Harrisburg University 2012 audit

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JUNE 30, 2012

ANNUAL

FINANCIAL

REPORT


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TABLE OF CONTENTS

Page

Independent Auditors Report 1 -2

Financial Statements:Statements of financial position 3Statements of activities 4Statements of cash flows 5Notes to financial statements 6 - 21

Schedule of expenditures of federal awards 22

Notes to schedule of expenditures of federal awards 23

Report on internal control over financial reporting and on compliance and othermatters based on an audit of financial statements performed in accordancewith Government Auditing Standards 24 - 25

Independent auditor's report on compliance with requirements that could have adirect and material effect on each major program and on internal control overcompliance in accordance with OMB Circular A-133 26 - 27

Schedule of findings and questioned costs 28 - 29

Report on status of prior year's compliance findings and internal controlweaknesses - major federal programs 30


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INDEPENDENT AUDITORS REPORT

Board of TrusteesHarrisburg University of Science and TechnologyHarrisburg, Pennsylvania

We have audited the accompanying statements of financial position of HarrisburgUniversity of Science and Technology as of June 30, 2012 and 2011, and the related statements ofactivities and cash flows for the years then ended. These financial statements are the responsibility ofHarrisburg University of Science and Technologys management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in theUnited States of America and the standards applicable to financial audits contained in GovernmentAuditing Standards, issued by the Comptroller General of the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and the significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all materialrespects, the financial position of Harrisburg University of Science and Technology as of June 30, 2012and 2011, and the changes in its net assets and its cash flows for the years then ended in conformity with

accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Universitywill continue as a going concern. As discussed in Note 12 to the financial statements, the University hassuffered significant reductions in net assets over the past several years, has a $ 9.7 million net deficiencyin unrestricted-other net assets, and failed to make a required semi-annual debt service payment dueSeptember 1, 2012, that raise substantial doubt about its ability to continue as a going concern.Management's plans regarding these matters also are described in Note 12. The financial statements donot include any adjustments that might result from the outcome of this uncertainty.

In accordance with Government Auditing Standards, we have also issued a report datedMarch 26, 2013 on our consideration of Harrisburg University of Science and Technologys 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 describethe scope of our testing of internal control over financial reporting and compliance and the results of thattesting, 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 Standardsand should be considered in assessing the results of our audit.


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Board of TrusteesHarrisburg University of Science and Technology

Our audit was conducted for the purpose of forming an opinion on the financialstatements of Harrisburg University of Science and Technology taken as a whole. The accompanyingschedule of expenditures of federal awards is presented for purposes of additional analysis as required bythe U.S. Office of Management and Budget Circular A-133,Audit of States, Local Governments, andNon-Profit Organizations, and is not a required part of the basic financial statements. Such information isthe responsibility of management and was derived from and relates directly to the underlying accountingand other records used to prepare the financial statements. The information has been subjected to theauditing procedures applied in the audit of the financial statements and certain additional procedures,including comparing and reconciling such information directly to the underlying accounting and otherrecords used to prepare the financial statements or to the financial statements themselves, and other

additional procedures in accordance with auditing standards generally accepted in the United States ofAmerica. In our opinion, the information is fairly stated in all material respects in relation to the financialstatements as a whole.

Chambersburg, PennsylvaniaMarch 26, 2013


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The Notes to the Financial Statements are an integral part of these statements.

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ASSETS 2012 2011

Cash - operating 140,555$ 1,649,940$

Accounts receivable, less allowance of $ 275,000 for 2012and $ 150,000 for 2011 315,499 219,727

Contributions receivable, net 2,155,391 2,640,781

Grants receivable 218,827 169,702

Other receivables 131,703 38,079

Prepaid expenses 197,774 175,394

Security deposits 8,825 8,825

Debt issue costs, net of accumulated amortization of

$ 92,413 for 2012 and $ 75,483 for 2011 409,159 426,089

Deferred financing cost, net of accumulated amortization of

$ 315 for 2012 and $ -0- for 2011 18,589 0

Bond reserve funds 4,826,307 4,826,194Assets held for sale 14,764,527 14,764,527

Property and equipment, net 65,072,288 66,642,012

Total Assets 88,259,444$ 91,561,270$

LIABILITIES AND NET ASSETS

Liabilities

Notes payable 6,284,954$ 3,683,749$

Accounts payable 1,673,804 489,637

Accounts payable related to property and equipment 89,703 149,666

Accrued interest 1,245,628 1,217,600Other accrued expenses 370,289 347,010

Accrued expenses - assets held for sale 750,038 0

Deposits and deferred revenue 602,068 471,160

Deposits on assets held for sale 14,000,000 14,000,000

Bonds payable 59,488,070 59,457,576

Total liabilities 84,504,554 79,816,398

Net Assets

Unrestricted

Investment in property and equipment 11,085,349 12,625,491Other 9,720,443)( 3,691,102)(

1,364,906 8,934,389

Temporarily restricted 2,389,984 2,810,483

Total net assets 3,754,890 11,744,872

Total liabilities and net assets 88,259,444$ 91,561,270$

HARRISBURG UNIVERSITY OF SCIENCE AND TECHNOLOGY

Statements of Financial Posit ion

June 30, 2012 and 2011


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Temporarily

Unrestricted Restricted Total

REVENUES, GAINS, AND OTHER SUPPORT

Educational and general

Tuition and fees 6,342,201$ 0$ 6,342,201$

Less student aid 1,442,849)( 0 1,442,849)(

Tuition and fees, net 4,899,352 0 4,899,352

Private gifts, grants, and contributions 790,045 800,059 1,590,104

Governmental grants 0 2,687,034 2,687,034

Interest and dividends 2,881 0 2,881

Gain (loss) from sale of investments 2,933)( 0 2,933)(Other sources 502,522 0 502,522

Total educational and general 6,191,867 3,487,093 9,678,960

Auxiliary revenues 428,673 0 428,673Net assets released from restrictions 3,907,592 3,907,592)( 0

Total revenues, gains, and other support 10,528,132 420,499)( 10,107,633

EXPENSES


Instructional 4,684,623 0 4,684,623

Research 982,215 0 982,215

Academic support 1,112,873 0 1,112,873Student services 3,195,573 0 3,195,573

Institutional support 7,467,505 0 7,467,505

Total educational and general 17,442,789 0 17,442,789

Auxiliary enterprises 654,826 0 654,826

Total expenses 18,097,615 0 18,097,615

Change in net assets 7,569,483)( 420,499)( 7,989,982)(Net assets at beginning of year 8,934,389 2,810,483 11,744,872

Net assets at end of year 1,364,906$ 2,389,984$ 3,754,890$


Statements of Acti vities

Years ended June 30, 2012 and 2011

2012


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Temporarily

Unrestricted Restricted Total

REVENUES, GAINS, AND OTHER SUPPORT


Tuition and fees 4,675,479$ 0$ 4,675,479$

Less student aid 913,137)( 0 913,137(

Tuition and fees, net 3,762,342 0 3,762,342

Private gifts, grants, and contributions 457,399 370,170 827,569

Governmental grants 0 7,799,864 7,799,864

Interest and dividends 10,262 0 10,262

Gain (loss) from sale of investments 1,576 0 1,576Other sources 195,968 0 195,968

Total educational and general 4,427,547 8,170,034 12,597,58

Auxiliary revenues 392 0 392Net assets released from restrictions 10,708,002 10,708,002)( 0

Total revenues, gains, and other support 15,135,941 2,537,968)( 12,597,973

EXPENSES


Instructional 4,101,986 0 4,101,986

Research 941,385 0 941,385

Academic support 1,218,640 0 1,218,640Student services 2,919,864 0 2,919,864

Institutional support 7,371,367 0 7,371,367

Total educational and general 16,553,242 0 16,553,242

Auxiliary enterprises 0 0 0

Total expenses 16,553,242 0 16,553,242

Change in net assets 1,417,301)( 2,537,968)( 3,955,269(Net assets at beginning of year 10,351,690 5,348,451 15,700,14

Net assets at end of year 8,934,389$ 2,810,483$ 11,744,872$

2011


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2012 2011

Cash flows from operating activities:

Change in net assets 7,989,982)( $ 3,955,269)( $

Adjustments to reconcile change in net assets to

net cash provided by (used in) operating activities:

Depreciation and amortization 2,241,638 2,182,465

Bond discount amortization 30,494 30,494

Interest expense added to note payable 27,485 0

Non-cash contributions 152,757)( 10,060)(

Loss (gain) from sale of investments 2,933 1,576)(

Changes in assets and liabilities:

(Increase) decrease in:

Accounts receivable 95,772)( 41,942)(

Contributions receivable 485,390 752,763

Grants receivable 49,125)( 1,235,205

Other receivables 93,624)( 37,184)(

Prepaid expenses 22,380)( 32,660

Security deposits - 225Increase (decrease) in:

Accounts payable 1,284,167 45,870

Accrued interest 28,028 10,916

Accrued expenses 773,317 19,927

Deposits and deferred revenue 130,908 43,928

Net cash provided by (used in) operating activities 3,399,280)( 308,422

Cash flows from investing activities:

Purchases of property and equipment 654,669)( 278,794)(

Decrease (increase) in accounts payable related to

property and equipment 140,037 1,782)(

Proceeds from sale of investments 49,824 11,636

Net cash provided by (used in) investing activities 464,808)( 268,940)(

Cash flows from financing activities:

Proceeds from borrowings 4,206,583 4,813,112

Repayments of debt principal 1,847,767)( 3,470,848)(

Debt issuance costs 4,000)( 0

Payments on capital lease 0 2,452)(

Net cash provided by (used in) financing activities 2,354,816 1,339,812

Increase (decrease) in cash and cash equivalents 1,509,272)( 1,379,294

Cash and cash equivalents, beginning of year 6,476,134 5,096,840

Cash and cash equivalents, end of year 4,966,862$ 6,476,134$

Summary of cash and cash equivalents

Cash - operating 140,555$ 1,649,940$

Bond reserve funds 4,826,307 4,826,194

4,966,862$ 6,476,134$

Supplemental disclosures of cash flows information:

Cash paid for interest 3,696,896$ 3,707,861$

Non cash investing and financing activities:

Accounts payable related to property and equipment converted

to note payable 200,000$ 0$

Statements of Cash Flows

Years ended June 30, 2012 and 2011


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NOTES TO FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Nature of Operations

Harrisburg University of Science and Technology (the University) is an independent not-for-

profit institution located in Harrisburg, Pennsylvania. The University is the nations onlycomprehensive university that integrates an affiliated college preparatory high school and abusiness accelerator. The University academic and research programs in mathematics, scienceand technology are designed to meet the needs of the region's youth, workforce, and businesses,and to expand, attract, and create economic opportunities in the region.

The University admitted its first class of students for the Fall 2005 term. In June 2009, theUniversity was accredited by the Middle States Commission on Higher Education. The MiddleStates Commission on Higher Education is an institutional agency recognized by the U.S.Secretary of Education and the Council for Higher Education Accreditation.

Basis of Accounting

These financial statements have been prepared on the accrual basis of accounting in conformitywith accounting principles generally accepted in the United States of America.

Financial Statement Presentation

The University reports information regarding its financial position and activities according tothree classes of net assets depending on the existence or nature of any donor restrictions asfollows:

Permanently restricted Net assets subject to donor-imposed restrictions that are to bemaintained permanently by the University. Generally, the donors of these assets permitthe University to use all or part of the income from these assets. The University had no

permanently restricted net assets at June 30, 2012 or 2011.

Temporarily restricted Net assets whose use by the University is subject to donor-imposed restrictions that can be fulfilled by actions of the University pursuant to thoserestrictions or that expire by passage of time.

Unrestricted Net assets that are not subject to donor-imposed restrictions. Unrestrictednet assets may be designated for specific purposes by action of the Board of Trustees.

Revenues are reported as increases in unrestricted net assets unless use of the related assets islimited by donor-imposed restrictions. Expenses are generally reported as decreases inunrestricted net assets. Expirations of donor-imposed stipulations that simultaneously increase

one class of net assets and decrease another are reported as reclassifications between theapplicable classes of net assets.


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Note 1. Summary of Significant Accounting Policies (Continued)

Contributions

Contributions received are recorded as unrestricted, temporarily restricted, or permanentlyrestricted support, depending on the existence or nature of any donor restrictions.

Contributions, including unconditional promises to give, are recorded as revenues in the periodthe promise is made. Conditional promises to give are not recognized until the conditions aremet or the pledge payments are received. Contributions of assets other than cash are recordedat their estimated fair value. Contributions to be received after one year (including those underthe terms of gift annuities and charitable remainder trusts) are discounted at an appropriatediscount rate. Amortization of discounts is recorded as additional contribution revenue inaccordance with donor-imposed restrictions, if any, on the contributions. An allowance foruncollectible contributions receivable is provided based upon managements judgmentincluding such factors as prior collection history, type of contribution, and nature of the fund-raising activity. The allowance for uncollectible promises to give was $ 17,400 and $ 13,750 atJune 30, 2012 and 2011, respectively.

Contributions with donor-imposed restrictions are reported as temporarily restricted revenuesand are reclassified to unrestricted net assets when an expense is incurred that satisfies thedonor-imposed restriction. Contributions restricted for the acquisition of property andequipment are reported as temporarily restricted revenue. Those contributions are reclassifiedto unrestricted net assets when restrictions have been met. Contributed property and equipmentis recorded at fair value at the date of donation. If donors stipulate how long the assets must beused, the contributions are recorded as restricted support. In the absence of such stipulations,contributions of property and equipment are recorded as unrestricted support.

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits and other investments (including

overnight repurchase agreements) with original maturities of three months or less, that are notheld for endowment or other long-term purposes. The University maintains its cash accounts invarious financial institutions. A portion of the Universitys cash balance may exceed FDICinsurance coverage at times throughout the year. Management considers this to be a normalbusiness risk.

Bond Reserve Funds

This represents funds originated from bond proceeds that are set aside for payment of interestand principal on the University Revenue Bonds Series B of 2007 as described in Note 4. Thesemonies are invested in various mutual funds of U. S. Treasury obligations which function likemoney market accounts, with cost approximating market. The minimum amount required atJune 30, 2012 and 2011 is $ 4,826,050.


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Accounts Receivable

It is the Universitys policy to provide an allowance for future losses on uncollectible accountsreceivable (primarily student tuition and fees) based on an evaluation of the underlying accountbalances, the historical collection experience of the University on such balances and otherfactors which, in managements judgment, require consideration in estimating doubtful

accounts. Actual write-offs of uncollectible accounts are done periodically after collectionefforts have been unsuccessful.

Property and Equipment

Property and equipment values represent cost at date of acquisition, or fair value at date ofdonation in the case of gifts. The University uses a capitalization threshold of $ 2,500.Depreciation is recorded using the straight-line method over the estimated useful lives of theassets as follows:

Buildings and improvements 40 yearsFurnishings and equipment 5 - 7 years

Leasehold improvements 2 10 yearsComputer software 3 yearsLibrary contents 10 years

The cost and accumulated depreciation of property sold or retired is removed from the relatedasset and accumulated depreciation accounts and any resulting gain or loss is recorded in theperiod of disposal.

Deposits and Deferred Revenue

Deposits and deferred revenue relates to summer session tuition for the portion of the sessionoccurring after June 30, and fall session tuition received prior to June 30.

Debt Issue Costs

Costs incurred in obtaining financing are capitalized and amortized using the straight-linemethod over the lives of the debt.

Advertising Expense

The University expenses advertising costs as incurred. This expense amounted to $ 35,679 and$ 56,057 for the years ended June 30, 2012 and 2011, respectively.

Use of Estimates

Management of the University has made a number of estimates and assumptions relating to thereporting of assets and liabilities and the disclosure of contingent assets and liabilities toprepare these financial statements in conformity with generally accepted accounting principles.Accordingly, actual results could differ from those estimates. Significant estimates that couldultimately result in changes to amounts reflected in these financial statements includeallowances for uncollectible accounts, contributions receivable, depreciation of property andequipment, and the present value of long-term contributions receivable. It is at least reasonablypossible that a change in estimates could occur in the near term.


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Concentrations

The University received approximately 42% and 68% of its revenues in the form of privategifts, grants, and contributions and governmental grants during the years ended June 30, 2012and 2011, respectively. Decreases in this funding could have a significant impact on theUniversity.

Tax Status

Under provisions of the Internal Revenue Code, Section 501 (c)(3), and the applicable taxregulations of Pennsylvania, the University is exempt from taxes on income other thanunrelated business income. Since the University had no net unrelated business income duringthe years ended June 30, 2012 and 2011, no provision for income taxes has been made.

Uncertain Tax Positions

The University follows the FASB Accounting Standards Codification, which provides guidanceon accounting for uncertainty in income taxes recognized in an enterprise's financial statements.The guidance prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to be taken in a taxreturn, and also provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. As of June 30, 2012, the Universityhad no uncertain tax positions that qualify for either recognition or disclosure in theUniversity's financial statements. The University's policy is to recognize interest and penaltieson unrecognized tax benefits in income tax expense in the financial statements. No interest andpenalties were recorded during the year ended June 30, 2012. Generally, the tax years before2007 are no longer subject to examination by federal, state or local taxing authorities.

Disclosure about Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, receivables and payables. The fair

value of cash and cash equivalents is their carrying value and carrying value of receivables andpayables approximates their fair value.

Note 2. Contributions Receivable

Contributions receivable, representing donor promises to give, have been discounted to presentvalue assuming their respective terms and a discount rate of 2.27% and 2.72% at June 30, 2012and 2011, respectively. The unamortized discount on pledges receivable was $ 22,442 and$ 72,502 at June 30, 2012 and 2011, respectively. The discounted pledges are scheduled to becollected as follows:

2012 2011

Unconditional promises expected to be collected in:

Less than one year 798,333$ 943,443$

One year to five years 1,360,385 1,710,561

Over five years 36,515 73,029

Total unconditional promises to give 2,195,233 2,727,033

Allowance for uncollectible promises to give 17,400)( 13,750)(

Discount for present value of cash flows 22,442)( 72,502)(

Net unconditional promises to give 2,155,391$ 2,640,781$


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Note 3. Property and Equipment/Deposits on Sale of Property

A summary of property and equipment of the University as of June 30 is as follows:

Accumulated Depreciated

Cost Depreciation Cost

Land 4,062,768$ 0$ 4,062,768$

Buildings and improvements 64,697,939 5,638,634 59,059,305

Leasehold improvements 437,614 228,181 209,433

Furnishings and equipment 3,643,725 2,052,832 1,590,893

Library contents 147,383 43,808 103,575

Computer software 355,202 308,888 46,314

73,344,631$ 8,272,343$ 65,072,288$

Land 4,062,768$ 0$ 4,062,768$

Buildings and improvements 64,482,117 4,022,941 60,459,176

Leasehold improvements 437,614 182,487 255,127

Furnishings and equipment 3,163,622 1,536,227 1,627,395

Library contents 140,579 29,605 110,974

Computer software 355,202 276,691 78,511

Construction in progress 48,061 0 48,061

72,689,963$ 6,047,951$ 66,642,012$

2012

2011

Depreciation expense (including amortization expense of assets under capital lease) for theyears ended June 30, 2012 and 2011 was $ 2,178,699 and $ 2,165,534, respectively.

During the year ended June 30, 2009, the University completed the construction of a new

371,000 square foot Academic Center at 326 Market Street. The total cost of the project,including architect fees, feasibility studies, construction costs, furnishings and equipment,capitalized interest, and other related costs, was $ 80.3 million. This cost includes $ 14,764,527for the parking facility that is scheduled to be transferred to the Harrisburg Parking Authority(see below) and is reported as assets held for sale on the statements of financial position.

Construction in process at June 30, 2011 represented costs for elevator enclosure in the parkinggarage. Final costs were $ 208,875, of which $ 80,407 were reimbursed by grant fundsreceived in 2012.

Agreement of sale of property Harrisburg Parking Authority

On January 16, 2007, the University entered into an agreement of sale with the HarrisburgParking Authority (HPA). The terms of this agreement provide for the sale of seven (7) floorsof parking facilities (approximately 392 parking spaces) constructed by the University for HPA.The initial purchase price for the parking facility was $ 14,000,600. According to theagreement of sale, the final purchase price will be determined upon completion of theconstruction of the parking facility. Change orders affecting the cost of construction, whetheran increase or decrease to the total project cost, will enter into the calculation of the finalpurchase price. Settlement is contingent upon mutual agreement of the final purchase price.


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Note 3. Property and Equipment/Deposits on Sale of Property (Continued)

Under the terms of this agreement, several deposits totaling $ 14 million were paid to theUniversity during 2007 to 2009. These amounts are reported as deposits on sale of property onthe statements of financial position. The costs associated with the construction of the parkingfacilities are shown on the statements of financial position as assets held for sale.

Under the terms of the agreement, possession was to be delivered to HPA 30 days after

completion of construction of the academic center located at 326 Market Street, issuance of acertificate of occupancy for the academic center by the appropriate governmental authorities, aswell as any private approvals, permits, connections or easements, necessary or desirable for HUto complete the academic center. Final easement documents have not been received, thereforethe transfer of the property has not yet occurred.

On May 29, 2009, HPA and the University entered into an Extension of Limited Parking Lease.This agreement was created to reduce to writing the desire of both HPA and the University tocontinue to operate in the same manner and in accordance with the terms of the Parking Leaseand Option to Purchase entered into by the parties on January 16, 2007. The term of the leaseexpired on January 31, 2010, however, both parties are operating as if the lease was still ineffect. HPA has assumed the operations of the parking facility, and the University began

leasing 300 spaces in February 2009. Total lease payments were $ 522,000 and $ 495,000 forthe years ended June 30, 2012 and 2011, respectively. In addition, the University accrued anexpense of $ 750,038 as of June 30, 2012 related to finalizing this agreement. HPA and theUniversity are currently in litigation regarding the terms of this agreement (see Note 10).Consequently, it is uncertain as to when settlement on the parking facility will occur.

Note 4. Bonds and Notes Payable

Bonds Payable

On January 1, 2007, the University obtained financing in the form of two construction loans inthe amounts of $ 27,690,000 (University Revenue Bond Series A of 2007) and $ 60,225,000(University Revenue Bond Series B of 2007) with the Harrisburg Authority (Authority), with

Commerce Bank N.A. functioning as Trustee (subsequently changed to UMB Bank) under theTrust Indenture dated January 1, 2007. The proceeds were used to refinance variousoutstanding loans; to fund the acquisition and construction of the new academic center at 326Market Street; and to establish certain bond reserve funds.

While the scheduled maturity for the Series A bonds was in September 2016, based on thespecial mandatory redemption provisions, final redemption of the Series A bonds occurred onSeptember 1, 2009.

As to the Series B Bonds only, the University has arranged for the issuance of a standby letterof credit (the SLOC) by Metro Bank (formerly Commerce Bank) pursuant to aReimbursement Agreement dated as of January 1, 2007 (the Reimbursement Agreement)

between the University and Metro Bank. On the date of execution and delivery of the Series BBonds, Metro Bank issued in favor of the Trustee the SLOC in the amount of $ 3,300,000,which may be drawn to pay the debt service on the Series B Bonds as described in theIndenture, as such amounts may from time to time be reduced and reinstated as provided in theSLOC. The SLOC expired on September 1, 2011 and was not renewed.

The Series B Bonds mature in 2036, but are subject to scheduled mandatory redemption by theAuthority annually beginning on September 1, 2015 and continuing through final redemptionon September 1, 2036.


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Note 4. Bonds and Notes Payable (Continued)

Bonds Payable (Continued)

The County of Dauphin, Pennsylvania has also issued a limited guaranty of up to $ 1.5 millionper year for a period of 10 years to be provided for the payment of a portion of debt service onthe Series B Bonds. The period for which the guaranty is in effect begins January 1, 2010 andends December 31, 2019 (the Guarantee Period), unless terminated earlier due to a

Termination Event of the County Guarantee. Under the Guarantee Agreement, the County willmake payment of not more than $ 1.5 million toward the amount of annual principal andinterest due to the holders of the Series B Bonds if the Authority or the Trustee shall fail to pay,in full, for any year during the Guarantee Period the principal of and interest on the Series BBonds when the same becomes due and payable. The total maximum aggregate amount of theCounty Guarantee over the Guarantee Period is $ 15 million, which was reduced to $ 13.5million at June 30, 2011. On February 29, 2012, the University used the County Guarantee tohelp make the March 1, 2012 bond interest payment, further reducing the available guaranteefunds to $ 12 million at June 30, 2012. See a separate recap of the amounts owed to the Countyof Dauphin in the "Notes Payable" section of this footnote.

The University Revenue Bonds bear interest at a rate of 6.0% for Series B. These bonds are

secured by all the assets of the University. For a default of the Series B bonds, the letter ofcredit from Metro Bank (if renewed) would be used first, followed by the County Guarantee,then the bond reserve funds.

Under the terms of the bond agreement and Dauphin County Guarantee Agreement, theUniversity is required to maintain various financial covenants. The University was not incompliance with the liquidity covenant for either of the years ended June 30, 2012 or 2011. Asa result, the University could only use Expendable Funds (as defined) in excess of $ 10 millionto acquire or construct Capital Additions in either year, and the same restriction applies in the2012-13 year. The University was also not in compliance in 2012 or 2011 with the ratecovenant which became effective on June 30, 2011. As a result, the University was required torequest a consultant to make a report and recommendation to the University with respect to

tuition, student fees and other charges, and with regard to operations of the University. TheUniversity believes it has complied with the limitation on capital additions in both years, andhired a consultant as required for the violation at June 30, 2011. The University is workingwith the Bond Trustee and Noel-Levitz (a consultant) to fulfill the June 30, 2012 requirements.

The balance outstanding for the bonds described above at June 30 is as follows:

2012 2011

University Revenue Bond Series B 60,225,000$ 60,225,000$

Less: Underwriter's bond discount 736,930)( 767,424)(

59,488,070$ 59,457,576$

Amortization expense on debt issue costs related to the above debt for each of the years endedJune 30, 2012 and 2011 was $ 16,931. Amortization of the underwriters bond discount tointerest expense (net of amounts capitalized) for each of the years ended June 30, 2012 and2011 was $ 30,494.


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Bonds Payable (Continued)

Bond principal payments due for the next five years and thereafter are as follows for the yearsended June 30:

2013 0$

2014 0

2015 0

2016 1,250,000

2017 1,325,000

Thereafter (2017 - 2037) 57,650,000

60,225,000$

See Note 11 (Subsequent Events) related to subsequent payments required for interest on thebonds.

Notes Payable

The balance of the Metro Bank SLOC was $ 1,141,485 at June 30, 2010. The University madetwo additional draws totaling $ 3,613,112 during the year ended June 30, 2011, and aftermaking mandatory monthly payments, the balance was reduced to $ 1,483,749 at June 30,2011. The University borrowed an additional $ 1,848,971 on the SLOC during the year endedJune 30, 2012, and after making mandatory monthly payments, the balance was reduced to$ 1,500,695 at June 30, 2012. The University has no further ability to borrow on this SLOC.

During the year ended June 30, 2010, the University borrowed $ 1,000,000 from the County ofDauphin, Pennsylvania at an interest rate of 1.0% and scheduled to mature on December 31,2010. Amendments to this agreement and a supplemental agreement entered into during theyear ended June 30, 2011 extended the maturity date to December 31, 2011. In addition, theUniversity borrowed an additional $ 1.2 million from the County of Dauphin on June 30, 2011

subject to the same interest rate, and also maturing on December 31, 2011. On February 29,2012, the University borrowed $ 1.5 million from the County of Dauphin under the CountyGuarantee described above. At that time, the University and the County of Dauphin enteredinto a promissory note for the entire $ 3.7 million, which effectively reduced the interest rate to0.5% and extended the repayment terms to December 29, 2019. See Note 11 for subsequentmodifications to this $ 3.7 million county debt.

On May 29, 2012, the University entered into a $ 300,000 line of credit with Fulton Bank, N.A.at an interest rate equal to the Fulton Bank Prime plus 2.0%, with a floor of no less than 5.25%.Monthly payments of accrued interest are due beginning on July 1, 2012 and continuing on thesame day of each month thereafter. All unpaid principal and interest is due at maturity, whichis June 30, 2013 according to the most recent amendment to the note agreement dated

December 20, 2012. The balance outstanding at June 30, 2012 was $ 300,000.

The University borrowed $ 750,000 from a related party at a variable rate (2.4% at June 30,2010), the balance of which was repaid prior to June 30, 2011.

During the year ended June 30, 2012, the University entered into six demand promissory noteswith donors to the University ranging in amount from $ 50,000 to $ 200,000 for a total amountborrowed of $ 600,000, of which $ 300,000 was from related parties. Interest on these notesaccrues at the rate of 4.25%, and principal and interest is payable on demand each calendar yearon December 31, provided that the lender notifies the University prior to November 1 of itselection to call the outstanding note. One of the lenders made notice, but has not demandedpayment. Five lenders did not make this notification prior to November 1, 2012, thus extendingthe loans until December 31, 2013.


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Notes Payable (Continued)

During the year ended June 30, 2012, the University entered into a promissory note with avendor in the amount of $ 200,000. The University has agreed to remit to the borrower grantfunds from a Pennsylvania Energy Development Authority Grant expected to be $ 100,000upon receipt of the grant funds. The remaining balance will be amortized over twelve monthly

installments of $ 8,515 at an interest rate of 4.0% per year. The balance on this note at June 30,2012 was $ 184,259.

Note principal payments due for the next five (5) years and thereafter are as follows for theyears ended June 30:

2013 $ 2,584,9542014 02015 02016 02017 0Thereafter 3,700,000

$ 6,284,954Total interest expense on all debt was $ 3,755,418 and $ 3,749,286 for the years ended June 30,2012 and 2011, respectively.

Note 5. Restricted Net Assets

The nature of temporarily restricted net assets at June 30 was as follows:

2012 2011

Contributions receivable to be used for:

Scholarships 0$ 4,000$

Various operating expenses 2,155,391 2,636,781

Grants receivable to be used for:

Various operating expenses 234,593 169,702

2,389,984$ 2,810,483$

Note 6. Assets Released from Restrictions

Net assets released from restrictions consist of the following for the years ended June 30, 2012and 2011:

2012 2011

Time and Purpose restrictions accomplishedCommonwealth of Pennsylvania Redevelopment

Assistance Capital Program - facility renovation 1,507,550$ 7,676,438$

National Science Foundation - grant related expenses 532,522 694,082

DCED Bio-Tech Grant - grant related expenses 85,000 89,999

Corporation for National and Community Service

Grant - grant related expenses 367,915 268,597

State Grant - IAG 74,938 55,602

Other state and federal grants 54,218 250,352

Contributions received on outstanding pledges 1,285,449 1,672,932

3,907,592$ 10,708,002$


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Note 7. Government Grants

In 2008, the University was approved for a $ 25 million Redevelopment Assistance CapitalProgram (RACP) reimbursement grant funded through the Commonwealth of PennsylvaniaOffice of Budget. In 2010, the University received approval for an additional $1.25 milliongrant. These funds, along with $ 1.4 million remaining from a prior $ 12 million RACP grant,a $ 5.0 million RACP grant approved in July 2011, and a $ 6.0 million RACP grant approved inSeptember 2011 brought the total RACP funding for the combined Harrisburg University andHarrisburg Sci-Tech High project to $ 49.25 million.

Revenue from this grant in the years ended June 30, 2012 and 2011 was $ 1,507,550 and$ 6,376,438, respectively. Revenue from the RACP grants applicable to this project recognizedprior to 2011 was $ 38,250,000, leaving a balance of $ 3,116,012 in RACP grant funding to berecognized in future periods, contingent upon meeting various matching requirements.

The University is the recipient of multi-year grants from the National Science Foundation thatprovide funding for the Science Education for New Civic Engagements and Responsibilities(SENCER) Project. Revenue of $ 518,529, including a $ 35,864 grant receivable at June 30,2012 was recognized under this grant for the year ended June 30, 2012. Revenue of $ 737,959,including a $ 49,856 grant receivable at June 30, 2011, was recognized under this grant for the

year ended June 30, 2011. A balance of $ 263,285 has been authorized under the terms of thisgrant and is available for future drawdown as of June 30, 2012.

The University is the recipient of various other federal and state government grants. Revenuefrom these grants in the amounts of $ 685,467, including $ 182,963 in grants receivable atJune 30, 2012, was recognized for the year ended June 30, 2012. Revenue of $ 685,467,including grants receivable of $ 119,846 at June 30, 2011, was recognized for the year endedJune 30, 2011.

Note 8. Summary of Expenses

Expenses by natural classification for the years ended June 30 were as follows:

2012 2011

Salaries and wages 5,001,238$ 4,970,837$

Payroll taxes 369,100 369,395

Employee benefits 687,233 649,943

Travel 274,117 271,762

Supplies and other 1,460,181 644,400

Technology 323,771 312,055

Marketing 498,748 677,982

Facility management 1,409,028 997,867

Administration 2,077,142 1,727,250

Interest 3,755,418 3,749,286Depreciation and amortization 2,241,639 2,182,465

18,097,615$ 16,553,242$

Fundraising expenses totaled approximately $ 510,608 and $ 387,449 for the years endedJune 30, 2012 and 2011, respectively.


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Note 9. Operating Leases

Total rents paid under operating leases for facilities (including student housing) and equipment,including the parking facilities detailed in Note 3, were $ 1,127,543 and $ 616,805 for the yearsended June 30, 2012 and 2011, respectively.

The University had a lease for space in Strawberry Square that was scheduled to expire inJanuary 2017, with a base annual rent of $ 52,200 adjusted each year for changes in the

consumer price index. This lease was cancelled in December 2012 by mutual agreement, andthe rents for the period from July through December 2012 will be considered contributionsfrom the lessors. The University also has a long-term lease to rent apartments at 355 MarketStreet from July 1, 2011 to June 30, 2016. The lease will automatically renew until June 30,2040 unless either party provides 6 months notice not to renew. Rents increase 3% annually.The University is only required to pay for units actually occupied by students. Thecommitments below assume all units are rented and the lease continues past June 30, 2016.

Approximate operating lease commitments on long-term leases for the next five years endingJune 30 are as follows:

2013 771,017$

2014 794,1472015 817,972

2016 842,510

2017 867,785

4,093,431$

Note 10. Commitments and Contingencies

Memorandum of Understanding

A memorandum of understanding (MOU) with the Harrisburg School District was executed onOctober 12, 2006 under which the University agrees to provide fully funded scholarships to

each graduate of the SciTech High program attending the University, as long as the graduatesagree to remain Harrisburg residents for five years after graduation from the University andattain sufficient academic grades as identified in the agreement.

Litigation

The Harrisburg Parking Authority has filed a Complaint against the University seekingperformance of the purchase agreement under which ownership of the parking facilityconstructed by the University be transferred to HPA (see Note 3) along with a subsidy paymentof $ 778,919. The University has filed a Counterclaim against HPA for breach of contract andpayment of $ 723,026 for Change Orders that HPA owes under the purchase agreement. TheUniversity is vigorously defending the claims, and the outcome cannot be predicted with anydegree of certainty. The parties are engaged in informal settlement discussions.

The University is involved with various lawsuits in the normal course of operations.Management cannot predict the outcome of the lawsuits or estimate the amount of any loss thanmay result. However, management believes that losses resulting from these matters, if any,would not have material effect on the financial position of the University.


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Note 10. Commitments and Contingencies

Financial Responsibility

34 CFR 668 addresses the requirements for the University to be considered "financiallyresponsible" in order to continue to participate in Title IV Federal Student Aid.

34 CFR 668.171 indicates that "an institution is not current in its debt payments if it is in

violation of any existing loan agreement at its fiscal year end, as disclosed in a note to itsaudited financial statements".

The University has contacted the U.S. Department of Education and submitted monthlyfinancial statements to the Department, which to date have been satisfactory to the Department.Continued participation in Title IV Federal Student Aid is subject to ongoing approval by theU. S. Department of Education.

Note 11. Subsequent Events

The University has evaluated events and transactions subsequent June 30, 2012 throughMarch 26, 2013, the date these financial statements were available to be issued. Based on thedefinitions and requirements of generally accepted accounting principles, management hasidentified several events that have occurred subsequent to June 30, 2012 and through March 26,2013 which require recognition or disclosure in the financial statements.

a) On July 2, 2012, United States Environmental Protection Agency awarded the University agrant of $ 150,000. This grant will provide sub awards to 4 year, 2 year and tribalundergraduate institutions in Region 5 and New York that are associated with a GreatLakes Innovative Stewardship Through Education Network (GLISTEN) collaborativecluster.

b) In August 2012, the University opened its second student housing complex. This complex,known as Market View Place (MVP), is located within one block of the University.Using state of the art technology, residents of MVP can access the Universitys network

which provides a seamless transition from the dorms to the classroom. MVP is owned by aprivate developer. Even though the University has exclusive rights to the use of the studenthousing buildings, the University is only responsible to pay for the units it occupies.

c) On August 29, 2012, the University received contribution in the amount of $ 657,500 froma local business. This donation served to satisfy a contribution receivable of $ 489,287 andprovided a new unrestricted donation in the amount of $ 168,213.

d) Section 4.2 of the Loan Agreement (see Note 4) provides that the University is required tomake, as Loan Payments, payments which correspond, as to amounts and due dates, to theBond Debt Service, at least seventy-five (75) business days (or earlier if required by theIndenture) prior to the date when such principal, premium, if any, and interest is due andpayable. By Notices of Default dated August 3, 2012 and December 3, 2012, the Trusteenotified the University of its failure to make the required Loan Payment, in anticipation ofthe Bonds Debt Service payment due on September 1, 2012 and March 1, 2013,respectively. The amount due on both September 1, 2012 and March 1, 2013 equals$ 1,806,750. In its Notices of Default, the Trustee asserted that such failure constitutes anEvent of Default under the Loan Agreement and under the Indenture.

As of September 1, 2012, the University failed to make the required bond debt servicepayment on the University Revenue Bonds, Series B of 2007 in the amount of $ 1,806,750.The University is currently working with the Bond Trustee to establish a repaymentschedule for the missed payment. As of the date of these statements, the University has notmade any payments towards this debt service requirement due September 1, 2012. See (j)for additional information related to the March 1, 2013 interest payments.


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Note 11. Subsequent Events (Continued)

e) On September 12, 2012, the National Science Foundation awarded the University a grant of$ 377,532 for support of the project entitled Shaping an Infrastructure for the Partnershipof Informal Science Education and Higher Education. This award is effectiveSeptember 15, 2012 and expires on August 31, 2015. This is a continuing grant which hasbeen approved on scientific / technical merit. Contingent on the availability of funds andthe scientific progress of the project, the National Science Foundation expects to continuesupport at approximately $ 340,820 and $ 393,758 for FY 2014 and FY 2015, respectively.

f) On September 26, 2012, the National Science Foundation awarded the University a grant of$ 960,030 for support of the project entitled Science Education for New CivicEngagement and Responsibilities. This award is effective October 1, 2012 and expires onSeptember 30, 2016. This is a continuing grant which has been approved on scientific /technical merit. Contingent on the availability of funds and the scientific progress of theproject, the National Science Foundation expects to continue support at approximately$ 900,065, $ 893,176, and $ 746,542 for FY 2014, FY 2015, and FY 2016, respectively.

g) On July 16, 2012 and December 12, 2012 the University received $ 250,000 and $ 500,000,respectively from The Donald B. and Dorothy L. Stabler Foundation. These payments

represent installments under a grant received in December 2011, and fulfill the grantcommitment from The Donald B. and Dorothy L. Stabler Foundation.

h) At its session on January 2, 2013, the Executive Committee for Substantive Change of theMiddle States Commission of Higher Education acted to acknowledge receipt of thesubstantive change request to provisionally include the additional location at 111 SouthIndependence Mall East, Philadelphia, PA, within the scope of the Universitysaccreditation, pending a site visit within six months commencing operations. In addition,the Executive Committee for Substantive Change of the Middle States Commission ofHigher Education acted to acknowledge receipt of the substantive change request to includethe online Master of Science in Learning Technologies program within the scope of theUniversitys accreditation.

i) On February 5, 2013, the United States Department of Educations Federal Student AidSchool Eligibility Channel School Participation Team issued an Approval Notice whichgrants approval for the additional location at 111 South Independence Mall East,Philadelphia, PA. This approval grants the University to offer Title IV funding to eligiblestudents at the Philadelphia location.

j) On February 28, 2013, the University used the County Guarantee in the amount of$ 1,500,000 as described in Note 4. These funds along with $ 306,750 of University funds,were used to make the bond debt service payment on the University Revenue Bonds,Series B of 2007 due March 1, 2013. As of March 12, 2013, the University owes theCounty of Dauphin $ 5.2 million.

Note 12. Sustainability of Harrisburg University - Going Concern Contingency

Over the course of the past six (6) years the University has had a net outflow of cash ofapproximately $ 22.2 million from operating activities. This use of financial resources wasanticipated by management over this time period. Over the past several years, both seniormanagement and the Board of Trustees for the University have focused on revenue generationand expense reduction initiatives while fulfilling the underlying mission of the University.


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Note 12. Sustainability of Harrisburg University - Going Concern Contingency (Continued)

Looking ahead, key components of the Universitys ability to become sustainable include thefollowing:

In February, 2013, University contracted with Noel-Levitz for a two (2) year engagementto focus on student recruitment and marketing efforts. This engagement is designed toincrease enrollments and retention and to focus on University marketing and brandingefforts,

The University is currently working on tuition pricing models to better resemble those of itspeers and competitor institutions,

Focusing on external contributions from donors, Maximizing the dollars of federal, state and local grants to the university, Formation of partnerships to deploy University offerings on-line, Creation of additional market-driven academic degrees and concentrations, Constant review and control of all University expenditures, Securing of a line of credit to smooth out cash flows, Providing student housing options for all students.While many of the above items have been the focus for the past several years, it is important tonote that since then the University has achieved several accomplishments which have led torevenue generation or expense reductions and is providing a pathway for continuedsustainability of the University. For example, in August 2012, the University opened its secondstudent housing complex. This complex, knows as Market View Place (MVP), is locatedwithin one block of the University. In August 2013, the University is scheduled to open its

third student housing complex. This complex is directly across the street from the University.Using state of the art technology, residents of all three student housing complexes can accessthe Universitys network which provides a seamless transition from the dorms to the classroom.Having student housing has increased the Universitys ability to attract and retain students.Each of the student housing buildings are owned by a private developer. Even though theUniversity has exclusive rights to the use of the student housing buildings, the University isonly responsible to pay for the units it occupies.

In addition, since year-end, the University has been awarded a federal grant from the UnitedStates Environmental Protection Agency in the amount of $150,000 and two federal grantsfrom the National Science Foundation (NSF). The NSF grants provide potential funding inthe amount of $ 1,337,562 for the initial grant year. For FY 2014, 2015, and 2016, the NSFgrants have potential funding amounts of $ 1,240,885, $ 1,286,934 and $ 746,542, respectively.

Over the past year the University has developed more offering for its students. These includefour concentrations, two certificates programs and three degree programs. The newconcentrations include: 1) Environmental Impact of Pharmaceuticals, 2) PharmaceuticalDesign, 3) Environmental Science and Renewal Energy and 4) Interactive Media Management.The new certificate programs are Certified Government Chief Information Officer andInformation Technology Project Management. The new degree programs include: 1) Bachelorof Science Data Analytics, 2) Masters of Science Data Analytics and 3) bachelor ofScience/Masters of Science Data Analytics in a 5 year accelerated program.


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In December 2011, the University opened the Government Technology Institute (GTI). TheGTI provides a pathway for public sector information technology workers to attain certificationin their ever-growing field. Through the GTI, a Certified Government Chief InformationOfficer program is offered directly to state employees. This course is strongly supported byPennsylvanias Chief Information Officer and the Governors office. Since its inception, GTIhas had 24 graduates and there are currently 24 students enrolled. In March 2013, theUniversity is scheduled to offer a beginning Information Managers course which was targetedat state officials below the CIO level. This course was oversubscribed by 30 students. Further,building off the four (4) founding members: CISCO, Unisys, Microsoft and CA Technologies,the GTI has added two (2) additional members, Deloitte and Computer Aid Inc. The Universityis currently working to add two (2) of the nations top cable providers over the next fewmonths. Finally, the University has submitted a White Paper document to the GovernorsInnovation Office recommending the creation of a computer/network lab at the University to beused by all state agencies. This computer lab is strongly supported by CISCO.

Focusing on student recruitment efforts the University welcomed 136 and 92 first-time, full-time freshmen to the University in Fall 2012 and 2011, respectively. With the use ofconsultants Noel-Levitz and Royall & Company, the University is currently striving to add 180

plus first-time, full-time freshmen to the University in Fall 2013.

Since year end, the University has gained approval from the Middle States Commission onHigher Education for two (2) substantive changes. The first substantive change was requiredfor the University to completely offer degrees in Learning Technology online. This changeprovides the University the ability to market this degree across the entire nation. The secondsubstantive change was received In January 2013. With this, the University has approval tooperate an additional location in Philadelphia, PA. The University will offer its first slate ofcourses in the summer of 2013 in partnership with the Hussian School of Art. The Universitywill co-locate with Hussian at its Philadelphia location. Initially, the University will offer itsexisting B.S. degree program in new media and its existing M.S. degree program in learningtechnologies in Philadelphia. In Spring 2014, the University and Hussian plan to offer a new

joint bachelors degree program in interactive art and media. The new degree program will beoffered by the University, but will be delivered by both University and Hussian faculty. TheUniversity has received approval from the United States Department of Education to offer TitleIV funding for students at the Philadelphia location.

Harrisburg University (HU) is in the process of creating a partnership to market and deliverbachelors and masters degree programs in data analytics to a national audience. In the past9 months, HU has developed the data analytics programs to address growing demand in thehealthcare, manufacturing, transportation, energy and telecommunications industries foremployees skilled in building large data sets and using analytic tools to make critical businessdecisions. HU has limited resources for delivering these programs beyond the reach of itscurrent marketing and student recruiting activities. Yet, the data analytics programs have

significant appeal in multiple industries across the nation.

The University continues to encounter significant cash flow issues. The University mustcontinue to focus on several key areas in order to continue fulfilling the mission of theUniversity. These areas of focus include: expense control and reduction, student recruiting andretention and revenue generation. First, under expense control, the University has negotiatedpayment terms for most of its vendors which better enables the University to maintain positivecash balances. Also, the University has entered into an agreement with a local business whichwill reduce the cost of security and cleaning approximately $ 7,000 to $ 8,000 per month. Also,In January 2013, the University switched their payroll processing company, which is


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estimated to save nearly $ 40,000 per year. Second, with the use of Noel-Levitz and Royall andCompany, the University will focus on soliciting the names of students who have the desire andcapacity to succeed at the University. The Universitys admission staff will undergo extensivetraining on how to sell the University offerings and how to get prospective students tocommit to the University. Third, using partnerships with local employers to design educationalcourses and degrees will continue to be a driving force in creating a market driven approachto academics. The University will also continue to partner with external entities to enable thedelivery of courses to students throughout the country with minimal cash outflows.

Recognizing that cost reductions and current year growth trends cannot mitigate all of theUniversitys cash flow needs, the University continues to pursue several major initiatives.First, the University is currently working with the University Bond Holders to negotiaterepayment of amounts previously due but unpaid under the bond documents. Second, theUniversity is working with the local area economic development agency to facilitate a bank-backed loan which will serve as a line of credit for the University. This credit facility is subjectto Bond Holder approval. Preliminary discussions of the credit facility contain an interest onlyperiod for the first three years and then amortization over a five to seven year period. Third,the University plans to have a Director of Major Gifts under contract beginning in early March

2013. This position will serve to generate and secure major gift proposals, Pennsylvaniagovernment relations aimed at the Governors office and the PA Department of Communityand Economic Development and federal government relations. Fourth, the University iscurrently in negotiations with Metro Bank to restructure its current loan obligation. Under thepending request, the outstanding obligation would convert to a three year interest only period.After the three year period, the University is proposing amortizing the remaining outstandingbalance over five years. This proposal would reduce the Universitys monthly payment byapproximately $ 22,000 per month.

All of these initiatives are contingent on cooperation from the Trustee and Bond Holders towaive their rights currently available under the terms of the bond agreement and related TrustIndenture, as well as the ability to continue participation in the Title IV Student Assistance

Program (see Note 10 to the financial statements as well as Note 6 of the "Notes to Schedule ofExpenditures of Federal Awards" on page 23 of this financial report).


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Schedule of Expenditures of Federal AwardsYear Ended June 30, 2012

Federal Revenues

CFDA Grant Period Expenditures/

U.S. Department of Education

Student Financial Aid Cluster:Federal Supplemental Educational Opportunity Grants 84.007 07/01/11 06/30/12 11,193$

Federal Work Study 84.033 07/01/11 06/30/12 9,946

Pell Grant Program 84.063 07/01/11 06/30/12 553,341

Federal Direct Student Loans 84.268 07/01/11 06/30/12 2,228,311 (Note 4)

Total Student Financial Aid Cluster 2,802,791

Corporation for National and Community Service

Learn and Serve America - Higher Education 94.005 07/01/11 06/30/12 368,239 (Note 5)

National Science Foundation

PA STEM-UP University Partnership for the

Advancement of Academic Women 47.076 11/1/11 - 8/31/15 23,216

(Subrecipient from Shippensburg University,

Agreement No. 4300000657)

Course Curriculum and Laboratory Improvement Program 47.076 07/01/11 06/30/12 518,529

Total Federal Assistance 3,712,775$

See accompanying notes to Schedule of Expenditures of Federal Awards.


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NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS

Note 1. General

The accompanying schedule of federal awards presents the expenditures of federal awardsprograms of Harrisburg University of Science and Technology (the University). The University

is described in Note 1 to the Universitys financial statements.

Note 2. Basis of Accounting

The accompanying schedule of federal awards is presented using the accrual basis of accounting,which is described in Note 1 to the Universitys financial statements.

Note 3. Relationship to Financial Statements

Amounts reported in the accompanying schedule agree with amounts included in the Universitysfinancial statements in all material respects.

Note 4. Federal Direct Student Loans

The University is only responsible for the performance of certain administrative duties and is notconsidered the lender with respect to the student loan programs, and accordingly, these loans arenot included in its financial statements and it is not practical to determine the balance of loansoutstanding to students and former students of the University under these programs.

Note 5. Subrecipients

Payments to subrecipients during the year ended June 30, 2012 from the Corporation for Nationaland Community Service Grant, CFDA #94.005, were $ 245,825.

Note 6. Financial Responsibility

The Universitys Equity, Primary Reserve, and Net Income ratios for the year ended June 30,2012 yield a composite score of (0.5) out of a possible 3.0 as described in 34 C.F.R. 668.172,Financial Ratios. Accordingly, the University has not achieved the minimum score of 1.5 anddoes not meet the requirement of the financial standards for this period. As a result of compositescores less than 1.5 for fiscal years ended June 30, 2010 and 2011, the University has beensubject to zone alternative disbursement requirements for the past two years. The zonealternative is only available if the composite score is in the range from 1.0 to 1.4. Therefore, theUniversity may be required to comply with other alternative standards such as an irrevocableletter of credit in order to remain eligible to participate.

In addition, as noted in Note 4 to the financial statements, the University was not in compliancewith certain debt covenants at June 30, 2012 or June 30, 2011. The University has responded asneeded to the restrictions and actions necessary as a result of not meeting the covenants.

34 CFR 668.171 indicates that "an institution is not current in its debt payments if it is inviolation of any existing loan agreement at its fiscal year end, as disclosed in a note to its auditedfinancial statements".

The University contacted the U.S. Department of Education on July 14, 2011 and again onJanuary 26, 2013 to make the Department aware of its covenant noncompliance, and plans towork with the Department to assure that the University continues to be eligible to participate inthe Title IV Student Assistance Program.


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REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGAND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL

STATEMENTS PERFORMED IN ACCORDANCE WITHGOVERNMENT AUDITING STANDARDS


We have audited the financial statements of Harrisburg University of Science andTechnology (a nonprofit organization) as of and for the year ended June 30, 2012, and have issued our reportthereon dated March 26, 2013, which was qualified due to a going concern uncertainty. We conducted ouraudit in accordance with auditing standards generally accepted in the United States of America and thestandards applicable to financial audits contained in Government Auditing Standards, issued by the

Comptroller General of the United States.

Internal Control Over Financial Reporting

Management of Harrisburg University of Science and Technology is responsible forestablishing and maintaining effective internal control over financial reporting. In planning and performingour audit, we considered Harrisburg University of Science and Technologys internal control over financialreporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on thefinancial statements, but not for the purpose of expressing an opinion on the effectiveness of HarrisburgUniversity of Science and Technologys internal control over financial reporting. Accordingly, we do notexpress an opinion on the effectiveness of Harrisburg University of Science and Technologys internal controlover financial reporting.

A deficiency in internal control exists when the design or operation of a control does notallow management or employees, in the normal course of performing their assigned functions, to prevent, ordetect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination ofdeficiencies, in internal control such that there is a reasonable possibility that a material misstatement of theentitys financial statements will not be prevented, or detected and corrected on a timely basis.

Our consideration of internal control over financial reporting was for the limited purposedescribed in the first paragraph of this section and would not necessarily identify all deficiencies in internalcontrol that might be significant deficiencies or material weaknesses. We did not identify any deficiencies ininternal control over financial reporting that we consider to be material weaknesses, as defined above.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether Harrisburg University of Scienceand Technologys financial statements are free of material misstatement, we performed tests of its compliancewith certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with whichcould 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 othermatters that are required to be reported underGovernment Auditing Standards.


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Board of TrusteesHarrisburg University of Science and Technology

We noted certain matters that we reported to management of Harrisburg University ofScience and Technology in a separate letter dated March 26, 2013.

This report is intended solely for the information and use of the board of trustees,management, and federal awarding agencies and pass-through entities, and is not intended to be and shouldnot be used by anyone other than these specified parties.



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INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH REQUIREMENTSTHAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH

MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCEIN ACCORDANCE WITH OMB CIRCULAR A-133


Compliance

We have audited Harrisburg University of Science and Technologys compliance with thetypes of compliance requirements described in the OMB Circular A-133 Compliance Supplementthat could

have a direct and material effect on each of Harrisburg University of Science and Technologys major federalprograms for the year ended June 30, 2012. Harrisburg University of Science and Technologys major federalprograms are identified in the summary of auditors results section of the accompanying schedule of findingsand questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicableto each of its major federal programs is the responsibility of Harrisburg University of Science andTechnologys management. Our responsibility is to express an opinion on Harrisburg University of Scienceand Technologys compliance based on our audit.

We conducted our audit of compliance in accordance with auditing standards generallyaccepted in the United States of America; the standards applicable to financial audits contained inGovernment Auditing Standards, issued by the Comptroller General of the United States; and OMB CircularA-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 whethernoncompliance with the types of compliance requirements referred to above that could have a direct andmaterial effect on a major federal program occurred. An audit includes examining, on a test basis, evidenceabout Harrisburg University of Science and Technologys compliance with those requirements andperforming such other procedures as we considered necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinion. Our audit does not provide a legal determination of HarrisburgUniversity of Science and Technologys compliance with those requirements.

As described in item 2012-1 in the accompanying schedule of findings and questioned costs,Harrisburg University of Science and Technology did not comply with requirements regarding financialresponsibility that are applicable to its Student Financial Aid Cluster. Compliance with such requirements isnecessary, in our opinion, for Harrisburg University of Science and Technology to comply with the

requirements applicable to that program.

In our opinion, except for the noncompliance described in the preceding paragraph,Harrisburg University of Science and Technology complied, in all material respects, with the compliancerequirements referred to above that could have a direct and material effect on each of its major federalprograms for the year ended June 30, 2012.


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To the Board of Trustees ofHarrisburg University of Science and Technology

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Internal Control Over Compliance

Management of Harrisburg University of Science and Technology is responsible forestablishing and maintaining effective internal control over compliance with the requirements of laws,regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, weconsidered Harrisburg University of Science and Technologys internal control over compliance with therequirements that could have a direct and material effect on a major federal program to determine the auditingprocedures for the purpose of expressing our opinion on compliance and to test and report on internal controlover compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinionon the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the

effectiveness of Harrisburg University of Science and Technologys internal control over compliance.

A deficiency in internal control over compliance exists when the design or operation of acontrol over compliance does not allow management or employees, in the normal course of performing theirassigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement ofa 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 possibilitythat material noncompliance with a type of compliance requirement of a federal program will not beprevented, or detected and corrected, on a timely basis.

Our consideration of internal control over compliance was for the limited purpose describedin the first paragraph of this section and was not designed to identify all deficiencies in internal control overcompliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify

any deficiencies in internal control over compliance that we consider to be material weaknesses, as definedabove.

Harrisburg University of Science and Technology's response to the finding identified in ouraudit is described in the accompanying schedule of findings and questioned costs. We did not auditHarrisburg University of Science and Technology's response and, accordingly, we express no opinion on theresponse.

The purpose of this report is solely to describe the scope of our testing of compliance with thetypes of compliance requirements to each of Harrisburg University of Science and Technology's majorprograms and our testing of internal control over compliance and the results of our testing, and to provide anopinion on Harrisburg University of Science and Technology's compliance but not to provide an opinion onthe effectiveness of Harrisburg University of Science and Technology's internal control over compliance.This report is an integral part of an audit performed in accordance with Government Auditing Standards inconsidering Harrisburg University of Science and Technology's compliance with requirements applicable toeach major program and its internal control over compliance. Accordingly, this report is not suitable for anyother purpose.



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SCHEDULE OF FINDINGS AND QUESTIONED COSTS

For the Year Ended June 30, 2012

A. Summary of Auditors Results:

Financial Statements:(i) Type of auditors report issued: Unqualified(ii) Internal control over financial reporting:

Material weakness(es) identified? yes X noSignificant deficiencies identified not considered None

to be material weaknesses? yes X reported

(iii) Noncompliance material to financial statements noted? yes X noFederal Awards:

(iv) Internal control over major programs:Material weakness(es) identified? yes X noSignificant deficiencies identified that are not Noneconsidered to be material weaknesses? yes X reported

(v) Type of auditors report issued on compliance for majorprograms: Qualified

(vi) Any audit findings disclosed that are required to bereported in accordance with Circular A-133,Section .510(a) X yes no

(vii) Identification of major programs:CFDA Number(s) Name of Federal Program or Cluster

Title IV Student Financial Aid Cluster:84.007 FSEOG Program84.033 FWS Program84.063 Pell Grant Program84.268 Federal Direct Student Loans

94.005 Corporation for National and Community Service

(viii) Dollar threshold used to distinguish between Type Aand Type B programs: $ 300,000

(ix)Auditee qualified as low-risk auditee? yes X no


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SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED)For the Year Ended June 30, 2012

B. Findings - Financial Statements Audit

None

C. Findings and Questioned Costs - Major Federal Award Programs Audit

Finding 2012-1: In order to participate in the Title IV Student Financial Assistance programs, aninstitution must meet specific standards of financial responsibility as defined in theCode of Federal Regulations (CFR) Part 668. One of these standards under Section668.171 is to maintain a composite score of at least 1.5 out of a possible 3.0 for thecombination of Equity, Primary Reserve, and Net Income ratios, as defined in theCFR. The Universitys scores for the years ended June 30, 2012, 2011 and 2010were (0.5), 1.2 and 1.4, respectively. As a result of not maintaining the minimumscore, the University is required to comply with the conditions of the ZoneAlternative, which the University has done.

Another general standard under Section 668.171 is that the institution remain currentin its debt payments. While the University has made all required debt payments ontime through the fiscal year ended June 30, 2012, the CFR states that an institutionis not current in its debt payments if it is in violation of any existing loan agreementat its fiscal year end, as disclosed in a note to its audited financial statements or auditopinion. Note 4 of the Universitys audited financial statements for the fiscal yearended June 30, 2012 includes a disclosure that the University is not in compliancewith the Rate Covenant or the Liquidity Covenant for its Bonds Payable. In addition,the University did not make its required interest payment of $1,806,750 that was dueon September 1, 2012.

The University contacted the Department of Education in July and again in January

2013 to make the Department aware of this issue and will need to work with theDepartment to assure that the University continues to be eligible to participate in theTitle IV Student Assistance Program.

There are no questioned costs as a result of this finding.

Auditee Response: The University contacted the Department of Education regarding our compositescore. The audited financial statements will be submitted to the Department ofEducation by the March 31, 2013 deadline. Once reviewed, the Department ofEducation will provide HU with guidance relating to the University's participation inthe Title IV program. Harrisburg University understands the rules surrounding theregulation and will comply with the Department's determination.


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REPORT ON STATUS OF PRIOR YEARS COMPLIANCE FINDINGSAND INTERNAL CONTROL WEAKNESSES MAJOR FEDERAL PROGRAMS

Year Ended June 30, 2012

2011-1

Condition: The University did not comply with minimum standards of financialresponsibility as defined in CFR 668.171 to maintain a minimumcomposite score of at least 1.5 out of a possible 3.0 for the combination ofEquity, Primary Reserve, and Net Income ratios. The Universitys scorefor the year ended June 30, 2011 was 1.2.

In addition, the University did not comply with the general standard underSection 668.171 that the institution remains current in its debt paymentsdue to noncompliance with the Rate Covenant and the Liquidity Covenant

for its Bonds Payable.

Status: The University complied with the Department of Education requirement toparticipate in the Zone Alternative program as defined in its letter to theUniversity dated June 8, 2012.

As of June 30, 2012, the condition noted above still exists. Refer to theschedule of findings and questioned costs.

Harrisburg University 2012 audit

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