ROGER WILLIAMS UNIVERSITY. Consolidated Financial Statements and Consolidating Schedules. June 30, 2006 and 2005

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1 Consolidated Financial Statements and Consolidating Schedules (With Independent Auditors Report Thereon)

2 KPMG LLP 600 Fleet Center 50 Kennedy Plaza Providence, RI The Board of Trustees Roger Williams University: Independent Auditors Report We have audited the accompanying consolidated statements of financial position of Roger Williams University (the University) as of, and the related consolidated statements of activities and cash flows for the years then ended. These consolidated financial statements are the responsibility of the University s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control over financial reporting. Accordingly, we express no such opinion. 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the University as of, and the changes in its net assets and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. As discussed in note 17 to the consolidated financial statements, the University adopted Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143, effective July 1, Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information included in Schedules I and II is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual entities. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. September 1, 2006, except for note 19, for which the date is October 4, 2006 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.

3 Consolidated Statements of Financial Position Assets Cash $ 109 1,415 Accounts and notes receivable, net (note 3) 2,697 2,572 Pledges receivable, net (note 4) 4,787 6,531 Other assets Bond issuance costs, net 3,211 3,274 Student loans receivable, net (notes 3 and 8) 2,633 2,781 Deposits with bond trustees, at fair value (notes 5 and 7) 10,793 12,660 Investments, at fair value (note 5) 90,451 84,298 Land, buildings and equipment, net (notes 6 and 7) 137, ,197 Total assets $ 252, ,209 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses $ 11,039 7,339 Accrued wages and fringe benefits 3,919 3,075 Short-term borrowings (note 7) 4,600 5,000 Deposits and deferred revenue 12,709 17,420 Postretirement benefits (note 11) Obligations under capital leases (note 7) 3, Loans and mortgages payable 5,370 5,529 Long-term liabilities 5,449 3,702 Bonds payable, net of discount (note 7) 103, ,281 Refundable advances U.S. government grants (note 8) 1,663 1,680 Total liabilities 152, ,517 Net assets: Unrestricted 84,987 67,506 Temporarily restricted (note 9) 9,787 11,025 Permanently restricted (note 10) 5,377 5,161 Total net assets 100,151 83,692 Total liabilities and net assets $ 252, ,209 See accompanying notes to consolidated financial statements. 2

4 Consolidated Statements of Activities Years ended Total Temporarily Permanently Temporarily Permanently Unrestricted restricted restricted Total Unrestricted restricted restricted Total Operating: Revenues, gains and other support: Tuition $ 104,642 94, , ,642 94,796 94,796 Less: University student aid (25,917) (24,360) (25,917) (25,917) (24,360) (24,360) Federal and state financial aid (925) (1,084) (925) (925) (1,084) (1,084) Net tuition 77,800 69,352 77,800 77,800 69,352 69,352 Student fees 5,680 4,879 5,680 5,680 4,879 4,879 Federal grants 2,692 2,477 2,692 2,692 2,477 2,477 Miscellaneous 1, ,120 1, Auxiliary enterprises 33,538 30,542 33,538 33,538 30,542 30,542 Contributions, grants and other income 2,383 1,735 2, ,383 1, ,735 Investment earnings on deposits with trustees Income on investments (note 5) 2,008 1,826 2,008 2,008 1, ,826 Net realized gains on investments (note 5) 2,167 1,701 1, ,167 1, ,701 Net assets released from restrictions (note 13) 1,911 (1,911) 1,302 (1,302) Total revenues, gains and other support 127, , ,621 (1,238) , ,346 (576) ,878 Program expenses: Instruction 58,063 52,693 58,063 58,063 52,693 52,693 Academic support 4,770 4,288 4,770 4,770 4,288 4,288 Student services 15,290 13,777 15,290 15,290 13,777 13,777 Auxiliary enterprises 24,618 21,594 24,618 24,618 21,594 21,594 Total program expenses 102,741 92, , ,741 92,352 92,352 Management and general 11,727 11,591 11,727 11,727 11,591 11,591 Total expenses 114, , , , , ,943 Change in net assets from operating activities 13,131 9,935 14,153 (1,238) ,131 10,403 (576) 108 9,935 Nonoperating: Net unrealized gains (note 5) 3,395 2,470 3,395 3,395 2, ,470 Net gain on sale of investment Change in fair value of interest rate swap 1,444 (1,131) 1,444 1,444 (1,131) (1,131) Change in net assets from nonoperating activities 5,446 1,349 5,446 5,446 1, ,349 Change in net assets before cumulative effect of accounting change 18,577 11,284 19,599 (1,238) ,577 11,406 (230) ,284 Cumulative effect of accounting change (note 17) (2,118) (2,118) (2,118) Change in net assets 16,459 11,284 17,481 (1,238) ,459 11,406 (230) ,284 Net assets at beginning of year 83,692 72,408 67,506 11,025 5,161 83,692 56,100 11,255 5,053 72,408 Net assets at end of year $ 100,151 83,692 84,987 9,787 5, ,151 67,506 11,025 5,161 83,692 See accompanying notes to consolidated financial statements. 3

5 Consolidated Statements of Cash Flows Years ended Cash flows from operating activities: Change in net assets $ 16,459 11,284 Adjustments to reconcile change in net assets to net cash provided by operating activities: Cumulative effect of accounting change 2,118 Depreciation 7,577 6,793 Amortization Change in fair value of interest rate swap (1,444) 1,131 Net realized and unrealized gains on investments (5,562) (4,171) Contributions and earnings restricted for long-term investment (441) (108) Changes in operating assets 1,838 2,706 Changes in operating liabilities 2,523 3,113 Net cash provided by operating activities 23,272 20,951 Cash flows from investing activities: Proceeds from sale of investments 35,920 31,560 Purchases of investments (36,512) (43,266) Purchases of property, plant and equipment (26,809) (18,297) Decrease in student loans receivable, net Change in deposits with bond trustees 1,867 10,288 Net cash used in investing activities (25,386) (19,566) Cash flows from financing activities: Proceeds from loan 3,700 2,700 Payments on debt (3,316) (3,891) Contributions and earnings restricted for long-term investment Change in refundable advances U.S. government grants (17) 171 Net cash provided by (used in) financing activities 808 (912) Change in cash (1,306) 473 Cash as of beginning of year 1, Cash as of end of year $ 109 1,415 Supplemental disclosure: Cash paid for interest $ 5,645 5,264 See accompanying notes to consolidated financial statements. 4

6 (1) Background of the University Roger Williams University (the University) offers a comprehensive educational program divided into two undergraduate colleges (Feinstein College of Arts & Sciences and Metropolitan College), five professional undergraduate schools (School of Architecture, Art, and Historic Preservations, Gabelli School of Business, School of Justice Studies, School of Engineering, Computing, and Construction, and School of Education) and the Ralph R. Papitto School of Law, which opened in 1993 as the University s first graduate school. Undergraduate enrollment for the fall semester during fiscal 2006 consisted of 3,741 full-time and 618 part-time students. The University also has a master s program in Criminal Justice, Education, Architecture, Public Administration, and Forensic Psychology with an enrollment of 84 full-time and 162 part-time students for the fall semester of fiscal Enrollment at the Ralph R. Papitto School of Law for the fall semester of fiscal 2006 consisted of 511 full-time and 98 part-time students. (2) Summary of Significant Accounting Policies (a) Basis of Financial Statement Presentation The accompanying consolidated financial statements are presented on the accrual basis of accounting and have been prepared to focus on the University as a whole and to present balances and transactions according to the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified as follows: Permanently restricted net assets Represent net assets subject to donor-imposed stipulations that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income and gains earned, if any, on related investments for general or specific purposes. Temporarily restricted net assets Represent net assets subject to donor-imposed stipulations that may or will be met by actions of the University and/or the passage of time. Unrestricted net assets Represent those net assets that the University may use at its discretion. The University is incorporated under the laws of the State of Rhode Island and is, therefore, subject to the provisions of the Rhode Island Uniform Management of Institutional Funds Act (the Act), as amended. Under the Act, the accumulated realized and unrealized gains related to the investment of a permanently restricted contribution may legally be appropriated for expenditure by the University to a specified limit, with a fixed amount remaining with the permanently restricted contribution in order to account for any changes in the purchasing power of the historic dollar value of the contribution, unless donor-imposed restrictions explicitly provide otherwise, thus preserving the buying power of these contributions. Accordingly, the net gains on permanently restricted contributions which contain no donor restrictions as to the use of income derived therefrom have been included in unrestricted net assets. The net gains on permanently restricted contributions which contain donor restrictions as to the use of income derived therefrom have been included in temporarily restricted net assets to the extent they are not spent pursuant to the restrictions in the same period they are earned. Only the original amount of permanently restricted contributions, plus the calculation of a portion of the 5

7 income and gains based upon the consumer price index, has been included in permanently restricted net assets. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Net unrealized and realized gains on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulations or law. Upon the expirations of temporary restrictions on net assets, that is, the donor-imposed stipulated purpose has been accomplished and or the stipulated time period has elapsed, such assets are released from restrictions and reclassified to unrestricted. Contributions, including unconditional promises to give, are recognized as revenues in the period received. Contributions and earnings subject to donor-imposed stipulations that are met in the same reporting period are reported as unrestricted revenue. Promises to give that are scheduled to be received after the consolidated statement of financial position date are shown as increases in unrestricted net assets or temporarily restricted net assets. Temporarily restricted net assets are reclassified to unrestricted net assets when the purpose or time restrictions are met. Promises to give subject to donor-imposed stipulations that the corpus be maintained permanently are shown as increases in permanently restricted 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 after one year are discounted at the appropriate rate commensurate with the risks and duration involved. Amortization of the discount is recorded as additional contribution revenue in accordance with the donor-imposed restrictions, if any. Dividends, interest, and net unrealized and realized gains (losses) on long-term investments are reported as follows: increases in permanently restricted net assets if the terms of the contributions or relevant State law require these to be added to the principal; increases (decreases) in temporarily restricted net assets if the terms of the contributions impose restrictions on the use of the income and gains; or increases (decreases) in unrestricted net assets in all other cases. (b) Principles of Consolidation The consolidated financial statements include the accounts of Roger Williams University and the Ralph R. Papitto School of Law, after elimination of significant intercompany accounts and transactions. 6

8 (c) Land, Buildings, and Equipment Land, buildings, and equipment are recorded at cost as of date of acquisition, or, in the case of contributions, fair market value as of date of the contribution. The cost of repairs and maintenance is generally charged to expense in the year incurred. Depreciation of building and equipment is recorded using the straight-line method over their estimated lives of 50 years and 7 to 20 years, respectively. As further described in note 17, effective July 1, 2005, the University adopted Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143, to account for conditional asset retirement obligations that existed as of that date. Once the University determines an obligation exists, it assesses whether or not the amount of the obligation can be reasonably estimated. If the amount of the obligation can be reasonably estimated, the University records the present value of the obligation, the corresponding cost is capitalized and the liability is accreted to fair value each reporting period until settled. (d) (e) (f) (g) Pledges Receivable Unconditional promises to give that are expected to be collected within one year are recorded at their net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of estimated future cash flows. The discounts on those amounts are computed using a risk-free interest rate applicable to the year in which the promise is expected to be received. Amortization of the discount is included in contribution revenue. Conditional promises to give are not included as revenue until such time as the conditions are substantially met. Income Tax Status The University is a tax-exempt organization as described in Section 501(c)(3) of the Internal Revenue Code and is generally exempt from income taxes pursuant to Section 501(a) of the Code. Bond Issuance Costs Bond issuance costs are capitalized and amortized over the lives of the bonds. Accumulated amortization was $936 and $802 as of, respectively. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 7

9 (h) Investments Investments are reported at fair value. Fair values of debt securities and readily marketable equity securities held directly are based on quotations from national securities exchanges. Shares in mutual funds are based on share values reported by the funds. The net increase (decrease) in realized and unrealized appreciation (depreciation) in the market value of such investments has been included in the consolidated statements of activities in the appropriate net asset classification. The University also holds shares or units in alternative investment funds involving private equity venture capital and real estate strategies. Such funds may hold securities or other financial instruments for which a ready market exists and are priced accordingly. In addition, such funds may hold assets which require the estimation of fair values in the absence of readily determinable market values. Such valuations are determined by fund managers and generally consider variables such as operating results, comparable earnings multiples, projected cash flows, recent sales prices, and other pertinent information, and may reflect discounts for the illiquid nature of certain investments held. The University 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 alternative investments. Because of the inherent uncertainty of valuation for these investments, such estimates may differ from values that may have been determined had a ready market existed, and the differences could be significant. The agreements underlying participation in such alternative investment funds may limit the University s ability to liquidate its interests in such investments for a period of time. (i) (j) Liquidity In order to provide information about liquidity, assets are sequenced according to their nearness of conversion to cash and liabilities according to the nearness of their estimated maturity. Allocations The University reports expenses by their functional classification. Accordingly, depreciation, interest, and operations and maintenance expenses have been allocated to functional classifications based upon relative expenditure levels. Fundraising costs for the years ended were $1,189 and $1,115, respectively, and are included in management and general expense in the consolidated statements of activities. (k) Operations The consolidated statements of activities report changes in net assets from operating and nonoperating activities. Operating revenues consist of those items attributable to the University s academic programs and ongoing core activities as well as investment income and realized net gains (losses) on investments. Unrealized net gains (losses) on investments, gain on sale of assets, and change in fair value of interest rate swap are reported as nonoperating items. 8

10 (l) Fair Value of Financial Instruments FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires the University to disclose fair value information about all financial instruments, whether or not recognized in the statements of financial position, for which it is practicable to estimate fair value. The University s financial instruments not carried at fair value are carried at net realizable value, which approximates fair value, in the statements of financial position. Such financial instruments consist of cash and equivalents, receivables from customers, grantors and donors, and accounts payable and accrued expenses. The fair value of the University s long-term debt was approximately $106,000 at June 30, Student loans receivable are generally subject to significant restrictions by external funders; accordingly, it is not practicable to determine the fair value of such amounts. (3) Allowances for Uncollectible Accounts and Student Loans Receivable Accounts receivable are presented net of allowances for uncollectible accounts of $1,082 and $1,363 as of, respectively. Student loans receivable are presented net of allowances for uncollectible loans of $781 and $956 as of, respectively. (4) Pledges Receivable Pledges receivable consisted of the following as of June 30: Unconditional promises expected to be collected in: Less than one year $ 1,469 1,772 One year to five years 4,207 4,956 Less discount and allowance for uncollectible pledges (889) (197) $ 4,787 6,531 Pledges receivable have been discounted at rates ranging from 1.2% to 5.07%. 9

11 (5) Investments Investments as of June 30 consisted of the following: Cost Market Cost Market Cash and equivalents $ 2,867 2,867 12,295 12,295 Fixed income 6,918 6,617 5,984 5,896 Equity 60,861 75,301 51,725 62,941 Real estate and other 1,121 1, Limited partnerships 4,139 4,443 2,450 2,449 Investments $ 75,906 90,451 72,999 84,298 Money market funds $ 3,112 3, U.S. Government agency securities 7,960 7,681 12,373 12,232 Total deposits with bond trustees $ 11,072 10,793 12,801 12,660 Total $ 86, ,244 85,800 96,958 The following summarizes total investment return for the years ended June 30: Interest and dividends $ 2,008 1,826 Net realized and unrealized gains 5,562 4,171 Earnings on deposits with bond trustees Total investment return $ 7,781 6,425 Following is a reconciliation of total investment return to amounts reported in the statements of activities for the years ended June 30: Operating - interest, dividends, realized gains and earnings on deposits with bond trustees $ 4,386 3,955 Non-operating - net unrealized gains 3,395 2,470 Total investment return $ 7,781 6,425 Total investment management and advisory fees for the years ended were $426 and $370, respectively, and are included in management and general expense in the consolidated statements of activities. 10

12 Investments by net asset class are as follows at June 30: Permanently restricted $ 5,141 4,832 Temporarily restricted 5,107 4,125 Unrestricted 90,996 88,001 Total $ 101,244 96,958 (6) Land, Buildings and Equipment The following is a summary of land, buildings and equipment as of June 30: Land $ 2,094 2,094 Buildings 114, ,645 Building and land improvements 29,541 26,112 Equipment 27,953 24,845 Furniture and fixtures 12,308 11,663 Library books 14,584 13,500 Construction in progress 14,903 7, , ,382 Less accumulated depreciation (78,808) (69,185) $ 137, ,197 The University capitalized net interest costs of $163 and $349 for the years ended, respectively. The outstanding commitments of uncompleted construction contracts approximated $1,844 as of June 30,

13 (7) Debt The University s debt obligations as of June 30 are summarized as follows: Rhode Island Health and Educational Building Corporation (RIHEBC) Bonds payable: Higher Education Facility Revenue Bonds, Series 1996, at interest rates of 5% to 5.5%, due November 15, 2024 $ 24,365 25,089 Higher Education Facility Revenue Bonds, Series 1998, at interest rates of 4.20% to 5.125% due November 15, ,647 35,666 Higher Education Facility Revenue Bonds, Series 2000, at interest rates of 4.60% to 5.50% due November 15, ,868 14,134 Higher Education Facility Revenue Bonds, Series 2003, at interest rates of 2.25% to 5.0%, due November 15, ,926 31,392 Bonds payable, net $ 103, ,281 Loans payable: Department of Education, 3%, due September 2024 $ 2,719 2,829 Slade s Ferry Bank, 5.5%, due January ,651 2,700 $ 5,370 5,529 The Series 1996 RIHEBC bonds are shown net of related discount of $665 and $701 as of June 30, 2006 and 2005, respectively. The bonds are secured by various properties and a pledge of the University s annual tuition and dormitory revenues. The Series 1998 RIHEBC bonds are shown net of related discount of $348 and $364 as of June 30, 2006 and 2005, respectively. The bonds are secured by various properties and a pledge of the University s annual tuition and dormitory revenues. The Series 2000 RIHEBC bonds are shown net of related discount of $332 and $346 as of June 30, 2006 and 2005, respectively. The bonds are secured by various properties and a pledge of the University s annual tuition and dormitory revenues. The Series 2003 RIHEBC bonds is shown net of related discount of $143 and $149 as of June 30, 2006 and 2005, respectively. The bonds are secured by various properties and a pledge of the University s annual tuition and dormitory revenues. 12

14 The University entered into a tax exempt master lease with Bank of America in December 2005 mainly for dining commons equipment and furnishings. There were $3,535 and $47 of obligations under capital leases as of, respectively. Monthly interest and principal payments were $223 and $14 for the periods ending, respectively. The University must meet certain financial covenants. The University was in compliance with all such covenants at. The required principal amounts to be paid on bonds, loans payable and obligations under capital leases are as follows: Fiscal year: 2007 $ 3, , , , ,289 Thereafter 95,365 $ 114,199 The University has an unsecured line of credit agreement with Bank of America that provides for borrowings up to $10,000. The interest rate on the line is the lower of either the prime rate minus 1.0% or the matched funded rate, defined as Bank of America s cost of funds plus 150 basis points and is 7.25% as of June 30, 2006 and 5.25% as of June 30, There were $4,600 and $5,000 of short-term borrowings outstanding under this agreement as of, respectively. In connection with the RIHEBC Bonds indentures and the Department of Education loan, the University maintained on deposit with bond trustees $10,793 and $12,660 as of, respectively, of assets held in trust to be used to pay costs related to approved capital expenditures and to satisfy future principal and interest payments. These agreements also require the University to transfer certain amounts from its unrestricted investments on an annual basis. Interest expense on bonds payable, loans payable and obligations under capital leases for the years ended was $5,360 and $4,971, respectively. Interest expense on short-term borrowings for the years ended was $266 and $142, respectively. Interest expense on subsidized student loans for the periods ending was $16 and $14, respectively. (8) Refundable Advances U.S. Government Grants Student loans receivable include amounts advanced to the University by the U.S. government under the Federal Perkins Loan Program (the Program). Such amounts may be reloaned by the University after collection, but in the event that the University no longer participates in the Program, the amounts are generally refundable to the U.S. government. 13

15 (9) Temporarily Restricted Net Assets Temporarily restricted net assets consisted of the following as of June 30: Purpose restrictions: Instruction $ 1,441 2,014 Scholarship Other 3,591 2,812 Pledges receivable, net 4,461 6,051 $ 9,787 11,025 Long-term investment gains on permanently restricted net assets containing purpose restrictions are initially classified as temporarily restricted, and released to unrestricted revenues when they are spent in accordance with the terms of the underlying contribution. (10) Permanently Restricted Net Assets Permanently restricted net assets consisted of the following as of June 30: Purpose restrictions: Instruction $ 3,467 3,271 Scholarship 1, Other 375 1,127 Pledges receivable, net $ 5,377 5,161 (11) Benefit Plans (a) Defined Contribution Plan The full-time faculty and staff of the University may elect to participate in a defined contribution retirement plan administered by the Teachers Insurance and Annuity Association, the College Retirement Equities Fund, and the Variable Annuity Life Insurance Company. Under this plan, the University and plan participants make annual contributions. The University s share of these contributions was $3,695 and $3,357 for the years ended, respectively. (b) Postretirement Benefits Other Than Pensions Prior to November 2002, full-time faculty of the University could apply to participate in a postretirement benefit plan as established by the University s Faculty Union Contract. Under this 14

16 plan, there were three package options determined by service requirements and/or age. Options included salary contribution for one to two years and health benefits continuation until age 65. Similar options were offered individually to nonfaculty staff. As of November 2002, the University no longer accepted participants into this plan, but will continue to pay the benefits of all eligible individuals in the plan prior to November For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005; the rate was assumed to decrease gradually down to 5% for the year 2006, and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate one percentage point would increase the accumulated postretirement benefit obligation as of June 30, 2006 by $10 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 2006 by $5. The average discount rate used in determining the accumulated postretirement benefit obligation was 7% and 7% for. As the plan is unfunded, no assumption was needed as to the long-term rate of return on assets. The University recorded $145 and $200 of expense in fiscal years 2006 and 2005, respectively. (12) Related-Party Transactions A member of the board of trustees is the Founder and President of an investment firm that managed approximately $33,000 in fiscal 2006 and $32,000 in fiscal 2005 of the University s investments. Fees paid to the investment firm during fiscal 2006 and 2005 were $326 and $313, respectively. An amount equivalent to the investment management fees was contributed to the University in addition to pledge payments. Two members of the board of trustees made contributions (pledges) to the University in fiscal 2002 and The gross outstanding balance on these promises to give amounted to $4,238 and $4,778 as of, respectively. The University redeemed 950 shares of Series A Redeemable Convertible Preferred Stock of Avtek, Inc. in September A member of the board of trustees is the Chairman of Avtek, Inc. and another trustee is the Chief Financial Officer of Avtek, Inc. The University recognized a net gain of $281 upon redemption. The University rents dormitory and conference space from Kentron Associates, L.P. A member of the board of Trustees is the major shareholder. The amount of rent is at fair market value and is included in the University s operating expenses. 15

17 (13) Net Assets Released from Restrictions Net assets released from temporary donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of events specified by the donors were as follows for the years ended June 30: Purpose restrictions: Instruction $ Scholarships and other 1,205 1,196 $ 1,911 1,302 (14) Contingencies The University is engaged in legal cases that have arisen in the normal course of its operations. The University believes that the outcome of these cases will have no material adverse effect on the consolidated financial position of the University. (15) Interest Rate Swap The University entered into an interest swap agreement with Bank of America in March The purpose of the agreement is to swap the fixed rate of the 1996 RIHEBC bonds for a synthetic fixed rate of % commencing in August 2006, which would generate interest savings over the term of the agreement for the difference between the synthetic fixed rate of % compared to the 1996 RIHEBC interest rates of 4.90% to 5.375%. The University entered into this agreement to manage the cash flows attributable to interest payments on the 1996 RIHEBC bonds and does not use such instruments for speculative purposes. The fair value of the swap instrument represents the estimated benefit or cost to the University to cancel the agreement as of the dates of the statements of financial position, and is based on option pricing models that consider risks and other market factors. The fair value of the swap is an asset of $313 and a liability of $1,131 as of, respectively. (16) Capital Commitments The University is obligated, under certain limited partnership s agreements, to make additional capital contributions up to contractual levels. The timing and amounts of the contributions will be determined by the general partners. As of June 30, 2006, the University has unfunded commitments of $5,

18 (17) Change in Accounting Principle As of July 1, 2005, the University adopted the provisions of FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143, to account for conditional asset retirement obligations. The University determined that it had conditional asset retirement obligations at that date related to the removal and disposal of asbestos in several buildings. Accordingly, the University recognized $2,118 as a cumulative effect of change in accounting principle as of that date. Accretion of the liability will be charged in operations for future inflation of these types of costs and subsequent actual costs will be charged to the liability account. (18) Natural Classification of Operating Expenses Operating expenses by their natural classification were as follows for the years ended June 30: Salaries and wages $ 50,321 46,359 Fringe benefits 16,288 14,558 Depreciation and amortization 7,781 6,996 Food service 4,694 3,905 Purchased services 3,238 2,944 Utilities and communications 4,737 4,074 Facility renovations 1,656 1,434 Interest 5,642 5,127 Advertising and publications 1,071 1,052 Supplies and postage 981 1,013 Other 18,059 16,481 $ 114, ,943 (19) Subsequent Event On October 4, 2006, the University issued, through RIHEBC, $26,800 Facility Revenue Refunding Bonds Roger Williams University issue Series 2006A, and $17,200 Facility Revenue bonds Roger Williams University issue Series 2006B. The Series 2006A and 2006B bonds are tax exempt for federal income purposes. The Series 2006A Bonds will bear interest at variable rates prior to converting to fixed rates to be determined at a future point in accordance with the bond indenture. The Series 2006B Bonds bear interest at fixed interest rates ranging from 4 to 5%. The University s interest rate swap, as described in note 15, will be used to fix the rate on the new variable rate debt. 17

19 The bond proceeds will be deposited into a Refunding Trust to be applied to the refunding and defeasance of the outstanding debt from the 1996 RIHEBC bonds and to finance construction, furnishing and equipping of a new 350 bed dormitory, other capital improvements on campus, and the cost of issuance. The bonds are secured by various properties and a pledge of the University s annual tuition and dormitory revenues. 18

20 Schedule I ROGER WILLIAMS UNIVERSITY Consolidating Schedule of Financial Position June 30, 2006 School Assets University of Law Total Cash and equivalents $ Accounts and notes receivable, net 2, ,697 Pledges receivable, net 4, ,787 Other assets Bond issuance costs, net 3,211 3,211 Student loans receivable, net 1, ,633 Deposits with bond trustees 10,793 10,793 Investments, at market 80,161 10,290 90,451 Intercompany (3,148) 3,148 Land, buildings and equipment, net 132,754 4, ,359 Total assets $ 233,512 19, ,540 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses $ 10, ,039 Accrued wages and fringe benefits 3, ,919 Short-term borrowings 4,600 4,600 Deposits and deferred revenue 12, ,709 Postretirement benefits other than pension Obligations under capital leases 3,535 3,535 Loans payable 5,370 5,370 Long-term liabilities 5, ,449 Bonds payable, net 103, ,806 Refundable advances U.S. govt grants 1,663 1,663 Total liabilities 151, ,389 Net assets: Unrestricted 68,828 16,159 84,987 Temporarily restricted 9, ,787 Permanently restricted 3,984 1,393 5,377 Total net assets 82,090 18, ,151 Total liabilities and net assets $ 233,512 19, ,540 See accompanying independent auditors report. 19

21 Schedule II ROGER WILLIAMS UNIVERSITY Consolidating Schedule of Activities Year ended June 30, 2006 School University of Law Total Operating: Revenues, gains and other support: Tuition $ 88,848 15, ,642 Less: University student aid (22,716) (3,201) (25,917) Federal and state financial aid (924) (1) (925) Net tuition 65,208 12,592 77,800 Student fees 5, ,680 Federal grants 2, ,692 Miscellaneous ,120 Auxiliary enterprises 32,527 1,011 33,538 Contributions, grants and other income 2, ,383 Investment earnings on deposits with trustees Income on investments 1, ,008 Net realized gain on investments 1, ,167 Total revenues, gains and other support 112,851 14, ,599 Expenses (1) : Educational and general: Instruction 38,616 5,439 44,055 Academic support 2,596 1,023 3,619 Student services 10,035 1,566 11,601 Management and general 8, ,898 Facilities management 5, ,033 General administration 7, ,160 Interest 5,642 5,642 Depreciation and amortization 6, ,781 Total educational and general 85,167 10,622 95,789 Auxiliary expenses 17, ,679 Total expenses 103,064 11, ,468 Change in net assets from operations 9,787 3,344 13,131 Nonoperating: Net unrealized gain on investments 3, ,395 Net gain on sale of investment Change in fair value of interest rate swap 1,444 1,444 Change in net assets from nonoperating activities 5, ,446 Change in net assets before cumulative effect of accounting change 14,989 3,588 18,577 Cumulative effect of accounting change (2,118) (2,118) Change in net assets 12,871 3,588 16,459 Net assets at beginning of year 69,218 14,474 83,692 Net assets at end of year $ 82,089 18, ,151 (1) Depreciation, amortization, interest, physical plant operations (facilities management) and general administrative expenses are presented prior to being allocated to functional categories. See accompanying independent auditors report. 20