PHILADELPHIA UNIVERSITY. Financial Statements. June 30, 2007 and 2006

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1 Financial Statements (With Independent Auditors Report Thereon)

2 Table of Contents Page Independent Auditors Report 1 Statements of Financial Position 2 Statements of Activities 3 Statements of Cash Flows 4 5

3 Independent Auditors Report The Board of Trustees Philadelphia University: We have audited the accompanying statements of financial position of Philadelphia 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 Philadelphia 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, 2007

4 Statements of Financial Position Assets Cash and cash equivalents $ 7,399,353 9,321,687 Accounts receivable: Tuition, net (note 1(m)) 877, ,320 Grants and contracts 595,877 1,116,386 Employee loan receivable (note 8) 786,307 Other 412, ,841 Inventory 633, ,775 Prepaid expenses 1,091, ,728 Contributions receivable, net (note 3) 10,636,071 5,873,146 Investments (note 4) 26,858,393 23,191,277 Student loans receivable, net (note 1(m)) 1,270,508 1,277,891 Deposits with bond trustees (note 4) 5,347,912 19,018,027 Debt issuance costs 810,373 1,223,954 Property, plant, and equipment, net (note 2) 110,281,325 97,499,705 Total assets $ 167,001, ,820,737 Liabilities and Net Assets Liabilities: Current portion of long-term debt (note 6) $ 28,791 1,312,294 Accounts payable and accrued expenses 2,686,976 5,062,671 Accrued interest payable 255, ,251 Accrued compensation (note 8) 1,556,724 3,594,102 Deposits and advances 3,661,748 3,229,845 Other liabilities 2,318,767 2,417,705 U.S. government advances for student loans 1,003,930 1,024,590 Long-term debt, less current portion (note 6) 69,200,963 68,616,112 Total liabilities 80,713,473 85,766,570 Net assets (note 5): Unrestricted 56,665,366 52,663,980 Temporarily restricted 18,211,041 11,273,357 Permanently restricted 11,411,438 11,116,830 Total net assets 86,287,845 75,054,167 Total liabilities and net assets $ 167,001, ,820,737 See accompanying notes to financial statements. 2

5 Statements of Activities Years ended Temporarily Permanently Temporarily Permanently Unrestricted restricted restricted Total Unrestricted restricted restricted Total Operating revenue and other additions: Tuition and fees, net (note 1(i)) $ 51,669,651 51,669,651 47,118,472 47,118,472 Auxiliary enterprises, net (note 1(i)) 11,787,592 11,787,592 10,798,772 10,798,772 Contributions 701, , , ,934 Grants and contracts 6,865,723 6,865,723 6,667,648 6,667,648 Investment income 2,035,188 2,035,188 2,451,273 2,451,273 Other revenue 1,015, ,141 1,347,536 1,111, ,858 1,315,144 Net assets released from restrictions 1,559,626 (1,559,626) 1,974,555 (1,974,555) Total operating revenue and other additions 75,634,931 (1,227,485) 74,407,446 71,034,940 (1,770,697) 69,264,243 Operating expenses: Program services: Instructional 27,193,642 27,193,642 26,912,921 26,912,921 Student services 10,680,258 10,680,258 7,672,883 7,672,883 Auxiliary enterprises 12,156,780 12,156,780 10,647,224 10,647,224 Total program services 50,030,680 50,030,680 45,233,028 45,233,028 Management and general: Academic support 6,975,000 6,975,000 6,497,637 6,497,637 Administrative 14,029,381 14,029,381 13,347,426 13,347,426 Total management and general 21,004,381 21,004,381 19,845,063 19,845,063 Total operating expenses 71,035,061 71,035,061 65,078,091 65,078,091 Change in net assets from operating activities 4,599,870 (1,227,485) 3,372,385 5,956,849 (1,770,697) 4,186,152 Nonoperating activities: Contributions 5,462, ,608 5,757, , ,008 1,299,671 Cumulative effect of change in accounting p rinciple (note 1(n) ) (476,226) (476,226) Loss on extinguishment of debt (note 6) (1,400,247) (1,400,247) Net realized and unrealized gains on investments 801,763 2,702,535 3,504, ,734 1,371,093 1,662,827 Change in net assets from nonoperating activities (598,484) 8,165, ,608 7,861,293 (184,492) 2,349, ,008 2,486,272 Change in net assets 4,001,386 6,937, ,608 11,233,678 5,772, , ,008 6,672,424 Net assets at beginning of year 52,663,980 11,273,357 11,116,830 75,054,167 46,891,623 10,694,298 10,795,822 68,381,743 Net assets at end of year $ 56,665,366 18,211,041 11,411,438 86,287,845 52,663,980 11,273,357 11,116,830 75,054,167 See accompanying notes to financial statements. 3

6 Statements of Cash Flows Years ended Cash flows from operating activities: Change in net assets $ 11,233,678 6,672,424 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 4,664,307 3,615,660 Amortization of debt issuance costs and original issue discount 650, ,765 Contributions restricted for endowment (294,608) (321,008) Net realized and unrealized gains on investment s (3,504,298) (1,662,827) Changes in assets and liabilities: Accounts receivable: Tuition (222,462) (45,623) Grants and contracts 520,509 (242,670) Employee loan receivable (786,307) Other (176,466) 88,398 Inventory (62,954) 31,055 Prepaid expenses (254,653) 229,760 Contributions receivable (4,762,925) (48,283) Student loans receivable 7,383 (10,091) Accounts payable and accrued expenses (2,375,695) 702,627 Accrued interest payable (253,677) 142,292 Accrued compensation (2,037,378) 1,324,798 Deposits and advances 431,903 (484,277) Other liabilities (98,938) 2,257,950 Net cash provided by operating activities 2,678,216 12,462,950 Cash flows from investing activities: Purchases of property, plant, and equipment (17,445,927) (33,441,373) Purchases of investments (13,293,059) (13,355,374) Proceeds from sales of investments 13,130,241 13,650,375 U.S. government advances for student loans (20,660) (14,383) Net cash used in investing activities (17,629,405) (33,160,755) Cash flows from financing activities: Contributions restricted for endowment 294, ,008 Proceeds from long-term borrowings 15,055,000 11,185,000 Payments on long-term debt (1,482,294) (9,630,375) Payments to trustee for advance refunding (14,595,000) Use of deposits with bond trustees 15,176,331 33,028,111 Additions to deposits with bond trustees (1,506,216) (11,722,344) Payment of debt issuance costs (143,073) (133,596) Original issue premium/discount 304,773 26,617 Underwriting discount (75,274) (81,033) Net cash provided by financing activities 13,028,855 22,993,388 Net increase (decrease) in cash and cash equivalents (1,922,334) 2,295,583 Cash and cash equivalents at beginning of year 9,321,687 7,026,104 Cash and cash equivalents at end of year $ 7,399,353 9,321,687 Supplemental disclosure: Cash paid for interest $ 2,622,073 1,169,961 See accompanying notes to financial statements. 4

7 (1) Summary of Significant Accounting Policies (a) Organization Philadelphia University (the University) is a private, nonsectarian, coeducational institution located in Philadelphia, Pennsylvania. The main campus covers approximately 100 acres, excluding the University s branch campus located in Bucks County. During fiscal year 2007, the University enrolled 3,256 students, of whom approximately 85% were undergraduate students. Approximately 48% of the University s present full-time undergraduate student body comes from Pennsylvania, 26% from New Jersey and New York, and the remaining 26% from other states and countries. (b) Basis of Presentation The financial statements of the University have been prepared in conformity with U.S. generally accepted accounting principles. Resources are reported for accounting purposes in separate classes of net assets based on the existence or absence of donor-imposed restrictions. A description of the three net asset categories follows: Unrestricted Net assets that are not subject to donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the board of trustees (the Board). Temporarily restricted Net assets whose use by the University is subject to donor-imposed restrictions that can be fulfilled by actions of the University pursuant to those restrictions or that expire by the passage of time. Permanently restricted Net assets subject to donor-imposed restrictions that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income on these assets. Expenses are reported as decreases in unrestricted net assets. Expirations of donor-imposed restrictions that simultaneously increase one class of net assets and decrease another are reported as reclassifications between the applicable classes of net assets. Donor-restricted contributions are reported as unrestricted operating revenue when the restriction is satisfied within the same year that the contribution is received. (c) (d) Cash Equivalents The University considers all highly liquid investments with purchased maturities of three months or less to be cash equivalents. Cash equivalents that consist of $1,206,924 and $982,203 at June 30, 2007 and 2006, respectively, are stated at cost, which approximates market value. Inventory Inventory consists of the University store s books, clothing, and supplies and dining services food and supplies and is valued at cost or market, whichever is lower. Cost is determined using the first-in, first-out method. 5 (Continued)

8 (e) (f) Prepaid Expenses and Deposits and Advances Prepaid expenses and deposits and advances relate primarily to summer session expenses and revenues, respectively, expended or received prior to June 30. Revenues and expenses for the summer session are accounted for entirely in the period in which the summer session ends. Investments and Deposits with Bond Trustees Investments and deposits with bond trustees are carried at fair value. The cost of investments sold is determined by use of the specific-identification method. Investments acquired through gifts are recorded at market value at the date of the gift. Investments with readily determinable market values are reported in the financial statements at fair value based on quoted market prices. The estimated fair value of investments such as hedge funds, private equity interests, and other holdings not priced daily on an independent exchange are based on valuations provided by the external investment manager. The University believes the carrying amount of these financial instruments is a reasonable estimate of the fair value. Because these investments are not readily marketable, their estimated value is subject to additional uncertainty, and therefore, values realized upon disposition may vary from currently reported values. (g) Property, Plant, and Equipment Property, plant, and equipment values represent cost at date of acquisition or fair value at date of donation in the case of gifts. The University records depreciation using the straight-line method. Buildings and building components are depreciated over an estimated useful life of 50 years. Furniture and fixtures and office equipment are depreciated over estimated useful lives of 8, 15, or 20 years. Computer hardware and software are depreciated over an estimated useful life of 5 years. Acquisitions or improvements that extend the useful lives of assets are capitalized at cost if they exceed $500. Library books are expensed when purchased. At the time plant and equipment are retired or otherwise disposed of, the cost is adjusted and any gain or loss on disposition is recognized. Maintenance and repairs are included as expenses in the statements of activities. (h) Retirement Benefits Retirement benefits are provided for substantially all full-time employees through payments to the Teachers Insurance and Annuity Association/College Retirement Equities Fund, a defined contribution benefit plan. The University contributes 9% of base salary as the retirement benefit for all eligible and participating employees. Retirement expense was $1,697,671 and $1,653,086 for the years ended, respectively. 6 (Continued)

9 (i) (j) (k) (l) (m) Scholarships Student tuition and fees as well as sales and services of auxiliary enterprises are shown net of scholarships. Scholarships related to tuition and fees were $16,142,693 and $14,530,584 for the years ended, respectively. Scholarships related to auxiliary enterprises were $1,976,425 and $1,645,859 for the years ended, respectively. Fundraising Expenses Direct expenses for fundraising were approximately $872,000 and $794,000 for the years ended, respectively, and are reported within administrative expense in the accompanying statements of activities. Nonoperating Activities The University reports temporarily and permanently restricted gifts, net realized and unrealized gains and losses on investments, and unusual nonrecurring transactions to be nonoperating activities. Income Taxes The University has been recognized by the Internal Revenue Services as tax-exempt under Section 501(c)(3) of the Internal Revenue Code. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts in the financial statements. Actual results could differ from those estimates. In the statements of financial position, tuition accounts receivable and student loans receivable are presented net of $190,000 and $84,000, respectively, allowances for doubtful accounts at both. (n) Asset Retirement Obligation In fiscal year 2006, the University adopted Financial Accounting Standards Board Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations. Under FIN 47, costs related to legal obligations to perform certain activities in connection with the retirement, disposal, or abandonment of assets are required to be accrued. The University has identified asbestos abatement and other required disposals as a conditional asset retirement obligation. Asbestos abatement costs were estimated using a per square-foot estimate. Retroactively to July 1, 2005, the University recorded an asset retirement cost of $244,927, net of related accumulated depreciation of $135,508, an asset retirement obligation (included in other liabilities) of $636,829, and a cumulative effect of a change in accounting principle of $476,226. The 2007 accretion of the conditional asset retirement obligation and amortization of the related asset was $31, (Continued)

10 (2) Property, Plant, and Equipment At, property, plant, and equipment consisted of the following: Land and land improvements $ 3,870,561 3,870,561 Buildings 112,950,426 58,826,515 Furniture and equipment 41,553,960 37,336,465 Construction in progress 323,715 41,219, ,698, ,252,735 Accumulated depreciation (48,417,337) (43,753,030) $ 110,281,325 97,499,705 (3) Contributions Receivable The University records unconditional promises to give as contributions receivable. Those due beyond one year are discounted to the present value using discount rates ranging from 3.72% to 6.18%. At June 30, 2007 and 2006, the unamortized discount was $1,028,629 and $1,162,321, respectively. Information on contributions receivable at, net of discounts and allowances for uncollectible contributions, is as follows: Less than one year $ 503, ,221 One to five years 10,130,014 5,723,475 More than five years 81, ,022 Total 10,714,854 6,525,718 Allowance for uncollectible contributions (78,783) (652,572) $ 10,636,071 5,873,146 8 (Continued)

11 (4) Investments and Deposits with Bond Trustees A summary of investments and deposits with bond trustees follows: June 30, 2007 Deposits with bond trustees Investments Cost Fair value Cost Fair value Cash and cash equivalents $ 260, , , ,571 U.S. government and agency issues 5,087,168 5,087,168 50,000 53,773 Domestic equities 9,496,954 11,289,180 Hedge funds 3,515,882 4,831,926 Commodities fund 1,000, ,372 International equity mutual fund 4,400,000 4,692,235 Fixed-income mutual fund 4,308,517 4,175,336 Total $ 5,347,912 5,347,912 23,610,924 26,858,393 June 30, 2006 Deposits with bond trustees Investments Cost Fair value Cost Fair value Cash and cash equivalents $ 12,458,797 12,458,797 1,133,273 1,133,273 Repurchase agreements 3,032,000 3,032,000 U.S. government and agency issues 3,527,230 3,527,230 50,000 56,805 Domestic equities 8,823,280 9,251,764 Hedge funds 3,506,853 4,038,855 Commodities fund 1,000,000 1,021,543 International equity mutual fund 2,761,506 3,967,770 Fixed-income mutual fund 3,847,355 3,721,267 Total $ 19,018,027 19,018,027 21,122,267 23,191,277 As allowed by Commonwealth of Pennsylvania law, the University allocates to income each year a portion of endowment net realized gains under a board-approved endowment spending policy of 5% of the trailing three-year average of the market value of endowment assets. As a result, net realized and unrealized gains on permanently restricted endowment assets that have no donor-imposed restriction are nonetheless recorded in the financial statements as temporarily restricted net assets because such amounts legally must be made available to support future spending in years in which actual returns may be less than the board-approved spending rate. During the years ended, the University transferred $581,790 and $616,009, respectively, of endowment net realized gains from temporarily restricted net assets in order to meet the current year s spending requirement to unrestricted net assets. These transfers are included in net assets released from restrictions in the accompanying statements of activities. 9 (Continued)

12 (5) Net Assets The University s net assets consisted of the following at : Unrestricted $ 56,665,366 52,663,980 Temporarily restricted: Endowment-accumulated gains 7,350,839 5,230,094 Contributions receivable 10,636,071 5,873,146 Annuity funds 21,223 17,743 Other 202, ,374 Total temporarily restricted 18,211,041 11,273,357 Permanently restricted: Endowment, primarily for scholarships 11,411,438 11,116,830 Total net assets $ 86,287,845 75,054,167 (6) Long-Term Debt Long-term debt outstanding at is as follows: Pennsylvania Higher Educational Facilities Authority (PHEFA) Revenue Bonds: Series of 2007 (a) $ 15,055,000 Series of 2006 (b) 11,185,000 11,185,000 Series of 2004 (c) 42,090,000 42,260,000 Series of 2000 (d) 14,595,000 Series of 1993 (e) 1,285,000 Bank loan (f) 770, ,609 69,100,315 70,122,609 Add (less) unamortized bond premium (discount) 129,439 (194,203) $ 69,229,754 69,928,406 (a) In May 2007, the University issued $15,055,000 revenue bonds through PHEFA. The proceeds of the bonds were used primarily to advance refund the 2000 PHEFA revenue bonds ($14,595,000). The bond proceeds were also used to pay bond issuance costs and to establish the debt service reserve fund. The bonds mature in varying amounts through June 1, 2030, at interest rates ranging from 4.20% to 5.00%. A loss on early extinguishment of debt of approximately $1,400,247 is recorded in the accompanying statements of activities and included $584,038 of unamortized deferred financing costs and original issue discount. This bond issue produced a net present value savings of approximately $1,103,000 over the life of the new issue. 10 (Continued)

13 The bonds are a general obligation of the University and are collateralized by a debt service reserve fund held in trust in an amount that is 125% of the annual debt service. The bond indenture includes a special provision prohibiting the University from incurring short-term debt that exceeds 20% of the total unrestricted revenues for the most recent audited fiscal year, provided that, for a period of 30 consecutive days in every fiscal year, the University will have no outstanding short-term debt. The 2007 debt service reserve fund had a fair value of $1,504,589 as of June 30, 2007 and is included in deposits with bond trustees in the statement of financial position. (b) In January 2006, the University issued $11,185,000 revenue bonds through PHEFA. The proceeds of the bonds were primarily used to refund the 1996 PHEFA revenue bonds ($6,350,000) and to renovate and fit-out the existing campus athletic facility. The bond proceeds were also used to pay bond issuance costs and to establish the debt service, debt service reserve and project funds. The bonds mature in varying amounts through June, 1, 2035, at annual interest rates ranging from 4.00% to 5.50%. The bonds maturing on June 1, 2020 and June 1, 2035 are subject to optional redemption prior to maturity at the option of the Authority, as directed by the University, in whole or in part at any time on June 1, 2016 or on any date thereafter. The bonds are a general obligation of the University and are collateralized by a debt service reserve fund held in trust in an amount that is 125% of the average annual debt service. The bond indenture includes a special provision prohibiting the University from incurring short-term debt that exceeds 20% of the total unrestricted revenues for the most recent audited fiscal year, provided that, for a period of 30 consecutive days in every fiscal year, the University will have no outstanding short-term debt. The 2006 debt service fund had a fair value of $641 and $14,196 as of, respectively, and is included in deposits with bond trustees in the statement of financial position. The 2006 debt service reserve fund had a fair value of $848,219 and $838,006 as of June 30, 2007 and 2006, respectively, and is included in deposits with bond trustees in the statement of financial position. The project fund had a fair value of $218,554 and $3,533,737 as of, respectively, and was also included in deposits with bond trustees in the statement of financial position. (c) In November 2004, the University issued $44,585,000 in two series revenue bonds through PHEFA; Series 2004A totaling $29,085,000 and Series 2004B totaling $15,500,000. The proceeds of the bonds were used primarily to construct and furnish the campus center of approximately 73,000 square feet, a 245-space parking garage, a recreation center of approximately 62,000 square feet, and related site improvements. The bond proceeds were also being used to pay bond issuance costs and establish the Series 2004A and 2004B debt reserve, project, and capitalized interest funds. (i) Series 2004A are revenue bonds totaling $29,085,000 maturing in varying amounts through June 1, 2032, at annual interest rates ranging from 5.00% and 5.25%. The Series 2004A bonds maturing on or after June 1, 2014 are subject to optional redemption prior to redemption at the direction of the University. These bonds are a general obligation of the University collateralized by debt service reserve funds held in trust in an amount that is 125% of the maximum annual debt service requirement. The bond indenture includes a special provision prohibiting the University from incurring short-term debt that exceeds 20% of total unrestricted revenues and 66.67% of total assets. The Series 2004A debt service fund had a fair value of $3,196 and $731 as of, respectively, and is included in 11 (Continued)

14 deposits with bond trustees in the statements of financial position. The Series 2004A debt service reserve fund had a fair value of $2,733,719 and $2,675,028 as of June 30, 2007 and 2006, respectively, and is included in deposits with bond trustees in the statements of financial position. The project fund had a fair value of $19,143 and $8,441,158 as of June 30, 2007 and 2006, respectively, and is also included in deposits with bond trustees in the statement of financial position. The capitalized interest fund had a fair value of $1 and $39 as of June 30, 2007 and 2006, respectively, and was also included in deposits with bond trustees in the statement of financial position. (ii) Series 2004B are variable rate revenue bonds totaling $15,500,000 maturing in varying amounts through June 1, 2035, at a short-term interest rate not in excess of 12%. The Series 2004B bonds are subject to optional redemption prior to maturity at the direction of the University. The University exercised its option and has redeemed $2,495,000, including $170,000 on April 1, These bonds are a general obligation of the University collateralized by a five-year letter-of-credit agreement, expiring on November 17, The project funds were fully expended as of June 30, The capitalized interest fund had a fair value of $18,531 and $483,132 as of, respectively, and is also included in deposits with bond trustees in the statements of financial position. (d) In April 2000, the University issued $17,760,000 in revenue bonds through PHEFA. The proceeds of the bonds were primarily used to refund the 1997 PHEFA revenue bonds ($3,500,000), refinance a $5,333,530 PHEFA revenue note (Series of 1999), construct a new academic building, renovate an apartment complex, and improve the campus infrastructure. The bond proceeds were also used to pay bond issuance costs, establish a debt service reserve fund, and establish a trusteed project fund. The bonds mature in varying amounts through June 1, 2030, at annual interest rates ranging from 5.75% to 6.25%. The bonds maturing on or after June 1, 2011 are subject to optional redemption prior to maturity at the direction of the University, on or after June 1, Also, the bonds maturing on June 1, 2030 are subject to special optional redemption prior to maturity at the direction of the University on or after June 1, 2002 through June 1, On June 1, 2006 and 2005, the University exercised this option and redeemed $165,000 and $275,000, respectively, of bonds maturing on June 1, The bonds were repaid in full in The bonds are a general obligation of the University and are collateralized by a debt service reserve fund held in trust in an amount that is the lesser of 10% of the original bonds outstanding, the maximum annual debt service, or 125% of the average annual debt service. This amount was $1,776,000 at June 30, 2006 (cost approximates fair value) and is included in deposits with bond trustees in the statements of financial position. The bond indenture contains a provision that prohibits the University from incurring short-term debt exceeding 20% of unrestricted gross revenues for the preceding fiscal year. The indenture also requires that, for 30 consecutive days in every fiscal year, no short-term debt be outstanding. The bond issuance costs included a premium to purchase a financial guaranty insurance policy from Radian Asset Assurance, Inc., formerly Asset Guaranty Insurance Company, which provides for the prompt payment of principal and interest on the 2000 PHEFA revenue bonds should the University not make these payments. (e) In October 1993, the University issued $12,560,000 in revenue bonds through PHEFA. The proceeds of the bonds were primarily used to defease the 1987 PHEFA revenue bonds, which were previously 12 (Continued)

15 used to construct and furnish a dormitory facility and a dining facility. The 1993 bond proceeds were also used to pay bond issuance costs and establish a debt service reserve fund. The bonds mature in varying amounts through 2007 at annual interest rates ranging from 5.35% to 5.45%. The University may not redeem the bonds before the stated maturities. The bonds were repaid in full in The bonds are a general obligation of the University and are collateralized by a debt service reserve fund held in trust in an amount that is the lesser of 10% of the original bonds outstanding, the maximum annual debt service, or 125% of the average annual debt service. This amount was $1,319 and $1,256,000 at, respectively, (cost approximates fair value), and is included in deposits with bond trustees in the statements of financial position. The bond indenture contains a provision that prohibits the University from incurring short-term debt exceeding 20% of unrestricted gross revenues for the preceding fiscal year. The indenture also requires that, for 30 consecutive days in every fiscal year, no short-term debt be outstanding. (f) In May 2004, the University obtained an $850,000 unsecured bank loan to purchase a residential property on two acres of land directly adjacent to the University. The loan has an annual interest rate of 5.35% and matures on May 31, 2011, but may be prepaid at any time without penalty. Interest expense was $3,102,455 and $2,167,867 for the years ended, respectively. Principal maturities for the next five fiscal years ending June 30 and in the aggregate thereafter are as follows: (7) Commitments and Contingencies 2008 $ 28, , ,317, ,024, ,405,000 Thereafter 64,295,000 $ 69,100,315 The University leases equipment and facilities under operating leases. Rental expense under these leases was $930,131 and $622,783 for the years ended, respectively. Future minimum lease payments for the fiscal years ending June 30 under these noncancelable operating leases are as follows: 2008 $ 1,068, , , , ,224 $ 1,985, (Continued)

16 The University has a long-term contract liability with its dining services provider, which is included in other liabilities on the balance sheet, in the amount of $1,480,863 and $1,600,588 at June 30, 2007 and 2006, respectively. The University is party, from time to time, to various legal proceedings in the normal course of its operations. In the opinion of management, none of these items individually or in the aggregate would have a significant effect on the financial statements of the University. (8) Former President s Employment Agreement In September 2002 the University entered into an employment agreement with its former President that provided for a base salary and a supplemental executive retirement benefit. The balance of the former President s supplemental retirement account of $2,210,983 was included in accrued compensation and investments at June 30, The University recorded an additional $75,373 of accrued compensation under the agreement for the fiscal year ended June 30, No amounts related to the supplemental retirement account are reported on the statement of financial position at June 30, 2007, because the former President assumed legal control of the account balance effective as of that date. The University also loaned its former President the funds to pay the taxes associated with the executive retirement benefit. The balance of this loan at June 30, 2007 was $786,307 and is reported as employee loan receivable in the accompanying statements of financial position. The principal balance, as well as interest accruing at approximately 4.7% per year, are due in fiscal year The former President retired effective August 31, 2007 and, pursuant to his employment agreement, began a 12-month sabbatical, after which he may elect to return to the University as a faculty member. 14