shenandoah university winchester, virginia consolidated … · 2018-09-01 · consolidated...

SHENANDOAH UNIVERSITY

Winchester, Virginia

CONSOLIDATED FINANCIAL REPORT

JUNE 30, 2013

Elaine B. Aikens Keith A. MayWalter H. Aikens Richard R.J. Morin

C. J. Borden Nicholas J. Nerangis, Sr.William F. Brandt, Jr. Mark J. OhrstromStephen P. Caruthers Debra S. Orbacz

Teresa A. Cluss Bipin B. PatelLaura N. Dabinett Leigh RobertsAnne-Marie Dunn Reverend Lee B. SheafferAndrew U. Ferrari Mary Farland ShockeyTracy Fitzsimmons Gerald F. Smith, Jr.Robert J. Frogale Harry S. Smith

Mary Bruce Glaize Mark E. StavishReverend Jay M. Hanke James A. Stutzman

Stanley E. Harrison Reverend Larry ThompsonReverend Tommy Herndon Charles A. Veatch

L. Janell Hoffman James T. VickersSusan R. Jones F. Dixon Whitworth, Jr.Diane S. Kearns James R. Wilkins, Jr. Marjorie Lewis Heather H. Wilson

Ann K. MacLeod Irene R. WurtzelArt H. Major

William F. Brandt, Jr., Vice Chair

James T. Vickers, Past Chair

BOARD OF TRUSTEES

OFFICERS OF THE BOARD OF TRUSTEES

OFFICERS

Tracy Fitzsimmons, PresidentBryon Grigsby, Senior Vice President and Vice President for Academic Affairs

Richard C. Shickle, Sr., Vice President for Administration and Finance

Tracy Fitzsimmons, President & Registered Agent

Marjorie Lewis, Secretary

Mitchell L. Moore, Vice President for Advancement

Robert J. Frogale, Treasurer

Clarresa Morton, Vice President for Enrollment Management & Student Success

Andrew U. Ferrari, Chair

Rhonda VanDyke Colby, Vice President for Student Life

Joseph A. Allen The Honorable John O. Marsh, Jr.Frank Armstrong, III Suzanne W. McKown

Warren L. Braun Jan NeuharthRuth D. Bridgeforth Aubrey J. Owen Magalen O. Bryant Charles A. Pine, Jr.

The Honorable Harry F. Byrd, Jr. Lacy I. Rice, Jr.Massie Burns Linda C. Russell

Betty H. Carroll Ralph D. ShockeyWilliam H. Clement Robert Solenberger

Eugene F. Dearing, Jr. The Honorable Kenneth W. StarrH. Robert Edwards John D. Stokely, Jr.Wilbur M. Feltner W. James Truettner, Jr.

Hunter M. Gaunt, Jr. Kathryn Perry WernerElizabeth G. Helm Major General Charles E. WilliamsJeffrey D. Hester Rev. Raymond Wrenn

TRUSTEES EMERITI

TRUSTEE HONORARY

Miyako Kake

C O N T E N T S

Page INDEPENDENT AUDITOR'S REPORT 1 and 2 CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Financial Position 3 Consolidated Statements of Activities 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6-25

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 26 and 27

REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL

PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 28 and 29

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 30 NOTES TO THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 31 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 32 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS 33

INDEPENDENT AUDITOR'S REPORT To the Board of Trustees Shenandoah University Winchester, Virginia Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Shenandoah University, which comprise the consolidated statements of financial position as of June 30, 2013 and 2012, and the related consolidated 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 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 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 audits 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 misstatement 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.

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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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Shenandoah University as of June 30, 2013 and 2012, 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 Matters

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated September 30, 2013 on our consideration of Shenandoah University’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 Shenandoah University’s internal control over financial reporting and compliance.

Winchester, Virginia September 30, 2013

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Assets 2013 2012

Current Assets

Cash and cash equivalents (Note 1) 14,255,197$ 8,338,165$

Accounts and interest receivable, net (Note 1) 2,305,379 2,347,309

Current portion of notes receivable (Note 2) 400,000 420,000

Prepaid expenses 1,065,503 1,163,134

Contributions receivable, net (Notes 1 and 4) 1,864,863 280,695

Total current assets 19,890,942$ 12,549,303$

Noncurrent Assets

Contributions receivable, net (Notes 1 and 4) 1,350,015$ 73,940$

Notes receivable (Note 2) 2,476,760 2,399,931

Deferred charges 634,989 484,752

Assets restricted to investment in land, buildings and equipment (Note 1) 3,135,474 2,211,983

Bond proceeds for capital additions (Note 1) - - 2,700,926

Long-term investments (Notes 1 and 3) 61,679,491 59,341,382

Land, buildings and equipment (Notes 1 and 8) 94,938,509 93,134,405

Total assets 184,106,180$ 172,896,622$

Liabilities and Net Assets

Current Liabilities

Accounts and interest payable 2,038,591$ 2,297,786$

Accrued expenses 3,316,502 3,246,322

Deferred revenue 3,477,797 3,569,631

Current portion of annuity and life income obligations (Note 7) 228,095 236,193

Current portion of long-term debt (Note 5) 2,345,000 2,265,000

Current portion of capital lease obligations (Note 8) 1,389,218 1,323,882

Total current liabilities 12,795,203$ 12,938,814$

Noncurrent Liabilities

Annuity and life income obligations (Note 7) 450,314$ 612,790$

U.S. government grants refundable 2,376,947 2,365,384

Long-term debt (Note 5) 42,507,336 44,680,000

Capital lease obligations (Note 8) 1,543,450 1,336,187

Obligation under interest rate swap agreements (Notes 1 and 6) 53,240 1,333,959

Total liabilities 59,726,490$ 63,267,134$

Net Assets (Notes 1 and 13)

Unrestricted 69,764,530$ 60,523,341$

Temporarily restricted 30,531,756 25,180,332

Permanently restricted 24,083,404 23,925,815

Total net assets 124,379,690$ 109,629,488$

Total liabilities and net assets 184,106,180$ 172,896,622$

See Notes to Consolidated Financial Statements.


Consolidated Statements of Financial Position

June 30, 2013 and 2012

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Current Temporarily Permanently Current Temporarily Permanently

Operations Other Total Restricted Restricted Total Operations Other Total Restricted Restricted Total

Revenues, gains (losses) and other support:

Tuition and fees 86,131,842$ - -$ 86,131,842$ - -$ - -$ 86,131,842$ 77,599,651$ - -$ 77,599,651$ - -$ - -$ 77,599,651$

Less: Scholarship allowance (22,413,299) - - (22,413,299) - - - - (22,413,299) (19,983,426) - - (19,983,426) - - - - (19,983,426)

Net tuition and fees 63,718,543$ - -$ 63,718,543$ - -$ - -$ 63,718,543$ 57,616,225$ - -$ 57,616,225$ - -$ - -$ 57,616,225$

Contributions 1,315,791 1,227,327 2,543,118 5,120,819 113,966 7,777,903 1,707,720 219,714 1,927,434 1,186,189 264,156 3,377,779

Government grants 2,151,350 - - 2,151,350 - - - - 2,151,350 1,639,000 - - 1,639,000 - - - - 1,639,000

Investment income 1,473,559 28,575 1,502,134 90,624 37,811 1,630,569 1,453,614 157,882 1,611,496 119,238 3,847 1,734,581

Net unrealized and realized gains (losses)

on long-term investments 121,893 604,130 726,023 2,390,842 - - 3,116,865 (60,801) (13,191) (73,992) (13,576) - - (87,568)

Unrealized gain (loss) on swap agreements (Notes 1 and 6) - - 1,280,719 1,280,719 - - - - 1,280,719 - - (1,333,959) (1,333,959) - - - - (1,333,959) Auxiliary enterprises 8,432,432 - - 8,432,432 - - - - 8,432,432 8,642,537 - - 8,642,537 - - - - 8,642,537

Other support 2,139,350 435,254 2,574,604 - - - - 2,574,604 2,108,090 1,594,353 3,702,443 - - - - 3,702,443

Actuarial adjustment on annuity obligations - - (10,175) (10,175) 68,939 5,812 64,576 - - (7,261) (7,261) 213,718 (1,246) 205,211

Net assets released from restrictions (Note 13) 347,072 1,972,728 2,319,800 (2,319,800) - - - - 599,399 1,977,777 2,577,176 (2,577,176) - - - -

Total revenues, gains (losses) and other support 79,699,990$ 5,538,558$ 85,238,548$ 5,351,424$ 157,589$ 90,747,561$ 73,705,784$ 2,595,315$ 76,301,099$ (1,071,607)$ 266,757$ 75,496,249$

Expenses:

Program expenses:

Instruction 31,805,173$ 2,908,359$ 34,713,532$ - -$ - -$ 34,713,532$ 30,428,284$ 2,853,201$ 33,281,485$ - -$ - -$ 33,281,485$

Public service 1,212,456 29,282 1,241,738 - - - - 1,241,738 1,256,410 33,654 1,290,064 - - - - 1,290,064

Academic support 8,568,043 1,046,431 9,614,474 - - - - 9,614,474 8,162,563 952,891 9,115,454 - - - - 9,115,454

Student services 8,182,953 1,278,528 9,461,481 - - - - 9,461,481 7,793,061 1,342,515 9,135,576 - - - - 9,135,576

Auxiliary enterprises 6,087,975 1,278,744 7,366,719 - - - - 7,366,719 6,579,717 1,295,432 7,875,149 - - - - 7,875,149

Total program expenses 55,856,600$ 6,541,344$ 62,397,944$ - -$ - -$ 62,397,944$ 54,220,035$ 6,477,693$ 60,697,728$ - -$ - -$ 60,697,728$

Support expenses, institutional support 12,175,058$ 1,424,357$ 13,599,415$ - -$ - -$ 13,599,415$ 12,533,735$ 2,248,604$ 14,782,339$ - -$ - -$ 14,782,339$

Total expenses (Note 11) 68,031,658$ 7,965,701$ 75,997,359$ - -$ - -$ 75,997,359$ 66,753,770$ 8,726,297$ 75,480,067$ - -$ - -$ 75,480,067$

Excess (deficiency) of revenues over expenses 11,668,332$ (2,427,143)$ 9,241,189$ 5,351,424$ 157,589$ 14,750,202$ 6,952,014$ (6,130,982)$ 821,032$ (1,071,607)$ 266,757$ 16,182$

Transfers (11,573,332) 11,573,332 - - - - - - - - (6,852,014) 6,852,014 - - - - - - - -

Change in net assets 95,000$ 9,146,189$ 9,241,189$ 5,351,424$ 157,589$ 14,750,202$ 100,000$ 721,032$ 821,032$ (1,071,607)$ 266,757$ 16,182$

Net assets, beginning of year 1,905,000 58,618,341 60,523,341 25,180,332 23,925,815 109,629,488 1,805,000 57,897,309 59,702,309 26,251,939 23,659,058 109,613,306

Net assets, end of year 2,000,000$ 67,764,530$ 69,764,530$ 30,531,756$ 24,083,404$ 124,379,690$ 1,905,000$ 58,618,341$ 60,523,341$ 25,180,332$ 23,925,815$ 109,629,488$


Unrestricted

20122013


Consolidated Statements of Activities

Years Ended June 30, 2013 and 2012

Unrestricted

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2013 2012

Cash Flows from Operating Activities:

Change in net assets 14,750,202$ 16,182$

Adjustments to reconcile change in net assets to

net cash provided by operating activities:

Depreciation and amortization 5,940,048 5,853,799

(Gain) on cash surrender value of life insurance (34,924) (31,700)

Noncash contributions (1,272,659) (178,248)

Change in operating assets and liabilities:

Decrease (increase) in accounts and interest receivable 41,930 (161,996)

(Increase) in prepaid expenses and deferred charges (74,709) (189,950)

(Increase) decrease in contributions receivable (3,020,530) 63,697

(Decrease) increase in accounts payable, accrued expenses and deferred revenue (280,849) 422,017

Increase in refundable advances 11,563 3,350

Actuarial (gain) loss on annuity obligations (64,576) 205,211

Loan cancellations and assignments 38,993 48,329

Contributions restricted for long-term investment (2,263,152) (2,842,322)

Net unrealized and realized (gains) losses on long-term investments (3,036,866) 87,568

Loss on disposal of assets 175,169 204,909

Unrealized (gain) loss on swap agreements (1,280,719) 1,333,959

Loss on extinguishment of debt - - 238,326

Net cash provided by operating activities 9,628,921$ 5,073,131$

Cash Flows from Investing Activities:

Proceeds on disposition of property, plant and equipment 131,629$ 194,547$

Acquisition of property, plant and equipment (2,117,335) (4,655,884)

Repayments of loans 366,657 415,909

Disbursement of loans (462,479) (402,823)

Proceeds from sale of investments 28,855,059 27,719,946

Purchase of investments (27,726,207) (24,764,063)

Net cash (used in) investing activities (952,676)$ (1,492,368)$

Cash Flows from Financing Activities:

Collection of contributions for long-term investment 1,484,026$ 1,320,672$

Payment of annuity obligations (445,428) (80,485)

Issuance of long-term debt 172,336 45,694,355

Payment of long-term debt and capital lease obligations (3,970,147) (50,689,874)

Net cash (used in) financing activities (2,759,213)$ (3,755,332)$

Net increase (decrease) in cash and cash equivalents 5,917,032 (174,569)

Cash and cash equivalents at beginning of year 8,338,165 8,512,734

Cash and cash equivalents at end of year 14,255,197$ 8,338,165$

Supplemental Information:

Non-cash investing and financing activities:

Contributions of assets 1,272,659$ 178,248$

Investments acquired by collection of contributions receivable 60,179$ 15,044$

Assets acquired by capital lease 1,977,745$ 1,441,615$

Assets acquired by bond proceeds 2,700,926$ - -$

Interest paid 1,175,177$ 1,755,772$



Consolidated Statements of Cash Flows

Years Ended June 30, 2013 and 2012

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Notes to Consolidated Financial Statements Note 1. Nature of Activities and Significant Accounting Policies

General

Shenandoah University is a private, coeducational school offering both a broad liberal arts program and an emphasis on career preparation. Since its founding in 1875, Shenandoah University has always offered a creative combination of educational opportunities through programs in arts and sciences, business, health professions, and the performing arts. The University offers certificate and degree programs in selected disciplines at the associate, bachelor, master and doctoral degree levels. The University is accredited by the Commission on Colleges of the Southern Association of Colleges and Schools (SACS). In addition, programs at Shenandoah hold specialized accreditation from the following organizations: Accreditation Council for Occupational Therapy Education, Accreditation Council for Pharmacy Education, Accreditation Review Commission on Education for the Physician Assistant, Inc., American College of Nurse-Midwives Accreditation Commission for Midwifery Education, American Music Therapy Association, Inc., Association to Advance Collegiate Schools of Business International, Commission on Accreditation in Physical Therapy Education, Commission on Accreditation of Athletic Training Education, Commission on Collegiate Nursing Education, Committee on Accreditation for Respiratory Care, National Association of Independent Colleges and Universities, National Association of Schools of Music, State Council of Higher Education for Virginia, Teacher Education Accreditation Council, University Senate of the United Methodist Church, Virginia Board of Nursing, Virginia Department of Education and other appropriate associations and agencies. The University’s wholly owned subsidiaries, Hotel Management, LC, Shenandoah Hotel Property, LLC and Shenandoah University Properties, LLC, have been included in the consolidated statements. The subsidiaries were formed in the year ended June 30, 2009 and subsequently ended operations on May 31, 2012. The activity of one wholly owned subsidiary, 142 N. Loudoun Street Management, LC, has been included in the consolidated statements. This subsidiary was formed in the year ended June 30, 2012 for the purpose of managing the property located at 142 North Loudoun Street, Winchester, Virginia known as the Solenberger Building.

Accrual Basis

The consolidated financial statements of Shenandoah University have been prepared on the accrual basis.

Notes to Consolidated Financial Statements

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Classification of Net Assets

The University maintains its accounts in accordance with the principles and practices of fund accounting. Fund accounting is the procedure by which resources for various purposes are classified for accounting purposes in accordance with activities or objectives specified by donors. Separate accounts are maintained for each fund; however, in the accompanying financial statements, these funds have been combined to focus on the entity as a whole. This has been done by classification of fund transactions and balances into three categories of net assets: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. Accounting standards require that all not-for-profit organizations provide a statement of financial position, a statement of activities and a statement of cash flows. Unrestricted net assets generally result from revenues less expenses derived from providing services, unrestricted contributions, unrealized and realized gains and losses, and dividends and interest from investing in income-producing assets. Temporarily restricted net assets generally result from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that either expire by the passage of time or can be fulfilled and removed by actions of the University pursuant to those stipulations. The University releases temporarily restricted net assets from restriction upon incurrence of an expense when both unrestricted and temporarily restricted net assets are available for that purpose. Permanently restricted net assets generally result from contributions and other inflows of assets whose use by the University is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by the University. See Note 13 for additional disclosure relating to temporarily and permanently restricted net assets.

Revenue Recognition

Contributions, including unconditional contributions receivable, are recognized as revenues in the period received. Conditional contributions receivable are not recognized until they become unconditional, that is when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair market value. Unconditional contributions that are expected to be collected within one year are recorded at net realizable value. Unconditional contributions that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed using the University’s incremental borrowing rates applicable to the years in which the contributions are received. Amortization of the discounts is included in contribution revenue. The University follows the policy of reporting temporarily restricted contributions in the consolidated statements of activities as increases in unrestricted net assets in the period received when the restrictions can be met within the reporting period. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the 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. See Note 13 for additional disclosure.


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Contributions of land, buildings and equipment without donor stipulations concerning the use of such long-lived assets are reported as revenues of the unrestricted net asset class. Contributions of cash or other assets to be used to acquire land, buildings and equipment without such donor stipulations are reported as revenues of the temporarily restricted net asset class; the restrictions are considered to be released at the time of acquisition of such long-lived assets. Contributions of services shall be recognized if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills provided by individuals possessing those skills and would typically need to be purchased if not provided by donation.

Cash and Cash Equivalents

The University considers all highly liquid investments, except those held for long-term investment or investment in land, buildings and equipment, with a maturity of three months or less when purchased to be cash and cash equivalents. Cash and cash equivalents were $14,255,197 and $8,338,165 for years ended June 30, 2013 and 2012, respectively. Included in cash and cash equivalents are $537,316 and $494,024, which were restricted in accordance with donor imposed restrictions. Federal funds are maintained in a separate bank account in accordance with federal requirements. Long-term investments include cash and cash equivalents which are expected to be converted to long-term investments. These assets are excluded from cash and cash equivalents on the consolidated statements of financial position. Amounts of cash and cash equivalents are segregated as noncurrent assets by the University under bond proceeds for capital additions and assets restricted to investment in land, buildings and equipment for investment in future property and equipment. Cash and cash equivalents reported in these amounts totaled $1,981,543 and $4,483,495 for years ended June 30, 2013 and 2012, respectively.

Accounts and Interest Receivable

Student accounts and other receivables are stated at net realizable value. Management has estimated an allowance for doubtful accounts which has been deducted from the receivables to which it relates on the face of the consolidated statements of financial position. As of June 30, 2013 and 2012, allowance for doubtful accounts amounted to $380,125 and $354,881, respectively. At June 30, 2013 and 2012, accounts receivable consisted of the following:

2013 2012

Student accounts, net of allowance 1,582,246$ 1,784,871$ Various accounts 120,974 305,373 Gifts/bequests 47,340 5,850 Governmental grants 412,547 99,523 Accrued interest and dividends 142,272 151,692

2,305,379$ 2,347,309$


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Long-Term Investments Accounting standards require investments in equity securities with readily determinable fair values and all investments in debt securities to be reported at fair market value on the date of each financial statement. The standards also require that unrealized and realized net gains on investments of endowment and similar funds be reported as increases in permanently restricted net assets if the terms of the gift require that they be added to the principal of the permanent endowment fund, increases in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income, and increases in unrestricted net assets in all other cases.

Land, Buildings and Equipment

Land, buildings and equipment are stated at cost on the date of acquisition less accumulated depreciation or fair market value on the date of donation, in the case of gifts, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the respective classes of property. During the years ended June 30, 2013 and 2012, depreciation amounted to $5,797,660 and $5,442,521, respectively. The estimated useful lives of property are as follows:

Classification Life

Land improvements 20 years Buildings and improvements 20-40 years Library books 10 years Furniture and equipment 5 years Software 3 years

Land, buildings and equipment consisted of the following at June 30, 2013 and 2012:

2013 2012

Land 9,926,969$ 9,126,969$ Land improvements 10,561,177 9,755,849 Buildings and improvements 95,922,339 93,002,759 Artwork 498,434 486,514 Library books 3,207,668 3,202,768 Furniture and equipment 24,217,537 22,024,919 Construction in progress 1,389,848 1,340,266

$ 145,723,972 $ 138,940,044 Less accumulated depreciation (50,785,463) (45,805,639)

$ 94,938,509 $ 93,134,405


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Use of 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 that affect the reported amounts of assets and liabilities, 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.

Accounting for Derivatives and Hedging Activities

Shenandoah University has two interest rate swap agreements that are considered derivatives. These agreements are recognized on the consolidated statements of financial position at the fair market value. Accounting standards require that the change in fair value of all derivatives be recorded as a change in net assets in the period of change.

Fair Value of Financial Instruments

Except for notes receivable from students and long-term debt, the fair value of all financial instruments are substantially the same as the carrying value. It was not considered practical to determine fair value of notes receivable from students under U.S. Government loan programs and related government advances because the notes receivable are nonmarketable and can only be assigned to the U.S. Government or its designees.

The fair value of long-term debt is determined using the present value of future cash flows. Based upon current borrowing rates available to the University for similar borrowings, the carrying value of long-term debt approximates fair value.

Income Taxes

The University is exempt from federal income tax under Internal Revenue Code Section 501(c)(3), except to the extent of unrelated business taxable income, if any.

Note 2. Notes Receivable

Perkins, Nursing and Shenandoah University Loans

Notes receivable made under the Perkins, Nursing Student, and the Shenandoah University Loan Programs amounted to $2,876,760 and $2,819,931 as of June 30, 2013 and 2012, respectively.

Perkins Loans are repayable over a period not to exceed ten years and bear interest at the rate of 3% to 5% per annum. The U.S. Government provides 75% of the funding and requires a matching grant of 25% from the University. During the years ended June 30, 2013 and 2012, the U.S. Government did not provide additional funding.

Nursing Student Loans are repayable over a period not to exceed ten years and bear interest at the rate of 5% per annum. The U.S. Government provides 90% of the funding and requires a matching grant of 10% from the University. During the years ended June 30, 2013 and 2012, the U.S. Government did not provide additional funding.

Shenandoah University Loans are repayable over a period not to exceed ten years and bear interest at the rate of 5% to 8% per annum. The University provides 100% of the funding.


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Note 3. Investments and Fair Value Measurements

The fair value and cost value of investments consisted of the following at June 30, 2013 and 2012:

Cost Value Fair Value Cost Value Fair ValueLong-term investments:

Cash and cash equivalents 506,142$ 506,142$ 721,167$ 721,167$ Mutual Funds: Commodities - - - - 121,885 82,929 Equity 11,746,769 13,247,926 9,822,062 10,022,153 Fixed income 575,743 565,002 570,868 667,846 Other 22,350 13,585 21,600 11,140 Equity securities 16,661,387 23,259,484 18,099,187 23,073,520 Fixed income securities 14,786,649 15,363,737 13,905,312 15,234,597 Real estate 6,969,334 6,860,000 6,969,334 7,698,400 Funds held in trust 1,016,996 1,339,112 1,091,217 1,355,155 Other 370,137 524,503 357,387 474,475

52,655,507$ 61,679,491$ 51,680,019$ 59,341,382$

2013 2012

Accounting standards establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The framework does not require any new fair value measurement; rather, it applies to other accounting pronouncements that require or permits fair value measurements. The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a framework for measuring fair value.

Accounting standards establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included in Level 1, which are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.

Level 3 - Inputs are unobservable for the asset or liability. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.


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A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following table presents the balance of assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2013 and 2012:

Level 1 Level 2 Level 3 Total

Assets: Cash and cash equivalents 506,142$ - -$ - -$ 506,142$ Mutual Funds: Commodities - - - - - - - - Equity 13,247,926 - - - - 13,247,926 Fixed income 565,002 - - - - 565,002 Other 13,585 - - - - 13,585 Equity securities 23,259,484 - - - - 23,259,484 Fixed income securities 15,363,737 - - - - 15,363,737 Real estate - - 6,860,000 - - 6,860,000 Funds held in trust - - - - 1,339,112 1,339,112 Other 95,168 429,335 - - 524,503

53,051,044$ 7,289,335$ 1,339,112$ 61,679,491$

Liabilities, interest rate swap - -$ 53,240$ - -$ 53,240$

Level 1 Level 2 Level 3 Total

Assets: Cash and cash equivalents 721,167$ - -$ - -$ 721,167$ Mutual Funds: Commodities 82,929 - - - - 82,929 Equity 10,022,153 - - - - 10,022,153 Fixed income 667,846 - - - - 667,846 Other 11,140 - - - - 11,140 Equity securities 23,073,520 - - - - 23,073,520 Fixed income securities 15,234,597 - - - - 15,234,597 Real estate - - 7,698,400 - - 7,698,400 Funds held in trust 11,980 - - 1,343,175 1,355,155 Other 80,063 394,412 - - 474,475

49,905,395$ 8,092,812$ 1,343,175$ 59,341,382$

Liabilities, interest rate swap - -$ 1,333,959$ - -$ 1,333,959$

2012

2013


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For the fiscal years ended June 30, 2013 and 2012, the application of valuation techniques applied to similar assets and liabilities has been consistent. The following is a description of the valuation methodologies used for instruments measured at fair value.

Cash and cash equivalents - Are classified as Level 1. Mutual Funds – Are classified as Level 1 since they are traded in an active market for which closing prices are readily available. Equity securities – Are classified as Level 1 since they are traded in an active market for which closing prices are readily available. Fixed income securities - Investments in fixed income securities are classified as Level 1 and are comprised of U.S. Treasury notes, mortgage backed securities, municipal bonds and corporate bonds and notes. Real estate - Are classified as Level 2, which are observable amounts as obtained by independent appraisals. These are inputs other than quoted prices that are observable for the asset. Funds held in perpetual trusts - The University’s beneficial interest in perpetual trusts administered by a third party are classified as Levels 1 and 3. Level 1 inputs are quoted prices in active markets. Level 3 inputs are unobservable for the asset and liability. The University has an irrevocable right to receive the income earned from the trust’s assets, the fair value of the University’s beneficial interest is estimated to approximate the fair value of the trusts’ assets. Other - Are classified as Level 1, based on quoted market prices, and Level 2, based on observable inputs. Swap Agreements – The fair value of the swap agreements is based on the market price provided by the financial institution in which the financial instruments are held. The carrying amounts of the University’s financial instruments not described above arise in the ordinary course of business and approximate fair value.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the University believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.


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The table below sets forth a summary of changes in the fair value of the University’s Level 3 investment assets:

2013 2012

Balance - beginning of year 1,343,175$ 1,433,211$ Transfers (out of) Level 3 - - (102,200) Unrealized gains (losses) (4,063) 12,164

Balance - end of year 1,339,112$ 1,343,175$

Note 4. Contributions Receivable

Included in contributions receivable are the following unconditional contributions at June 30, 2013 and 2012:

2013 2012

Unconditional contributions expectedto be collected in:

Less than one year 2,034,227$ 424,863$ One year to five years 2,315,797 478,898 Over five years 360,000 - -

4,710,024$ 903,761$ Less unamortized discount (421,215) (119,712) Less assets restricted to investment in land,

buildings and equipment (1,073,931) (429,414)

3,214,878$ 354,635$

Contributions receivable have been reflected on the consolidated statements of financial position as follows at June 30, 2013 and 2012:

2013 2012

Current assets, contributions receivable 1,864,863$ 280,695$ Noncurrent assets, contributions receivable 1,350,015 73,940

3,214,878$ 354,635$

At June 30, 2013, the University has a conditional contribution outstanding of $160,000 from a bank for the Health and Life Sciences Building. Future payments require annual approval by the bank’s Contributions Committee. At June 30, 2012, the University did not have any conditional contributions. In accordance with generally accepted accounting principles, conditional promises to give are not reflected in the consolidated statements of financial position.


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Note 5. Long-Term Debt

Long-term debt consisted of the following obligations at June 30, 2013 and 2012:

2013 2012Series 2011 Bonds: $44,270,000

Education Facilities, first mortgage revenue bonds payable tobank, quarterly payments for principal and interest through2036. Of the 2011 Series, $36,455,000 was issued by theVirginia College Building Authority and had a variable interestrate of 1.285% at June 30, 2013. The remaining $7,815,000 ofthe Series 2011 Bonds were issued by the IndustrialDevelopment Authority of Clarke County, Virginia and had avariable interest rate of 0.941% at June 30, 2013. TheUniversity is required to comply with certain covenants,including maintenance of certain financial ratios. As of June 30,2013, the University is in compliance with the covenants.

43,050,000$ 44,270,000$ Taxable Term Loan: $3,180,000

Taxable term loan bearing interest at one month LIBOR plus1.10% with quarterly payments of principal and interest throughDecember 2014. The interest rate at June 30, 2013 was 1.293%.The University is required to comply with certain covenants,including maintenance of certain financial ratios. As of June 30,2013, the University is in compliance with the covenants.

1,630,000 2,675,000 Series 2012 Bonds: $10,000,000 (see below)

Education Facilities, first mortgage revenue bonds payable tobank, quarterly payments for principal and interest through2042. Issued by the Economic Development Authority of theTown of Mount Jackson, Virginia and had a variable interestrate of 0.94% at June 30, 2013. The University is required tocomply with certain covenants, including maintenance of certainfinancial ratios. As of June 30, 2013, the University is incompliance with the covenants. As of June 30, 2013, amountsoutstanding represent initial advances made under the 2012bond. 115,620 - -

Series 2013 Bonds: $6,000,000 (see below)Education Facilities, first mortgage revenue bonds payable tobank, quarterly payments for principal and interest through2042. Issued by the Economic Development Authority of theTown of Mount Jackson, Virginia and had a variable interestrate of 0.94% at June 30, 2013. The University is required tocomply with certain covenants, including maintenance of certainfinancial ratios. As of June 30, 2013, the University is incompliance with the covenants. As of June 30, 2013, amountsoutstanding represent initial advances made under the 2013bond. 56,716 - -

44,852,336$ 46,945,000$


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As noted above, the Series 2012 and Series 2013 Bonds provide borrowings up to $10,000,000 and $6,000,000, respectively. Amounts outstanding as of June 30, 2013, represent initial advances made in accordance with the loan agreement. Remaining bond proceeds are available for future draws. See Note 18 for disclosure of subsequent events related to these obligations. Aggregate maturities of debt during the next fiscal five years are: 2014, $2,345,000; 2015, $2,165,000; 2016, $1,837,336; 2017, $1,700,000; 2018, $1,750,000; and thereafter $35,055,000. During the years ended June 30, 2013 and 2012, the University had an unsecured line of credit with a bank in the amount of $4,500,000. Amounts drawn on this line accrued interest at one month LIBOR plus 2% with a minimum 2.75% adjusted monthly and maturing November 30, 2013. As of June 30, 2013 and 2012, there was no outstanding balance on this line of credit.

Note 6. Obligation Under Interest Rate Swap Agreements

The University uses variable-rate financing as indicated in Note 5. These debt obligations expose the University to variability in interest payments due to changes in interest rates. The University believes it is prudent to limit the variability of a portion of its interest payments and has entered into interest rate swap agreements to manage its interest rate risk. As of June 30, 2013, the University has two outstanding interest rate swap agreements on the Series 2011 Bonds. Both interest rate swap agreements have a variable rate and swap component. The notional amounts of swaps are reduced to coincide with the principal paid on bonds. Key terms of the interest rate swap agreements are as follows:

Effective Swap Maturity

Series Issue June 30, 2013 June 30, 2012 Date Fixed Rate Date

Series 2011 Virginia College Building Authority 28,425,000$ 29,645,000$ 12/27/2011 2.635% 12/27/2021

Series 2011

Industrial Development Authority of Clarke County 7,815,000$ 7,815,000$ 6/27/2012 2.375% 12/27/2021

Notional Amount Outstanding

The following table summarizes the University’s interest rate swap activity as presented in the consolidated financial statements as of June 30: Fair Values of Interest Rate Swap Agreements on the Consolidated Statements of Financial Position

Consolidated Statements of Financial Position Location 2013 2012

Obligation under interest rate swap agreements 53,240$ 1,333,959$

Effect of Interest Rate Swap Agreements on the Consolidated Statements of Activities

Consolidated Statements of Activities Location 2013 2012

Unrealized gain (loss) on swap agreements 1,280,719$ (1,333,959)$

In September 2013, the University entered into additional interest rate swap agreements. See Note 18 for further detail.


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Note 7. Beneficiary Trusts

Shenandoah University administers various charitable remainder trusts. A charitable remainder trust provides for the payment of distributions to the grantor or other designated beneficiaries over the trust’s term (usually the designated beneficiary’s lifetime). At the end of the term, the remaining assets are available for the University’s use. The portion of the trust attributable to the present value of the future benefits to be received by the University is recorded in the consolidated statements of activities as temporarily restricted or permanently restricted contributions in the period the trust is established. There were no contributions for the years ended June 30, 2013 and 2012. The University is also a party to various charitable gift annuity arrangements. A charitable gift annuity is an arrangement between a donor and a not-for-profit organization in which the donor contributes assets to the organization in exchange for a promise by the organization to pay a fixed amount for a specified period of time to the donor or other designated beneficiary. These agreements are similar to charitable annuity trusts except that no trust exists, the assets received are held as general assets of the University, and the annuity liability is a general obligation of the University. Contributions recognized for charitable gift annuities were $0 and $3,012 for the years ended June 30, 2013 and 2012, respectively.

Assets held in the charitable remainder trusts and gift annuity arrangements totaled $3,243,814 and $3,221,836 at the years ended June 30, 2013 and 2012, respectively, and are reported at fair market value in the University’s consolidated statements of financial position as cash, accounts receivable and investments. On an annual basis, the University revalues the liability based on changes in actuarial assumptions. The present values of the estimated future payments of $678,409 and $848,983 at June 30, 2013 and 2012, respectively, are calculated using the appropriate discount rate at the initial recognition of the contribution and applicable mortality tables.

Note 8. Leases

The University leases property under various capital leases. The leased property is included in land, buildings and equipment. The following leases will expire by February 2017 and require various minimum lease payments:

2013 2012

Computer equipment 5,924,219$ 5,435,502$ Less accumulated depreciation (2,510,989) (1,876,135)

3,413,230$ 3,559,367$


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Future minimum lease payments under the capital computer leases are as follows:

Year ending June 30:2014 1,438,968$ 2015 920,089 2016 540,136 2017 113,227

3,012,420$ Less interest expense (79,752)

Present value of net minimum lease payments 2,932,668$

Aggregate maturities of capital lease obligations are: 2014, $1,389,218; 2015, $897,997; 2016, $532,952; and 2017, $112,501. The University has entered into seven operating lease agreements for facilities. One lease is renewable annually, one is renewable after sixteen months, three of the leases are renewable every five years, and the remaining leases expire August 2018 and June 2025. Three of the leases require the payment of a proportionate share of all property taxes, insurance, maintenance and utilities. At June 30, 2013, future minimum lease payments under operating leases assuming exercise of renewable options are as follows: Year ending June 30:

2014 3,069,541$ 2015 2,527,036 2016 2,175,255 2017 2,137,018 2018 1,843,288 2019-2025 2,724,960

14,477,098$

Note 9. Concentration of Credit Risk

The University has deposits maintained in several commercial banks and brokerage accounts. The total amount by which cash on deposit in banks exceeds the federally insured limits is $17,166,056 at June 30, 2013. The University has not experienced any losses as a result of maintaining these deposits and does not expect any losses will occur in the future.


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Note 10. Employee Benefit Plans

The University has a self-insurance plan for health insurance through the Board of Higher Education Ministries Health Trust. The total expense for medical coverage was $2,973,596 and $2,913,204 for June 30, 2013 and 2012, respectively. The University has certain defined contribution retirement annuity plans, sponsored by the Teachers' Insurance and Annuity Association, for academic and nonacademic employees. The University contributions are based on a percentage of the employees' salary. University contributions to the plan for the years ended June 30, 2013 and 2012 were $2,157,562 and $2,091,003, respectively. The University has entered into a deferred compensation agreement, which provides benefits upon termination of employment or termination of the plan. Employer contributions are determined annually by the Board of Trustees. The cumulative balances in these plans were $346,156 and $282,040 as of June 30, 2013 and 2012, respectively.

The University has established an Emeriti Fully-Insured Retiree Health Plan. The plan is administered by independent trustees to whom all funds are transferred for investment purposes and benefit payments. Under the plan, contributions are made by the University for employees who meet certain age and service requirements. Voluntary contributions by employees can be made directly to the trustee or through payroll deductions. The University’s contributions to the plan were $163,834 and $121,178 for the years ended June 30, 2013 and 2012, respectively.


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Note 11. Expenses

Total University expenses by natural classification for the years ended June 30, 2013 and 2012 were:

2013 2012Compensation:

Salaries and wages 38,120,406$ 37,528,711$ Benefits 8,427,949 8,167,863

Total compensation 46,548,355$ 45,696,574$

Depreciation of buildings and equipment 5,797,660 5,442,521 Rentals and leases 3,531,629 3,230,279 Contracted food services 2,713,133 2,445,630 Conferences and travel 2,243,626 1,971,747 Utilities 2,023,499 2,086,910 Supplies 2,019,036 2,239,441 Repairs and maintenance of buildings and equipment 1,933,811 1,648,104 Contracted services 1,921,616 2,325,486 Interest on indebtedness 1,172,112 1,505,629 Employee tuition grants and tuition exchanges 895,139 941,676 Subscriptions and publications 868,070 880,575 Insurance 729,164 643,063 Dues and fees 708,281 965,671 Duplicating and printing 546,433 514,733 Postage 496,407 427,788 Advertising 322,506 314,332 Other 1,526,882 2,199,908

Subtotal 29,449,004$ 29,783,493$

Total expenses 75,997,359$ 75,480,067$

Note 12. Fundraising Costs

Fundraising expenses attributable to the Advancement department were $1,435,047 and $1,491,750, including compensation of $1,219,228 and $1,225,242, for the years ended June 30, 2013 and 2012, respectively.


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Note 13. Net Assets and Release of Restrictions As of June 30, 2013 and 2012, net assets consisted of the following:

2013 2012

Unrestricted: Current operations 2,000,000$ 1,905,000$ Designated for specific purposes 11,294,107 5,113,526 Invested in land, buildings and equipment 45,825,075 43,410,575 Endowment funds 10,645,348 10,094,240

Total unrestricted 69,764,530$ 60,523,341$

Temporarily restricted: Unexpended funds received for restricted purposes 2,557,570$ 2,258,272$ Contributions receivable and bequests in probate 4,263,809 705,807 Annuity and life income funds 2,122,869 2,053,931 Funds held in trust by others 1,339,112 1,355,155 Endowment funds 20,248,396 18,807,167

Total temporarily restricted 30,531,756$ 25,180,332$

Permanently restricted: Contributions receivable 25,000$ 78,243$ Annuity and life income funds 84,564 78,752 Endowment funds 23,973,840 23,768,820

Total permanently restricted 24,083,404$ 23,925,815$

Total net assets 124,379,690$ 109,629,488$

The sources of net assets released from temporary donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of events specified by the donors were as follows for the years ended June 30, 2013 and 2012:

2013 2012

Expiration of time restrictions, collectionof contributions receivable & trust expirations 139,248$ 320,456$

Acquisition of land, buildings and equipment 733,305 688,783 Satisfaction of program restrictions, instruction,

scholarship and departmental support 1,447,247 1,567,937

2,319,800$ 2,577,176$

These assets were reclassified to:

Unrestricted net assets, for: Scholarships 593,045$ 524,995$ Programs 993,450 1,363,398 Capital assets 733,305 688,783

2,319,800$ 2,577,176$


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Note 14. Endowments

Accounting standards provide guidance on classifying net assets associated with donor-restricted endowment funds held by organizations that are subject to an enacted version of UPMIFA. A key component of the requirement is to classify the portion of a donor-restricted endowment fund that is not classified as permanently restricted net assets as temporarily restricted net assets until appropriated for expenditure. Another key component of the requirement is for expanded disclosures for all endowment funds. Effective July 1, 2008, the Commonwealth of Virginia adopted a version of UPMIFA. The University’s endowment consists of 288 individual funds established for a variety of purposes as of June 30, 2013.

Interpretation of Relevant Law

The University has interpreted UPMIFA adopted by the Commonwealth of Virginia as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the University classifies as permanently restricted net assets (a) the original value of the gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:

1. The duration and preservation of the fund 2. The purposes of the institution and the donor-restricted endowment fund 3. General economic conditions 4. The possible effects of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the University 7. The investment policy of the University


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RestrictedUnrestricted Temporarily Permanently Total

Endowment Net AssetsJune 30, 2011 9,976,616$ 19,848,146$ 23,582,072$ 53,406,834$ Investment return Investment income 262,055 1,165,847 - - 1,427,902 Net depreciation (realized and unrealized) (12,132) (24,611) - - (36,743)

Total investment return 249,923$ 1,141,236$ - -$ 1,391,159$ Contributions and other additions - - 20,056 264,991 285,047 Appropriation of endowment assets for expenditure (498,972) (2,202,271) - - (2,701,243) Transfers to create board designated endowment funds 366,673 - - - - 366,673

Endowment Net AssetsJune 30, 2012 10,094,240$ 18,807,167$ 23,847,063$ 52,748,470$ Investment return Investment income 287,211 1,236,410 - - 1,523,621 Net appreciation (realized and unrealized) 575,285 2,422,481 - - 2,997,766

Total investment return 862,496$ 3,658,891$ - -$ 4,521,387$ Contributions and other additions - - 119,439 151,777 271,216 Appropriation of endowment assets for expenditure (545,762) (2,337,101) - - (2,882,863) Transfers to create board designated endowment funds 234,374 - - - - 234,374

Endowment Net AssetsJune 30, 2013 10,645,348$ 20,248,396$ 23,998,840$ 54,892,584$

Composition of endowment net assets by type of fund:

RestrictedUnrestricted Temporarily Permanently Total

As of June 30, 2012Donor restricted endowment funds (39,919)$ 18,807,167$ 23,847,063$ 42,614,311$ Board designated endowment funds 10,134,159 - - - - 10,134,159

10,094,240$ 18,807,167$ 23,847,063$ 52,748,470$

As of June 30, 2013Donor restricted endowment funds (35,220)$ 20,248,396$ 23,998,840$ 44,212,016$ Board designated endowment funds 10,680,568 - - - - 10,680,568

10,645,348$ 20,248,396$ 23,998,840$ 54,892,584$


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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 donor or UPMIFA requires the University to retain as a fund of perpetual duration or for a specified term. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $35,220 and $39,919 as of June 30, 2013 and 2012, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred after the investment of new permanently restricted contributions and continued appropriation for certain programs that were deemed prudent by the Board of Trustees.

Return Objectives, Risk Parameters and Strategies Employed for Achieving Objectives

The University places its endowment investment assets in an endowment investment pool. The Investment & Endowment Committee of the Board of Trustees manages the investment functions. The endowment investment pool is managed by an independent investment manager. At June 30, 2013, the pool was valued at $54,308,401. The University has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the University must hold in perpetuity or for a donor-specified period(s) as well as board-designated funds. The objective of the endowment portfolio of the University is to achieve maximum total return, consistent with assuming a reasonable degree of risk.

Spending Policy and How the Investment Objectives Relate to Spending Policy The University has a spending policy of appropriating for distribution each year a specified percentage of its endowment funds using a prior three year average through the calendar year-end preceding the fiscal year in which the distribution is planned. In establishing this policy, the University considered the long-term expected return on its endowment. This is consistent with the University’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.

Note 15. Commitments and Contingencies

The University has entered into contracts for the design and construction of the Health and Life Sciences Building, along with a contract to update street lighting on University Drive. The remaining commitments at June 30, 2013 totaled $19,958,250.

Note 16. Related Parties

Shenandoah University utilizes the services of certain businesses owned by members of the Board of Trustees. Pledges receivable includes pledges from several members of the Board of Trustees. During the year ended June 30, 2012, the University entered into a contract with a company owned by a member of the Board of Trustees to manage a wholly-owned subsidiary of the University. This Company used a related entity for maintaining and repairing the property owned by a subsidiary. The wholly owned subsidiary ended operations on May 31, 2012.


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Note 17. Accounting for Uncertain Tax Positions

The Financial Accounting Standards Board issued guidance on accounting for uncertainty in income taxes. Management evaluated the University’s tax positions and concluded that the University had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. With few exceptions, the University is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for tax years ending before 2010.

Note 18. Subsequent Events

The University has evaluated all subsequent events through September 30, 2013, the date the financial statements were available to be issued. On September 4, 2013, the University entered into a forward interest rate swap agreement on the Series 2012 and 2013 Bonds. The swap will commence on September 1, 2014, offers a fixed rate of 2.22% for the notional amount of $6,500,000, and will mature on December 28, 2017. On September 27, 2013, the University entered into a forward interest rate swap agreement on the Series 2012 and 2013 Bonds. The swap will commence on September 1, 2014, offers a fixed rate of 1.925% for the notional amount of $7,000,000, and will mature on December 28, 2017.

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 Trustees Shenandoah University Winchester, Virginia We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Shenandoah University, which comprise the consolidated statements of financial position as of June 30, 2013 and 2012, and the related consolidated statements of activities, and cash flows for the years then ended, and the related notes to the financial statements, and have issued our report thereon dated September 30, 2013.

Internal Control over Financial Reporting

In planning and performing our audits of the financial statements, we considered Shenandoah University'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 Shenandoah University’s internal control. Accordingly, we do not express an opinion on the effectiveness of Shenandoah University’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. 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.

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Compliance and Other Matters

As part of obtaining reasonable assurance about whether Shenandoah University'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. 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 entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.


REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133

INDEPENDENT AUDITOR'S REPORT

To the Board of Trustees Shenandoah University Winchester, Virginia Report on Compliance for Each Major Federal Program

We have audited Shenandoah University’s 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 each of Shenandoah University’s major federal programs for the year ended June 30, 2013. Shenandoah University’s major federal programs are 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 programs. Auditor’s Responsibility

Our responsibility is to express an opinion on compliance for each of Shenandoah University’s major federal programs 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 Shenandoah University’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 each major federal program. However, our audit does not provide a legal determination of Shenandoah University’s compliance. Opinion on Each Major Federal Program

In our opinion, Shenandoah University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2013.

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Report on Internal Control Over Compliance

Management of Shenandoah University 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 Shenandoah University’s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each 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 Shenandoah University’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. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 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.


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Federal Grantor/Pass-Through Federal Federal

Grantor/Program or Cluster Title CFDA Number Expenditures

Student Financial Aid Cluster:

U.S. Department of Education:

Federal Supplemental Educational Opportunity Grant 84.007 156,244$ Federal Direct Loans 84.268 40,754,731 Federal Work-Study Program 84.033 351,710 Federal Pell Grant Program 84.063 1,883,984

Federal Perkins Loan Program (1) 84.038 1,982,283

Total U.S. Department of Education 45,128,952$

U.S. Department of Health and Human Services:

Physician Assistant Training Grant 93.884 92,853$

Scholarships for Disadvantaged Students 93.925 637,500 Advanced Nursing Education Expansion 93.513 275,000 Expansion of Physician Assistant Training Program 93.514 198,000 Midwife Grant 93.247 236,034

Child Health and Human Development Extramural Research 93.865 11,646

Total U.S. Department of Health and Human Services 1,451,033$

Total Expenditures of Federal Awards 46,579,985$

The accompanying notes are an integral part of this schedule.


Schedule of Expenditures of Federal AwardsFor the Year Ended June 30, 2013

(1) The Federal Perkins Loan Program is a revolving loan fund. No additional federal funds were received inthe year ended June 30, 2013. In the year ended June 30, 2013, loans in the amount of $353,479 were awarded.

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Notes to the Schedule of Expenditures of Federal Awards For the Year Ended June 30, 2013

Note 1. Basis of Presentation

The accompanying schedule of expenditures of federal awards includes the federal grant activity of Shenandoah University and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, “Audits of States, Local Governments, and Non-Profit Organizations.” Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the consolidated financial statements.

Note 2. Loans Outstanding

Shenandoah University had the following loan balances outstanding at June 30, 2013: Federal Amount Cluster/Program Title CFDA Number Outstanding Federal Perkins Loan Program 84.038 $1,982,283 Nursing Student Loans 93.364 506,591

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Schedule of Findings and Questioned Costs Year Ended June 30, 2013

I. SUMMARY OF AUDITOR’S RESULTS

Financial Statements

Type of auditor’s report issued: Unmodified

Internal control over financial reporting:

Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X None Reported

Noncompliance material to financial statements noted? Yes X No

Federal Awards

Internal control over major programs:

Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X 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 X No

Identification of major programs: U.S. Department of Education Student Financial Aid Cluster (84.XXX).

Dollar threshold used to distinguish between type A and type B programs $ 1,397,400

Auditee qualified as low-risk auditee? X Yes No

II. FINANCIAL STATEMENT FINDINGS

No matters were reported.

III. FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARDS

No matters were reported.

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Summary Schedule of Prior Audit Findings Year Ended June 30, 2013

None.

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