Hendrix College. Accountants Report and Combined Financial Statements. July 31, 2006 and 2005

Transcription

1 Accountants Report and Combined Financial Statements

2 Contents Independent Accountants Report on Financial Statements and Supplementary Information... 1 Financial Statements Combined Statements of Financial Position...2 Combined Statements of Activities... 3 Combined Statements of Cash Flows... 4 Notes to Combined Financial Statements... 6 Supplementary Information Schedule of Expenditures of Federal Awards Independent Accountants Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards Independent Accountants Report on Compliance and Internal Control Over Compliance with Requirements Applicable to Major Federal Awards Programs Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings... 27

3 Independent Accountants Report on Financial Statements and Supplementary Information Board of Trustees Hendrix College Conway, Arkansas We have audited the accompanying combined statements of financial position of Hendrix College as of, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the College's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Hendrix College as of, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated October 6, 2006, on our consideration of the College s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule of expenditures of federal awards required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. October 6, 2006 /s/ BKD, LLP

4 Combined Statements of Financial Position Assets Cash and cash equivalents $ 5,608,232 $ 8,903,399 Restricted cash and cash equivalents 16,370,285 18,572,945 Accounts receivable, net of allowance; 2006 $209,683, 2005 $166, , ,626 Contributions receivable, net 6,542,692 10,653,980 Grant reimbursements receivable 230, ,024 Notes receivable, net of allowance of $158,718, 2006 and ,560,368 1,484,332 Accrued interest receivable 9,053 46,484 Investments 168,828, ,151,783 Beneficial interest in perpetual trusts 1,062, ,511 Property and equipment, net of accumulated depreciation and amortization; 2006 $32,231,629, 2005 $29,932,217 67,808,890 62,873,768 Other 2,022,361 2,151,277 Total assets $ 271,003,660 $ 259,636,129 Liabilities and Net Assets Liabilities Accounts payable and other liabilities $ 2,934,858 $ 2,538,905 Payments due to beneficiaries 47,466 54,845 Deposits held in custody for others 88, ,410 Interest payable 579, ,708 Deferred revenue 1,376,731 1,030,092 Annuities and trusts payable 4,592,284 3,854,263 Estimated self-insurance costs 107, ,939 Accrued postretirement benefit costs 6,654,329 5,788,358 Refundable advances on federal government loans 789, ,474 Bonds payable 38,905,000 35,160,000 Total liabilities 56,075,994 50,074,994 Net Assets Unrestricted 101,221, ,656,335 Temporarily restricted 67,298,618 64,553,941 Permanently restricted 46,407,740 44,350,859 Total net assets 214,927, ,561,135 Total liabilities and net assets $ 271,003,660 $ 259,636,129 See Notes to Combined Financial Statements 2

5 Combined Statements of Activities Years Ended Temporarily Restricted 2006 Permanently Restricted Unrestricted Total Revenues, Gains and Other Support Tuition and fees $ 18,487,374 $ $ $ 18,487,374 Less scholarships and financial aid (10,447,423) (10,447,423) Net tuition and fees 8,039, ,039,951 Investment income 2,056,979 1,857,438 3,914,417 Private gifts 2,947,884 1,759,299 1,485,541 6,192,724 Sales and services of auxiliary enterprises 5,419,013 5,419,013 Other revenues 162,361 2, ,329 Net realized and unrealized gains 4,882,956 6,163,789 11,046,745 Grants and contracts 3,001,672 3,001,672 Change in value of split interest agreements 193,345 (101,630) 91,715 Change in beneficial interest in perpetual trusts 672, ,970 Net assets released from restrictions 10,233,834 (10,233,834) 0 Total revenues, gains and other support 33,742,978 2,744,677 2,056,881 38,544,536 Expenses Educational and general expenses Instruction 13,539,170 13,539,170 Academic services 1,524,674 1,524,674 Student services 4,727,715 4,727,715 Institutional support 7,872,579 7,872,579 Total education and general expenses 27,664, ,664,138 Auxiliary enterprises expenses 4,384, ,384,685 Other expenses Loan administrative expenses (6,817) (6,817) Endowment administrative expenses 465, ,663 Loss on disposal of property and equipment 670, ,336 Loss on extinguishment of bonds 0 Total other expenses 1,129, ,129,182 Total expenses 33,178, ,178,005 Change in Net Assets 564,973 2,744,677 2,056,881 5,366,531 Net Assets, Beginning of Year 100,656,335 64,553,941 44,350, ,561,135 Net Assets, End of Year $ 101,221,308 $ 67,298,618 $ 46,407,740 $ 214,927,666 See Notes to Combined Financial Statements

6 Unrestricted Temporarily Restricted 2005 Permanently Restricted Total $ 16,469,832 $ $ $ 16,469,832 (8,845,565) (8,845,565) 7,624, ,624,267 2,162,757 2,189,690 4,352,447 3,197,383 4,848,774 6,224,552 14,270,709 5,160,572 5,160, ,232 3, ,472 8,306,783 9,795,096 18,101,879 21,534 2,251,725 2,273,259 63,528 28,692 92,220 29,248 29,248 9,008,836 (9,008,836) 0 35,666,364 10,143,217 6,282,492 52,092,073 12,786,852 12,786,852 1,437,384 1,437,384 4,617,351 4,617,351 7,558,118 7,558,118 26,399, ,399,705 4,407, ,407,535 20,544 20, , , , ,892 1,111, ,111,579 31,918, ,918,819 3,747,545 10,143,217 6,282,492 20,173,254 96,908,790 54,410,724 38,068, ,387,881 $ 100,656,335 $ 64,553,941 $ 44,350,859 $ 209,561,135 3

7 Combined Statements of Cash Flows Years Ended Operating Activities Change in net assets $ 5,366,531 $ 20,173,254 Items not requiring (providing) operating activities cash flows Depreciation and amortization 2,471,506 2,357,060 Net realized and unrealized gains on investments (11,046,745) (18,101,879) Change in value of split-interest agreements (91,715) (92,220) Change in beneficial interest in perpetual trusts (672,970) (29,248) Gifts and bequests restricted for endowment and trusts (1,485,541) (6,224,552) Loss on disposal of property and equipment 670,336 Loss on extinguishment of bonds 451,892 Changes in Accounts receivable 771 (597,814) Contributions receivable 4,111,288 (3,193,404) Grants reimbursement receivable 216,773 29,050 Notes receivable (76,036) 25,070 Accrued interest receivable 37,431 (16,025) Other assets 128,918 (1,229,947) Accounts payable and other liabilities 395, ,071 Payments due to beneficiaries (7,379) 25,566 Deposits held in custody for others (23,701) 5,334 Interest payable 62, ,975 Deferred revenue 346, ,943 Annuities and trusts payable 1,566, ,126 Estimated self-insurance costs (93,267) 29,606 Accrued postretirement benefits cost 865, ,770 Net cash provided by (used in) operating activities 2,743,820 (3,877,372) Investing Activities Purchase of property and equipment (8,076,964) (4,376,650) Deposits to restricted cash and cash equivalents 2,202,660 (18,572,945) Purchase of investments (63,062,741) (99,884,676) Proceeds from disposition of investments 58,479,983 99,121,006 Net cash used in investing activities (10,457,062) (23,713,265) See Notes to Combined Financial Statements 4

8 Combined Statements of Cash Flows (Continued) Years Ended Financing Activities Decrease in refundable advances on federal government loans $ (28,726) $ (30,159) Repayment of bonds payable (390,000) (267,500) Proceeds from issuance of bonds 4,135,000 22,388,108 Gifts and bequests restricted for endowment and trusts 1,485,541 6,224,552 Payments on annuities and trusts payable (783,740) (475,672) Net cash provided by financing activities 4,418,075 27,839,329 Increase (Decrease) in Cash and Cash Equivalents (3,295,167) 248,692 Cash and Cash Equivalents, Beginning of Year 8,903,399 8,654,707 Cash and Cash Equivalents, End of Year $ 5,608,232 $ 8,903,399 Supplemental Cash Flows Information Interest paid $ 1,550,074 $ 732,460 Bonds issued to fund defeasance escrow account $ $ 12,771,892 See Notes to Combined Financial Statements 5

9 Notes to Combined Financial Statements Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Hendrix College is a private institution of higher education located in Conway, Arkansas, that was incorporated under the laws of the State of Arkansas in The College offers undergraduate and graduate programs of college and university level instruction and awards degrees as authorized by the statutes of the State of Arkansas. The College is accredited by the North Central Accrediting Association. Hendrix-Murphy Foundation, Inc. is a not-for-profit corporation with the sole purpose of benefiting and supporting the College. The financial statements of the Foundation have been combined with the College. The Village at Hendrix, LLC, ( Village ) is a corporation formed to develop a portion of the College s property adjacent to the main campus facilities located in Conway, Arkansas. The financial statements of the Village have been combined with the College. Use of Estimates The preparation of the combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. Cash Equivalents The College considers all liquid investments with original maturities of three months or less to be cash equivalents. At, cash equivalents consisted primarily of money market funds. The College s cash accounts exceeded federally insured limits by approximately $5,500,000 and $8,500,000, based on balances reported by the financial institutions at July 31, 2006 and 2005, respectively. Restricted Cash and Cash Equivalents Restricted cash and cash equivalents included the unexpended proceeds from the net proceeds of the Series 2005B and 2006 Bonds, which are restricted for use in financing capital improvements on the College s campus. Investments and Investment Return Investments in equity and debt securities having readily determinable fair values are carried at fair value. Other investments, such as real estate, are valued at cost (or fair value at time of donation, if acquired by contribution). Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized gains and losses on other investments. 6

10 Notes to Combined Financial Statements Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the statements of activities as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. The College maintains pooled investment accounts for its endowments. Investment income and realized and unrealized gains and losses from securities in the pooled investment accounts are allocated monthly to the individual endowments based on the relationship of the fair value of the interest of each endowment to the total fair value of the pooled investments accounts, as adjusted for additions to or deductions from those accounts. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets include assets and trust obligations of the College related to gifts with explicit donor-imposed restrictions that have not been met as to specified purpose, periods of time or after specified dates. Unconditional promises to give that are due in future periods and are not permanently restricted are classified as temporarily restricted net assets. Permanently restricted net assets include assets of the College for which the donor has stipulated that the contribution be maintained in perpetuity. Donor-imposed restrictions limiting the use of the assets or their economic benefit neither expire with the passage of time nor can be removed by satisfying a specific purpose. Property and Equipment Property and equipment are recorded at cost or, in the case of donated property and equipment, at fair value at the time of the contribution. Property and equipment is depreciated on a straight-line basis over the estimated useful life of each asset. Deferred Revenue Income from tuition and other revenue is deferred and recognized over the periods to which the tuition and other revenue relate. Self Insurance The College has elected to self-insure certain costs related to employee health benefit programs. Costs resulting from uninsured losses are expensed when incurred. The College has purchased insurance that limits its exposure for individual claims to $100,000. 7

11 Notes to Combined Financial Statements Contributions Gifts of cash and other assets received without donor stipulations are reported as unrestricted revenue and net assets. Gifts received with a donor stipulation that limits their use are reported as temporarily or permanently restricted revenue and net assets. When a donor stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Gifts having donor stipulations which are satisfied in the period the gift is received are reported as unrestricted revenue and net assets. Gifts and investment income that are originally restricted by the donor and for which the restriction is met in the same time period are recorded as temporarily restricted and then released from restriction. Gifts of land, buildings, equipment and other long-lived assets are reported as unrestricted revenue and net assets unless explicit donor stipulations specify how such assets must be used, in which case the gifts are reported as temporarily or permanently restricted revenue and net assets. Absent explicit donor stipulations for the time long-lived assets must be held, expirations of restrictions resulting in reclassification of temporarily restricted net assets as unrestricted net assets are reported when the long-lived assets are placed in service. Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are reported at the present value of estimated future cash flows. Conditional gifts depend on the occurrence of a specified future and uncertain event to bind the potential donor and are recognized as assets and revenue when the conditions are substantially met and the gift becomes unconditional. Collections Collections, which were acquired through contributions since the College s inception, consist of works of art, historical treasures and similar assets. Collections are not capitalized in as much as the items are preserved and cared for continuously. Grants Support funded by grants is recognized as the College performs the contracted services or incurs outlays eligible for reimbursement under the grant agreements. Grant activities and outlays are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Income Taxes The College and Foundation are exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law. However, the College and Foundation are subject to federal income tax on any unrelated business taxable income. 8

12 Notes to Combined Financial Statements The Village at Hendrix, LLC, is subject to federal and state corporate income tax provisions. No income tax expense or liability has been recorded in the combined financial statements as operations of the Village have not generated income through July 31, Allocation of Expenses The costs related to operating the College s physical plant, including depreciation of its assets, are allocated to supporting the various functions based upon the square footage that each occupies within the College s facilities. Interest costs not capitalized as a component of asset cost are allocated to the specific functions for which the related debt was incurred. Promises to Give Unconditional promises to give are recognized as revenue or gains in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Accounts and Notes Receivable Accounts receivable generally represent amounts due from students and are stated at the amount billed less applied scholarship and loan proceeds. The College provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Tuition is generally due at the beginning of the semester unless the student has signed a payment plan. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the student. Notes receivable consist of amounts due under the Federal Perkins Loan Program and are stated at their outstanding principal amount, net of an allowance for doubtful notes. Loans are made to students based on demonstrated financial need and satisfaction of federal eligibility requirements. Principal and interest payments on loans generally do not commence until after the borrower graduates or otherwise ceases enrollment. The College provides an allowance for doubtful notes, which is based upon a review of outstanding loans, historical collection information and existing economic conditions. Loans that are delinquent continue to accrue interest. Loans that are past due for at least one payment are considered delinquent. Delinquent loans are written off based on individual credit evaluation and specific circumstances of the student. The amount of the loans delinquent greater than 90 days but still accruing interest at were approximately $310,000 and $325,000, respectively. Reclassifications Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 financial statement presentation. These reclassifications had no effect on the change in net assets. 9

13 Notes to Combined Financial Statements Note 2: Contributions Receivable Contributions receivable consisted of the following at July 31: Temporarily Restricted 2006 Permanently Restricted Total Due within one year $ 1,924,663 $ 741,671 $ 2,666,334 Due in one to five years 3,104, ,193 3,360,655 Due in more than five years 977,151 26,578 1,003,729 6,006,276 1,024,442 7,030,718 Less: Unamortized discount 454,860 33, ,026 $ 5,551,416 $ 991,276 $ 6,542,692 Temporarily Restricted 2005 Permanently Restricted Total Due within one year $ 3,785,143 $ 1,188,090 $ 4,973,233 Due in one to five years 5,092, ,710 5,360,589 Due in more than five years 1,011,842 25,875 1,037,717 9,889,864 1,481,675 11,371,539 Less: Unamortized discount 653,606 63, ,559 $ 9,236,258 $ 1,417,722 $ 10,653,980 Discount rates ranged from.96% to 5.00% in 2006 and Note 3: Conditional Gifts During the year ending July 31, 2003, the College received a conditional promise to give in the amount of $3,000,000. The gift provides a $1 match for every $2 the College raises for scholarships for middle-income students through July 31, Revenue from this gift is recognized only as contributions eligible for the match are earned. As of July 31, 2006, $2,240,583 had been collected on this gift. 10

14 Notes to Combined Financial Statements Note 4: Investments and Investment Return The College s and Foundation s investments at July 31, consisted of the following: Equity funds $ 66,257,224 $ 61,417,083 Corporate stocks 46,820,695 39,738,072 Fixed income funds 21,213,160 20,767,211 Limited partnerships 16,629,899 11,542,252 Real estate 4,465,620 3,820,189 Money market 5,180,847 3,566,197 Other 8,260,748 12,300,779 $ 168,828,193 $ 153,151,783 The College's temporarily and permanently restricted net assets include various endowment funds established by donors. At, the fair value of the assets of some of these funds was less than the level required by donor stipulation by $188,405 and $279,065, respectively. Total investment return is comprised of the following: Unrestricted 2006 Temporarily Restricted Total Investment income $ 2,056,979 $ 1,857,438 $ 3,914,417 Net realized gains on investments 2,232,819 3,775,631 6,008,450 Net unrealized gains (losses) on investments 2,650,137 2,388,158 5,038,295 $ 6,939,935 $ 8,021,227 $ 14,961,162 11

15 Notes to Combined Financial Statements Unrestricted 2005 Temporarily Restricted Total Investment income $ 2,162,757 $ 2,189,690 $ 4,352,447 Net realized gains on investments 2,781,289 20,590,689 23,371,978 Net unrealized gains (losses) on investments 5,525,494 (10,795,593) (5,270,099) $ 10,469,540 $ 11,984,786 $ 22,454,326 Note 5: Beneficial Interest in Perpetual Trusts The College is the beneficiary under several perpetual trusts administered by outside parties. Under the terms of the trusts, the College has the irrevocable right to receive income earned on the assets of the trusts in perpetuity, but never receives the assets held in trusts. The estimated value of the expected future cash flows is $1,062,480 and $389,511, which represents the fair value of the trust assets at, respectively. Note 6: Property and Equipment Property and equipment at July 31, consists of: Land and improvements $ 5,365,057 $ 5,084,123 Buildings 67,048,136 64,134,396 Furniture and equipment 13,107,657 12,840,354 Library holdings 7,203,711 6,985,992 Construction in progress 7,315,958 3,761, ,040,519 92,805,985 Less accumulated depreciation and amortization 32,231,629 29,932,217 $ 67,808,890 $ 62,873,768 12

16 Notes to Combined Financial Statements Note 7: Bonds Payable Capital Improvement Revenue Bonds (Hendrix College Projects), Series 2005 A, 2.4%-5.0%, due annually in varying amounts through October 2026 $ 12,550,000 $ 12,940,000 Capital Improvement Revenue Bonds (Hendrix College Projects), Series 2005 B, 2.6%-5.0%, due annually in varying amounts through October ,220,000 22,220,000 Capital Improvement Revenue Bonds (Hendrix College Projects), Series 2006, 3.5%-4.6%, due annually in varying amounts through October ,135,000 $ 38,905,000 $ 35,160,000 Student tuition, fees and dormitory rental revenues are pledged for the repayment of the bonds. The pledged revenues in each fiscal year cannot be less than 125% of the maximum annual debt service on all outstanding bonds in all outstanding bonds in any fiscal year thereafter. As of July 31, 2006, the College believes it is in compliance with its debt covenants. Debt service requirements of bonds outstanding at July 31, 2006, are: Principal Interest Total 2007 $ 505,000 $ 1,722,993 $ 2,227, ,000 1,700,854 2,220, ,000 1,677,886 2,662, ,015,000 1,645,816 2,660, ,045,000 1,611,041 2,656,041 Thereafter 34,835,000 20,831,349 55,666,349 $ 38,905,000 $ 29,189,939 $ 68,094,939 Note 8: Annuities and Trusts Payable The College has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The College has recorded a liability at, of $2,827,707 and $1,893,604, which represents the present value of the future annuity obligations. The liability has been determined using discount rates of.82% to 6.70% and applicable mortality tables. Assets received in connection with gift annuities for which a liability was recognized at had fair market values of $3,541,607 and $2,401,629, respectively. 13

17 Notes to Combined Financial Statements Additionally, the College administers various charitable remainder trusts. A charitable remainder trust provides for the payment of distributions to the grantor or other designated beneficiaries over the trust s term (usually the designated beneficiary s lifetime). At the end of the trust s term, the remaining assets are available for the College s use. The portion of the trust attributable to the future interest of the College is recorded in the statement of activities as either temporarily or permanently restricted contributions in the period the trust is established. Assets held in the charitable remainder trusts are recorded at fair value in the College s statements of financial position. On an annual basis, the College revalues the liability to make distributions to the designated beneficiaries based on actuarial assumptions. The College has recorded a liability at, of $1,764,577 and $1,960,659, which represents the present value of the future trust obligations. The present value of the estimated future payments is calculated using a discount rate of.95% to 5.00% and applicable mortality tables. Assets received in connection with remainder trusts for which a liability was recognized at, had fair market values of $3,518,618 and $3,812,432, respectively. Note 9: Net Assets Temporarily Restricted Net Assets Temporarily restricted net assets at July 31, are available for the following purposes or periods: Instruction $ 34,574,804 $ 32,316,864 Scholarships 16,471,941 15,183,043 Future operating expenses 16,251,873 17,054,034 $ 67,298,618 $ 64,553,941 Permanently Restricted Net Assets Permanently restricted net assets at July 31, are restricted to: Investment in perpetuity, the income of which is expendable to support Instruction $ 5,873,797 $ 5,677,232 Scholarships 24,402,840 23,273,398 Operating expenses 16,131,103 15,400,229 $ 46,407,740 $ 44,350,859 14

18 Notes to Combined Financial Statements Net Assets Released from Restrictions Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors Purpose restrictions accomplished Instruction $ 3,780,032 $ 3,720,217 Scholarships 2,681,989 2,403,101 Operating expenses 769, ,630 7,231,412 6,854,948 Time restrictions expired Passage of specified time 3,002,422 2,153,888 $ 10,233,834 $ 9,008,836 Note 10: Pension and Postretirement Health Benefit Plans The College has a defined contribution pension plan established under Section 403(b) of the Internal Revenue Code. The plan covers substantially all employees. The College contributes an amount equal to 3% of participating employee s base salary after two years of service. Additionally, the College matches employee contributions, up to a maximum of 3% of the employee s base salary. After five years of service, the College contributes 12% of the employee s base salary with no requirement to match employee contributions. The College contributed approximately $1,061,000 and $990,000 for 2006 and 2005, respectively. The College has a noncontributory defined benefit postretirement health care plan covering all employees who meet the eligibility requirements. The College funds the plan as claims are paid; however, the cost of providing postretirement health coverage is accrued during the years that the employees render services. The College is amortizing the initial accumulated postretirement benefit obligation (APBO) over 20 years on a straight-line basis. 15

19 Notes to Combined Financial Statements The College uses a July 31, 2006, measurement date for the plan. Significant balances, costs and assumptions are: Other Benefits Benefit obligation $ (11,270,123) $ (10,789,592) Present value of expected retiree contributions 1,359,434 1,160,803 Funded status $ (9,910,689) $ (9,628,789) Accumulated benefit obligation $ (9,910,689) $ (9,628,789) Amounts recognized in the statements of financial position: Accrued postretirement benefit cost $ (6,654,329) $ (5,788,358) Benefit costs $ 1,372,050 $ 1,286,737 Medipak and other premiums paid $ 183,910 $ 174,949 Benefits paid for retirees $ 322,169 $ 127,018 Weighted-average assumptions used to determine benefit costs and obligations: Discount rate 6.5% 6.5% For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2006 and The rate was assumed to decrease gradually to 5.0% by the year 2012 and remain at that level thereafter. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide benefits at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-2, the College has reflected the estimated effects of the Act on the measurements of plan benefit obligations and periodic benefit costs during the year ending July 31,

20 Notes to Combined Financial Statements The following are actuarial estimates of amounts expected to be paid under the plan, net of retiree contributions, as of July 31, 2006: 2007 $ 555, , , , , ,238,000 $ 7,276,000 Note 11: Designation of Unrestricted Net Assets Unrestricted net assets at July 31, 2006, include $328,293 of net assets that have been designated by senior administrators to be maintained in perpetuity. The income generated from the underlying investments is to be used in the maintenance of certain buildings. Also, at July 31, 2006, senior administrators have designated $785,477 for the Federal Perkins Loan program. These funds shall remain designated as long as the college participates in the Perkins Loan program. Note 12: Defeasance of Bonds Upon issuance and delivery of the 2005A Bonds the College defeased its outstanding 1996 bonds in the total principal amount of $12,320,000. Proceeds from the 2005A Bonds were used to purchase securities that were deposited in trust under an escrow agreement sufficient in amount to pay future principal, interest and redemption premiums on the defeased Bonds, which is to occur on October 1, This advance refunding transaction resulted in an extinguishment of debt since the college was legally released from its obligation on the 1996 bonds at the time of defeasance. Accordingly, the 1996 Bonds, aggregating $12,320,000 at July 31, 2005, remain outstanding, but are excluded from the College s balance sheet. Note 13: Disclosures About Fair Value of Financial Instruments The following methods were used to estimate the fair value of financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the College does not know whether the fair values shown represent values at which the respective financial instruments could be sold individually or in the aggregate. 17

21 Notes to Combined Financial Statements Investments Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Investments in oil and gas properties and real estate are excluded from the disclosure because they are not financial instruments. Contributions Receivable The carrying amount is a reasonable estimate of fair value. Beneficial Interest in Perpetual Trusts The carrying amount is a reasonable estimate of fair value. Notes Receivable The carrying amount is a reasonable estimate of fair value. Bonds Payable Fair value is estimated based on the borrowing rates currently available to the College for debt with similar terms and maturities. Annuities and Trusts Payable Fair values of the annuity and trust obligations are based on an actuarial evaluation of the estimated annuity or other payments under such obligations. The following table presents estimated fair values of the College s financial instruments at July 31, 2006 and 2005: Carrying Amount Carrying Fair Value Amount Fair Value Financial assets Cash and cash equivalents $ 5,608,232 $ 5,608,232 $ 8,903,399 $ 8,903,399 Restricted cash and cash equivalents 16,370,285 16,370,285 18,572,945 18,572,945 Investments 168,828, ,828, ,151, ,151,783 Contributions receivable 6,542,692 6,542,692 10,653,980 10,653,980 Beneficial interest in perpetual trust 1,062,480 1,062, , ,511 Notes receivable 1,560,368 1,560,368 1,484,332 1,484,332 Financial liabilities Bonds payable 38,905,000 38,336,635 35,160,000 35,189,784 Annuities and trusts payable 4,592,284 4,592,284 3,854,263 3,854,263 18

22 Notes to Combined Financial Statements Note 14: Significant Estimates and Concentrations Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: Postretirement Health Benefit Plan As described in Note 10, the amount of annual expense accrued for postretirement health benefits is based on an estimate of the present value of total amounts payable under the plan over the lifetimes of the beneficiaries. Note 15: Commitment to Develop The Village at Hendrix In May 2006, Hendrix announced development plans for property owned by the College adjacent to the main campus. The Village at Hendrix, LLC, was formed to hold the real estate development. Development costs of the property are projected to be funded primarily through a combination of cash contributions from the College s endowment and debt financing. Cash contributions from the College s endowment pool will be reallocated from other assets within the pool. As with any other investment, inherent risks are associated with the development of real estate. The financial statements of The Village at Hendrix, LLC, are included as part of the College s combined financial statements; however, as of July 31, 2006, no substantial expenditures have been made by the College relative to the development. Certain services necessary for the development of the project will be secured from a member of the Board of Trustees. 19

23 Supplementary Information

24 Schedule of Expenditures of Federal Awards Year Ended July 31, 2006 Cluster/Program CFDA Number Amount Student Financial Aid Cluster U.S. Department of Education: Federal Pell Grant Program $ 557,560 Federal Work Study Program ,637 Federal Supplemental Educational Opportunities Grants ,953 Federal Family Education Loan Program ,357,220 Federal Perkins Loan Program ,769,722 Total Student Financial Aid Cluster 8,923,092 Research and Development Cluster: National Science Foundation: Mathematical and Physical Science ,438 Geosciences ,188 Biological Sciences ,223 National Aeronautic and Space Administration: Aerospace Education Services Program (Pass-through from the Arkansas Space Consortium) ,889 National Institutes of Health: Cancer Treatment Research ,693 U.S. Department of Health and Human Services: Research Infrastructure (Pass-through from the University of Arkansas for Medical Sciences) ,088 Total Research and Development Cluster 684,519 $ 9,607,611 Notes to Schedule 1. This schedule includes the federal awards activity of Hendrix College and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non- Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. 2. Of the federal expenditures presented in this schedule, Hendrix College provided federal awards to subrecipients as follows: Program CFDA Number Subrecipient Amount Provided No awards were provided to subrecipients. 20

25 Independent Accountants' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance With Government Auditing Standards Board of Trustees Hendrix College Conway, Arkansas We have audited the financial statements of Hendrix College as of and for the year ended July 31, 2006, and have issued our report thereon dated October 6, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the College s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. Compliance and Other Matters As part of obtaining reasonable assurance about whether the College s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. 21

26 We noted certain matters that we reported to the College s administration in a separate letter dated October 6, This report is intended solely for the information and use of the governing body, administration and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. /s/ BKD, LLP October 6,

27 Independent Accountants Report on Compliance and Internal Control Over Compliance With Requirements Applicable to Major Federal Awards Programs Board of Trustees Hendrix College Conway, Arkansas Compliance We have audited the compliance of Hendrix College with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to its major federal program for the year ended July 31, The College s major federal program is identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal program is the responsibility of the College s administration. Our responsibility is to express an opinion on the compliance of Hendrix College based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the College s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the College s compliance with those requirements. In our opinion, Hendrix College complied, in all material respects, with the requirements referred to above that are applicable to its major federal program for the year ended July 31, Internal Control Over Compliance The administration of Hendrix College is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the College s internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A

28 Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts and grants that would be material in relation to a major federal program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses. This report is intended solely for the information and use of the governing body, administration and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. /s/ BKD, LLP October 6,

29 Schedule of Findings and Questioned Costs Year Ended July 31, 2006 Summary of Auditor s Results 1. The opinion expressed in the independent accountants report was: Unqualified Qualified Adverse Disclaimed 2. The independent accountants report on internal control over financial reporting described: Reportable condition(s) noted considered material weakness(es)? Yes No Reportable condition(s) noted that are not considered to be a material weakness? Yes No 3. Noncompliance considered material to the financial statements was disclosed by the audit? Yes No 4. The independent accountants report on internal control over compliance with requirements applicable to major federal awards programs described: Reportable condition(s) noted considered material weakness(es)? Yes No Reportable condition(s) noted that are not considered to be a material weakness? Yes No 5. The opinion expressed in the independent accountants report on compliance with requirements applicable to major federal awards was: Unqualified Qualified Adverse Disclaimed 6. The audit disclosed findings required to be reported by OMB Circular A-133? Yes No 25

30 Schedule of Findings and Questioned Costs (Continued) Year Ended July 31, The College s major programs were: Cluster/Program CFDA Number Student Financial Aid Cluster Federal Pell Grant Program Federal Work Study Program Federal Supplemental Educational Opportunities Grants Federal Family Education Loan Program Federal Perkins Loan Program The threshold used to distinguish between Type A and Type B programs as those terms are defined in OMB Circular A-133 was $300, The College qualified as a low-risk auditee as that term is defined in OMB Circular A-133? Yes No Findings Required to be Reported by Government Auditing Standards Reference Number No matters are reportable. Finding Questioned Costs Findings Required to be Reported by OMB Circular A-133 Reference Number No matters are reportable. Finding Questioned Costs 26

31 Summary Schedule of Prior Audit Findings Year Ended July 31, 2006 Reference Number Summary of Finding Status No matters are reportable. 27