The University of Memphis Foundation Financial Statements For the Years Ended June 30, 2015 and 2014
The University of Memphis Foundation Contents Independent Auditors' Report... 2 Statements of Financial Position... 4 Statement of Activities for the Year Ended June 30, 2015... 5 Statement of Activities for the Year Ended June 30, 2014... 6 Statements of Cash Flows... 7 Notes to Financial Statements... 8 Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards... 20
Independent Auditors' Report Board of Trustees The University of Memphis Foundation Memphis, Tennessee Report on the Financial Statements We have audited the accompanying financial statements of The University of Memphis Foundation (the "Foundation"), which comprise the statements of financial position as of June 30, 2015 and 2014, and the related statements of activities and cash flows for the years 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' 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 Foundation'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 Foundation'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. 2
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 Foundation as of June 30, 2015 and 2014, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 5, 2015, on our consideration of the Foundation's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Foundation's internal control over financial reporting and compliance. Memphis, Tennessee November 5, 2015 3
The University of Memphis Foundation Statements of Financial Position June 30, 2015 and 2014 2015 2014 Assets Cash $ 1,076,589 $ 417,950 Contributions receivable, net 15,522,966 12,539,832 Accrued interest and dividends 81,079 72,887 Investments 131,952,355 134,146,310 Cash surrender value of life insurance 360,576 339,364 Donated works of art and other property 596,227 596,227 Total assets $ 149,589,792 $ 148,112,570 Liabilities Accounts payable, primarily to The University of Memphis $ 8,863,246 $ 10,893,665 Gift annuity obligations 162,445 151,945 Total liabilities 9,025,691 11,045,610 Net Assets Unrestricted 8,535,825 9,360,513 Temporarily restricted 65,666,975 63,281,646 Permanently restricted 66,361,301 64,424,801 Total net assets 140,564,101 137,066,960 Total liabilities and net assets $ 149,589,792 $ 148,112,570 See notes to financial statements. 4
The University of Memphis Foundation Statement of Activities For the Year Ended June 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Support and Other Revenue Contributions $ 124,650 $ 21,396,840 $ 2,794,269 $ 24,315,759 Investment income 650,235 525,625-1,175,860 Net realized and unrealized gains on investments 65,742 2,244,233-2,309,975 Other income - 991,161-991,161 840,627 25,157,859 2,794,269 28,792,755 Net assets released from restrictions 22,542,028 (22,542,028) - - Total support and other revenue 23,382,655 2,615,831 2,794,269 28,792,755 Expenses University support 15,997,588 - - 15,997,588 Awards and scholarships 8,654,153 - - 8,654,153 Investment fees and expenses 30,762 - - 30,762 Bad debt expense 613,111 - - 613,111 Total expenses 25,295,614 - - 25,295,614 Increase (decrease) in net assets before donor modifications of restrictions (1,912,959) 2,615,831 2,794,269 3,497,141 Donor modifications of restrictions 1,088,271 (230,502) (857,769) - Increase (decrease) in net assets (824,688) 2,385,329 1,936,500 3,497,141 Net assets at beginning of year 9,360,513 63,281,646 64,424,801 137,066,960 Net assets at end of year $ 8,535,825 $ 65,666,975 $ 66,361,301 $ 140,564,101 See notes to financial statements. 5
The University of Memphis Foundation Statement of Activities For the Year Ended June 30, 2014 Temporarily Permanently Unrestricted Restricted Restricted Total Support and Other Revenue Contributions $ 197,391 $ 26,595,935 $ 3,854,750 $ 30,648,076 Investment income 460,392 234,815-695,207 Net realized and unrealized gains on investments 1,890,300 12,587,639-14,477,939 Other income - 1,142,532-1,142,532 2,548,083 40,560,921 3,854,750 46,963,754 Net assets released from restrictions 26,701,957 (26,701,957) - - Total support and other revenue 29,250,040 13,858,964 3,854,750 46,963,754 Expenses University support 18,643,637 - - 18,643,637 Awards and scholarships 9,471,723 - - 9,471,723 Investment fees and expenses 48,588 - - 48,588 Bad debt expense 113,765 - - 113,765 Total expenses 28,277,713 - - 28,277,713 Increase in net assets before donor modifications of restrictions 972,327 13,858,964 3,854,750 18,686,041 Donor modifications of restrictions - (93,752) 93,752 - Increase in net assets 972,327 13,765,212 3,948,502 18,686,041 Net assets at beginning of year 8,388,186 49,516,434 60,476,299 118,380,919 Net assets at end of year $ 9,360,513 $ 63,281,646 $ 64,424,801 $ 137,066,960 See notes to financial statements. 6
The University of Memphis Foundation Statements of Cash Flows For the Years Ended June 30, 2015 and 2014 2015 2014 Cash Flows from Operating Activities Increase in net assets $ 3,497,141 $ 18,686,041 Adjustments to reconcile increase in net assets to net cash provided by (used in) operating activities Net realized and unrealized gains on investments (2,309,975) (14,477,939) Bad debt expense 613,111 113,765 Contributions restricted for endowment (2,794,269) (3,854,750) Changes in operating assets and liabilities Contributions receivable (3,596,245) 1,267,169 Accrued interest and dividends (8,192) (49,307) Cash surrender value of life insurance (21,212) (157,326) Accounts payable, primarily to The University of Memphis (2,030,419) (652,386) Gift annuity obligations 10,500 (11,140) (10,136,701) (17,821,914) Net cash (used in) provided by operating activities (6,639,560) 864,127 Cash Flows from Investing Activities Proceeds from sale of investments 74,686,499 200,524,167 Purchases of investments (70,182,569) (205,509,968) Net cash provided by (used in) investing activities 4,503,930 (4,985,801) Cash Flows from Financing Activities Contributions restricted for endowment 2,794,269 3,854,750 Net cash provided by financing activities 2,794,269 3,854,750 Net increase (decrease) in cash 658,639 (266,924) Cash at beginning of year 417,950 684,874 Cash at end of year $ 1,076,589 $ 417,950 See notes to financial statements. 7
The University of Memphis Foundation Notes to Financial Statements June 30, 2015 and 2014 1. Summary of Significant Accounting Policies Organization and Activities The University of Memphis Foundation (the "Foundation") is a not-for-profit, tax-exempt corporation chartered in 1964 in the State of Tennessee. The Foundation accepts and manages private support to The University of Memphis ("University"). Leading citizens of the Mid-South area comprise an independent Board of Trustees. Support and Revenue Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending upon the existence or nature of any donor restrictions. Donor restrictions can be modified only by submission of a written request from the original donor or other authorized party. Support that is not restricted by the donor is reported as an increase in unrestricted net assets. All donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending upon the nature of the restriction. When a donor 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. Temporarily restricted net assets as of June 30, 2015 and 2014 totaled $65,666,975 and $63,281,646, respectively. Temporarily restricted net assets include net contributions receivable of $14,809,068 and $11,696,448 as of June 30, 2015 and 2014, respectively. Remaining temporarily restricted net assets consist primarily of investments. These assets are to be used for a specific program or purpose for future years. Permanently restricted net assets totaled $66,361,301 and $64,424,801 as of June 30, 2015 and 2014, respectively. Permanently restricted net assets originated with contributions received to establish perpetual endowments. The endowment gift is permanently restricted with the capital appreciation and earnings thereon to be used to provide financial assistance to deserving scholars, salary supplements and awards to attract and retain outstanding faculty members, visiting artists and lecturers and to provide for various departmental and University needs. Permanently restricted net assets include net contributions receivable of $713,898 and $843,384 as of June 30, 2015 and 2014, respectively. Remaining permanently restricted net assets consist of investments. Donated Property Donated property is recorded as contributions at the estimated fair value on the date of donation. Donated investments are recorded at fair value on the date of donation. 8
1. Summary of Significant Accounting Policies (continued) Cash The Foundation recognizes all demand deposit accounts as cash. All money market funds are considered to be investments and no amounts are classified as cash equivalents. Contributions Receivable Contributions receivable consist of unconditional promises to give and are recorded when the pledge is received. Contributions receivable that are expected to be collected within the next year are recorded at their net realizable value. Contributions receivable expected to be collected in subsequent years have been discounted to the present value of their net realizable value. Receivables are stated at the amount management expects to collect from outstanding balances. Management monitors outstanding balances and provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based upon its assessments of the current status of individual accounts. Balances that are still outstanding after a reasonable period of time has elapsed are generally written off through a charge to the valuation allowance and a credit to the appropriate receivable. Conditional promises to give are not included as revenue until the conditions are substantially met. The Foundation had received conditional promises to give of $2,002,931 and $3,204,931 at June 30, 2015 and 2014, respectively. These potential contributions, if received, would generally be restricted for specific purposes stipulated by the donors. Investment Valuation and Income Recognition The Foundation's investments are stated at fair value. Fair value is the price that would be received to sell an asset in an ordinary transaction between market participants at the measurement date. See Note 4 for a discussion of fair value measurements. Purchases and sales of investments are recorded on a trade-date basis. Interest income is recorded when earned and dividends are recorded on the ex-dividend date. Net realized and unrealized gains (losses) on investments include the Foundation's gains and losses on investments bought and sold as well as held during the year. Income producing assets have been pooled to enhance earnings power. The pool income is allocated pro rata to each participating account based on relative carrying value. Administrative Fee In order to cover expenses of Foundation operations and provide unrestricted funds for University support, an administrative fee of 2.0% was assessed on the carrying value of accounts invested in the endowment pool for the years ended June 30, 2015 and 2014. The fee covers the cost of business office operations, provides support for University of Memphis fundraising activities, and assists with other University of Memphis needs. Administrative fees earned were approximately $1,782,000 and $1,630,000 for the years ended June 30, 2015 and 2014, respectively. 9
1. Summary of Significant Accounting Policies (continued) Income Taxes The Foundation is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code and is similarly exempt from Tennessee state income taxes under applicable provisions of the Tennessee tax regulations. The Foundation's limited partnership investments generate unrelated business income or loss activity which is subject to federal income taxes. There was no unrelated business income tax expense (UBIT) for the years ended June 30, 2015 and 2014. The Foundation has determined that it does not have any material uncertain tax positions as of June 30, 2015, and there is no interest or penalties related to income tax assessments. Fiscal years ending on or after June 30, 2012, remain subject to examination by federal and state tax authorities. Endowment Funds The Foundation classifies net assets of donor-restricted endowment funds in accordance with Accounting Standard Codification ("ASC") 205, Presentation of Financial Statements. ASC 205 provides guidance on net asset classification of donor-restricted endowment funds and improves disclosures on both an organization's donor-restricted and board-designated endowment funds. The Uniform Prudent Management of Institutional Funds Act ("UPMIFA") establishes guidelines for prudent management of costs and expenditures of funds in relation to the whole economic situation of the charitable institution and was enacted by the State of Tennessee effective July 1, 2007. An organization, whether or not it is subject to an enacted version of UPMIFA, shall disclose information to enable users of financial statements to understand net asset classification, net asset composition, changes in net asset composition, spending policies, and related investment policies of its endowment funds. See Note 7 for required disclosures of endowment funds. Use of Estimates Management uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Such estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenue and expenses. Significant financial statement estimates include those used in the valuation of certain investments, the allowance for uncollectible contributions, and the present value discount applied to contributions receivable. Management determines the estimate of the allowance for uncollectible contributions considering a number of factors, including historical experience and aging of accounts. Actual results could differ from those estimates. 10
1. Summary of Significant Accounting Policies (continued) Subsequent Events The Foundation has evaluated the effect subsequent events would have on the financial statements through November 5, 2015, which is the date the financial statements were available to be issued. No subsequent events have been recognized or disclosed. 2. Contributions Receivable As of June 30, 2015 and 2014, contributors to the Foundation have unconditionally promised to give as follows: 2015 2014 Within one year $ 7,491,029 $ 4,747,359 One to five years 9,191,385 8,585,329 More than five years 548,178 317,500 Total unconditional promises to give 17,230,592 13,650,188 Less present value component 256,017 209,358 Less allowance for uncollectible contributions receivable 1,451,609 900,998 $ 15,522,966 $ 12,539,832 Contributions receivable beyond one year have been discounted to their net present value using imputed interest rates of 1.34% and 1.28% as of June 30, 2015 and 2014, respectively. 3. Investments Investments as of June 30, 2015 and 2014 are summarized as follows: 2015 2014 Cost Fair Value Cost Fair Value Money market funds $ 944,183 $ 944,183 $ 2,020,025 $ 2,020,025 Limited partnerships and LLCs 83,015,290 96,245,033 77,902,472 91,016,384 Mutual funds 30,807,970 30,915,154 36,864,335 37,373,886 U.S. government securities 209,809 208,250 199,779 196,616 Corporate bonds 3,639,480 3,639,735 3,536,389 3,539,399 $ 118,616,732 $ 131,952,355 $ 120,523,000 $ 134,146,310 4. Fair Value Measurements The carrying amounts in the statements of financial position for accounts payable approximate fair value due to their short maturities. The carrying amounts for contributions receivable approximate fair value as amounts expected to be collected in future years have been discounted to present value and the receivable has been reduced by an allowance for doubtful accounts (Note 2). The carrying amounts of other financial instruments approximate fair value. 11
4. Fair Value Measurements (continued) ASC 820, Fair Value Measurements and Disclosures, provides a common definition of fair value and establishes a framework for measuring fair value. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These inputs are summarized in three broad levels for financial statement purposes. Level 1: Quoted prices for identical securities in active markets. Level 2: Other significant observable inputs other than Level 1 prices, such as quoted prices for similar securities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect the Foundation's investment managers' own assumptions used to determine the fair value of investments. Level 2 investment securities include certain U.S. government and agency obligations and corporate bonds for which quoted prices are not available in active markets for identical instruments. Because quoted prices in active markets for identical assets are not available, these prices are determined using observable market information such as quotes from less active markets and/or quoted prices of securities with similar characteristics. Level 2 investments in 2014 include fixed income funds with observable inputs. The fair values of Level 2 investments were estimated based on the net asset value ("NAV") at June 30, 2015, provided by the fund manager. The Foundation uses the net asset value (NAV) or capital balances of its interest in Level 3 investments as a practical expedient to determine the fair value of Level 3 investment funds. These funds do not have a readily determinable fair value and either have the attributes of an investment company or prepare their financial statements consistent with the measurement principles of an investment company. Because of the inherent uncertainty of valuations of Level 3 investments, their estimated values may differ significantly from the values that would have been used had a ready market for the Level 3 investments existed, and the difference could be material. Additional information about the major categories of Level 3 investments is presented below. Valuations provided by the general partners and investment managers are evaluated by management through accounting and financial reporting processes to review and monitor existence and valuation assertions. Management has instituted processes in the areas of initial due diligence, ongoing monitoring and financial reporting. Management also reviews interim financial information and reviews details of investment holdings to obtain an understanding of the underlying investments. Monitoring also includes obtaining and reviewing audited financial statements noting the type of opinion, basis of accounting, procedures pertaining to the valuation of alternative investments and comparison of audited valuation with the fund's valuation. 12
4. Fair Value Measurements (continued) The following tables set forth by level, within the fair value hierarchy, the Foundation's investments measured at fair value on a recurring basis as of June 30, 2015 and 2014. Assets at Fair Value as of June 30, 2015 Level 1 Level 2 Level 3 Total Money market funds $ 944,183 $ - $ - $ 944,183 Limited partnerships and LLCs Hedge strategies-hedged equity - - 43,592,248 43,592,248 Private equity - - 6,477,488 6,477,488 Real assets 4,710,374-3,283,513 7,993,887 U.S. equity - - 11,989,837 11,989,837 International equity - - 12,050,893 12,050,893 Emerging markets equity - - 7,106,900 7,106,900 Opportunistic - - 2,485,900 2,485,900 Fixed income - - 4,547,880 4,547,880 Total limited partnerships and LLCs 4,710,374-91,534,659 96,245,033 Mutual funds Fixed income-short term 27,235,158 - - 27,235,158 Hedge strategies-real return 3,679,996 - - 3,679,996 Total mutual funds 30,915,154 - - 30,915,154 U.S. government securities - 208,250-208,250 Corporate bonds - 3,639,735-3,639,735 Total $ 36,569,711 $ 3,847,985 $ 91,534,659 $ 131,952,355 Assets at Fair Value as of June 30, 2014 Level 1 Level 2 Level 3 Total Money market funds $ 2,020,025 $ - $ - $ 2,020,025 Limited partnerships and LLCs Hedge strategies-hedged equity - - 40,778,501 40,778,501 Private equity - - 7,146,742 7,146,742 Real assets 2,783,799-6,226,880 9,010,679 U.S. equity - - 11,581,652 11,581,652 International equity - - 11,138,438 11,138,438 Emerging markets equity - - 7,039,569 7,039,569 Opportunistic - - 2,308,263 2,308,263 Fixed income - 2,012,540-2,012,540 Total limited partnerships and LLCs 2,783,799 2,012,540 86,220,045 91,016,384 Mutual funds Fixed income-short term 32,018,270 - - 32,018,270 Fixed income-total return 1,336,031 - - 1,336,031 Hedge strategies-real return 4,019,585 - - 4,019,585 Total mutual funds 37,373,886 - - 37,373,886 U.S. government securities - 196,616-196,616 Corporate bonds - 3,539,399-3,539,399 Total $ 42,177,710 $ 5,748,555 $ 86,220,045 $ 134,146,310 13
4. Fair Value Measurements (continued) The following table illustrates the activity of Level 3 assets from July 1, 2013 to June 30, 2015: Fair value July 1, 2013 $ 34,394,180 Realized gains 5,725,620 Change in unrealized gains 5,435,730 Purchases 67,155,037 Sales/distributions (26,490,522) Fair value June 30, 2014 86,220,045 Realized gains 1,748,537 Change in unrealized gains 1,576,245 Purchases 11,491,971 Sales/distributions (9,502,139) Fair value June 30, 2015 $ 91,534,659 The following table provides information related to the previously mentioned investments that are valued based on NAV: Fair Value June 30, 2015 Fair Value June 30, 2014 Unfunded Commitments at June 30, 2015 Redemption Frequency Redemption Notice Period Annually/ 90 days Hedged equity (a) $ 43,592,248 $ 40,778,501 $ - Upon Liquidation At Manager's Private equity (b) 6,477,488 7,146,742 2,961,768 Discretion N/A Quarterly/Upon 60 days Real assets (c) 3,283,513 6,226,880 4,556,076 Liquidation U.S. equity (d) 11,989,837 11,581,652 - Quarterly 60 days International equity (e) 12,050,893 11,138,438 - Quarterly 60 days Emerging markets equity (f) 7,106,900 7,039,569 - Annually 90 days Opportunistic (g) 2,485,900 2,308,263 - Annually 90 days Fixed Income (h) 4,547,880 - - Monthly 15 days Total $ 91,534,659 $ 86,220,045 $ 7,517,844 a) Hedged Equity This category consists of funds of funds that make long and short position equity investments. The bulk of the investment is subject to semi-annual or annual redemption. b) Private Equity This category consists of partnerships that invest primarily in U.S. based private companies. These investments cannot be voluntarily redeemed and are subject to sale based on market demand. c) Real Assets This category consists of investment partnerships and funds that invest primarily in U.S. and foreign commercial real estate and natural resources. Some investments in this category allow quarterly redemption, but distributions during periods of illiquidity are restricted by gate constraints. 14
4. Fair Value Measurements (continued) d) U.S. Equity This category generally consists of managers that invest primarily in equity securities of U.S. corporations. U.S. equity may include multiple styles (growth, value) and market capitalizations (small, mid, large). These investments will primarily be long-only. e) International Equity This category will generally consist of managers that invest primarily in equity securities of corporations domiciled in foreign countries. International equity may include multiple styles (growth, value) and market capitalizations (small, mid, large). These investments will primarily be longonly. f) Emerging Markets This category will generally consist of managers that invest primarily in equity securities of corporations domiciled in emerging foreign countries. Emerging markets equity may include multiple styles (growth, value) and market capitalizations (small, mid, large). These investments will primarily consist of long-only investments and hedged equity investments (long and short). g) Opportunistic This category may include any strategy that offers exceptional risk/reward opportunities. This category is designed to provide the Investment Committee with the flexibility to select investments for a relatively small part of an overall allocation, which may not fit into the other designed allocation categories. h) Fixed Income This category will generally consist of managers that invest primarily in fixed income securities of governments, government agencies, and corporations. These securities may include US and foreign government bonds, corporate bonds, asset-backed securities, mortgages (residential and commercial), municipal bonds, commercial paper, money market funds, preferred stock and closed-end funds. As the fixed income allocation is designed to provide capital preservation and liquidity, it will largely consist of investment grade securities. High yield bonds may be utilized. 5. Temporarily Restricted Net Assets Temporarily restricted net assets are comprised of the following components/use restrictions as of June 30, 2015 and 2014: 2015 2014 Alumni relations $ 553,222 $ 402,831 Awards 1,107,339 1,004,927 Capital improvements 14,300,647 13,976,293 Centers, institutes and labs 4,643,001 5,092,756 Contributions receivable, net 14,809,068 11,696,448 Departmental/academic enrichment 7,603,876 7,816,885 Gift annuities 51,176 46,350 Operations 216,181 92,269 Professorships/chairs/visiting scholars 5,444,233 5,511,337 Scholarships/fellowships 12,121,156 12,314,585 Special projects/lecture series/workshops 4,817,076 5,326,965 $ 65,666,975 $ 63,281,646 15
6. Permanently Restricted Net Assets Permanently restricted net assets are restricted to investment in perpetuity. The components of the permanently restricted net asset balances and the purposes the income is expendable to support as of June 30, 2015 and 2014 are as follows: 2015 2014 Alumni relations $ 519,638 $ 494,948 Awards 2,112,710 1,966,149 Centers, institutes and labs 1,358,584 855,062 Contributions receivable, net 713,898 843,384 Departmental/academic enrichment 10,599,543 11,022,765 Professorships/chairs/visiting scholars 13,081,119 11,877,838 Scholarships/fellowships 27,976,899 27,138,978 Special projects/lecture series/workshops 9,998,910 10,225,677 $ 66,361,301 $ 64,424,801 7. Endowment Funds The University of Memphis Foundation's endowment accounts consist of donor-restricted endowment funds and include approximately 490 individual funds established for a variety of purposes. As required by GAAP, net assets associated with endowment funds are classified and reported based on the existence or absence of donor imposed restrictions. The Board of Trustees of The University of Memphis Foundation has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donorrestricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Foundation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment funds and (b) the original value of subsequent gifts to the permanent endowment funds. The remaining portion of the donor-restricted endowment funds that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Foundation in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Foundation considers the following factors in making a determination to appropriate or accumulate donor restricted endowment funds: The duration and preservation of the fund The purposes of the Foundation and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the Foundation The investment policies of the Foundation 16
7. Endowment Funds (continued) Endowment net asset composition by type of fund as of June 30, 2015: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (342,326) $ 21,318,671 $ 66,361,301 $ 87,337,646 Board-designated endowment funds 6,486,185 - - 6,486,185 Total funds $ 6,143,859 $ 21,318,671 $ 66,361,301 $ 93,823,831 Endowment net asset composition by type of fund as of June 30, 2014: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (245,938) $ 22,261,708 $ 64,424,801 $ 86,440,571 Board-designated endowment funds 5,553,834 - - 5,553,834 Total funds $ 5,307,896 $ 22,261,708 $ 64,424,801 $ 91,994,405 Changes in endowment net assets for the period of July 1, 2013 through June 30, 2015 are as follows: Temporarily Permanently Unrestricted Restricted Restricted Total July 1, 2013 $ 3,954,441 $ 14,629,690 $ 60,476,299 $ 79,060,430 Investment return: Investment income (loss) (88,496) (1,238,984) - (1,327,480) Net appreciation (realized and unrealized) 824,339 12,585,115-13,409,454 Total investment return 735,843 11,346,131-12,081,974 Contributions - 276,486 3,854,750 4,131,236 Appropriation of endowment assets for expenditure (181,741) (3,004,656) - (3,186,397) Other changes: Investment deficiencies reclassed to unrestricted net assets 799,353 (799,353) - - Modifications of restrictions - (186,590) 93,752 (92,838) June 30, 2014 5,307,896 22,261,708 64,424,801 91,994,405 Investment return: Investment income (loss) (88,990) (1,002,660) - (1,091,650) Net appreciation (realized and unrealized) 169,097 2,242,596-2,411,693 Total investment return 80,107 1,239,936-1,320,043 Contributions - 160,044 2,794,269 2,954,313 Appropriation of endowment assets for expenditure (236,027) (2,210,463) - (2,446,490) Other changes: Investment deficiencies reclassed to unrestricted net assets (96,388) 96,388 - - Modifications of restrictions 1,088,271 (228,942) (857,769) 1,560 June 30, 2015 $ 6,143,859 $ 21,318,671 $ 66,361,301 $ 93,823,831 17
7. Endowment Funds (continued) All of the permanently restricted endowment funds are required to be retained permanently either by explicit donor stipulation or UPMIFA. The portion of the temporarily restricted endowment funds subject to time and purpose restrictions was $21,318,671 and $22,261,708 as of June 30, 2015 and 2014, respectively. There were no temporarily restricted endowment funds only subject to time restrictions as of June 30, 2015 and 2014. Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the Foundation is required to retain in a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets. These deficiencies resulted from unfavorable market fluctuations that occurred after the investment of permanently restricted contributions and/or continued appropriation for fees and expenditures. At June 30, 2015 and 2014, deficiencies of this nature totaled $342,326 and $245,938, respectively. Return Objectives and Risk Parameters The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment funds while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Foundation must hold in perpetuity or for a donor specified period as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce consistent long-term growth of capital without undue exposure to risk. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the Foundation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Foundation targets a diversified asset allocation that places an emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy The Foundation has a policy of budgeting for expenditure each year a percentage of its endowment funds' average fair value over the prior twelve quarters through the fiscal year-end one year preceding the fiscal year in which the expenditure is planned. For fiscal years 2015 and 2014, this percentage was 4.00% and 3.75%, respectively. In establishing this policy, the Foundation considered the long-term expected return on its endowment funds. Accordingly, over the long term, the Foundation expects the current spending policy to allow for endowment growth. This is consistent with the Foundation's objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. 18
8. Concentrations of Risk Although the Foundation has a policy to maintain a diversified investment portfolio, its investments are subject to market and credit risks which may be affected by economic developments in a specific geographic region or industry. Approximately 18% and 27% of the Foundation's pledge receivable balance at June 30, 2015 and 2014 was due from two donors, respectively. 19
Independent Auditors' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Board of Trustees The University of Memphis Foundation Memphis, Tennessee 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 University of Memphis Foundation (the "Foundation"), which comprise the statement of financial position as of June 30, 2015, and the related statements of activities, and cash flows and the related notes to the financial statements for the year then ended, and have issued our report thereon dated November 5, 2015 Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Foundation's internal control over financial reporting ("internal control") to determine the auditing 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 Foundation's internal control. Accordingly, we do not express an opinion on the effectiveness of the Foundation's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Foundation's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or 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 the internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 20
Compliance and Other Matters As part of obtaining reasonable assurance about whether the Foundation's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Foundation'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 Foundation's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Memphis, Tennessee November 5, 2015 21