PITZER COLLEGE REPORT ON AUDITED FINANCIAL STATEMENTS. For the Years Ended June 30, 2006 and 2005

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3 REPORT ON AUDITED FINANCIAL STATEMENTS For the Years Ended

4 2006 and 2005 CONTENTS Page Report of Independent Auditors 1 Statements of Financial Position 2 Statements of Activities 3 Statements of Cash Flows 5 Notes to Financial Statements 7

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6 REPORT OF INDEPENDENT AUDITORS The Board of Trustees Pitzer College Claremont, California In our opinion, the accompanying statements of financial position and the related statements of activities and cash flows present fairly, in all material respects, the financial position of Pitzer College (the College ) at, 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. These financial statements are the responsibility of the College's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. September 30,

7 STATEMENTS OF FINANCIAL POSITION At (in thousands) Assets: Cash $ 1,201 $ 347 Short term investments (Note 5) 9,151 7,782 Prepaid expenses and deposits Accounts receivable, net (Note 3) 2,274 1,900 Notes receivable, net (Note 3) 3,811 3,907 Contributions receivable, net (Note 4) 5,968 7,892 Beneficial interest in trusts 2,183 - Investments (Note 5) 122, ,174 Plant facilities, net (Note 6) 25,650 19,426 Total assets $ 173,834 $ 144,070 Liabilities: Accounts payable and accrued liabilities $ 4,678 $ 3,328 Liability for early retirement plan (Note 8) 1,677 1,625 Deposits and deferred revenues 1,835 1,371 Life income and annuities payable (Note 9) Capital lease obligation (Note 7) Bonds payable (Note 10) 46,128 46,675 Government advances for student loans 3,100 3,071 Asset retirement obligation (Note 6) 1,005 - Total liabilities 58,792 56,454 Net assets (Note 11) Unrestricted 80,103 53,409 Temporarily restricted 8,159 9,714 Permanently restricted 26,780 24,493 Total net assets 115,042 87,616 Total liabilities and net assets $173,834 $144,070 The accompanying notes are an integral part of these financial statements. 2

8 STATEMENT OF ACTIVITIES For the Year Ended June 30, 2006 (in thousands) Unrestricted Temporarily Restricted Permanently Restricted Revenues: Net student revenues (Note 12) $31,093 $ - $ - $31,093 Contributions 4,975 1,188 2,146 8,309 Grants and contracts Spending policy income (Note 5) 2, ,837 Other investment income (Note 5) 2, ,057 Summer conference revenue Other revenues Release of temporarily restricted net assets 2,780 (2,780) - - Total revenues 45,727 (1,569) 2,194 46,352 Expenses: Academic program 18, ,388 Co-curricular program 9, ,634 Public service Marketing 4, ,009 General and administrative 3, ,656 Total expenses 36, ,609 Revenues over (under) expenses 9,118 (1,569) 2,194 9,743 Other changes in net assets: Realized and unrealized gains (losses), net of spending allocation (Note 5) 10,380 7,876 (1) 18,255 Matured annuity and life income agreements 7,790 (8,038) Actuarial adjustment Transfers to other Claremont Colleges Staff retirement plan comprehensive gain Transfers and redesignations between net asset categories (8) 167 (159) - Change in net assets before cumulative effect of change in accounting policy 27,574 (1,555) 2,287 28,306 Cumulative effect of change in accounting policy (880) - - (880) Change in net assets after cumulative effect of change in accounting policy 26,694 (1,555) 2,287 27,426 Net assets beginning of year 53,409 9,714 24,493 87,616 Net assets end of year $80,103 $8,159 $26,780 $115,042 The accompanying notes are an integral part of these financial statements. Total 3

9 STATEMENT OF ACTIVITIES For the Year Ended June 30, 2005 (in thousands) Unrestricted Temporarily Restricted Permanently Restricted Total Revenues: Net student revenues (Note 12) $28,217 $ - $ - $28,217 Contributions 2,979 2, ,729 Grants and contracts Spending policy income (Note 5) 2, ,636 Other investment income (Note 5) Summer conference revenue Other revenues Release of temporarily restricted net assets 2,416 (2,416) - - Total revenues 38,708 (48) ,076 Expenses: Academic program 17, ,766 Co-curricular program 7, ,610 Public service Marketing 3, ,810 General and administrative 3, ,876 Total expenses 33, ,714 Revenues over (under) expenses 4,994 (48) 416 5,362 Other changes in net assets: Realized and unrealized gains (losses), net of spending allocation (Note 5) 3,589 (13) (3) 3,573 Actuarial adjustment - (4) (11) (15) Transfers to other Claremont Colleges (165) - - (165) Staff retirement plan comprehensive loss (30) - - (30) Transfers and redesignations between net asset categories 677 1,390 (2,067) - Change in net assets 9,065 1,325 (1,665) 8,725 Net assets beginning of year 44,344 8,389 26,158 78,891 Net assets end of year $53,409 $9,714 $24,493 $87,616 The accompanying notes are an integral part of these financial statements. 4

10 STATEMENTS OF CASH FLOWS For the Years Ended (in thousands) Cash flows from operating activities: Student fees, net of financial aid $31,476 $28,035 Gift, grant and contract revenue 4,066 3,559 Investment income 3,547 1,115 Other revenues 1,080 1,847 Payments to employees and suppliers (34,163) (32,266) Net cash provided by operating activities 6,006 2,290 Cash flows from investing activities: Purchases of plant facilities (7,139) (1,456) Proceeds from sale of investments 48,211 51,075 Purchases of investments (46,589) (88,760) Loans made to students and employees (756) (796) Collections of student and employee loans Net cash used in investing activities (5,422) (39,114) Cash flows from financing activities: Payments to life income beneficiaries (32) (33) Investment income and gains on life income investments 9 10 Proceeds from borrowings - 36,388 Principal payments on bonds and capital lease (661) (619) Contributions restricted for endowment Contributions restricted for plant expenditures Change in government advances for student loans Net cash provided by financing activities ,744 Net increase (decrease) in cash 854 (80) Cash at beginning of year Cash at end of year $ 1,201 $ 347 5

11 STATEMENTS OF CASH FLOWS, Continued For the Years Ended (in thousands) Reconciliation of change in net assets to cash flows from operating activities: Change in net assets $27,426 $8,725 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Depreciation expense 1,096 1,003 Amortization of bond discount and issuance costs Comprehensive (gain) loss on staff retirement plan (275) 30 Realized gains on sale of investments (14,438) (3,158) Unrealized gains on investments (5,400) (1,901) Non-cash gifts (3,929) (1,121) Adjustment of actuarial liability for life income agreements (14) 15 (Decrease) increase in contributions receivable, net 1,924 (794) Increase in beneficial interest in trusts (2,183) - Increase in accounts receivable, net (375) (244) Decrease (increase) in prepaid expenses and deposits 9 (158) Increase in accounts payable and accrued liabilities 1, Increase in liability for early retirement plan Increase in deposits and deferred revenues Contributions for long term investments (923) (887) Defined benefit plan contributions under (over) expense 1 (35) Effect of change in accounting principle Net cash provided by operating activities $ 6,006 $ 2,290 Supplemental disclosure of cash flows: Interest paid $ 2,232 $ 670 Capital lease obligation incurred $ 100 $ - The accompanying notes are an integral part of these financial statements. 6

12 NOTES TO FINANCIAL STATEMENTS 1. Organization: Founded in 1963, Pitzer College (the College or Pitzer ) is an independent, coeducational, residential liberal arts and sciences college. The College is part of the unique educational environment known as The Claremont Colleges. Within The Claremont College s consortium, Pitzer s educational philosophy is singular. Blending classroom instruction with fieldwork, Pitzer engages a student's mind, heart and spirit by integrating educational resources on campus, abroad and in the local community. Pitzer offers a curriculum that spans 40 major fields and focuses on interdisciplinary, intercultural education with an emphasis on social responsibility and community service. The College is a nonprofit corporation exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and corresponding California provisions. The objective of the College is to maintain and conduct a nonprofit educational institution. The primary purpose of accounting and reporting is the recording of resources received and applied rather than the determination of net income. 2. Summary of Significant Accounting Policies: The following accounting policies of the College are in accordance with those generally accepted for colleges and universities: Basis of Presentation: The accompanying financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America in accordance with the American Institute of Certified Public Accountants Audit and Accounting Guide, Not-for-Profit Organizations. Consolidated Financial Statements: The activities of Pitzer College Costa Rica are consolidated in the College s financial statements, as required by Statement of Financial Position 94-3, Reporting of Related Entities by Not-for-Profit Organizations, issued by the American Institute of Certified Public Accountants. Pitzer College Costa Rica was formed to hold real property in Costa Rica for the benefit of the education curriculum of the College and in support of the Firestone Center for Restoration Ecology. 7

13 2. Summary of Significant Accounting Policies, Continued: Net Asset Categories: The accompanying financial statements present information regarding the College s financial position and activities according to the following net asset categories: Unrestricted Net Assets: Unrestricted net assets include all support that is not subject to donor-imposed restrictions. Funds functioning as endowment include gains earned on pooled investments that are available for appropriation under the spending policy adopted by the Board of Trustees (Note 2, Management of Pooled Investments). Plant facilities and other net assets include all long-lived assets, net of related long-term debt, and other support. Temporarily Restricted Net Assets: Temporarily restricted net assets include gifts of cash and securities, and income from endowments that are subject to donor-imposed restrictions that either lapse or can be satisfied. When a donor restriction expires, temporarily restricted net assets are released or reclassified to unrestricted net assets (Note 2, Expiration of Donor-Imposed Restrictions). Permanently Restricted Net Assets: Permanently restricted net assets include pledges, gifts, and income that are subject to donor-imposed restrictions that they be maintained permanently by the College. The donors of endowment funds generally allow the College to use the income and a portion of the gains earned on these assets for general or specific purposes under the College s spending policy. Tuition and Fees: Student tuition and fees are recorded as revenues in the year during which the majority of the related academic services are rendered. Grants and Contracts: Revenues from grants and contracts are reported as increases in unrestricted net assets, as allowable expenditures under such agreements are incurred. 8

14 2. Summary of Significant Accounting Policies, Continued: Investment Income: Investment income and gains and losses on investments are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation. Contributions: Contributions, including unconditional promises to give, are recognized as revenue in the period received and are reported as increases in the appropriate category of net assets. Contributions where donor restrictions are met within the same fiscal year as the contribution are included in unrestricted net assets. Conditional promises to give 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 value. Contributions to be received are discounted at an appropriate discount rate. Expiration of Donor-Imposed Restrictions: The expiration of a donor-imposed restriction on a contribution or on endowment income is recognized in the period in which the restriction substantially expires. At that time, the related resources are reclassified to unrestricted net assets. A restriction expires when the stipulated time has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both. The College follows the policy of reporting donorimposed restricted contribution and endowment income whose restrictions are met in the same period as received as unrestricted support. It is also the College s policy to release the restrictions on contributions of cash or other assets received for the acquisitions of long-lived assets when the long-lived assets are placed into service. 9

15 2. Summary of Significant Accounting Policies, Continued: Allocation of Certain Expenses: Expenses are reported as decreases in unrestricted net assets. The Statements of Activities present expenses by five functional categories. Academic Program includes expenses for instruction and related academic support departments such as research, libraries, the Dean of Faculty and Registrar Offices. Co-curricular Program includes expenses associated with the residential life operation of the College and related support departments such as Dean of Students Office and Career Planning. Public Service includes conference activities. Marketing expenses for revenue development for the College include expenses such as Admission/Financial Aid, Public Relations, Alumni Relations and the Advancement Office. General and Administrative includes expenses such as administrative computing, planning, institutional research, human resources, liability insurance, legal and audit fees, and the President and Treasurer s Offices. Depreciation and operation and maintenance of plant expense is allocated to functional categories based on building square footage dedicated to that specific function. Interest expense is allocated based on the use of the related borrowings. Cash and Cash Equivalents: For the purposes of reporting cash flows, cash includes demand deposit bank accounts. Resources invested in money market funds are classified as cash equivalents, except that any such investments managed as part of the investment pool are classified as investments. Investments: Where permitted by law, the College pools investments for management purposes. The remainder of investments are managed as separate investments. Marketable securities are reported at fair market value, except for real estate investments, trust deed loans, and certain other miscellaneous assets, which are stated at cost. The limited partnerships are carried at estimated fair value provided by the management of the limited partnerships at the most current date available at year end, and are adjusted by cash receipts, cash disbursements, and securities distributions through. The College reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the limited partnerships. Because limited partnerships are not readily marketable, the estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market for the investments existed. 10

16 2. Summary of Significant Accounting Policies, Continued: Investments, continued: The cost of securities sold is determined by the average cost method and is used to compute realized gains and losses. Unrealized gains and losses reflect the changes in the market values of investments from the prior year. The date of record for investments is the trade date. Management of Pooled Investments: The College follows an investment policy which anticipates a greater long-range return through investing for capital appreciation and accepts lower current yields from dividends and interest. In order to offset the effect of lower current yields for current operations, the Board of Trustees has adopted a spending policy for pooled investments. The amount of investment return available for current operations is determined by applying 4.7% to a twelve-quarter average market value of pooled investments, plus $391,000 of annual debt service costs through If the ordinary income of pooled investments is insufficient to provide the full amount of investment return specified, the balance may be appropriated from realized gains of the pooled investments. Cumulative net realized gains and transfers of ordinary income in excess of the spending policy ( cumulative gains ) are recorded in unrestricted net assets and are available for appropriation under the College s spending policy. At, these cumulative gains totaled approximately $18,588,000 and $13,682,000, respectively. Plant Facilities: Plant facilities consist of property, plant and equipment which are stated at cost, representing purchase price or fair market value at the date of the gift, less accumulated depreciation computed on a straight-line basis over the estimated useful lives of buildings, permanent improvements and equipment (generally 7 years for equipment and permanent improvements and 40 years for buildings). Assets are retired at their cost less accummulated depreciation at the time they are sold, impaired, or no longer in use. Each year the College funds its annual depreciation charge through current revenues. Assets Whose Use is Limited: Assets whose use is limited include assets maintained by a trustee in accordance with the CEFA Series 1997, 1999 and 2005 bond agreements. See Note 19 for additional information. 11

17 2. Summary of Significant Accounting Policies, Continued: Life Income Contracts: The College has legal title to annuity and life income contracts subject to life interests of beneficiaries. No significant financial benefit is now being or can be realized until the contractual obligations are released. However, the cost of managing these funds is included in unrestricted expenditures. The College uses the actuarial method of recording annuity and life income contracts. Under this method, the asset is recorded at fair value when a gift is received. The present value of the aggregate annuity payable is recorded as a liability, based upon life expectancy tables, and the remainder is recorded as a contribution in the appropriate net assets category. Investment income and gains are credited, and beneficiary payments and investment losses are charged, to the liability accounts, with periodic adjustments made between the liability and the net assets to record actuarial gains or losses. The actual liability is based on the present value of future payments discounted at rates ranging from 6.0% to 7.5% and over estimated lives according to 1994 Group Annuity Mortality Joint- Life UnisexTables. The College is subject to additional legally mandated annuity reserve requirements by the State of California on its California gift annuity contracts. On December 2, 1998 the Insurance Commission Chief Counsel granted the College permission to invest its reserves for California annuities pursuant to Insurance Code Section (b). This approval is subject to the following conditions: (1) maintain a nationally recognized statistical rating organization bond rating of A or better and (2) maintain an endowment to gift annuity ratio of at least 10:1. As of the College has elected to maintain its reserves in a separate investment account. Fair Value of Financial Instruments: A financial instrument is defined as a contractual obligation that ultimately ends with the delivery of cash or an ownership interest in an entity. Disclosures included in these notes regarding the fair value of financial instruments have been derived using external market sources, estimates using present value, or other valuation techniques. A determination of the fair value of notes receivables, which are primarily federally sponsored student loans with U.S. government mandated interest rates and repayment terms and subject to significant restrictions as to their transfer or disposition, is not practical because such a determination cannot be made without incurring excessive costs. 12

18 2. Summary of Significant Accounting Policies, Continued: 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 and 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. Redesignations: Certain amounts previously received from donors have been transferred among net assets categories due to changes in donor designations. Accounting Change: The College implemented Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No 143 (FIN 47) as of June 30, FIN 47 clarified that conditional asset obligations meet the definition of liabilities and should be recognized when incurred if their fair values can be reasonably estimated. Upon implementation of FIN 47, the College recorded a cumulative effect of change in accounting principle of $880,000. Pro forma effects of retroactively applying FIN 47 (as if it had been applied during all years reported) are as follows: pro forma change in net assets for the year ended June 30, 2005 was $8,679,

19 3. Accounts and Notes Receivable, net: Accounts receivable at are as follows (in thousands): Student accounts $ 680 $ 469 Federal grants and contracts Investment receivables Other Claremont Colleges Other ,377 1,961 Less allowance for doubtful accounts (103) (61) Net accounts receivable $2,274 $1,900 Notes receivable to the College at were approximately $3,811,000 and $3,907,000, that consists primarily of loans receivable from students of $4,067,000 and $4,108,000, less an allowance for doubtful loans of $342,000 and $289,000, respectively. 4. Contributions Receivable, net: Unconditional promises to give are included in the financial statements as contributions receivable and revenues of the appropriate net asset category. Promises to give are recorded after discounting to the present value of future cash flows at rates ranging from 1.66% to 5.15%. Unconditional promises to give at are expected to be realized as follows (in thousands): Within one year $2,052 $2,127 Between one year and five years 4,356 5,467 More than five years - 1,000 6,408 8,594 Less discount ( 440) ( 702) Net contributions receivable $5,968 $7,892 14

20 4. Contributions Receivable, net Continued: Contributions receivable at are intended for the following uses (in thousands): Endowment $ 120 $ 164 Plant facilities Other 5,843 7,480 $5,968 $7,892 The College has received a conditional promise to give totaling approximately $300,000. This promise to give is contingent upon receiving matching funds from other sources. The purpose of this promise is for the establishment of a permanent professorship endowment. As this amount is conditional, it is not recognized until the conditions are met. 5. Investments: Where permitted by gift agreement and/or applicable government regulations, investments are pooled. Pooled investments and allocation of pooled investment income are accounted for on a unit value method. The following is a summary of data pertaining to this method for the years ended : Unit market value at end of year $ $ Net ordinary investment income per weighted average unit $5.05 $4.98 Units owned: Unrestricted net assets: Funds functioning as endowment 123, ,811 Permanently restricted net assets: Endowment 140, ,188 Total units 264, ,999 Weighted average units 248, ,991 15

21 5. Investments, Continued: Investment income for the fiscal years ended related to College investments, net of management and custody fees of $175,000 and $172,000, respectively, is as follows (in thousands): Pooled investments income $ 1,253 $1,150 Pooled investments gain appropriated 1,584 1,486 Total spending policy income and gains 2,837 2,636 Other investment income 2, Less amounts allocated to life income contracts and agreements (9) (10) Total other investment income 2, Realized and unrealized gains (losses) net of pooled investment gains appropriated 18,255 3,573 Total investment returns $23,149 $6,702 16

22 5. Investments, Continued: It is the College's policy to invest and maintain a diversified investment portfolio. The following schedule summarizes the assets in pooled investments and the assets held as short term and long-term separate investments at. The carrying value of investments are estimates based on the quoted market prices. The carrying values are considered fair values. Pooled investments: Carrying Carrying Cost Value Cost Value ($000) ($000) ($000) ($000) Cash equivalents $ 4,195 $ 4,195 $ 2,477 $ 2,477 Mutual funds 2,374 2,503 2,374 2,259 Fixed income funds 9,707 9,174 8,640 8,640 Equity index funds 32,565 32,073 27,829 28,293 Common stocks 13,477 18,713 11,404 16,450 Limited partnerships real estate 1,520 1,843 1,214 1,366 Total pooled investments $63,838 $68,501 $53,938 $59,485 Separate investments: Endowment and funds functioning as endowment: Cash equivalents $ 944 $ 944 $391 $391 U.S. Government securities Fixed Income Common stocks and other Real property 8,000 14, ,464 15, Advances from other net assets - - (1) (1) Total endowment and funds functioning as endowment $ 9,464 $15,798 $816 $819 17

23 5. Investments, Continued: Carrying Carrying Cost Value Cost Value ($000) ($000) ($000) ($000) Annuity and life income contracts and agreements: Cash equivalents $ 40 $ 40 $ 15 $ 15 U.S. Government securities Common stocks Real property - - * * Other assets - - * * Total life income and annuity contracts $362 $395 $554 $578 Plant: Cash equivalents $ 422 $ 422 $ 396 $ 396 Fixed income index funds 1,566 1,478 1,490 1,490 Equity index funds 1,954 1,610 1,869 1,484 Assets whose use is limited 33,657 33,657 * 36,897 36,897 * Total plant $37,599 $37,167 $40,652 $40,267 Other: Short term investments - operating $9,151 $9,151 $7,782 $7,782 Cash equivalents Weingart advances 1,050 1,050 1,008 1,008 Common stocks and other * * Total other 10,253 10,253 8,806 8,806 Advances to other net assets Total other $10,253 $10,253 $8,807 $8,807 * Cost 18

24 5. Investments, Continued: Carrying Carrying Cost Value Cost Value ($000) ($000) ($000) ($000) By investment category: Pooled investments $ 63,838 $ 68,501 $ 53,938 $ 59,485 Separately invested 57,678 63,613 50,829 50,471 Total by investment category $121,516 $132,114 $104,767 $109,956 By asset type: Cash equivalents $ 15,802 $ 15,802 $ 12,069 $ 12,069 Mutual funds 2,374 2,503 2,374 2,259 Fixed income index funds 11,273 10,652 10,531 10,532 Equity index funds 34,519 33,683 29,698 29,777 U.S. Government securities Common stocks 13,719 18,993 11,690 16,760 Real property 8,000 14, * Limited partnership real estate 1,520 1,843 1,214 1,366 Assets whose use is limited 33,657 33,657 * 36,897 36,897 * Other assets * * Total by asset type $121,516 $132,114 $104,767 $109,956 By category: Endowment and funds functioning as endowment: Pooled $ 63,838 $ 68,501 $ 53,938 $ 59,485 Separately invested 9,464 15, Total endowment and funds functioning as endowment $ 73,302 $ 84,299 $ 54,754 $ 60,304 Annuity and life income contracts $ 362 $ 395 $ 554 $ 578 Plant $ 37,599 $ 37,167 $ 40,652 $ 40,267 Other $ 10,253 $ 10,253 $ 8,807 $ 8,807 * Cost Total by category $121,516 $132,114 $104,767 $109,956 19

25 6. Plant Facilities, net: Plant facilities are recorded at cost or estimated fair value at date of donation, and at June 30, 2006 and 2005, consist of the following (in thousands): Land and land improvements $ 4,675 $ 3,319 Buildings 31,137 30,157 Equipment 4,727 4,390 Equipment under capital lease Construction in progress 5,977 1,318 46,884 39,452 Less accumulated depreciation (21,234) (20,026) Net plant facilities $25,650 $19,426 The College has recorded asset retirement obligations under Statement of Financial Accounting Standards No. 143 related to certain fixed assets, primarily for disposal of regulated materials upon eventual retirement of the assets. The following schedule summarizes asset retirement obligation activity for the years ended : Obligations incurred $ - $ - Obligations settled - - Accretion expense Revisions in estimated cash flows Beginning balance Ending balance $1,005 $960 20

26 7. Capital Lease Obligation: In October of 2005 the College entered into a capital lease commitment to finance the acquisition of computer equipment. The corresponding obligation is due in monthly installments totaling approximately $2, through September Interest is payable monthly at a rate of 4.76% The annual lease obligation at June 30, 2006 is as follows (in thousands): Fiscal Year Ending June 30, 2007 $ Total payments 90 Less interest (7) Total capital lease obligation $83 21

27 8. Early Retirement Plan: The College maintains an Early Retirement Plan ( the Plan ) that enables faculty with at least 20 years of service to elect early retirement. For those faculty members that have entered into a contractual agreement with the College under the Plan, the College is obligated to continue to make salary payments, as well as normal retirement contributions and other employment benefit costs as stipulated in each agreement. Plan assets are combined with the general assets of the College. Certain financial information pertaining to the Plan as of is summarized below (in thousands): Accumulated post retirement benefit obligation $(2,019) $(2,000) Unrecognized transition obligation Unrecognized gain (151) (173) Accrued benefit cost $(1,677) $(1,625) Service cost $ 68 $ 64 Interest cost Amortization of transition obligation Net plan cost $236 $230 The discount rate, rate of increase in medical costs and rate of increase in future compensation levels used in determining the actuarial present value of the benefit obligation were 5.75%, 6.50% and 4.00% at June 30, 2006 and June 30, Life Income and Annuities Payable: Life income and annuities payable of approximately $286,000 and $311,000 at, respectively, represent actuarially determined liabilities for contractual obligations under gift annuities and unitrusts. 22

28 10. Bonds Payable: At, bonds payable are comprised of the following (in thousands): Bonds issued through California Educational Facilities Authority ( CEFA ): Series 1997 A $ 1,640 $ 1,890 Series 1999 A 8,395 8,715 Series 2005 A 16,085 16,085 Series 2005 B 20,575 20,575 46,695 47,265 Less unamortized discount and issuance costs (567) (590) Total bonds payable $46,128 $46,675 The CEFA Series 1997 A bonds are due in Annual installments range from $160,000 in 2011 to $305,000 in Interest is payable semiannually at rates ranging from 5.25% to 5.45%. Bonds maturing after April 1, 2007 with principal balances totaling $1,640,000 are subject to mandatory redemption prices ranging from 102% to 100% of the outstanding principal balance. The CEFA Series 1999 A bonds are due in Annual installments range from $335,000 in 2007 to $710,000 in Interest is payable semiannually at rates ranging from 4.15% to 5.10%. Bonds maturing after April 1, 2009 with principal balances totaling $7,355,000 are subject to mandatory redemption prices ranging from 101% to 100% of the outstanding principal balance. The CEFA Series 2005 A bonds were issued in April The bond proceeds will fund the acquisition, construction, rehabilitation, remodeling, renovation and equipping of certain educational facilities. The CEFA Series 2005 A bonds are due in Annual installments range from $110,000 in 2014 to $1,580,000 in Interest is payable semiannually at 5.00%. Bonds maturing after April 1, 2015 with principal balances totaling $15,860,000 are subject to redemption at the outstanding principal balance plus accrued interest. 23

29 10. Bonds Payable, Continued: The CEFA Series 2005 B bonds were issued in April The bond proceeds will fund the acquisition, construction, rehabilitation, remodeling, renovation and equipping of certain educational facilities. The CEFA Series 2005 B bonds are due in Annual installments range from $1,835,000 in 2036 to $2,300,000 in Interest is payable monthly at a variable rate determined on a weekly basis. Interest rates ranged from 1.93% to 3.93% and 2.07% to 3.00% during the periods ended, respectively. Bonds maturing after April 1, 2006 with principal balances totaling $20,575,000 are subject to mandatory redemption prices ranging from 102% to 100% of the outstanding principal balance. The CEFA Series 1997, 1999 and 2005A bonds are not collaterallized. The Series 2005 B bonds are guaranteed by an irrevocable letter of credit in the amount of $20,906,455 which expires in 2010 or earlier under certain conditions. Total interest expense was approximately $2,224,000 and $670,000 for the years ended, respectively. The maturity of the bonds payable at June 30, 2006 is as follows (in thousands): Fiscal Year Ending June 30, 24 Principal Amount 2007 $ Thereafter 43,580 $46,695 The CEFA Series 1997, 1999 and 2005 bond agreements contain various restrictive covenants which include the maintenance of certain financial ratios, as defined in the agreements. The College has a $1,500,000 line of credit with a bank. Any borrowings on the line would bear interest at the bank s prime rate (8.25% at June 30, 2006). There were no borrowings outstanding on the line at. The estimated fair value of the College's notes and bonds payable at June 30, 2006 and 2005 was approximately $46,723,000 and $48,167,000, respectively. This estimated fair value was based upon the discounted amount of future cash outflows at current rates available to the College for debt of the same remaining maturities.

30 11. Net Assets: At, net assets consists of the following (in thousands): Unrestricted: Available for operations $ 586 $ 547 For designated purposes Funds functioning as endowment 62,311 38,743 Plant facilities 16,867 14,042 Provision for defined benefit plan comprehensive loss (202) (477) Total unrestricted $80,103 $53,409 Temporarily restricted: Plant facilities $ 1,599 $ 1,091 Other 6,560 8,623 Total temporarily restricted $ 8,159 $ 9,714 Permanently restricted: Student loans $ 2,535 $ 2,510 Life income contracts and agreements Endowment 24,145 21,725 Total permanently restricted $26,780 $24,493 There were no deficiences at June 30, Deficiencies of $123,000 at June 30, 2005, for donor-restricted endowment funds, resulting from declines in market value from the original gift amount, have been recorded in unrestricted net assets. The June 30, 2005 deficiency reversed as the market value of the portfolio increased. The allocation of deficiencies is recorded in accordance with Statement of Financial Accounting Standards No.124, Accounting for Certain Investments Held by Not-For-Profit Organizations. 25

31 12. Net Student Revenues: Student revenues for the years ended consist of the following (in thousands): Tuition: Tuition - regular students $24,327 $22,243 Tuition - new resource students 1,213 1,098 Campus activities fees Gross tuition revenue 26,072 23,826 Less: College funded grant aid (7,498) (6,880) Tuition revenue net of College funded grant aid 18,574 16,946 Federally funded grant aid (174) (183) Tuition revenue net of grant aid 18,400 16,763 Other Student Revenues: External studies programs 3,671 3,326 Room fees 3,530 3,250 Board fees 2,167 1,923 Facility fees 2,251 2,056 Summer sessions PACE program Other student fees Net student revenues $31,093 $28, General and Administrative Fund Raising Expense: Included in General and Administrative expenditures for the years ended June 30, 2006 and 2005 is approximately $1,047,000 and $1,056,000, respectively, of expenditures related to fund raising. 26

32 14. Endowment: The net assets of the College include permanent endowment and funds functioning as endowment (collectively the endowment ). Permanent endowments are subject to the restrictions of gift instruments requiring in perpetuity that the principal be invested and the income only be utilized as provided for under the California Uniform Management of Institutional Funds Act. While funds functioning as endowment have been established by the Board of Trustees to function as endowment, any portion of such funds may be expended. Changes in the College s endowment for the years ended were as follows (in thousands): Investment returns: Earned income $ 1,253 $ 1,150 Change in realized and unrealized net appreciation of investments 11,983 5,016 Net investment gain 13,236 6,166 Endowment returns used for operations (2,706) (2,636) Net investment returns 10,530 3,530 Other changes in endowed equity: Gifts 2, Transfers 13,313 1,931 Net change in endowed equity 25,988 5,865 Endowed equity, beginning of year 60,468 54,603 Endowed equity, end of year $86,456 $60,468 At, endowed equity consists of the following (in thousands): Investments $84,299 $60,304 Beneficial interest in trusts 2,037 - Contributions receivable, net of discount Total endowed equity $86,456 $60,468 27

33 15. Employee Benefit Plans: The College participates with other members of The Claremont Colleges (Note 16) in a defined contribution retirement plan which provides retirement benefits for academic employees and certain administrative personnel through the Teachers Insurance and Annuity Association, The College Retirement Equity Fund, and Fidelity and Vanguard Mutual Funds. Under this defined contribution plan, College and participant contributions are used to purchase individual annuity contracts and investments equivalent to retirement benefits earned. Vesting provisions are full and immediate. Benefits commence upon retirement, and pre-retirement survivor death benefits are provided. College contributions to the plan for the years ended totaled approximately $1,390,000 and $1,048,000, respectively. The Claremont University Consortium administers a defined benefit plan (the "Plan") covering substantially all nonacademic employees of the College, along with those of the other Claremont Colleges. The Plan is funded in accordance with Employee Retirement Income Security Act of 1974 ( ERISA ). The benefits are based on a percentage of each year s base compensation. Plan assets are invested primarily in a diversified group of equity and fixed-income securities, in an insurance company's separate and general accounts. At, the College's allocation of the net pension cost was approximately $52,000 and $157,000, respectively. The Plan was curtailed in the fiscal year ended June 30, 2004, subsequent to the Plan s measurement date. The impact of the curtailment is a reduction to the benefit obligation. Additional information on the Plan can be obtained from the annual report of the Claremont University Consortium. 16. Affiliated Institutions: Pitzer College is a member of an affiliated group of colleges known as The Claremont Colleges. Each college is a separate corporate entity governed by its own board of trustees. Claremont University Consortium, a member of this group, is the central coordinating institution which provides common student and administrative services, including certain central facilities utilized by all The Claremont Colleges. The costs of these services and facilities are shared by the members of the group. Amounts paid by the College for such services and use of facilities were approximately $2,973,000 and $2,777,000 for the years ended, respectively. 28

34 17. Related Parties: It is the policy of the College to provide full disclosure to the Board of Trustees of any Related-Party Transactions. In the opinion of management, there were no material related-party transactions which require disclosure in the financial statements other than already noted. 18. Contingencies and Committments: At June 30, 2006, the College has an investment commitment in a limited partnership of $2,000,000. Certain federal grants including financial aid which the College administers and for which it receives reimbursements are subject to audit and final acceptance by federal granting agencies. Current and prior year costs of such grants are subject to adjustment upon audit. The amount of expenditures that may be disallowed by the grantor, if any, cannot be determined at this time, although the College expects such amounts, if any, would not have a significant impact on the financial position of the College. During 2005, the College entered into a construction contract related to the construction of three residence halls. The outstanding commitment under the construction contract was approximately $26,202,000 and $25,116,000 for the years ending June 30, 2006 and 2005, respectively. Per a provision in the Costa Rica gift agreement, if the College decides, for any reason, to discontinue its educational programs on the Costa Rica property, the donor will have the first right of refusal option to repurchase the real property from the college. The donor s option to repurchase the real preoperty will expire on March 19, The College is a defendant in various legal actions incident to the conduct of its operations. The College s management does not expect that liabilities, if any, related to these legal actions would have a material effect on the College s financial position. 29

35 19. Assets Whose Use is Limited: Indenture requirements of bond financing (see Note 10, Bonds Payable ) provide for the establishment and maintenance of various accounts with trustees. The indenture terms limit the use of these funds to capital expenditures and debt service payments as outlined in the agreements. Assets whose use is limited are comprised of cash equivalents, government and corporate securities and are recorded at cost, which approximates fair value. Assets whose use is limited were approximately $33,657,000 and $36,897,000 as of, respectively. 30