed by the individuals providing the service and the service would typically need to be purchased if not donated. Income taxes: The AFAAC is a not-for-profit organization as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes on related income. Uncertain tax provisions, if any, are recorded in accordance with accounting guidance for income taxes, which requires the recognition of a liability for tax provisions taken that do not meet the more-likely-than-not standard that the position will be sustained upon examination by the taxing authorities. There is no liability for uncertain tax positions recorded at June 30, 2014. The AFAAC is subject to U.S. federal, state and local income tax examinations by tax authorities for all years in which the AFAAC has been in existence. Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. 8

Notes to Financial Statements Note 2. Pledges Receivable Pledges receivable from donors are due to be collected as follows: Due in: 2015 $ 81,815 2016 14,738 2017 16,210 112,763 Less allowance for uncollectible pledges $ 5,638 107,125 Note 3. Property and Equipment Property and equipment at June 30, 2014 consisted of the following: Furniture and equipment $ 233,685 Vehicles 108,000 Computer software 56,125 Construction in process (assets to be transferred to AFA) 12,458 410,268 Less accumulated depreciation $ 106,147 304,121 The statement of financial position includes approximately $177,000 of equipment that was transferred from the AFA to the AFAAC during the year ending June 30, 2014. 9

Notes to Financial Statements Note 4. Composition of Net Assets Unrestricted net assets have not been designated by the Board of Directors for any particular purpose. Temporarily restricted net assets are available for the following purposes: Pride Club: Baseball $ 41,744 Baseball Capital 6,838 Basketball - Men's 51,476 Basketball - Women's 6,382 Blue Silver Renovation 1,566 Boxing 7,359 Cadet Intramurals 1,151 Cross Country 617 Cheer 18,557 Diving 5,127 Fencing 41,193 Stadium Renovation 5,344 Football 121,925 Gymnastics - Men's 33,814 Gymnastics - Women's 15,919 Golf 99,413 Hall of Excellence 159 Hockey 3,165 Human Performance Lab 386 Lacrosse 25,615 Rifle 7,632 Soccer - Men's 12,032 Soccer - Women's 16,309 Swimming - Men's 22,553 Swimming - Women's 20,121 Tennis - Men's 19,189 Tennis - Women's 146,019 Track 19,236 Volleyball 5,179 Water polo 63,939 Wrestling 16,864 Cadet wing 422 Cooperative agreement - support of athletic programs: Grants 1,343,602 Program income 3,641,205 Total temporarily restricted net assets $ 5,822,052 10

Notes to Financial Statements Note 5. Net Assets Released from Restrictions Net assets released from donor/grantor restrictions by incurring expenses satisfying the restricted purpose or by occurrence of other events specified by donors are as follows: Pride Club: Baseball $ 14,038 Basketball - Men's 96 Basketball - Women's 465 Blue Silver Renovation 1 Boxing 1,463 Cross Country 8 Cheer 314 Diving 385 Fencing 838 Stadium Renovation 6 Football 8,741 Gymnastics - Men's 432 Gymnastics - Women's 1,136 Golf 3,017 Hall of Excellence 912 Hockey 4,945 Human Performance Lab 299 Lacrosse 3,241 Rifle 184 Soccer - Men's 11 Soccer - Women's 311 Swimming - Men's 2,380 Swimming - Women's 534 Tennis - Men's 1,330 Tennis - Women's 30,339 Track 5,968 Volleyball 604 Water polo 201 Wrestling 2,681 Cadet wing 3,297 Government shutdown 262,070 Cooperative agreement - support of athletic programs: Grants 7,104,977 Program income 346,036 Total net assets released from restrictions $ 7,801,260 11

Notes to Financial Statements Note 6. Retirement Plan The AFAAC sponsors a 401(k) qualified defined contribution plan which is available to all employees. For the period of July 1, 2013 through December 31, 2013, the AFAAC contributed 5% of each employee s salary, regardless of whether the employee contributed to the plan. Effective January 1, 2014, the AFFAC contributed a dollar-for-dollar match of employees contributions up to 5% of employees salaries. For the year ended June 30, 2014, the AFAAC contributed $398,170 to the plan. Note 7. Significant Concentration Through a cooperative agreement funded by the U.S. Department of Defense, the AFAAC received approximately 37% of its total revenue from the AFA. Note 8. Subsequent Events Management has evaluated and disclosed subsequent events up to and including December 15, 2014, the date the financial statements were available to be issued. 12

Air Force Academy Athletic Corporation Compliance Report June 30, 2014

Contents 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 1 2 Report on compliance for the major federal program; report on internal control over compliance and report on schedule of expenditures of federal awards required by OMB Circular A-133 3 5 Schedule of expenditures of federal awards 6 Notes to schedule of expenditures of federal awards 7 Summary schedule of prior audit findings 8 Schedule of findings and questioned costs 9 11 Corrective action plan 12

Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Independent Auditor's Report To the Board of Directors Air Force Academy Athletic Corporation USAFA, Colorado 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 financial statements of the Air Force Academy Athletic Corporation (the AFAAC), which comprise the statement of financial position as of June 30, 2014, and the related statements of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report dated December 15, 2014. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the AFAAC s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the AFAAC s internal control. Accordingly, we do not express an opinion on the effectiveness of the AFAAC s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We did identify a deficiency in internal control, described in the accompanying schedule of findings and questioned costs as item 2014-001 that we consider to be a significant deficiency. 1

Compliance and Other Matters As part of obtaining reasonable assurance about whether the AFAAC s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. AFAAC s Response to Finding AFAAC s response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The AFAAC s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the AFAAC s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the AFAAC s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Denver, Colorado December 15, 2014 2

Report on Compliance for the Major Federal Program, Report on Internal Control Over Compliance and Report on Schedule of Expenditures of Federal Awards Required By OMB Circular A-133 Independent Auditor s Report To the Board of Directors Air Force Academy Athletic Corporation USAFA, Colorado Report on Compliance for the Major Federal Program We have audited the Air Force Academy Athletic Corporation s (the AFAAC) compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on the AFAAC s major federal program for the year ended June 30, 2014. The AFAAC s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal program. Auditor s Responsibility Our responsibility is to express an opinion on compliance for the AFAAC s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the AFAAC s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of the AFAAC s compliance. 3

Opinion on the Major Federal Program In our opinion, the AFAAC complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30, 2014. Report on Internal Control Over Compliance Management of the AFAAC is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the AFAAC s internal control over compliance with the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the AFAAC s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified a deficiency in internal control over compliance, as described in the accompanying schedule of findings and questioned costs, as item 2014-002, that we consider to be a significant deficiency. The AFAAC s response to the internal control over compliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The AFAAC s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. 4

Report on the Schedule of Expenditures of Federal Awards Required by OMB Circular A-133 We have audited the financial statements of the AFAAC as of and for the year ended June 30, 2014, and have issued our report thereon dated December 15, 2014, which contained an unmodified opinion on those financial statements. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by OMB Circular A-133 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 schedule of expenditures of federal awards is fairly stated in all material respects in relation to the financial statements as a whole. Denver, Colorado December 15, 2014 5

Schedule of Expenditures of Federal Awards Year Ended June 30, 2014 Federal Federal Grantor/ CFDA Pass-Through Entity Federal Pass-Through Grantor/Program Title Number Identifying Number Expenditures U.S. Department of Defense, Department of Air Force, Material Command Passed through the United States Air Force Academy, Air Force Academy Athletic Programs 12.801 FA7000-13-2-0015 $ 7,104,977 See Notes to Schedule of Expenditures of Federal Awards. 6

Notes to Schedule of Expenditures of Federal Awards Year Ended June 30, 2014 Note 1. Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule) includes the federal grant activity of the Air Force Academy Athletic Corporation (the AFAAC) under programs of the federal government for the year ended June 30, 2014. The information in the Schedule is presented in accordance with the requirements of the Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Government, and Non-Profit Organizations. Because the schedule presents only a selected portion of the operations of the AFAAC, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the AFAAC. Note 2. Significant Accounting Policies Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in OMB Circular A-122, wherein certain types of expenditures are not allowable or are limited as to reimbursement. 7

Summary Schedule of Prior Audit Findings Year Ended June 30, 2014 Prior Finding Corrective Action Plan Number Comment Status or Other Explanation Not applicable - The Air Force Academy Athletic Corporation did not receive an audit of their financial statements or compliance as of June 30, 2013 and for the year then ended. 8

Schedule of Findings and Questioned Costs Year Ended June 30, 2014 I. Summary of the Auditor's Results Financial Statements Type of auditor's report issued: Unmodified Internal control over financial reporting:. Material weakness(es) identified? Yes No. Significant deficiency(ies) identified? Yes None reported. Noncompliance material to financial statements noted? Yes No Federal Awards Internal control over major programs:. Material weakness(es) identified? Yes No. Significant deficiency(ies) identified? Yes None reported Type of auditor's report issued on compliance for major programs: Unmodified. Any audit findings disclosed that are required to be reported in accordance with Section 510(a) of Circular A-133? Yes No Identification of major program: CFDA Number Name of Federal Program or Cluster 12.801 Air Force Academy Athletic Programs Dollar threshold used to distinguish between type A and type B programs: $300,000 Auditee qualified as low-risk auditee? Yes No (Continued) 9

Schedule of Findings and Questioned Costs Year Ended June 30, 2014 II. Findings Related to the Financial Statement Audit as Required to be Reported in Accordance with Generally Accepted Government Auditing Standards A. Internal Control 2014-001 Finding: There were adjustments made to the trial balance presented to us to begin our audit that significantly affected year-end balances of certain general ledger accounts, specifically, pledge receivables, cash, accrued liabilities and equipment. Criteria: Significant deficiencies include deficiencies in controls over the period-end financial reporting process, including procedures to enter transaction totals into the general ledger; initiate; authorize; record and process journal entries into the general ledger; and record recurring and nonrecurring adjustments to the financial statements. Condition/Prevalence: During the audit, certain adjustments were identified as a result of our audit procedures and subsequently recorded in the general ledger by management and properly reflected in the June 30, 2014 financial statements. The adjustments consisted of the following items: Adjustment to correct the overstatement of pledges receivable for $101,859. Adjustment to correct the understatement of accrued health insurance claims for $13,523. Adjustment to correct the overstatement of equipment for $5,715. Adjustment to correct the overstatement of cash for $39,405. Cause: The majority of the adjustments were proposed because they were not identified by management of the AFAAC through the year-end review process as entries that were needed to be made for the financial statements to be in conformity with generally accepted accounting principles or due to the business office not receiving information from other departments that would have enabled them to record the entry in a timely manner. Effect: The lack of adequate recording of certain transactions at year-end could result in misstatements to the AFAAC s financial statements. Recommendation: We recommend that management adopt and adhere to procedures that will help ensure that all routine, as well as significant and unusual transactions, are recorded accurately and reviewed on a timely basis. Response and Corrective Action Plan: AFAAC concurs with the findings, and has made all appropriate adjustments to the general ledger. AFAAC will work with our internal auditor to ensure pledge receivables are reflected accurately in subsequent financial statements. Additionally, we will periodically test transactions sufficiently with the goal of preventing future misstatements and, as of September 2014, all journal entries undergo peer or management review prior to posting in the accounting system. B. Compliance Findings None reported 10

Schedule of Findings and Questioned Costs Year Ended June 30, 2014 III. Findings and Questioned Costs for Federal Awards A. Internal Control 2014-002 U.S. Department of Defense, Department of Air Force, Material Command Passed through the U.S. Air Force Academy Air Force Athletic Programs (CFDA No. 12.801) Federal Award Year 2014 Finding: The AFAAC does not have an adequate system in place for complying with the suspension and debarment requirements of OMB Circular A-133. Criteria: OMB Circular A-133 dictates that when a nonfederal entity enters into a contract or purchase order with an entity (vendor or subrecipient), the nonfederal entity must verify the entity is not suspended or debarred from participation in federal programs/grant when expending $25,000 or more in a year. Condition/Prevalence: The AFAAC did not have a process in place for complying with this requirement. Cause: Management was not aware of this requirement. Effect: The lack of a system for ensuring compliance with this requirement could result in instances of noncompliance. Recommendation: We recommend that the AFAAC implement procedures to ensure that vendors have not been suspended or debarred from participation in federal programs prior to entering into contracts or purchase orders and that documentation be maintained to support this verification. The OMB Compliance Supplement indicates three methods that an entity can accomplish this: 1) checking the Excluded Parties List System (EPLS) maintained by the General Services Administration, 2) collecting a certification from the entity, or 3) adding a clause or condition to the covered transaction with that entity. Response and Corrective Action Plan: AFAAC concurs with this finding, and will suggest to the government program manager and grants team that a new personnel authorization be created with knowledge of federal procurement requirements. Beginning in fiscal year 2015, periodic searches are performed to ensure no AFAAC vendors are on the suspended or disbarred list, regardless of funding source or dollar value of the potential purchase. B. Instances of Noncompliance None reported 11

Corrective Action Plan Year Ended June 30, 2014 Current Finding Anticipated Date Number Comment Corrective Action Plan of Completion Contact Person 2014-001 There were adjustments made to the trial See corrective action March 31, 2015 Chief Financial Officer, balance presented to us to begin our audit plan at 2014-001 AFAAC that significantly affected year-end balances of certain general ledger accounts, specifically, pledge receivables, cash, accrued liabilities and equipment. 2014-002 The AFAAC does not have an adequate system in See corrective action March 31, 2015 Chief Financial Officer, place for complying with the suspension and plan at 2014-002 AFAAC debarment requirements of OMB Circular A-133. 12