BENTLEY UNIVERSITY. Financial Statements. June 30, 2012 and (With Independent Auditors Report Thereon)

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1 Financial Statements (With Independent Auditors Report Thereon)

2 KPMG LLP Two Financial Center 60 South Street Boston, MA Independent Auditors Report The Board of Trustees Bentley University: We have audited the accompanying statements of financial position of Bentley University (the University), as of, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the University s management. Our responsibility is to express an opinion on these 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 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. October 26, 2012 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

3 Statements of Financial Position Assets Cash and cash equivalents $ 11,103 15,226 Restricted cash 7,787 Accounts receivable, net 1,062 1,766 Pledges receivable, net 3,057 8,376 Prepaid expenses and other assets 1,538 1,910 Student loans, net 7,976 8,239 Deposits with bond trustees 2,203 2,071 Investments, at fair value 203, ,842 Property, plant and equipment, net 244, ,112 Total assets $ 482, ,542 Liabilities and Net Assets Liabilities: Accounts payable and accrued liabilities $ 23,351 22,295 Student deposits and deferred income 7,517 8,568 Interest rate swaps, at fair value 34,697 18,735 Split-interest obligations 2,467 3,721 Postretirement benefits 5,096 4,991 Refundable U.S. government grants 6,691 6,691 Bonds payable, net 139, ,182 Total liabilities 219, ,183 Net assets: Unrestricted 178, ,576 Temporarily restricted 42,896 51,258 Permanently restricted 41,549 40,525 Total net assets 263, ,359 Total liabilities and net assets $ 482, ,542 See accompanying notes to financial statements. 2

4 Statement of Activities Year ended June 30, 2012 Temporarily Permanently Unrestricted restricted restricted Total Changes in unrestricted net assets: Operating activities: Revenues and other support: Tuition and fees $ 186, ,856 Residence hall and dining 41,211 41,211 Less scholarships and aid (62,320) (62,320) Net tuition and fees 165, ,747 Endowment return utilized in operations 7,333 7,333 Private gifts and contributions 2, ,088 Government and private grants 2,235 2,235 Other sources 1,783 1,783 Other auxiliary enterprises 5,112 5,112 Net assets released from restrictions 530 (530) Total revenues and other support 185, ,298 Expenses: Instruction 68,214 68,214 Academic support 13,679 13,679 Student services 30,366 30,366 Institutional support 31,989 31,989 Auxiliary enterprises 35,990 35,990 Total expenses 180, ,238 Changes in net assets from operating activities 4, ,060 Nonoperating activities: Contributions ,031 Pledge valuation changes (1,943) (1,943) Investment return (1,888) (859) 205 (2,542) Endowment return utilized in operations (4,133) (3,200) (7,333) Change in fair value of interest rate swaps (15,962) (15,962) Change in value of split-interest agreements (13) 679 Postretirement benefit obligation changes other than net periodic costs (2) (2) Net assets released from restrictions 2,628 (2,628) Reclassification of net assets 25 (37) 12 Changes in net assets from nonoperating activities (18,646) (8,450) 1,024 (26,072) Change in net assets (13,674) (8,362) 1,024 (21,012) Net assets as of beginning of year 192,576 51,258 40, ,359 Net assets as of end of year $ 178,902 42,896 41, ,347 See accompanying notes to financial statements. 3

5 Statement of Activities Year ended June 30, 2011 Temporarily Permanently Unrestricted restricted restricted Total Changes in unrestricted net assets: Operating activities: Revenues and other support: Tuition and fees $ 183, ,446 Residence hall and dining 40,090 40,090 Less scholarships and aid (59,543) (59,543) Net tuition and fees 163, ,993 Endowment return utilized in operations 7,123 7,123 Private gifts and contributions 2,456 3,575 6,031 Government and private grants 2,044 2,044 Other sources 2,052 2,052 Other auxiliary enterprises 5,432 5,432 Net assets released from restrictions 313 (313) Total revenues and other support 183,413 3, ,675 Expenses: Instruction 67,673 67,673 Academic support 13,016 13,016 Student services 27,934 27,934 Institutional support 31,390 31,390 Auxiliary enterprises 37,657 37,657 Total expenses 177, ,670 Changes in net assets from operating activities 5,743 3,262 9,005 Nonoperating activities: Contributions ,412 2,144 Pledge valuation changes (167) (167) Investment return 20,569 12, ,326 Endowment return utilized in operations (3,877) (3,246) (7,123) Change in fair value of interest rate swaps 4,140 4,140 Loss on change in capitalization policy (5,520) (5,520) Change in value of split-interest agreements (40) (35) Loss on debt refinancing (1,711) (1,711) Postretirement benefit obligation changes other than net periodic costs Reclassification of net assets 169 (13) (156) Changes in net assets from nonoperating activities 14,303 9,383 1,905 25,591 Change in net assets 20,046 12,645 1,905 34,596 Net assets as of beginning of year 172,530 38,613 38, ,763 Net assets as of end of year $ 192,576 51,258 40, ,359 See accompanying notes to financial statements. 4

6 Statements of Cash Flows Years ended Operating activities: Change in net assets $ (21,012) 34,596 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 18,043 17,897 Net realized and unrealized losses (gains) on investments 3,204 (33,056) Loss on disposal of fixed assets 45 Loss on change in capitalization policy 5,520 Loss on debt refinancing 1,711 Contributions restricted for long-term purposes (820) (973) Change in fair value of interest rate swap agreements, net 15,962 (4,140) Change in operating assets, net 6,617 (2,139) Change in operating liabilities, net (633) 613 Net cash provided by operating activities 21,361 20,074 Investing activities: Proceeds from sales and maturities of investments 52, ,752 Purchases of investments (50,563) (114,976) Acquisitions of property, plant and equipment (15,929) (12,848) Change in deposits with bond trustees (132) 283 Net cash used in investing activities (14,481) (13,789) Financing activities: Contributions restricted for long-term purposes Repayments on bonds (2,782) (47,117) Proceeds from long-term borrowing and premium 41,817 Bond issuance costs (455) Collateral posted on interest rate swaps (8,787) (3,880) Collateral returned on interest rate swaps 1,000 4,590 Change in split-interest obligations (1,254) (1,470) Net cash used in financing activities (11,003) (5,542) Change in cash and cash equivalents (4,123) 743 Cash and cash equivalents as of beginning of year 15,226 14,483 Cash and cash equivalents as of end of year $ 11,103 15,226 Supplemental disclosure: Cash paid for interest $ 7,920 9,109 Increase in accounts payable from capital additions See accompanying notes to financial statements. 5

7 (1) Description of the University Bentley University (Bentley or the University) is a business university enrolling approximately 4,100 full-time and part-time undergraduate students, 1,400 graduate students, and 34 PhD students. Bentley was founded in 1917 and is set on 163 acres in Waltham, Massachusetts, just minutes west of Boston. Academic programs at Bentley combine business and information technology with arts and sciences to prepare students for a workplace that is increasingly global, information rich, and technology driven. With particular strengths in ethics and social responsibility, and global commerce and culture, Bentley develops business leaders who are technologically skilled, culturally literate, creatively inspired and socially responsible. The graduate school emphasizes the impact of technology on business practice and offers PhD programs in Business and Accountancy, the Bentley MBA with 17 areas of concentration, an integrated MS+MBA, seven Master of Science degrees and custom executive education programs. Bentley is accredited by the New England Association of Schools and Colleges (NEASC). Graduate and undergraduate business programs are accredited by AACSB International The Association to Advance Collegiate Schools of Business, which also grants a separate accreditation to Bentley programs in accountancy. The University is also accredited by EQUIS (European Quality Improvement System). (2) Summary of Significant Accounting Policies (a) Basis of Financial Statement Presentation The accompanying 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 in the following three classes of net assets: Unrestricted Net Assets represent those net assets that the University may use at its discretion. Temporarily Restricted Net Assets result from contributions and other inflows of assets whose use by the University is limited by donor-imposed stipulations that either expire by the passage of time or can be fulfilled and removed by actions of the University pursuant to those stipulations. Investment return on donor-restricted endowments is recognized within temporarily restricted net assets until appropriated for expenditure under the University s spending policy and a qualifying expenditure is incurred. Permanently Restricted Net Assets result from contributions whose use by the University is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the University. Such net assets consist primarily of the historical gift value of the University s donor-restricted endowment funds. 6 (Continued)

8 (b) (c) (d) (e) (f) (g) Cash Equivalents For purposes of the statements of cash flows, cash equivalents include treasuries and short-term instruments not held for future long-term investment with original maturities of three months or less and are carried at cost, which approximates fair value. Tuition and Related Revenues Tuition, fees, residence hall, and dining revenue are recorded at established rates, net of financial aid and scholarships provided directly by the University for students. Pledges Receivable Unconditional promises to give that are expected to be collected within one year are presented at 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 these pledges are computed using rates commensurate with the risks involved and 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 the conditions are substantially met. Property, Plant and Equipment Land, buildings, plant renovations, and equipment are stated at cost at the date of acquisition or renovation or at estimated fair value at the date of donation in the case of gifts. Minor renovations and repairs are charged to operations as incurred. Depreciation of plant and equipment is computed on a straight-line basis over the useful lives of the respective assets. Interest incurred on tax-exempt debt used to finance building construction is added to the cost of the asset, net of any income earned on temporarily invested debt proceeds during construction. Bond Discounts, Premiums and Issuance Costs Bond discounts, premiums and issuance costs are amortized through the final maturity date of the respective bond issues. 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 at 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. Management estimates requiring the application of significant judgment include valuations of interest-rate swaps and certain alternative investments, employment obligations, split-interest agreements, and the valuation of receivables. The current economic environment may increase the uncertainty of those estimates. 7 (Continued)

9 (h) Income Taxes The University generally does not provide for income taxes since it is a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code (the Code). ASC 740, Income Taxes, permits an entity to recognize the benefit and requires accrual of an uncertain tax position only when the position is more likely than not to be sustained in the event of examination by tax authorities. In evaluating whether a tax position has met the recognition threshold, the University must presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. ASC 740 also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest or penalties. Tax positions deemed to meet the more-likely than-not threshold are recorded as tax expense in the current year. There were no uncertain tax positions as of June 30, 2012 or (i) Statements of Activities The statements of activities report the changes in net assets from operating and nonoperating activities. Nonoperating activity reflects contributions for long-term investments and capital projects and the investment return in excess of the amount appropriated under the Board of Trustees approved spending formula, as described in Note 6. In addition, nonoperating activities include changes in the values of split-interest agreements and interest rate swaps, net assets released from restrictions for capital purposes, postretirement benefit obligation changes other than net periodic costs, material changes in accounting policies and certain other non-recurring transactions. All other activity is classified in operating activities. All contributions are considered available for unrestricted use unless specifically restricted by the donor. Amounts received that are restricted by the donor as to time or for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net asset classes. When a qualifying expenditure occurs or a time restriction expires, temporarily restricted net assets are reduced and unrestricted net assets are correspondingly increased as net assets released from restrictions in the statements of activities. However, if a restriction is fulfilled in the same time period in which the contribution is received, the contribution is reported as unrestricted revenue. Dividends, interest, and realized and unrealized gains (losses) on long-term investments are reported as follows: Increases in permanently restricted net assets if the terms of the gift require these to be added to the principal; Increases (decreases) in temporarily restricted net assets if the terms of the gift or relevant state law imposes restrictions on the use of the income and gains; Increases (decreases) in unrestricted net assets in all other cases. 8 (Continued)

10 (j) Functional Expenses The University reports expenses by their functional classification. Accordingly, indirect costs such as depreciation, interest, and operations and maintenance expenses have been allocated to functional classifications based on building square footage. Total fundraising costs for the years ended were $4,246 and $4,594, respectively, and are included in institutional support expense on the statements of activities. (k) (l) (m) (n) Split-Interest Agreements The University s split-interest agreements with donors consist of irrevocable charitable gift annuities and charitable remainder trusts held and administered by the University. For annuity contracts, the contributed assets are included as part of investments at fair value. Contribution revenue, net of the accompanying obligation, is recognized as of the date the donated assets are transferred to the University and liabilities are recorded for the present value of the estimated future payments to the donors and/or other beneficiaries. These liabilities are adjusted during the term of the agreements consistent with changes in the value of the assets and actuarial assumptions. Disclosure about Fair Value of Financial Instruments The University discloses 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 generally carried at net realizable value, which approximates fair value. Such financial instruments consist of cash and equivalents, receivables from students, grantors and donors, and payables. At June 30, 2012, the aggregate fair value of the University's fixed-rate bonds was approximately $98,000. Fair value was estimated using equivalent bond yields to discount expected debt service cash flows as of that date. Derivative Instruments The University utilizes interest-rate swap agreements with counterparties to effectively convert a portion of its variable-rate debt to fixed rates and for other hedging and investment purposes. The swaps fair values and changes therein are recognized in the University s financial statements. Differences between the fixed and variable rates in effect at each interest due date are settled net under each swap, increasing or decreasing interest expense. The fair value of the swap instruments considers the estimated benefit or cost to the University to cancel the agreements as of the reporting dates, and is based on option pricing models that consider interest rates and other market factors, as well as the credit risks of the parties to the agreements. Interest rate volatility, remaining outstanding principal, and time to maturity will affect the swaps fair values at subsequent reporting dates. 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 9 (Continued)

11 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 Audit Committee. When such a relationship exists, the University requires that 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 of employment or consulting relationships with entities doing business with the University. When such relationships exist, measures are taken to appropriately manage the actual or perceived conflict in the best interest of the University. (o) Fair Value Measurements 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. GAAP establishes a fair value hierarchy that 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. Levels are determined based on the aforementioned hierarchy, except for investments measured using net asset value as a practical expedient to estimate fair value, as described in note 5. (p) Reclassifications Certain 2011 information has been reclassified to conform to the 2012 presentation. (3) Allowances for Uncollectible Accounts and Student Loans Accounts receivable are presented net of an allowance for uncollectible accounts of $250 and $232 as of, respectively. Student loans are presented net of an allowance for uncollectible loans of $400 as of June 30, 2012 and (Continued)

12 (4) Pledges Receivable Pledges receivable as of June 30 included the following: Amounts due in: Less than one year $ 973 1,200 One to five years 1,345 1,976 Greater than five years 1,075 11,100 Less discount and allowance for uncollectible pledges (336) (5,900) Pledges receivable, net $ 3,057 8,376 Pledges receivable have been discounted at rates ranging from 1.8% to 6.25%. (5) Investments (a) Overall Investment Objective The overall investment objective of the University is to invest its assets in a prudent manner that will achieve a long-term rate of return sufficient to fund a portion of its annual operating activities and increase investment value after inflation. The University diversifies its investments among various asset classes incorporating multiple strategies and managers. Major investment decisions are authorized by the Board s Investment Committee, which oversees the University s investment program in accordance with established guidelines. (b) Investment Strategies In addition to traditional stocks and fixed income securities, the University may also hold shares or units in traditional institutional funds as well as in alternative investment funds involving hedged strategies, private equity and real asset strategies. Hedged strategies involve funds whose managers have the authority to invest in various asset classes at their discretion, including the ability to invest long and short. Funds with hedged strategies generally hold securities or other financial instruments for which a ready market exists and may include stocks, bonds, put or call options, swaps, currency hedges and other instruments, and are valued accordingly. Private equity funds employ buyout and venture capital strategies and focus on investments in turn-around situations. Real asset funds generally hold interests in public real estate investment trusts (REITs) and commodities, including oil, gas, and gold. Private equity and real asset strategies therefore often require the estimation of fair values by the fund managers in the absence of readily determinable market values. Because of the inherent uncertainties of valuation, these estimated fair values may differ significantly from values that would have been used had a ready market existed, and the differences could be material. 11 (Continued)

13 (c) Basis of Reporting 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 market price of an identical security is used as reported fair value. Shares in mutual funds are based on share prices reported by the funds as of the last business day of the fiscal year. The University s interests in alternative investment funds are generally reported at the net asset value (NAV) reported by the fund managers, which is used as a practical expedient to estimate the fair value of the University s interest therein, unless it is probable that all or a portion of the investment will be sold for an amount different from NAV. 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. As of, the University had no plans or intentions to sell investments at amounts different from NAV. The following tables summarize 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: June 30, 2012 Redemption/ Days Level 1 Level 2 Level 3 Total liquidation notice Long-term investment strategies: U.S. treasuries $ 20,747 5,611 26,358 Daily One Equities: U.S. equities 13,911 13,911 Daily One two Large-cap long/short funds 21,215 21,215 Quarterly 60 Small-mid cap 8,423 8,423 Monthly 10 Global developed markets 11,898 15,739 27,637 Daily One six Global emerging markets 13,157 13,157 Daily monthly One ten Total 46,556 64, ,701 Hedged equity funds of funds: Absolute return/multiple strategies 27,186 27,186 Annual Absolute return/multiple strategies 16,649 16,649 Locked-up Total 43,835 43,835 Private equity and venture capital funds 15,318 15,318 Illiquid N/A U.S. real estate investment trust funds 9,577 9,577 Daily One Commodities oil and energy Illiquid N/A Commodities oil and energy 7,982 7,982 Daily One Commodities hard assets 2,385 2,385 Daily One 12 (Continued)

14 June 30, 2012 Redemption/ Days Level 1 Level 2 Level 3 Total liquidation notice Other equity securities $ 2,748 2,748 Illiquid N/A Life insurance 2,628 2,628 Illiquid N/A Cash 3,542 3,662 7,204 Daily One Total long-term investments $ 62,060 75,789 65, ,058 A portion of hedged equity funds of funds is subject to 3-year rolling lockups, or restrictions on redemptions from these funds, which expire between December 2012 and December Private equity and venture capital funds are expected to liquidate within 5 to 10 years, and the University has an unfunded future commitment to invest in these funds that aggregates $6,260 at June 30, June 30, 2011 Redemption/ Days Level 1 Level 2 Level 3 Total liquidation notice Long-term investment strategies: U.S. treasuries $ 29,137 5,636 34,773 Daily One Equities: U.S. equities 15,793 15,793 Daily One two Large-cap long/short funds 19,236 19,236 Quarterly 60 Small-mid cap 9,785 9,785 Monthly 10 Global developed markets 10,756 17,196 27,952 Daily One six Global emerging markets 11,037 11,037 Daily monthly One ten Total 55,686 62, ,576 Hedged equity funds of funds: Absolute return/multiple strategies 21,805 21,805 Annual Absolute return/multiple strategies 22,395 22,395 Locked-up Total 44,200 44,200 Private equity and venture capital funds 12,400 12,400 Illiquid N/A U.S. real estate investment trust funds 5,604 5,604 Daily One Commodities oil and energy 9,589 9,589 Semi-annually 45 Commodities oil and energy 1,028 1,028 Illiquid N/A Commodities hard assets 3,145 3,145 Daily One Other equity securities 3,944 3,944 Illiquid N/A Cash and other nonpooled funds 5,326 4,030 9,356 Daily One Total long-term investments $ 69,761 76,509 61, ,842 Most investments classified in Levels 2 and 3 consist of shares or units in investment funds as opposed to direct interests in the funds underlying securities, some of which are marketable or not 13 (Continued)

15 difficult to value. Because each fund s reported NAV is used as a practical expedient to estimate the fair value of the University s interest therein, the level in which a fund s fair value measurement is classified is based on the University s ability to redeem its interest at or near the date of the statement of financial position, as opposed to the observability of inputs. 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. The following tables present the University s activities for the years ended for investments classified in Level 3: 2012 Hedged equity Private funds of equity and Other funds and venture Life equity Level 3 roll forward commodities capital funds Insurance securities Total Beginning balance at June 30, 2011 $ 45,228 12,400 3,944 61,572 Acquisitions 2,882 2,628 5,510 Dispositions (348) (1,467) (469) (2,284) Net realized and unrealized (losses) gains (365) 1,503 (727) 411 Balance at June 30, 2012 $ 44,515 15,318 2,628 2,748 65, Hedged equity Private funds of equity and Other funds and venture equity Level 3 roll forward commodities capital funds securities Total Beginning balance at June 30, 2010 $ 31,999 9,221 4,258 45,478 Acquisitions 15,000 2, ,101 Dispositions (5,759) (1,403) (2,564) (9,726) Net realized and unrealized gains 3,988 1,593 2,138 7,719 Balance at June 30, 2011 $ 45,228 12,400 3,944 61, (Continued)

16 The following summarizes investment return components for the years ended June 30, 2012 and 2011: Investment return: Interest and dividends, net of advisory fees $ Net realized and unrealized (losses) gains (3,204) 33,056 Total return $ (2,542) 33,326 Total investment management and advisory fees were $1,485 and $1,521 for the years ended, 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 2 or 3 years, if the University makes a redemption request prior to the next available withdrawal date in accordance with the notification terms of the agreement. 15 (Continued)

17 Aggregate investment liquidity as of June 30, 2012 is presented below based on redemption or sale period: Investment fair values Investment redemption or sale period: Daily $ 95,054 Monthly 21,579 Quarterly 21,216 Annual 27,186 Subject to rolling lock-ups 16,649 Illiquid 21,374 Total as of June 30, 2012 $ 203,058 (6) Endowment The University s endowment consists of approximately 400 individual funds established for a variety of purposes, including both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. (a) Relevant Law The University is subject to the Commonwealth of Massachusetts enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This law provides precise standards to invest in a prudent manner by establishing a duty to minimize cost, diversify the investments, investigate facts relevant to the investment of the fund, consider tax consequences of investment decisions and ensure investment decisions are made in light of the fund s entire portfolio as a part of an investment strategy having risk and return objectives reasonably suited to the fund and to the University. UPMIFA also permits the University to appropriate for expenditure or accumulate so much of an endowment fund as the University determines to be prudent for the uses, benefits, purposes, and duration for which the endowment fund is established, thereby allowing a fund to be spent below its historical dollar value. Seven criteria are to be used to guide the University in its yearly expenditure decisions: 1) duration and preservation of the endowment fund; 2) the purposes of the University and the endowment fund; 3) general economic conditions; 4) effect of inflation or deflation; 5) the expected total return from income and the appreciation of investments; 6) other resources of the University; and, 7) the investment policy of the University. The University classifies as permanently restricted net assets (a) the original value of donorrestricted endowment contributions, (b) the original value of subsequent contributions thereto, and (c) accumulations of return thereon made in accordance with the direction of the applicable donor gift instrument, if any. The remaining portion of a donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until 16 (Continued)

18 such amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by UPMIFA. Endowment net assets consist of the following at June 30, 2012: Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment $ (45) 34,567 38,561 73,083 Board-designated endowment 119, ,625 Total endowment $ 119,580 34,567 38, ,708 Endowment net assets consist of the following at June 30, 2011: Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment $ (28) 38,502 37,668 76,142 Board-designated endowment 123, ,824 Total endowment $ 123,796 38,502 37, ,966 Changes in endowment net assets for the year ended June 30, 2012 are as follows: Temporarily Permanently Unrestricted restricted restricted Total Endowment, June 30, 2011 $ 123,796 38,502 37, ,966 Investment return: Interest and dividends, net Net realized and unrealized losses (1,549) (940) (2,489) Total (1,225) (743) (1,968) Contributions ,010 Endowment return utilized in operations (4,133) (3,200) (7,333) Transfers out (301) (301) Additions to quasi-endowment 1,218 1,218 Reclassification of net assets (21) Endowment, June 30, 2012 $ 119,580 34,567 38, , (Continued)

19 Changes in endowment net assets for the year ended June 30, 2011 are as follows: Temporarily Permanently Unrestricted restricted restricted Total Endowment, June 30, 2010 $ 96,518 29,734 36, ,734 Investment return: Interest and dividends, net Net realized and unrealized gains 17,665 12,114 29,779 Total 17,915 12,286 30,201 Contributions ,122 Endowment return utilized in operations (3,877) (3,246) (7,123) Additions to quasi-endowment 12,564 12,564 Reclassification of net assets 526 (272) Endowment, June 30, 2011 $ 123,796 38,502 37, ,966 (b) (c) (d) Funds with Deficiencies From time to time, the fair value of investments associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the University to retain as a fund of perpetual duration. Deficiencies of this nature are reported in unrestricted net assets and were $45 and $28 as of, respectively. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level will be classified as an increase in unrestricted net assets. Return Objectives and Risk Parameters The University has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the organizations must hold in perpetuity or for a donor-specified period as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results that exceed the performance of several benchmarks reflecting the University s asset allocation while assuming a reasonable level of risk. These benchmarks include the S&P 500 index, Russell 2000, EAFE Index and Barclays Capital Aggregate Bond Index. Strategies Employed for Achieving Objectives To satisfy its long-term rate of return objectives, the University relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) 18 (Continued)

20 and current yield (interest and dividends). The University targets a diversified asset allocation that places emphasis on investments in equities including marketable and nonmarketable assets, fixed income, and real assets to achieve its long-term return objectives within moderate risk constraints. (e) Spending Policy and How the Investment Objectives Relate to Spending Policy The University has a policy of appropriating for distribution each year up to a maximum of 6% of its endowment funds average fair value using the prior 12 quarters through calendar year end preceding the fiscal year in which the distribution is planned; however, this distribution has never been higher than 5%. In establishing this policy, the University considered the expected return on its endowment. Accordingly, the University expects the current spending policy to allow its endowment to maintain its purchasing power by growing at a rate higher than the planned payouts. Additional real growth will be provided through new gifts and any excess investment returns. (7) Property, Plant and Equipment Property, plant and equipment as of June 30 are as follows: Land $ 31,871 31,871 Buildings and improvements 326, ,366 Furniture and equipment 45,625 58,900 Library books , ,345 Less accumulated depreciation (160,105) (166,233) Property, plant, and equipment, net $ 244, ,112 Depreciation expense was $18,201 and $17,983 for the years ended, respectively. Prior to fiscal 2011, library books were capitalized upon purchase, with half of their original cost depreciated over 7 years and half over 40 years. Effective July 1, 2010, after determining that library books have experienced a declining utility to the University in recent years due to alternative technologies, the University wrote-off the net carrying value of all library books at that date, resulting in a loss of $5,520 as reported in nonoperating activities during the year ended June 30, Beginning in fiscal 2012, the University generally no longer capitalizes library books and instead charges such costs as incurred to academic support expense. 19 (Continued)

21 (8) Bonds Payable, Net Outstanding debt as of June 30 is as follows: Massachusetts Development Finance Agency: Series 2010, 3.00% to 5.00%, due serially through July 1, 2028 Revenue Bonds $ 37,020 38,220 Massachusetts Health and Educational Facilities Authority: Series K, variable rate (0.15% as of June 30, 2012 and 0.22% at June 30, 2011), due serially commencing in 2026 through July 1, ,000 45,000 General Electric Government Finance: Government Finance Bonds, adjustable rate (fixed at 3.187% through April 2014), due serially to May 1, ,935 55, , ,737 Less: unamortized bond premium 3,245 3,445 Bonds payable, net $ 139, ,182 On September 16, 2010, the University refunded the remaining balance of its Series J bonds through the issuance of $38,220 of Massachusetts Development Finance Agency Revenue Bonds, Bentley University Issue, Series 2010, which are due serially through The bonds were issued at a net interest cost to the University of 3.95% and provided net present value savings of $4,277. Including a premium paid by the bondholders, the bonds will bear coupon rates up to 5%. The Massachusetts Health and Educational Facilities Authority Series K bonds are variable-rate demand obligations that may be adjusted periodically by a remarketing agent to be the lowest rate which, in its judgment, would permit the sale of the bonds. In the event that the variable rate cannot be established by the remarketing agent, or in the event that the variable rate determined by the remarketing agent shall be held to be invalid or unenforceable by a court of law, then the interest rate for such period shall be equal to 101% of the BMA Index. Certain bond indentures require the maintenance of certain financial covenants. The University was in compliance with all such covenants at. 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 a standby letter of credit, expiring in 2017, with JPMorgan 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 9, the University utilizes interest-rate swaps to effectively fix a portion of its variable-rate exposure under the bonds. 20 (Continued)

22 As of June 30, 2012, the aggregate maturities for all bonds payable for the years ending June 30 are as follows: Amount due Fiscal year: 2013 $ 2, , , , ,499 Thereafter 119,791 $ 135,955 The University has a secured line of credit with JPMorgan for a maximum amount of $25,000. There were no balances outstanding under the line at, and there were no borrowings during the years then ended. Borrowing rates on this line of credit are one-month LIBOR + 100bps. The line expires in November (9) Interest Rate Swaps As of June 30 the following interest rate swap agreements were outstanding: Remaining Fair value at June 30 Expiration notional Swap asset (liability) Counterparty Trade date date amount fixed rate JPMorgan 10/24/08 07/01/30 $ 25, % $ (8,363) (4,002) JPMorgan 10/24/08 07/01/33 20, (6,925) (2,832) Bank of America 12/15/04 07/01/33 10, (4,395) (2,195) Bank of America 09/24/03 11/01/28 15, (3,393) (1,431) Bank of New York 10/24/08 07/01/28 41, (11,621) (8,275) Totals $ (34,697) (18,735) The variable rate side of the swaps is based on 67% of one month LIBOR. The swap agreements require the posting of collateral if the mark-to-market liability payable by the University exceeds $7,500 in the aggregate for the JPMorgan swaps and $12,000 for the Bank of New York swap. The two Bank of America swaps contain no collateral requirements. The University must deposit cash collateral to the extent these thresholds are exceeded. The counterparties are required to maintain a minimum credit rating based on provisions contained in the individual swap agreements. The counterparties credit ratings were at or above the minimum thresholds contained in the agreements as of. However, these ratings become more relevant if the swaps move into the money and have a positive fair value (receivable to the University from the counterparties). As of June 30, 2012, the University was required to post collateral for the JPMorgan swaps in the aggregate amount of $7,787. There was no collateral posting required as of June 30, (Continued)

23 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 that are corroborated by market data, they are categorized in Level 2 of the fair value hierarchy. (10) Benefit Plans (a) Defined Contribution Plan Eligible faculty and staff of the University are participants in a defined contribution 403(b) retirement plan. The University contributes, for the benefit of the participants, 10% of eligible earnings annually to the plan. Total expense under this plan for the years ended June 30, 2012 and 2011 amounted to $6,185 and $6,056, respectively. (b) Postretirement Benefits The University provides certain health care benefits for retired employees covered under the Bentley University Retiree Medical Benefits Plan (the Plan). Benefits are paid through an insurance company as claims are settled. The Plan is a noncontributory, defined benefit plan. The following table sets forth the funded status of the Plan, as well as amounts recognized in the statements of financial position as of June 30: Change in benefit obligation: Projected benefit obligation as of beginning of year $ 4,991 4,913 Service cost Interest cost Benefits paid (262) (293) Actuarial changes (17) Projected benefit obligation as of end of year $ 5,096 4,991 Components of net periodic benefit cost are as follows for the years ended June 30: Service cost for benefits earned during the period $ Interest cost on projected benefit obligation Recognized net loss Net periodic benefit cost $ (Continued)

24 The following assumptions were used in the measurement of net periodic benefit cost and the projected benefit obligation: Weighted average discount rate 3.79% 5.75% The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., medical cost trend rate) for the Plan was assumed to be 6.0% in The rate will remain level in 2013 and then decrease to 5.5% in the year 2014, and remain level thereafter. Increasing the assumed health care cost trend rate by 1.0% point in each year would increase the accumulated benefit obligation by $107. Decreasing the assumed health care cost trend rate by 1.0% point in each year would decrease the accumulated benefit obligation by $95. As of June 30, 2012, benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter, are as follows: Amount Fiscal year: 2013 $ ,591 (11) Student Loans In addition to service and interest costs, the components of projected net periodic postretirement benefit cost for fiscal 2012 include the amortization of actuarial losses of $17. Student loans include funds advanced to the University by the U.S. government under the Federal Perkins Loan Program (the Program). Student loans under the Program are subject to significant restrictions and generally have long-term maturities. Such funds are 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 and are reported as refundable advances. Accordingly, it is not practicable to determine the fair value of such amounts. 23 (Continued)

25 (12) Net Assets Following is a summary of net assets as of June 30: June 30, 2012 Temporarily Permanently Total Unrestricted restricted restricted net assets Operating: Undesignated, departmental funds $ 52,294 52,294 University designated 5,065 5,065 Donor restricted 5,905 5,905 Student loans 1,807 1,807 Endowment 119,580 34,567 38, ,708 Life income funds ,783 2,511 Pledges 1,852 1,205 3,057 Total net assets $ 178,902 42,896 41, ,347 June 30, 2011 Temporarily Permanently Total Unrestricted restricted restricted net assets Operating: Undesignated, departmental funds $ 63,416 63,416 University designated 3,621 3,621 Donor restricted 4,649 4,649 Student loans 1,769 1,769 Endowment 123,796 38,502 37, ,966 Life income funds (26) 997 1,591 2,562 Pledges 7,110 1,266 8,376 Total net assets $ 192,576 51,258 40, ,359 Net assets were released from temporary donor restrictions by incurring expenses satisfying the restricted purposes, including scholarships, instruction, research, and other operational purposes, or by occurrence of events specified by the donors or the passage of time, and amounted to $3,158 and $313 for the years ended, respectively. 24 (Continued)