Earlham College. Accountants Report and Consolidated Financial Statements. June 30, 2008 and 2007

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1 Accountants Report and Consolidated Financial Statements

2 Contents Independent Accountants Report... 1 Consolidated Financial Statements Statements of Financial Position... 2 Statements of Activities... 3 Statements of Cash Flows... 4 Notes to Financial Statements... 5

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4 Consolidated Statements of Financial Position Assets Cash and cash equivalents $ 1,656,116 $ 1,255,750 Cash - restricted 2,634,370 2,518,210 4,290,486 3,773,960 Accrued investment income receivable 184, ,795 Accounts and other receivables, net of allowance of $162, and $167, ,289,197 1,099,050 Contributions receivable, net of allowance of $250, and 1,976, ,627 $104, Note 2 Grants receivable 212, ,251 Student notes receivable, net of allowance of $83, and ,066,679 3,734,739 Inventories 225, ,615 Prepaid expenses, deferred charges and deposits 376, ,572 Investments - Note 3 369,744, ,098,761 Investment in real estate - Note 4-22,931,057 Bond issue costs 329, ,405 Property and equipment - Note 5 76,173,259 69,854,951 Assets held for McCoy Lead Trust - Note 9 407, ,558 Interest in charitable trusts 623, ,200 Liabilities Total assets $ 459,900,062 $ 489,040,541 Accounts payable 1,968,495 $ 1,601,209 Accrued expenses 677, ,089 Employee insurance obligation - Note 6 500, ,000 Deposits 583, ,436 Note payable - Conner Prairie Foundation - Note 7-6,500,000 Line of credit outstanding - Note 8 2,000,000 - Amounts held for others 598, ,766 McCoy Lead Trust liability - Note 9 407, ,618 Bonds payable - Note 10 37,087,592 38,077,778 Annuities payable - Note 11 1,939,306 1,553,814 Advances from federal agencies for student loans 4,150,272 4,188,722 Total liabilities 49,913,553 54,442,432 Net Assets Unrestricted Current operations 46,165,770 55,038,963 Funds functioning like an endowment fund 196,339, ,876,070 Total unrestricted 242,505, ,915,033 Temporarily restricted - Note ,078, ,589,107 Permanently restricted - Note 13 67,402,702 66,093,969 Total net assets 409,986, ,598,109 Total liabilities and net assets $ 459,900,062 $ 489,040,541 See 2

5 Consolidated Statements of Activities Years Ended Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Operating Revenue, Gains and Other Support Tuition and fees $ 38,723,871 $ - $ - $ 38,723,871 $ 37,672,452 $ - $ - $ 37,672,452 College funded scholarships (17,373,999) - - (17,373,999) (16,507,433) - - (16,507,433) Net tuition and fees 21,349, ,349,872 21,165, ,165,019 Contributions 1,119,324 5,230,907 1,694,813 8,045,044 1,346,033 4,037,044 1,359,493 6,742,570 Investment return designated for current operations - Note 3 8,651,993 4,582,070-13,234,063 8,112,426 4,018,658-12,131,084 Other investment income - Note 3 654,022 42, , ,047 53, ,145 Federal grants 665, , , ,945 State and other grants 812, , , ,586 Auxiliary income 7,851, ,851,261 7,679, ,679,118 Change in value of split-interest agreement (638,917) (130,962) (17,824) (787,703) 193,583 (67,646) 73, ,791 Other income 1,140, ,140, , ,734 41,606,178 9,724,075 1,676,989 53,007,242 41,364,491 8,041,154 1,433,347 50,838,992 Net assets released from restrictions - Note 14 8,222,370 (8,222,370) - - 6,214,403 (6,214,403) - - Total operating revenue, gains and othersupport 49,828,548 1,501,705 1,676,989 53,007,242 47,578,894 1,826,751 1,433,347 50,838,992 Operating Expenses Instructional 17,591, ,591,178 16,633, ,633,668 Research 449, , , ,595 Public service 369, , , ,032 Academic support 2,478, ,478,080 2,403, ,403,932 Student services 3,769, ,769,099 3,680, ,680,899 Administrative and general 10,166, ,166,526 10,646, ,646,261 Physical plant operation and maintenance 6,040, ,040,305 5,919, ,919,347 Auxiliary 6,756, ,756,527 6,355, ,355,372 Total operating expenses 47,620, ,620,179 46,560, ,560,106 Change in Net Assets From Operations 2,208,369 1,501,705 1,676,989 5,387,063 1,018,788 1,826,751 1,433,347 4,278,886 Reclassification based on donor restrictions 368,256 - (368,256) Investment return greater (less) than amount designated for current operations - Note 3 (20,986,359) (9,012,304) - (29,998,663) 50,734,341 17,047,943-67,782,284 Change in Net Assets (18,409,734) (7,510,599) 1,308,733 (24,611,600) 51,753,129 18,874,694 1,433,347 72,061,170 Net Assets, Beginning of Year 260,915, ,589,107 66,093, ,598, ,161,904 88,714,413 64,660, ,536,939 Net Assets, End of Year $ 242,505,299 $ 100,078,508 $ 67,402,702 $ 409,986,509 $ 260,915,033 $ 107,589,107 $ 66,093,969 $ 434,598,109 3 See

6 Consolidated Statements of Cash Flows Years Ended Operating Activities Change in net assets $ (24,611,600) $ 72,061,170 Items not requiring (providing) cash Depreciation 2,551,576 2,696,306 Amortization (569) 10,580 Net realized and unrealized (gains) losses 23,799,984 (75,306,738) Non-cash contributions - (117,000) Contributions, restricted for long-term investment (1,652,712) (1,093,137) Changes in Accrued investment income receivable 213,808 30,823 Accounts and notes receivable (190,147) (286,183) Contributions receivable (1,293,091) (302,188) Grants receivable (42,768) 1,492 Student notes receivable (331,940) (105,250) Inventories 38, Prepaid expenses, deferred charges and deposits 216,141 (281,793) Interest in charitable trusts - (74,094) Accounts payable 582,533 (588,777) Accrued expenses 183,765 (114,282) Employee insurance obligation 20,000 80,000 Deposits 53,020 (58,208) Amounts held for others (25,278) 361,114 McCoy Lead Trust liability (22,978) 72,837 Annuities payable 385,492 (45,987) Net cash used in operating activities (126,280) (3,058,344) Investing Activities Purchase of property and equipment (9,085,131) (6,115,098) Proceeds from sale of investments 148,618, ,256,458 Purchases of investments (158,064,573) (305,713,702) Net change in assets held for McCoy Lead Trust 116,918 (74,333) Proceeds from sale of real estate investments 22,931,057 - Net cash provided by (used in) investing activities 4,516,891 (10,646,675) Financing Activities Proceeds from contributions restricted for investment in endowment 1,652,712 1,093,137 Transfer of Japan Study Program funds to the GLCA (5,176,023) Reduction of bond payable (970,000) (970,000) Proceeds from long-term debt - 15,661,682 Proceeds from line of credit 2,000,000 - Payment of bond issue costs (56,797) (112,011) Payment of note payable to Conner Prairie Foundation (6,500,000) - Net cash provided by (used in) financing activities (3,874,085) 10,496,785 Net Increase (Decrease) in Cash and Cash Equivalents 516,526 (3,208,234) Cash and Cash Equivalents, Beginning of Year 3,773,960 6,982,194 Cash and Cash Equivalents, End of Year $ 4,290,486 $ 3,773,960 Supplemental Cash Flows Information Interest paid $ 1,310,716 $ 1,069,051 Property and equipment purchases in accounts payable 442, ,773 See 4

7 Note 1: Nature of Operations and Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Earlham College and Earlham Foundation (the consolidated organization being referred to herein as Earlham or Organizations ). All material inter-organization accounts and transactions have been eliminated in consolidation. Nature of Operations Earlham College (College) was incorporated in 1881 as a not-for-profit organization under the laws of the State of Indiana. Earlham College is organized and operated for educational purposes and its primary sources of revenue are tuition, contributions and investment return. Earlham Foundation (Foundation) was incorporated in 1931 under the terms of a 1921 Indiana Act concerning foundations and holding companies. Its purpose is to receive and hold endowed gifts and bequests for the use and benefit of Earlham College and Earlham School of Religion. The Earlham School of Religion was created in 1960 as a Christian theological seminary to provide graduate-level training in the Quaker tradition. It operates as a separate fund within the financial structure of Earlham College. Use of Estimates The preparation of 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 the revenues, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Earlham considers all liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money market funds and certificates of deposit. At June 30, 2008, Earlham s cash accounts exceeded federally insured limits by approximately $3,127,000. 5

8 Accounts Receivable Accounts receivable are stated at the amount of tuition, housing, and fees billed to students as well as amounts billed to outside organizations plus any accrued and unpaid service charges. Earlham provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice unless a monthly electronic funds transfer plan election is made in advance. Accounts that are unpaid after the due date are subject to service charges at 1% per month. Accounts past due more than 120 days are considered delinquent. Service charges continue to accrue on delinquent accounts until the account is past due more than one year, at which time the service charge accrual ceases and does not resume until the account is no longer classified as delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the account. The total of accounts with balances over 120 days past due and still accruing service charges was approximately $411,090 at June 30, 2008 and $424,240 at June 30, Student Notes Receivable Student notes receivable under the Federal Perkins Loan Program are reported at the outstanding principal balances. The repayment period begins after an initial grace period of either six or nine months after the student ceases to be at least a half-time student. Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments are also carried at fair value. For those investments with no quoted market prices, market values used were those provided by the managers of the investment funds. These estimated values are subject to uncertainty and, therefore, may differ significantly from the value that would have been used had a market for such investments existed. Such difference could be material. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized and unrealized gains and losses on other investments. Investment return is included in the consolidated statements of activities as unrestricted or temporarily restricted based upon the existence and nature of any donor or legally imposed restrictions. All long-term investments have been pooled into the Earlham pooled endowment fund. This fund is managed by professional investment managers and net investment income is allocated quarterly on a unitized basis. 6

9 Earlham has significant investments in stocks, bonds and mutual funds and is therefore subject to various risks such as interest rate, market and credit risks. Investments are made by investment managers engaged by Earlham and the investments are monitored for Earlham by an investment advisor. Although the market value of investments is subject to fluctuations on a year-to-year basis, management believes the investment policy is prudent for the long-term welfare of Earlham. Property and Equipment Expenditures for property and equipment and items which substantially increase the useful lives of existing assets are capitalized at cost. Depreciation is calculated on the straight-line method at rates designed to depreciate the costs of assets over estimated useful lives as follows: Buildings, grounds and improvements 50 Furniture and equipment 5 Transportation equipment 5 Computer equipment 5 Years Funds Invested for Japan Study Program At one time, the College was designated as the Agent College by the Associated Colleges of the Midwest (ACM) and the Great Lakes Colleges Association (GLCA) for the management of the Japan Study Program. As part of its management of the Japan Study Program, the College oversaw the investment of various grants and gifts, including those from the Japanese Government and others, in support of the Japan Study Program. During fiscal year 2007, management of the investments, along with the funds, was transferred to the GLCA. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by Earlham has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by Earlham in perpetuity. 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 consolidated statements of activities as net assets released from restrictions. 7

10 Gifts of land, buildings, and 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. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. 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. Government Grants Support funded by grants is recognized as Earlham performs the contracted services under grant agreements. Grant revenue is recognized as earned as the eligible expenses are incurred. Grant expenditures are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Income Taxes The Organizations are exempt from federal income taxes under Section 501(c)(3) of the U. S. Internal Revenue Code and a similar provision of state law. However, the Organizations are subject to federal income tax on any unrelated business taxable income. The Organizations are not considered to be private foundations. Expense Allocation The costs of supporting the various programs and other activities have been summarized on a functional basis in the notes to the consolidated financial statements. Physical plant operations and maintenance costs have been classified as program, management and general, and fund raising based on the actual direct expenditures and cost allocations based upon square footage of space occupied. 8

11 Fair Value of Financial Instruments Earlham's financial instruments include cash and cash equivalents, accrued investment income receivable, contributions receivable, student notes receivable, investments, investment in real estate, assets held for McCoy lead trust, interest in charitable trusts, note payable - Conner Prairie Foundation, line of credit, amounts held for others, liabilities under split-interest agreements and bonds payable. For cash and cash equivalents, accrued investment income receivable, note payable - Conner Prairie, and line of credit, the carrying amounts approximate fair value because of the short maturity of these items. Investments, including investment in real estate, are reflected at their estimated fair values using methodologies described above. The carrying amount of the contributions receivable, student notes receivable, assets held for McCoy lead trust, interest in charitable trusts, amounts held for others, and liabilities under split-interest agreements are a reasonable estimate of the corresponding fair value. At June 30, 2008, the carrying value of the outstanding bonds payable was $36,670,000 and the fair value was $37,690,000. At June 30, 2007, the carrying value of the outstanding bonds was $37,640,000 and the fair value was $37,870,000. The fair value of the bonds payable is based on a discounted cash flow analysis using current yield rates offered for debt of the same remaining maturities. Reclassifications Certain reclassifications have been made to the 2007 financial statements to conform to the 2008 financial statement presentation. These reclassifications had no effect on the change in net assets. Note 2: Contributions Receivable 2008 Temporarily Permanently Restricted Restricted Total Due within one year $ 238,226 $ 198,102 $ 436,328 Due in one to five years 1,560, ,889 1,825,139 Due in more than five years 206,898 80, ,065 2,005, ,158 2,548,532 Allowance for uncollectible contributions (201,773) (47,858) (249,631) Discount (257,607) (64,576) (322,183) $ 1,545,994 $ 430,724 $ 1,976,718 The discount rate ranged from 2.36% to 6.57% for

12 2007 Temporarily Permanently Restricted Restricted Total Due within one year $ 107,517 $ 153,972 $ 261,489 Due in one to five years 163, , ,401 Due in more than five years 219, , , , , ,954 Allowance for uncollectible contributions (60,800) (43,200) (104,000) Discount (134,243) (76,084) (210,327) $ 295,004 $ 388,623 $ 683,627 The discount rate ranged from 1.51% to 6.57% for Time restrictions $ 301,919 $ 125,618 Building renovations 114, ,441 Scholarship awards 6,521 19,688 Instructional programs 1,122,661 62,894 Investment in perpetuity, the income of which is expendable to support Scholarship awards 155,849 43,196 Instructional programs 274, ,790 $ 1,976,718 $ 683,627 10

13 Note 3: Investments Earlham s investments are as follows: Endowment funds Short-term investments $ 6,527,197 $ 13,048,542 Domestic equities 95,029, ,216,550 International equities 57,484,068 70,384,274 Fixed income debt securities 43,014,344 43,292,292 Emerging markets 8,464,108 10,845,681 Alternative investments Real estate 15,870,062 15,668,099 Venture capital 11,707,089 12,527,118 Private equity 45,676,445 29,585,490 Energy 7,094,368 4,830,065 Distressed debt 9,876,619 7,094,919 Natural resources 10,343,663 5,674,342 Hedge 43,578,733 34,110, ,666, ,277,744 Investments in split-interest agreements and other Short-term investments 234, ,660 Equity securities 2,131,870 2,005,906 Fixed income debt securities 1,112, ,230 3,478,885 3,434,796 Bond proceeds - short-term investments 11,599,537 16,386,221 Total investments $ 369,744,730 $ 384,098,761 At, the investment portfolio balance included 67% and 50% of investments whose value is determined by fund managers estimates or appraisals. At June 30, 2008, Earlham was committed to invest an additional $73,550,000 in alternative investments. Because certain investment managers do not provide market values until late in the following quarter, the College s policy is to use the prior quarter s market value, adjusted for cash receipts and cash disbursements, to determine the value of its endowment internally on a quarterly basis. The market value used for the endowment investments under the College s endowment policy at June 30, 2008 was $350,029,619. An adjustment of $4,636,689 represents the difference between the market value used to compute the endowment at June 30, 2008 for internal purposes and market values provided by the investment managers received subsequent to year-end which has been recorded in investments in the consolidated statement of financial position. 11

14 State law allows the Board to appropriate as much of the net appreciation as is prudent considering long and short-term needs, present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions. Under the endowment spending policy for fiscal year , 4 1/2% of a twelve-quarter moving average of the fair value of Earlham s investments ending December 31 is appropriated to support the current operations of the undergraduate programs and seminary. Total investment return is comprised of the following: Dividends and interest (net of expenses of $1,033,699 and $1,346,673 for 2008 and 2007) $ 5,677,023 $ 5,541,757 Net realized and unrealized gains (losses) on investments (21,745,541) 74,785,756 Total return on investments (16,068,518) 80,327,513 Investment return designated for current operations (13,234,063) (12,131,084) Other investment income (696,082) (414,145) Investment return in excess of (less than) amounts designated for current operations $ (29,998,663) $ 67,782,284 Note 4: Investment in Real Estate During 2006, the College agreed to sell its investment real estate which was contingent upon certain conditions being met. During July 2007, these conditions were met and the property was sold. Note 5: Property and Equipment Earlham s property and equipment are as follows: Buildings, grounds and improvements $ 92,939,061 $ 86,373,967 Furniture and equipment 7,757,604 7,666,804 Transportation equipment 667, ,769 Computer equipment 5,054,728 4,682,959 Total cost 106,418,933 99,342,499 Accumulated depreciation (39,597,581) (37,046,007) 66,821,352 62,296,492 Land 2,496,357 2,505,956 Construction in progress 6,855,550 5,052,503 $ 76,173,259 $ 69,854,951 12

15 Note 6: Employee Insurance Obligation Earlham has adopted a plan of self-insuring employee group medical insurance. Expenses are recorded as incurred. Insurance policies in force at June 30, 2008 limit Earlham's annual liability generally to $90,000 per individual. Lifetime insurance coverage per individual is limited to $1,000,000. Earlham s portion of the predetermined funding provision is charged to expense each month. A reinsurance policy is in place to limit Earlham s annual liability to 125% of anticipated claims. The estimate of claims incurred but not paid was $500,000 as of June 30, 2008 and $480,000 at June 30, Note 7: Note Payable - Conner Prairie Foundation Earlham had a $6,500,000 note payable to Conner Prairie Foundation. During July 2007, the note was paid off in conjunction with the sale of the real estate that secured the note. Note 8: Line of Credit Earlham has a $4,000,000 revolving bank line of credit expiring in At June 30, 2008, there was $2,000,000 borrowed against this line. The line is unsecured. Interest varies with the bank s one-month LIBOR rate plus.75%, which was 3.25% on June 30, 2008 and is payable monthly. Note 9: McCoy Lead Trust Earlham administers a charitable lead trust which provides for the payment of distributions to Earlham College over the trust s term. At the end of the trust s term, the remaining assets will be distributed to the grantors or their designated beneficiaries. Assets held in the charitable lead trust are recorded at fair market value in Earlham s statements of financial position. On an annual basis, Earlham revalues the liability to make distributions to the designated beneficiaries based on actuarial assumptions. The present value of the estimated future payments is calculated using a discount rate of 6% and applicable mortality tables. 13

16 Note 10: Bonds Payable Indiana Educational Facilities Authority, Educational Facilities Revenue Bonds, Series 1998 (A) $ 5,950,000 $ 6,400,000 Indiana Educational Facilities Authority, Educational Facilities Revenue Bonds, Series 2004A (B) 9,000,000 9,000,000 Indiana Educational Facilities Authority, Variable Rate Demand Educational Facilities Revenue Bonds, Series 2004B (C) 6,465,000 6,985,000 Indiana Educational Facilities Authority, Educational Facilities Revenue Bonds, Series 2007 (D) 15,255,000 15,255,000 36,670,000 37,640,000 Unamortized premium 417, ,778 $ 37,087,592 $ 38,077,778 (A) In August 1998, Earlham College entered into a loan agreement with the Indiana Educational Facilities Authority to finance the construction and equipping of a wellness addition to the existing athletic facility and the acquisition, construction, expansion, renovation and equipping of various other facilities. The loan was financed by the sale of $11,000,000 principal amount of Educational Facilities Revenue Bonds, Series 1998 by the Indiana Educational Facilities Authority. The bonds are dated August 15, 1998 and bear various interest rates ranging from 3.8% to 5.2% depending on the maturity date. Interest is payable semi-annually on April 15 and October 15. The principal amount of the bonds is payable annually on October 15 through (B) In July 2004, Earlham College entered into a loan agreement with the Indiana Educational Facilities Authority to finance the refunding of the outstanding principal amount of the City of Richmond, Indiana Economic Development Revenue Bonds, Series 1991; the refunding of the outstanding principal amount of the Authority s Variable Rate Demand Educational Facilities Revenue Bonds, Series 1995; the construction and equipping of a new student residence hall and the renovation and equipping of various other residential facilities; and the acquisition, construction, expansion, renovation and equipping of other various educational facilities. The loan was financed by the sale of $9,000,000 principal amount of Economic Development Revenue Bonds by the City of Richmond, Indiana. These bonds are dated July 15, 2004 and bear various interest rates ranging from 4.00% to 5.00% depending on the maturity date. Interest is payable semi-annually on April 1 and October 1. The principal amount of the bonds is payable annually on October 1 from 2010 through (C) In July 2004, Earlham College entered into a loan agreement with the Indiana Educational Facilities Authority to finance the costs of acquisition, construction, expansion, renovation and equipping of certain educational facilities. The loan was financed by the sale of $8,025,000 principal amount of Variable Rate Demand Educational Facilities Revenue Bonds by the Indiana Education Facilities Authority. These bonds are dated July 15, 2004 with interest determined by a Remarketing Agent either Wednesday of each week or the tenth business day of each month depending on the Interest Rate Mode. Should a remarketing failure occur, a draw would be made from a letter of credit. This letter of credit, with a maximum amount of $8,123,939, expires on July 15,

17 The Remarketing Agent will determine the interest rate based upon the interest rate necessary to remarket the outstanding bonds at a price of par. Earlham College may convert the interest rate from a variable rate to a fixed rate by notifying certain parties of the intention to convert. The conversion will then occur on the first day of the month after notification. The variable interest rate in effect on the date of conversion becomes the fixed interest rate. Variable interest is payable either the first business day of each month or the first day of each August and February depending on the Interest Rate Mode. The loan may be prepaid. If Earlham College elects to convert to the fixed rate, certain prepayment premiums apply. As of June 30, 2008, the variable interest rate in effect was 1.58%. The principal amount of the bonds is payable annually on October 1 through (D) In June 2007, Earlham College entered into a loan agreement with the Indiana Educational Facilities Authority to finance the costs of acquisition, construction, expansion, renovation and equipping of certain educational facilities. The loan was financed by the sale of $15,255,000 principal amount of Educational Facilities Revenue Bonds by the Indiana Education Facilities Authority. These bonds are dated June 20, 2007 and bear various interest rates ranging from 4.25% to 5.00% depending on the maturity date. Interest is payable semi-annually on April 1 and October 1. The principal amount of the bonds is payable annually on October 1 from 2009 through The future maturities of bonds payable are as follows: 2008 $ 1,670, ,620, ,125, ,130, ,130,000 Thereafter 26,995,000 36,670,000 Plus unamortized premium 417,592 $ 37,087,592 Note 11: Annuities Payable Earlham has been the recipient of several gift annuities, which require future payments to the contributors or their named beneficiaries. The assets received from the donor are recorded at fair market value. Earlham recorded a liability at of $1,939,306 and $1,553,814, which represents the present value of the future annuity obligations discounted at a rate of 6% in 2008 and

18 Note 12: Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purposes or periods: Earlham College Building renovations $ 1,487,087 $ 3,001,358 Institutional support 11,255,474 11,836,123 Scholarship awards 42,042,814 46,085,208 Instructional programs 18,776,491 18,056,322 Research programs 6,776,657 7,237,805 Academic support programs 6,121,556 6,384,096 Student services programs 868, ,870 Public service 549, ,626 Other 817, ,382 For periods after June , ,651 89,549,801 95,735,441 Earlham School of Religion Scholarship awards 6,689,776 7,444,510 Instructional programs 3,838,931 4,409,156 10,528,707 11,853,666 Totals $ 100,078,508 $ 107,589,107 Note 13: Permanently Restricted Net Assets Permanently restricted net assets (valued at original gift basis) are restricted to: Investment in perpetuity, the income of which is expendable to support Earlham College General Institutional program activities $ 2,246,208 $ 2,246,208 Academic support programs 1,950,723 1,963,949 Research programs 1,789,914 1,724,519 Instructional programs 6,928,021 6,897,698 Public services programs 117, ,562 Student service programs 782, ,760 Scholarship awards 19,922,489 18,857,551 Any activity of the College 22,928,724 22,948,756 Other activities 871,904 1,021,986 57,538,055 56,532,989 Earlham School of Religion Instructional programs 3,159,916 2,632,677 Scholarship awards 3,446,855 3,438,153 Any activity of ESR 3,257,876 3,490,150 9,864,647 9,560,980 Totals $ 67,402,702 $ 66,093,969 16

19 Note 14: 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 Instructional program expenses $ 1,256,197 $ 1,535,632 Research program expenses 621, ,095 Public services program expenses 390,512 86,029 Academic support program expenses - 130,234 Student services program expenses 53,192 52,005 Earlham School of Religion program expenses 525, ,977 General Institutional support 3,028, ,301 Scholarship awards 2,346,956 2,337,130 Total net assets released from restrictions $ 8,222,370 $ 6,214,403 Note 15: Pension Plans All full-time employees of Earlham are participants after their second year of service in a defined-contribution retirement plan administered by TIAA-CREF for colleges and universities. Under this plan, Earlham makes annual contributions which are immediately vested for the benefit of the participants. Earlham s contributions amounted to $1,339,038 and $1,281,826 for the years ended. Note 16: Lease Earlham has entered into a lease for certain campus real estate with Bethany Theological Seminary (Bethany). Bethany constructed a building on the leased real estate. The lease has a 100-year initial term, requires annual rental payments of $100 and provides for renewal options. Bethany shares certain administrative costs with Earlham College and with the Earlham School of Religion. 17

20 Note 17: Functional Expenses Expenses by functional classification are as follows: Program services $ 37,453,653 $ 35,864,357 Management and general 9,388,618 10,476,016 Fund raising 1,811,606 1,566,406 $ 48,653,877 $ 47,906,779 Note 18: Conditional Gifts During the year ended June 30, 2008, Earlham received a conditional promise to give which is not recognized in the financial statements. An unaffiliated foundation has agreed to provide Earlham College $4.8 million to establish the Bonner Scholar Endowment provided that Earlham College is able to match $1.3 million for the Bonner Scholar Endowment. Additionally, Earlham College is expected to raise an additional $1 million to establish the Bonner Operating Endowment whose income will be used to support the Bonner Scholars Program. Earlham College has until August 1, 2010 to meet the specified matching requirements identified by the foundation to receive the award. 18