ROGER WILLIAMS UNIVERSITY. Consolidated Financial Statements. June 30, 2010 and 2009

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1 Consolidated Financial Statements (With Independent Auditors Report Thereon)

2 KPMG LLP 6th Floor, Suite A 100 Westminster Street Providence, RI Independent Auditors Report The Board of Trustees Roger Williams University: 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 also 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. November 23, 2010 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

3 Consolidated Statements of Financial Position Assets Cash and cash equivalents $ 3,300 6,030 Accounts, pledges and notes receivable, net (notes 3 and 4) 6,422 6,910 Other assets 3,428 3,643 Student loans receivable, net (notes 3 and 10) 2,092 2,178 Deposits with bond trustees, at fair value (notes 5 and 8) 9,756 15,683 Investments, at fair value (note 5) 64,517 62,400 Property and equipment, net (notes 7 and 8) 223, ,371 Total assets $ 313, ,215 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses $ 16,203 14,149 Fair value of interest rate swap agreements (note 16) 4,393 2,814 Short-term borrowings (note 8) 13,500 13,500 Deposits and deferred revenue 11,783 14,045 Obligations under capital leases (note 8) 2,197 2,550 Loans payable (note 8) 8,821 4,443 Long-term liabilities (note 7) 4,176 4,467 Bonds payable, net (note 8) 146, ,103 Refundable advances U.S. government grants (note 10) 1,751 1,649 Total liabilities 209, ,720 Net assets: Unrestricted 92,509 89,129 Temporarily restricted (note 11) 4,629 3,745 Permanently restricted (note 11) 6,879 5,421 Total net assets 104,017 98,295 Total liabilities and net assets $ 313, ,015 See accompanying notes to consolidated financial statements. 2

4 Consolidated Statements of Activities Years ended Changes in unrestricted net assets: Operating: Revenues and other support: Tuition $ 124, ,822 University student aid (33,276) (30,960) Federal and state financial aid (1,635) (1,112) Net tuition 89,953 90,750 Student fees 7,517 6,779 Federal grants 3,073 2,852 Miscellaneous 1,421 1,240 Auxiliary enterprises 39,354 37,913 Contributions 1,420 1,328 Investment earnings on deposits with bond trustees Endowment income designated for operations (notes 5 and 6) 4,295 Net assets released from restrictions (note 14) 1, Total revenues and other support 144, ,035 Expenses (notes 5 and 13): Instruction 69,578 68,065 Academic support 6,856 5,780 Student services 18,893 18,837 Auxiliary enterprises 26,727 27,379 Management and general 19,235 17,862 Loss on disposal of long-lived assets (note 7) 2,739 Total expenses 144, ,923 Increase in unrestricted net assets from operating activities 260 8,112 Nonoperating: Investment return, above (below) income designated for operations (notes 5, 6 and 13) 6,529 (24,362) Loss on debt extinguishment (note 8) (704) Change in fair value of interest rate swaps (note 16) (1,579) (1,827) Reclassifications (note 6) (1,830) Total nonoperating gains (losses), net 3,120 (26,893) Increase (decrease) in unrestricted net assets 3,380 (18,781) Changes in temporarily restricted net assets: Contributions 1, Reclassifications (note 6) 509 Net assets released from restrictions (note 14) (1,404) (677) Investment return (notes 5, 6 and 13) 747 (1,966) Reclassification required under the State of Rhode Island s enacted version of UPMIFA and the provisions of ASC (note 6) 1,044 Increase (decrease) in temporarily restricted net assets 884 (1,345) Changes in permanently restricted net assets: Contributions Reclassifications (note 6) 1,321 (483) Reclassification required under the State of Rhode Island s enacted version of UPMIFA and the provisions of ASC (notes 2(a) and 6) (1,044) Increase (decrease) in permanently restricted net assets 1,458 (1,298) Change in net assets 5,722 (21,424) Net assets as of beginning of year 98, ,719 Net assets as of end of year $ 104,017 98,295 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 $ 5,722 (21,424) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 10,524 8,956 Bond amortization, net 126 (339) Loss on disposal of long-lived assets 2,739 Loss on debt extinguishment 704 Change in fair value of interest rate swaps 1,579 1,827 Net realized and unrealized (gains) losses on investments (6,803) 23,598 Contributions restricted for long-term investment (137) (229) Changes in operating assets and liabilities, net Net cash provided by operating activities 14,329 13,845 Cash flows from investing activities: Proceeds from sales of investments 22,147 76,964 Purchases of investments (17,461) (59,354) Purchases of property and equipment (28,187) (71,938) Decrease in student loans receivable, net Change in deposits with bond trustees 5,927 10,326 Net cash used in investing activities (17,488) (43,865) Cash flows from financing activities: Proceeds from borrowings 63, ,251 Repayments on borrowings (62,910) (78,745) Contributions restricted for long-term investment Change in refundable advances U.S. government grants Net cash provided by financing activities ,787 Change in cash (2,730) 4,767 Cash and cash equivalents as of beginning of year 6,030 1,263 Cash and cash equivalents as of end of year $ 3,300 6,030 Supplemental disclosure: Cash paid for interest $ 7,691 7,505 Change in accounts payable from property, plant and equipment (690) (4,870) See accompanying notes to consolidated financial statements. 4

6 (1) Background of the University Roger Williams University (the University) is a private, liberal arts university that includes the College of Arts and Sciences, five professional schools, and The Roger Williams University School of Law. The University offers 43 bachelor s degrees and master s degrees in Architecture, Criminal Justice, Education, Forensic Psychology, and Public Administration. The University s core values embrace the following: Love of learning Preparation for careers and future study Collaborations of students and faculty in research Commitment to community service Appreciation of global perspectives (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 in accordance with U.S. generally accepted accounting principles (GAAP) 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. The consolidated financial statements include the accounts of Roger Williams University and the Roger Williams University School of Law, after elimination of significant inter-entity accounts and transactions. In 2009, the University adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic , which provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and also requires disclosures about endowment funds, including donor-restricted endowment funds and board-designated endowment funds. The University is incorporated in and subject to the laws of Rhode Island, which effective as of June 30, 2009 adopted UPMIFA. Under UPMIFA, the assets of a donor-restricted endowment fund may be appropriated for expenditure by the University in accordance with the standard of prudence prescribed by UPMIFA. Accordingly, the University has classified its net assets as follows: Permanently restricted net assets contain donor-imposed stipulations that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of the University and primarily consist of the historic dollar value of contributions to establish or add to donor-restricted endowment funds. 5 (Continued)

7 Temporarily restricted net assets contain donor-imposed stipulations as to the timing of their availability or use for a particular purpose. These net assets are released from restrictions when the specified time elapses or actions have been taken to meet the restrictions. Net assets of donor-restricted endowment funds in excess of their historic dollar value are classified as temporarily restricted net assets until appropriated by the Board of Trustees and spent in accordance with the standard of prudence imposed by UPMIFA. Unrestricted net assets contain no donor-imposed restrictions and are available for the general operations of the University. Such net assets may be designated by the Board of Trustees for specific purposes, including to function as endowment funds. Prior to 2009, the University was subject to the Rhode Island Uniform Management of Institutional Funds Act (UMIFA), as amended. Rhode Island s enacted version of UMIFA required the University to maintain the purchasing power of original endowment contributions, resulting in annual additions to the permanently restricted portion of the University s donor-restricted endowment funds to account for inflation. This requirement was eliminated by the enactment of UPMIFA in 2009 and, accordingly, the University reclassified $1,044 of such cumulative additions from permanently restricted net assets to temporarily restricted net assets in See note 6 for more information about the University s endowment. 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 net assets. Contributions, including unconditional promises to give, are recognized as revenues in the period received. Promises to give that are scheduled to be received after the consolidated statement of financial position date are generally shown as increases in temporarily restricted net assets. Promises to give subject to donor-imposed stipulations that the corpus be maintained permanently are shown as increases in permanently restricted net assets. Unconditional promises to give are recorded at fair value at the date of gift using discount rates commensurate with the risks involved. The discount is amortized as additional contribution revenue over the term of the pledge. Conditional promises to give are not recognized until such time as the conditions are substantially met. Dividends, interest, and net unrealized and realized gains (losses) on investments are reported as follows: increases in permanently restricted net assets if the terms of the contributions (or, prior to 2009, relevant state law) require these to be added to the principal; 6 (Continued)

8 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) Property and Equipment Property and equipment are recorded at cost as of date of acquisition, or, in the case of contributions, estimated fair value as of the date of contribution. The cost of repairs and maintenance is charged to expense in the year incurred. Depreciation of buildings and equipment is recorded using the straight-line method over their estimated lives of 50 years and 7-20 years, respectively. Once the University determines a conditional asset retirement obligation exists, it assesses whether 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. See note 7 for further information. (c) (d) (e) 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. The University assesses uncertain tax positions and determined that there were no such positions that have a material effect on the financial statements. Use of Estimates The preparation of financial statements in conformity with GAAP 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. The current economic environment increases the uncertainty of those estimates. Investments Investments are reported at estimated fair value. If an investment is held directly by the University and an active market with quoted prices exists, the University reports the fair value as the market price of an identical security. Shares in mutual funds are based on share values reported by the funds as of the last business day of the fiscal year. The University also holds shares or units in traditional institutional funds as well as in alternative investment funds involving hedge strategies, private equity and real asset strategies. Hedge strategies involve funds whose managers have the authority to invest in multiple asset classes at their discretion, including the ability to invest long and short in the markets. Funds with hedge strategies generally hold securities or other financial instruments for which a ready market exists and are priced accordingly. Private equity and real asset funds generally hold assets which require the estimation of fair values in the absence of readily determinable market values. Because of the inherent uncertainties of valuation, the estimated fair values may differ significantly from the value that would have been used had a ready market for the investment 7 (Continued)

9 existed, and the differences could be material. 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 has applied the accounting guidance in Accounting Standards Update No , Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU ), which permits the use of net asset value (NAV) or its equivalent reported by each underlying alternative investment fund as a practical expedient to estimate the fair value of the investment. These investments are generally redeemable or may be liquidated at NAV under the original terms of the subscription agreements or operations of the underlying funds. However, it is possible that these redemption rights may be restricted by the funds in the future in accordance with the underlying fund agreements, as applicable. Changes in market conditions, the economic environment, or the funds liquidity provisions may significantly impact the NAV of the funds and, consequently, the fair value of the University s interests in the funds. Although certain investments may be sold in a secondary market, the secondary market is not active and individual transactions are not necessarily observable. It is therefore possible that if the University were to sell a fund in the secondary market, the sale could occur at an amount materially different than the reported value. As of, the University had no plans or intentions to sell investments at amounts different from NAV. (f) 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 $1,871 and $2,237, respectively, and are included in management and general expense in the consolidated statements of activities. (g) (h) Statements of Activities The statements of activities report changes in unrestricted net assets from operating and nonoperating activities. Operating activities consist principally of those items attributable to the University s primary mission of providing education, including endowment income designated for operations determined in accordance with the University s policy (see note 6). Unrestricted operating revenues also include net assets released from restrictions in support of operating activities, and all unrestricted contributions. Nonoperating activities include unrestricted investment return, less endowment income designated for operations, as well as nonrecurring items and other changes not directly affecting the University s core operations. Fair Value Measurements Investments, deposits with bond trustees and interest rate swaps are reported at fair value in the University s financial statements. 8 (Continued)

10 Fair value represents the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants as of the measurement date. The fair value hierarchy prioritizes inputs used to measure fair value into three levels: Level 1 quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the University utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Because the University uses net asset values reported by fund managers as a practical expedient to estimate the fair values of its investments held through limited partnerships and other funds, classification of these investments within the fair value hierarchy is based on the University s ability to timely redeem its interest rather than on inputs used. At, the carrying values of the University s cash, receivables, payables, and deposits approximated their fair values given their short-term nature. The University s bonds trade periodically in a limited market. Utilizing available market pricing information provided by a third party, the University estimated that the aggregate fair value of its fixed-rate debt as of June 30, 2010 was $94,274 (face value of $96,611). Utilizing available market pricing information provided by a third-party, the University estimated that the aggregate fair value of its fixed-rate debt as of June 30, 2009 was $87,314 (face value of $95,033). As the University s Series 2008A and Series 2008B bonds payable are at variable rates set by the market, their carrying values approximated fair value at. (i) (j) Reclassifications Certain 2009 financial information has been reclassified to conform with the 2010 presentation. Subsequent Events For purposes of determining the effects of subsequent events on these financial statements, management has evaluated events subsequent to June 30, 2010 and through November 23, 2010, the date on which the consolidated financial statements were issued. (3) Allowances for Uncollectible Accounts and Student Loans Receivable Accounts receivable are presented net of allowances for uncollectible accounts of $1,070 and $1,081 as of, respectively. Student loan receivables are presented net of allowances for uncollectible loans of $721 and $728 as of, respectively. 9 (Continued)

11 (4) Pledges Receivable Pledges receivable consisted of the following as of June 30: Unconditional promises expected to be collected in: Less than one year $ 819 1,070 One year to five years 1,366 5,173 Less discount and allowance for uncollectible pledges (413) (4,214) $ 1,772 2,029 Pledges receivable are discounted at rates ranging from 1.23% to 5.07%. (5) Investments The following table summarizes the University s investments and other assets by major category in the fair value hierarchy as of, as well as related strategy, liquidity and funding commitments: 2010 Redemption Level 1 Level 2 Level 3 Total or liquidation Days notice Fixed income: U.S. Treasuries $ 5,250 5,250 Daily One High grade corporate 3,944 3,944 Bi-Monthly Fifteen Equities: Traditional domestic equity index funds 12,472 12,472 Daily One International equities 5,907 5,907 Monthly Five to Thirty International growth 3,999 3,999 Bi-Monthly Ten Hedged equity funds of funds: Multiple strategies 5,808 14,562 20,370 Quarterly to Sixty to Locked Locked Emerging markets 3,534 3,534 Monthly Thirty Private equity and venture capital funds 5,687 5,687 Illiquid NA Cash and cash equivalents 3,354 3,354 Daily One Total investments $ 21,076 23,192 20,249 64,517 Deposits with bond trustees $ 2,636 7,120 9,756 Daily One 10 (Continued)

12 2009 Redemption Level 1 Level 2 Level 3 Total or liquidation Days notice Fixed income: U.S. Treasuries $ 4,814 4,814 Daily One High grade corporate 3,346 3,346 Bi-Monthly Fifteen Equities: Traditional domestic equity index funds 20,136 20,136 Daily One International equities 3,311 3,311 Monthly Five to Thirty International growth 2,948 2,948 Bi-Monthly Ten Hedged equity funds of funds: Multiple strategies 18,224 18,224 Locked Locked Emerging markets 2,421 2,421 Monthly Thirty Private equity and venture capital funds 6,238 6,238 Illiquid NA Cash and cash equivalents Daily One Total investments $ 25,910 12,028 24,462 62,400 Deposits with bond trustees $ 9,042 6,641 15,683 Daily One Registered mutual funds are classified in Level 1 of the fair value hierarchy as defined in note 1(h) because their fair values are based on quoted prices for identical securities. Most investments classified in Levels 2 and 3 consist of shares or units in nonregistered investment funds as opposed to direct interests in the funds underlying securities, which may be readily marketable or not difficult to value. Because the NAV reported by each fund is used as a practical expedient to estimate the fair value of the University s interest therein, its classification in Level 2 or 3 is based on the University s ability to redeem its interest at or near the date of the statement of financial position. If the interest can be redeemed in the near term, the investment is classified in Level 2. Accordingly, the inputs or methodology used for valuing or classifying investments for financial reporting purposes are not necessarily an indication of the risks associated with those investments or a reflection of the liquidity of or degree of difficulty in estimating the fair value of each fund s underlying assets and liabilities. 11 (Continued)

13 The following tables present the University s activities for the fiscal years ended for investments classified in Level 3: Hedged Private equity equity and funds of venture funds capital funds Total Beginning value as of July 1, 2009 $ 18,224 6,238 24,462 Acquisitions Dispositions (641) (641) Unrealized investment gains (losses) 2,146 (119) 2,027 Transfers to Level 2 (5,808) (5,808) Fair value at June 30, 2010 $ 14,562 5,687 20,249 Hedged Private equity equity and Cash and cash funds of venture equivalents funds capital funds Total Beginning value as of July 1, 2008 $ 4,684 9,974 14,658 Transfer (2) (2) Acquisitions 17, ,293 Dispositions (4,682) (4,682) Unrealized investment gains (losses) 1,024 (3,829) (2,805) Fair value at June 30, 2009 $ 18,224 6,238 24,462 The following summarizes the investment return for the years ended June 30: Interest and dividends, net of management and advisory fees $ 619 1,766 Net realized and unrealized gains (losses) 6,803 (23,598) Investment return $ 7,422 (21,832) 12 (Continued)

14 Investment returns are included in the statements of activities as follows for the years ended June 30: Operating: Investment earnings utilized in operations $ 146 4,496 Nonoperating activities: Investment return, net of amounts used in operations 6,529 (24,362) Changes in temporarily restricted net assets: Investment return 747 (1,966) Investment return $ 7,422 (21,832) Total investment management and advisory fees were $367 and $675 for the years ended June 30, 2010 and 2009, respectively. Private equity and venture capital investments are generally made through limited partnerships. Under the terms of these agreements, the University is obligated to remit additional funding periodically as capital or liquidity calls are exercised by the manager. These partnerships have a limited existence, and under such agreements may provide for annual extensions for the purpose of disposing portfolio positions and returning capital to investors. However, depending on market conditions, the inability to execute the fund s strategy, and other factors, a manager may extend the terms of a fund beyond its originally anticipated existence or may wind the fund down prematurely. The University cannot anticipate such changes because they are based on unforeseen events, but should they occur they might result in less liquidity or return from the investment than originally anticipated. As a result, the timing and amount of future capital or liquidity calls in any particular future year are uncertain. Certain hedge funds of funds contain rolling lock-up provisions. Under such provisions, tranches of the investment are available for redemption at calendar year-end once every two or three years, if the University makes a redemption request prior to the next available withdrawal date in accordance with the notification terms of the agreement. Private equity and venture capital funds are held in funds that have initial terms of one-to-twelve years and have an average remaining life of approximately five years. The University had open capital commitments for its limited partnership investments of $1,907 as of June 30, The capital commitments are scheduled to be funded through March (Continued)

15 Aggregate investment liquidity as of June 30, 2010 is presented below based on redemption or sale period: Investment fair values Investment redemption or sale period: Daily $ 21,076 Bi-monthly 7,943 Monthly 9,441 Quarterly 5,808 Locked 14,562 Illiquid 5,687 Total as of June 30, 2010 $ 64,517 (6) Endowment The University s endowment consists of approximately 80 individual funds, established for a variety of purposes, including both donor-restricted endowment funds (true endowment) and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees, are classified and reported based on the existence or absence of donor-imposed restrictions. Endowment net assets consist of the following at June 30, 2010: Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ (257) 1,520 6,849 8,112 Board-designated endowment funds 61,884 61,884 Total endowment net assets $ 61,627 1,520 6,849 69,996 Endowment net assets consist of the following at June 30, 2009: Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ (336) 806 5,391 5,861 Board-designated endowment funds 56,886 56,886 Total endowment net assets $ 56, ,391 62, (Continued)

16 Changes in endowment net assets for the year ended June 30, 2010 are as follows: Temporarily Permanently Unrestricted restricted restricted Total Endowment net assets, July 1, 2009 $ 56, ,391 62,747 Donor-restricted contributions Reclassifications (1,451) 130 1,321 Interest and dividends, net Net realized and unrealized gains 6, ,919 Net assets released and other changes 79 (501) (422) Endowment net assets, June 30, 2010 $ 61,627 1,520 6,849 69,996 Changes in endowment net assets for the year ended June 30, 2009 are as follows: Temporarily Permanently Unrestricted restricted restricted Total Endowment net assets, July 1, 2008 $ 91,210 1,843 6,206 99,259 Donor-restricted contributions Interest and dividends, net Net realized and unrealized losses (21,280) (2,388) (23,668) Endowment income designated for operations (4,295) (4,295) Transfers for plant expenditures (9,705) (9,705) Other changes (134) Net asset reclassification based on UPMIFA enactment 1,044 (1,044) Endowment net assets, June 30, 2009 $ 56, ,391 62,747 (a) Funds with Deficiencies From time to time, the fair value of assets associated with an individual donor-restricted endowment fund may fall below the fund s historic dollar value. Deficiencies of this nature reported in unrestricted net assets aggregated $257 and $336 as of, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by the Board. Subsequent gains that restore the fair value of the assets of these endowment funds to the required level will be classified as increases in unrestricted net assets. 15 (Continued)

17 (b) Objectives of the Endowment The objectives of the endowment shall be defined as follows: absolute which shall be measured in real (i.e., net of inflation) rate-of-return terms and shall have the longest time horizon for measurement; relative which shall be measured as time-weighted rates of return versus capital market indices; and comparative which shall be measured as performance of both the investment managers and the portfolio as a whole as compared to universes of similar investment managers and similar institutions, respectively. The relative objective of the endowment is to seek competitive investment performance versus appropriate or relative capital market indices. This objective shall be measured primarily by comparing investment results, over a moving annualized three and five-year time period, to representative benchmarks. The comparative performance objective of the endowment is to achieve a total rate of return that is above the median performance of a universe of similarly managed institutions. The endowment assets have a long-term, indefinite time horizon that runs concurrent with the endurance of the institution. As such, these funds can assume a time horizon that extends well beyond a normal market cycle, and can assume an above-average level or risk as measured by the standard deviation of annual returns. It is expected, however, that both professional management and sufficient portfolio diversification will smooth volatility and help to assure a reasonable consistency of return. (c) Spending Policy and How the Investment Objectives Relate to Spending Policy It is the University s policy to distribute annually up to 5% of a trailing 12-quarter average of the endowment s total asset value, with the understanding that this spending rate plus inflation will not normally exceed total return from investment. However, it is understood that this total return basis for calculating spending is sanctioned by UPMIFA, under which guidelines the University is permitted to spend an amount in excess of the current yield (interest and dividends earned), including realized or unrealized appreciation. The vast majority of the University s endowment is Board-designated and not donor-restricted. In applying its overall spending policy, the Board considers the prudent standards outlined in UPMIFA and applicable to the University s donor-restricted endowment funds. However, the Board retains the discretion to modify its spending or transfer additional Board-designated endowment funds for other institutional purposes beyond the originally budgeted amount of spending. For fiscal 2010, the Board authorized a modification to the spending policy, eliminating the contribution from the endowment for only this fiscal period. The Board decided that sufficient revenues were available to support operating expenses. 16 (Continued)

18 (7) Property and Equipment The following is a summary of property and equipment as of June 30: Land $ 3,712 2,094 Buildings 206, ,295 Building and land improvements 48,848 44,299 Equipment 39,948 37,467 Furniture and fixtures 14,479 14,070 Library books 18,535 17,556 Construction in progress 2,912 65, , ,083 Less accumulated depreciation (110,954) (100,712) $ 223, ,371 The amount of asset retirement obligations related to the removal and disposal of asbestos in certain buildings, which is recorded in long-term liabilities on the statements of financial position, was $2,264 and $2,401 as of, respectively. The University capitalized net interest costs of $666 and $1,921 for the years ended June 30, 2010 and 2009, respectively. The outstanding commitments for uncompleted construction contracts was $1,122 as of June 30, The University built a 140-foot-high water tower on the northwest corner of the campus to primarily serve its campus but also enhance water service to the southern part of the Town of Bristol. Upon completion of construction in 2010, the University transferred the tower to the Bristol County Water Authority for one dollar, and leased the underlying land to the Authority for one dollar per year through 2060 (renewable through 2110). The University incurred a loss on the disposal of the long-lived asset of $2,238 at June 30, 2010, which is included in operating activities in the 2010 statement of activities. 17 (Continued)

19 (8) Debt The University s bond and loan 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 1998, at interest rates of 4.50% to 5.0% due November 15, 2028 $ 30,390 31,620 Higher Education Facility Revenue Bonds, Series 2000, at interest rates of 4.75% to 5.50% due November 15, ,950 13,285 Higher Education Facility Revenue Bonds, Series 2003, at interest rates of 3.50% to 5.0%, due November 15, ,575 28,485 Higher Education Facility Revenue Bonds, Series 2006B, at interest rates of 4.0% to 5.0%, due November 15, ,875 17,200 Higher Education Facility Revenue Bonds, Series 2008A, at variable interest rates that are reset weekly which was 0.23% at June 30, 2010, due November 15, ,905 21,940 Higher Education Facility Revenue Bonds, Series 2008B, at variable interest rates that are reset weekly which was 0.23% at June 30, 2010, due November 15, ,000 38, , ,530 Less unamortized bond discount (873) (914) Plus unamortized bond premium Bonds payable, net $ 146, , Loans payable: Department of Education, 3%, due September 2024 $ 2,251 2,374 Rockland Trust (formerly Slades Ferry Bank), 5.5%, due January ,703 2,069 Washington Trust, 6.76%, due April ,867 $ 8,821 4, (Continued)

20 Bonds and Loans Payable The Series 2008A and 2008B bonds are variable-rate demand obligations that bear interest at variable rates that may be adjusted weekly or monthly by a Remarketing Agent to be the lowest rates which in its judgment would permit the sale of the bonds. In the event that variable rates cannot be established by the Remarketing Agent, or in the event that the variable rates determined by the Remarketing Agent shall be held to be invalid or unenforceable by a court of law, then the interest rates for such period shall be equal the SIFMA Index. The rates on the bonds may be converted to fixed rates at the election of the University upon the satisfaction of certain requirements. In the event that the University receives notice of any optional tender on its variable-rate bonds, or if the bonds become subject to mandatory tender, the purchase price of the bonds will be paid from the remarketing of such bonds. However, if the remarketing proceeds are insufficient, the University will have a general obligation to purchase the bonds tendered. The University maintains standby letters of credit, expiring in 2013, with Bank of America to provide alternative liquidity to support the repurchase of tendered variable rate bonds in the event they are unable to be remarketed in amounts sufficient to support repayment. In addition, as described in note 16, the University utilizes interest-rate swaps to effectively fix a portion of its variable exposure under the bonds. Under the terms of the Series 1998, Series 2000, Series 2003, Series 2006B, Series 2008A, and Series 2008B Bonds, the University must meet certain financial covenants. The University was in compliance with all such covenants at. In connection with the RIHEBC indentures and the Department of Education loan, the University maintained on deposit with bond trustees $9,756 and $15,683 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. The required principal amounts to be paid on bonds and loans payable are as follows as of June 30, 2010: Amounts due Fiscal year: 2011 $ 4, , , , ,931 Thereafter 127,213 $ 155,516 The University also has an unsecured line of credit agreement with Bank of America that provides for borrowings up to $13,500, which matures on December 31, The interest rate on the line is prime less 1%, and was 2.25% as of. There were $13,500 of short-term borrowings 19 (Continued)

21 outstanding under this agreement as of. The fair value of the line of credit approximated its carrying value at. Interest expense on bonds payable and loans payable for the years ended was $7,000 and $4,925, respectively. Interest expense on short-term borrowings for the years ended June 30, 2010 and 2009 was $90 and $176, respectively. (9) Leases The University leases building space and equipment under various noncancelable operating lease agreements. Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases with terms of one year or more consist of the following at June 30, 2010: Year ending June 30: $ 1,896 1, $ 4,945 Rental expense for the years ended was $1,741 and $632, respectively. 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 $2,197 and $2,550 of obligations under capital leases as of, respectively. Semi-annual interest and principal payments were $223 in each of the years ended. The present value of future minimum capital lease payments as of June 30, 2010 is: Year ending June 30: $ Thereafter 219 $ 2,197 Interest expense for the obligation under capital leases for the years ended was $91 and $104, respectively. 20 (Continued)

22 (10) 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 would generally be refundable to the U.S. government, and accordingly they have been reflected as refundable advances on the accompanying statements of financial position. (11) Restricted Net Assets (a) Temporarily Restricted Net Assets Temporarily restricted net assets consisted of the following as of June 30: Purpose restrictions: Instruction $ Scholarships Other 1, Subtotal 2,891 1,746 Pledges receivable, net 1,738 1,999 $ 4,629 3,745 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. (b) Permanently Restricted Net Assets Permanently restricted net assets consisted of the following as of June 30: Purpose restrictions: Instruction $ 3,754 3,681 Scholarships 3,101 1,710 Subtotal 6,855 5,391 Pledges receivable, net $ 6,879 5, (Continued)

23 (12) Defined Contribution Plans The full-time faculty and staff of the University may elect to participate in defined contribution retirement plans administered by the Teachers Insurance and Annuity Association, the College Retirement Equities Fund, and the Variable Annuity Life Insurance Company. Under these plans, the University and plan participants make annual contributions. The University s share of these contributions was $4,569 and $4,620 for the years ended, respectively. (13) Related-Party Transactions Members of the University s Board of Trustees and senior management may, from time to time, be associated, either directly or indirectly, with companies doing business with the University. The University has a written conflict of interest policy that requires, among other things, that no member of the Board of Trustees may participate in any decision in which he or she has a material financial interest. Each trustee is required to certify compliance with the conflict of interest policy on an annual basis as well as disclose any potential related-party transactions to the Board of Trustees. When such a relationship exists, the University requires that any such transactions be conducted at arms length, with terms that are fair and reasonable to and for the benefit of the University. For senior management, the University requires annual disclosure of significant financial interests in, or governance or employment or consulting relationships with, entities doing business with the University. When such relationships exists, measures are taken to appropriately manage the actual or perceived conflict in the best interest of the University. The University expended $8,386 and $4,692 for the years ended, respectively, for investment fees, rent, tuition, construction and other fees involving transactions with businesses whose officers, partners and/or stockholders are current or former officers, employees or trustees of the University. Contributions are also periodically received from members of the Board of Trustees. In August 2000, the University began leasing a former motel and conference center in Portsmouth, Rhode Island from a company owned by a then trustee. Pursuant to the terms of the existing lease, the University was obligated to purchase from the company all right, title and interest in the property and accompanying improvements at fair market value, with a minimum purchase price of approximately $5,300. A dispute subsequently arose between the University and the company and now former trustee regarding the terms and effectiveness of the lease as well as the purchase price for the property, and litigation commenced in early In January 2010, the parties resolved their dispute, the lawsuits were dismissed, and the University purchased the subject property for $4,900, which it believes approximates its fair value. 22 (Continued)

24 (14) 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, $ 1, (15) Contingencies The University is engaged in various 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. (16) Interest Rate Swaps At, the University had in place two interest-rate swap agreements to effectively convert a portion of its variable-rate bonds (Series 2008A and 2008B) to fixed rates until maturity of the bonds. The swaps notionals amortize at the same rate as the related debt principal. As of June 30, the following interest-rate swap agreements were outstanding: Remaining Fair value at June 30 Effective Expiration notional Swap fixed liability Counterparty Issue date date date amount rate Bank of America 07/01/08 07/15/08 11/15/2024 $ 23, % $ (2,625) (2,062) Bank of America 08/21/08 10/01/08 11/15/ , % (1,768) (752) $ (4,393) (2,814) The variable rate on the first Bank of America swap is based on the SIFMA Index. The variable rate on the second Bank of America swap is based on 67% of one-month LIBOR-BBA. The second swap may be canceled after five years at no cost to the University, regardless of whether the swap is in-or-out of the money at that time. The counterparty is required to maintain a minimum credit rating based on provisions contained in the individual swap agreements, which were at or above the minimum thresholds contained in the agreements as of. Interest rate volatility, remaining outstanding principal and time to maturity will affect each swap s fair value at subsequent reporting dates. To the extent the University holds a swap through its expiration date, the swap s fair value will reach zero. Because the swap fair values are based predominantly on observable inputs corroborated by market data, they are classified in Level 2 in the GAAP fair value hierarchy. 23