9/7/2007 9:21 AM. Colgate University Consolidated Financial Statements May 31, 2007 and 2006

Transcription

1 9/7/2007 9:21 AM Colgate University Consolidated Financial Statements

2 Report of Independent Auditors The Board of Trustees Colgate University In our opinion, the accompanying statements of consolidated financial position and the related consolidated statements of activities and cash flows present fairly, in all material respects, the financial position of Colgate University at, and the changes in their net assets and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 of these statements 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 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As further discussed in Note 1(n) and Note 6, the University changed its method of accounting for conditional asset retirement obligations in 2006, and the University adopted the provisions of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans in The 2006 and 2007 consolidated financial statements include the cumulative effects of adopting these new pronouncements.,

3 Consolidated Statements of Financial Position Assets Cash and cash equivalents $ 19,865 $ 20,934 Accounts receivable, net 1,062 1,116 Intermediate investments 27,222 58,152 Inventories 1,435 1,552 Prepaid expenses and other assets 4,706 4,870 Student loans receivable, net 3,091 2,926 Pledges receivable, net 12,922 13,739 Long-term investments 770, ,038 Land, buildings and equipment, net 298, ,734 Funds held in trust by others 5,932 6,272 Total assets $ 1,145,167 $ 978,333 Liabilities Accounts payable and accrued expenses $ 27,043 $ 16,109 Deposits and deferred revenues 6,382 6,544 Annuities and deferred giving arrangements 16,043 16,789 Postretirement benefits 23,358 16,798 Federal student loan funds 3,155 3,173 Conditional asset retirement obligation 8,239 7,889 Long-term debt, net 167, ,690 Total liabilities 252, ,992 Net Assets Unrestricted 600, ,170 Temporarily restricted 65,932 60,289 Permanently restricted 226, ,882 Total net assets 893, ,341 Total liabilities and net assets $ 1,145,167 $ 978,333 The accompanying notes are an integral part of the consolidated financial statements. 2

4 Consolidated Statement of Activities Year Ended May 31, 2007 (with comparative totals for the year ended May 31, 2006) 2007 Temporarily Permanently 2006 Unrestricted Restricted Restricted Total Total Operating Revenues Tuition and fees $ 96,040 $ - $ - $ 96,040 $ 90,502 Less: Scholarships (30,215) - - (30,215) (28,574) Net tuition and fees 65, ,825 61,928 Sales and services of auxiliaries 23, ,319 21,974 Government grants and contributions 2, ,491 2,444 Private grants and contributions 7,287 5,238-12,525 10,550 Investment return designated for operations 12,622 16,659-29,281 27,180 Other 1, ,869 1,929 Net assets released from restrictions 20,548 (20,548) Total operating revenues 133,961 1, , ,005 Operating Expenses Instruction and research 48, ,876 46,474 Athletics 15, ,384 14,579 Academic support 12, ,902 11,272 Student services 10, ,202 10,103 Institutional support 24, ,616 24,791 Auxiliary operations 20, ,768 19,951 Total operating expenses 132, , ,170 Increase (decrease) in net assets from operating activities 1,213 1,349-2,562 (1,165) Non-Operating Activities Investment return, less amounts designated for operations 89,055 5,606 6, ,309 41,864 Contributions for long-term investment 1,825 7,326 42,181 51,332 20,203 Change in value of split interest agreements 2,202 (1,149) 2,210 3, Postretirement benefit expense (1,658) - - (1,658) (2,001) Other (192) - 20 (172) (1,098) Net assets released from restrictions 7,412 (7,412) Net assets with changed restrictions (317) (77) Increase in net assets from non-operating activities 98,327 4,294 51, ,074 59,924 Cumulative effect of changes in accounting principles (4,902) - - (4,902) (6,992) Net increase in net assets 94,638 5,643 51, ,734 51,767 Net assets at beginning of year 506,170 60, , , ,574 Net assets at end of year $ 600,808 $ 65,932 $ 226,335 $ 893,075 $ 741,341 The accompanying notes are an integral part of the consolidated financial statements. 3

5 Consolidated Statement of Activities Year Ended May 31, 2006 Temporarily Permanently Unrestricted Restricted Restricted Total Operating Revenues Tuition and fees $ 90,502 $ - $ - $ 90,502 Less: Scholarships (28,574) - - (28,574) Net tuition and fees 61, ,928 Sales and services of auxiliaries 21, ,974 Government grants and contributions 2, ,444 Private grants and contributions 6,394 4,156-10,550 Investment return designated for operations 12,122 15,058-27,180 Other 1,929-1,929 Net assets released from restrictions 18,229 (18,229) - - Total operating revenues 125, ,005 Operating Expenses Instruction and research 46, ,474 Athletics 14, ,579 Academic support 11, ,272 Student services 10, ,103 Institutional support 24, ,791 Auxiliary operations 19, ,951 Total operating expenses 127, ,170 (Decrease) increase in net assets from operating activities (2,150) (1,165) Non-Operating Activities Investment return, less amounts designated for operations 35,706 3,806 2,352 41,864 Contributions for long-term investment 2,568 3,400 14,235 20,203 Change in value of split interest agreements Postretirement benefit expense (2,001) - - (2,001) Other (1,099) - 1 (1,098) Net assets released from restrictions 14,606 (14,606) - - Net assets with changed restrictions (1,421) (600) 2,021 - Increase (decrease) in net assets from non-operating activities 48,625 (7,472) 18,771 59,924 Cumulative effect of change in accounting principle (6,992) - - (6,992) Net increase (decrease) in net assets 39,483 (6,487) 18,771 51,767 Net assets at beginning of year 466,687 66, , ,574 Net assets at end of year $ 506,170 $ 60,289 $ 174,882 $ 741,341 The accompanying notes are an integral part of the consolidated financial statements. 4

6 Consolidated Statements of Cash Flows Year Ended Cash Flows from Operating Activities Change in net assets $ 151,734 $ 51,767 Depreciation, amortization and accretion 11,085 10,608 Cumulative effect of accounting change 4,902 6,992 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Accounts receivable Inventories Prepaid expenses and other assets Pledges receivable, net ,850 Funds held in trust by others Accounts payable and accrued expenses 19,930 (3,580) Deposits and deferred revenues (162) 661 Annuities and deferred giving arrangements (746) 493 Postretirement benefits 1,658 2,001 Conditional asset retirement obligation 71 - Contributions for long-term investments (51,249) (29,962) Other non-operating activity 288 (1,100) Realized and unrealized (gain) on investments (120,299) (55,453) Net cash provided by (used in) operating activities 18,547 (3,862) Cash Flows from Investing Activities Purchases of plant and equipment, net (72,170) (39,547) Proceeds from student loans collected Student loans issued (840) (772) Purchases of investments (355,029) (602,116) Proceeds from sales and maturities of investments 358, ,289 Other investing activity (288) 1,100 Net cash used in investing activities (68,875) (49,307) Cash Flows from Financing Activities Proceeds from contributions for: Investment in endowment 42,525 14,627 Investment in long-lived assets 8,076 15,126 Investment in life income agreements (Decrease) increase in federal student loan funds (18) (18) Change in line of credit (4,100) Proceeds from issuance of long-term debt - 46,389 Payments on long-term debt (1,690) (1,640) Bond issuance costs - (1,512) Net cash provided by financing activities 49,259 69,081 Net (decrease) increase in cash and cash equivalents (1,069) 15,912 Cash and cash equivalents Beginning of year 20,934 5,022 End of year $ 19,865 $ 20,934 Supplemental Data Noncash investing and financing activities: Gifts in kind $ 282 $ 786 Stock gifts and contributions 15,058 28,062 Increase (decrease) in construction related payables 8,996 (1,834) Asset retirement cost included in plant and equipment Interest paid 4,526 3,995 The accompanying notes are an integral part of the consolidated financial statements. 5

7 1. Summary of Significant Accounting Policies (a) Basis of Presentation The consolidated financial statements of Colgate University (the University) have been prepared on the accrual basis of accounting, and include the accounts of the University's wholly-owned subsidiaries, the Colgate Inn, LLC, Hamilton Initiative, LLC, Palace Theater, LLC, and Hamilton Theater, LLC. All significant intercompany transactions have been eliminated. In accordance with SFAS No. 117, "Financial Statements of Not-for-Profit Organizations", net assets having similar characteristics have been classified into the following categories: Permanently restricted - Net assets subject to donor-imposed stipulations that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the investment return on these assets. Temporarily restricted - Net assets whose use by the University is subject to donorimposed stipulations that can be fulfilled by actions of the University pursuant to those stipulations or that expire by the passage of time. Unrestricted - Net assets that are not subject to donor-imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. Expenses are generally reported as decreases in unrestricted net assets. Expirations of donor-imposed stipulations that simultaneously increase one class of net assets and decrease another are reported as reclassifications between the applicable classes of net assets. Contributions with donor-imposed restrictions are reported as temporarily restricted revenues and are reclassified to unrestricted net assets when the donor-imposed restriction is satisfied. Contributions restricted for the acquisition of land, buildings and equipment and specific programs are reported as temporarily restricted revenues. These contributions are reclassified to unrestricted net assets upon acquisition of the assets. Contributions received of a capital nature, that is, contributions to be used for facilities and equipment or to be invested by the University to generate a return that will support operations, are included in non-operating activities. (b) Endowment and Similar Funds Endowment and similar funds are long-term assets of the University created either by donor gifts or by actions of the Board of Trustees. Their purpose is to generate, in perpetuity, operating revenue for specific activities or for the use of the University. Endowment and similar funds are invested under direction of the Board of Trustees to achieve maximum long-term total return with prudent concern for the preservation of investment capital. All investments of endowment and similar funds are recorded in the statement of financial position as long-term investments, including incidental cash balances held by external investment managers. The fair value of endowment investments was $706,657 and $558,378 as of, respectively. 6

8 The Board of Trustees determines the appropriate amount to withdraw from endowment and similar funds on an annual basis, to provide support for operations with prudent concern for the long-term growth in the underlying assets. The board approved spending policy is also designed to insulate endowment support for programming from short-term fluctuations in capital markets. Annual spending will normally increase 6% over the prior year's spending, provided that the amount so determined is not greater than 5.5% of the average fair value for the preceding four quarters, nor less than 4.5% of the average fair value for the preceding eight quarters. Endowment and similar funds provided support for general operations of $26,827 and $25,229 in fiscal 2007 and 2006, respectively, which included Board approved special appropriations of $1,500 and $1,924 for 2007 and 2006, respectively. (c) (d) (e) Funds Held in Trust by Others Funds held in trust by others principally represent either charitable lead or charitable remainder trusts. For these trusts the University does not serve as trustee, nor has the power to appoint a trustee. Annuities and Deferred Giving Arrangements Planned gifts are separately invested in accordance with trust instruments that provide for income distributions to beneficiaries and final distributions of remainder value to the University. When the University serves as trustee, or has the power to appoint the trustee, the trust assets are included in long-term investments. The expected payments to beneficiaries are recorded as a liability on the statement of financial position at their net present value. The fair value of planned giving investments was $38,053 and $39,029 on, respectively. Investments Investments are stated at fair value. Net appreciation or depreciation in the fair value of investments, which consists of the realized gains or losses and the unrealized appreciation or depreciation on those investments, is recognized in the statement of activities. Realized gains and losses on the sale of investments are generally determined on the specific identification method on the trade date. The fair value of all debt and equity securities with a readily determinable fair value are based on quotations obtained from national securities exchanges. Limited partnership interests, private equity, real estate and other non-marketable investments for which a readily determinable fair value does not exist, are carried at estimated fair values provided by the investment managers. The University reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of these investments. Estimated fair values may differ significantly from the values that would have been used had a ready market for these securities existed. Under the terms of certain limited partnership agreements, the University is obligated periodically to advance additional funding for private equity and real estate investments. At, the University had commitments of approximately $85,739 and $84,590, respectively, for which capital calls had not been exercised. Such commitments generally have fixed expiration dates or other termination clauses. The University maintains sufficient liquidity in its investment portfolio to cover such calls. 7

9 (f) (g) (h) Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Student Loan Receivables Student loans receivable at, are reported net of reserves for doubtful loans of $546 and $451, respectively. The reserve is intended to provide for loans, both in repayment status and not yet in repayment status (borrowers still in school or in the grace period following graduation), that may not be collected. Land, Buildings and Equipment Land, buildings and equipment are recorded at cost, or if donated, at fair value on the date of donation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets as follows: Years Land improvements 7-10 Buildings and improvements Equipment and library books 3-10 Works of art, historical treasures and similar assets have been recognized at their estimated fair value based upon appraisals or similar valuations at the date of acquisition or donation and are depreciated over 100 years. Depreciation and operation and maintenance costs are allocated to functional expenses based upon square footage and specific identification where appropriate. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. (i) (j) Cash Equivalents Cash equivalents include short-term, highly liquid investments with a maturity of three months or less at the time of purchase. Cash and cash equivalents representing assets of endowment and similar funds and annuity and life income funds are included in long-term investments. Contributions The fair value of contributions received, including unconditional promises to give, is recognized as revenue within the appropriate net asset category when the donors' commitments are received. Conditional contributions or promises are recorded when donorimposed stipulations have been substantially met. Conversely, contributions made by the University, including unconditional promises to give, are recognized as expenses in the period in which the commitments are made. 8

10 (k) (l) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. Risks and Uncertainties Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in risk in the near term would materially affect the amounts reported in the consolidated statement of financial position and the consolidated statement of activities. Plan contributions and actuarial present value of accumulated plan benefits for the postretirement liability are prepared based on certain assumptions pertaining to interest rates, inflation rates and employee demographics, all of which are subject to change. Due to uncertainties inherent in the estimations and assumptions process, it is at least reasonably possible that changes in these estimates and assumptions in the near term would be material to the financial statements. (m) (n) Internal Revenue Code Status The University is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. The University is the sole member of the Colgate Inn LLC, Hamilton Initiative, LLC, Palace Theater, LLC and Hamilton Theater, LLC, which are limited liability corporations. As such, the University may be subject to income taxes if any of the entities generate taxable income. Conditional Asset Retirement Obligation In March of 2005, the FASB issued FASB interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which was issued to provide clarity surrounding the recognition of conditional asset retirement obligations, as referred to in FASB Statement No. 143 "Accounting for Asset Retirement Obligations." This interpretation requires that the fair value of a liability for a conditional asset retirement obligation be recognized in the period in which it occurred if a reasonable estimated fair value can be made. Upon initial application of FIN 47, the University recognized $6,992 as the cumulative effect of a change in accounting principle in the statement of activities. As of May 31, 2007, $872 of asset retirement costs, net of accumulated depreciation, has been included in property, plant and equipment and $8,239 of conditional retirement asset obligations are included as a liability in the statement of financial position. 9

11 2. Pledges Receivable Unconditional pledges at May 31, are expected to be realized in the following periods: Less than one year $ 8,627 $ 7,695 One year to five years 4,278 7,304 More than five years 1,625 - Subtotal 14,530 14,999 Less: present value discount and allowance (1,608) (1,260) Total pledges receivable, net $ 12,922 $ 13,739 At May 31, 2007, the University had outstanding conditional pledges and bequests of approximately $46, Land, Buildings and Equipment Investments in land, buildings and equipment consist of the following at May 31: Land and improvements $ 20,269 $ 18,430 Buildings 233, ,724 Equipment, books and art 79,878 77,184 Construction in progress 95,705 40, , ,924 Less: Accumulated depreciation (130,520) (120,190) Total land, buildings and equipment, net $ 298,413 $ 245,734 Outstanding commitments for construction contracts amounted to $26,468 as of May 31, Net interest capitalized amounted to approximately $2,522 and $1,751 for the years ended May 31, 2007 and 2006, respectively. 4. Investments Long-term investments by type consist of the following as of May 31: Cost Fair Value Cost Fair Value Cash equivalents $ 24,900 $ 24,900 $ 18,466 $ 18,466 Fixed income investments 84,087 82, , ,879 Equity investments 451, , , ,304 Other $ 560,871 $ 770,519 $ 503,014 $ 623,038 Intermediate investments primarily consist of deposits with trustees of debt obligations and are invested in securities with maturities of up to three years at the time of purchase. 10

12 The components of total investment return from all sources for 2007 and 2006 are reflected below: Interest income and dividends $ 10,291 $ 13,590 Realized and unrealized gains, net 120,299 55,454 Total return $ 130,590 $ 69,044 Investment return, as reflected in the statement of activities as of May 31, is as follows: Operating Unrestricted $ 12,622 $ 12,122 Temporarily restricted 16,659 15,058 29,281 27,180 Non-operating Unrestricted 89,055 35,706 Temporarily restricted 5,606 3,806 Permanently restricted 6,648 2, ,309 41,864 Total return $ 130,590 $ 69,044 Pooled Funds Endowment and similar funds assets are pooled on a unit fair value basis whenever possible. Funds are added to or withdrawn from the pool at the unit fair value at the beginning of the fiscal quarter in which the transaction takes place. Pooled funds were as follows as of May 31: Investments in pooled funds, at fair value $ 711,175 $ 567,297 Total number of units 36,789 34,082 Market value per unit $19.33 $16.65 Total return, consisting of realized and unrealized gains and losses, dividends and interest income was 21.5% and 12.6% per unit for the years ended, respectively. 11

13 5. Debt Arrangements The University has a line of credit available with a limit of $15,000. There were no amounts outstanding on the line as of May 31, Long-term obligations at May 31, are summarized as follows: New York State Dormitory Authority Issue: Series 1996, 5.74%, due 2022 $ 15,345 $ 15,820 Series 1998, 4.63%, due ,335 24,980 Madison County Industrial Development Agency: Tax-Exempt Civil Facility Revenue Bonds: Series 2003A, 4.69%, due ,385 14,955 Series 2003B, 4.87%, due ,775 20,775 Series 2004A, 4.70%, due ,905 45,905 Series 2005A, 5.00%, due ,690 43,690 Long-term debt, net 164, ,125 Premium and discounts on bond issuance, net 3,437 3,565 Long-term debt - total principal $ 167,872 $ 169,690 Principal maturities of the long-term obligations, exclusive of net premium, are as follows: 2008 $ 1, , , , , ,540 Total principal payments $ 164,435 The fair value of the University's long-term debt is estimated based upon the amount of future cash flows, discounted using the University's current borrowing rate for similar debt instruments of comparable maturities. The fair value of long-term debt was $172,484 and $171,796 at May 31, 2007 and 2006, respectively. Interest expense is allocated to functional expenses according to the original purpose of the bond proceeds. The various notes and bonds are collateralized by the related property and equipment. Certain agreements require the establishment of debt service and building and equipment reserves. Included in intermediate investments are deposits with trustees of debt obligations of $26,524 and $57,332 at, respectively, primarily representing unexpended bond proceeds and replacement reserves. The unexpended bond proceeds will be used to fund certain construction projects. 12

14 6. Retirement Benefits The University participates in contributory retirement plans administered by the Teachers Insurance Annuity Association of America (TIAA) and College Retirement Equities Fund (CREF). All employees who have completed one year of full time service at the University are eligible for participation in the plans. All retirement benefits are funded and vested under a defined contribution program. The University s contributions to the plan amounted to approximately $5,031 and $4,805 in 2007 and 2006, respectively. The University also provides health and life insurance benefits for eligible employees upon retirement at the University s early or normal retirement ages. The cost of these benefits is accounted for in accordance with Statement of Financial Accounting Standards No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. Information with respect to the plans is as follows: Change in benefit obligation Benefit obligation at beginning of period $ 21,500 $ 24,586 Service cost Interest cost 1,340 1,250 Plan participants' contributions Actuarial loss 400 (4,607) Benefits paid (996) (1,009) Benefit obligation at end of period $ 23,358 $ 21,500 For measurement purposes, an 8% and 10% annual rate of increase was assumed for health care benefits and prescription drug coverage, respectively, for These rates are assumed to decrease gradually to 5% by 2013 and remain consistent thereafter. The University has adopted a policy where the components of the postretirement benefit expense associated with prior service costs are shown as nonoperating activity in the statement of activities. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point change in the assumed health care cost trend rates would have the following effects: 1% Point 1% Point Increase Decrease Effect on total service and interest cost components $ 428 $ (337) Effect on postretirement benefit obligation 4,163 (3,334) Funded Status In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 158 focuses primarily on balance sheet reporting for the funded status of benefit plans and requires recognition of benefit liabilities for under-funded plans and benefit assets for over-funded plans, with offsetting impacts to unrestricted net assets. Colgate University has elected to early adopt the balance sheet recognition provisions of SFAS 158 as of May 31, The impact of adoption resulted in a net decrease of $4,902 in unrestricted net assets, which has been recorded as a cumulative effect of a change in accounting principle. 13

15 The funded status of the plan, reconciled to the amounts reported in the balance sheet, follows: End of Year Funded status $ (23,358) $ (21,500) Unrecognized actuarial net loss 4,407 4,133 Unrecognized prior service cost Net amount recognized $ (18,456) $ (16,798) Amount recognized in unrestricted net assets consist of Actuarial net loss $ 4,407 Prior service cost $ 495 4,902 The incremental effect of applying SFAS 158 on individual line items in the balance sheet as of May 31, 2007 is as follows: Postretirement Before Healthcare After Application Benefit Plan Application of SFAS 158 Adjustments of SFAS 158 Postretirement benefits $ 18,456 $ 4,902 $ 23,358 Total liabilities 247,190 4, ,092 Unrestricted net assets 605,710 (4,902) 600,808 Expected Cash Flows Information about the expected cash flows for the postretirement healthcare benefit plan, follows: Expected employer contributions 2008 $ 912 Expected benefit payments , , , ,894 14

16 Net Periodic Benefit Cost Service cost $ 751 $ 919 Interest cost 1,340 1,250 Amortization of Unrecognized actuarial net loss Prior service cost Net periodic benefit cost $ 2,291 $ 2,649 The actuarial net loss and prior service cost for the postretirement healthcare benefit plans that will be amortized from unrestricted net assets into net periodic benefit cost in 2008 are $131 and $74, respectively. Weighted-Average Assumption Used to Determine Net Periodic Postretirement Cost Discount rate 6.36% 5.25% Healthcare cost trend rate for this year 8.00% 9.00% Rate to which the cost trend rate is to decline 5.00% 5.00% Year that rate reaches the ultimate trend rate Net Assets Operating net assets released from restrictions include support for such program activities as financial aid and instruction. Non-operating net assets released from restrictions primarily represent amounts for facilities and equipment. Unrestricted net assets consist primarily of long-term investments of $488,464 and $398,096 at, respectively, including investment returns on endowed funds, which are legally available to be spent but are not, by Trustee policy, to maintain the purchasing power of the endowment over time. Temporarily restricted net assets are generally available for program purposes such as financial aid, facilities and equipment and deferred giving arrangements. Permanently restricted net assets are endowments that are restricted by the donor. Primarily all of the investment return from permanently restricted net assets are used to support program activities, principally financial aid and instruction, except for certain endowments which require unrealized gains to be reinvested and allow for use of interest and dividend income only. 8. Related Party Activity Certain investments held by the University are managed by investment firms in which Trustees of the University, or their family members, have a direct financial interest. Fair value of these investments total $6,960 and $2,401 at, respectively. Subsequent to May 31, 2006, the University committed an additional $12,000 to similar investments. 15

17 9. Contingencies The University is subject to several actions arising out of its operation. The claims are in various stages of development. The University and legal counsel are unable to conclude as to the ultimate outcome of the action. It is in the opinion of the University s management that the ultimate liability, if any, resulting from the action will not have a material impact on the University s financial statements, however, there can be no assurances. 16