AMERICAN UNIVERSITY OF BEIRUT. Financial Statements. September 30, 2006 and (With Independent Auditors Report Thereon)

Transcription

1 Financial Statements (With Independent Auditors Report Thereon)

2 Independent Auditors Report The Board of Trustees American University of Beirut: We have audited the accompanying balance sheets of American University of Beirut (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 American University of Beirut 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. November 14, 2007

3 Balance Sheets Assets Cash and cash equivalents $ 14,199,435 15,690,640 Accounts and grants receivable, net of allowances 2006, $17,576,000; 2005, $12,100, ,382,374 83,591,164 Inventories and prepaid expenses 3,667,378 3,389,319 Contributions receivable, net of allowances 51,301,010 48,155,812 Investments 402,421, ,713,411 Property and equipment, net 206,675, ,015,011 Total assets $ 789,647, ,555,357 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses $ 23,791,240 16,742,721 Deposits and deferred revenues 43,503,885 43,500,398 Term loan payable 25,000,000 25,000,000 Accrued end-of-service benefits 48,600,000 44,300,000 Total liabilities 140,895, ,543,119 Net assets: Unrestricted allocated to: Operations 3,428,752 7,729,057 Exchange differential (15,964,385) (15,964,385) Investments: Net gains on endowment fund investments 60,150,413 54,412,621 Net gains on quasi-endowment fund investments 38,286,474 34,395,054 Other 146,460, ,286,362 Property and equipment acquisitions 18,202,480 19,193,772 Net investment in property and equipment 194,918, ,468,564 Total unrestricted 445,482, ,521,045 Temporarily restricted 116,552, ,791,428 Permanently restricted 86,717,339 74,699,765 Total net assets 648,752, ,012,238 Commitments and contingencies Total liabilities and net assets $ 789,647, ,555,357 See accompanying notes to financial statements. 2

4 Statements of Activities Years ended Temporarily Permanently Temporarily Permanently Unrestricted restricted restricted Total Unrestricted restricted restricted Total Operating: Revenues: Contributions, grants, and contracts $ 3,810,461 17,650,313 21,460,774 4,538,366 11,920,125 16,458,491 Fees from services: Educational services, net of financial aid: 2006, $8,095,000; 2005, $7,713,000 76,404,996 76,404,996 77,059,807 77,059,807 Health services 74,390,191 74,390,191 70,696,049 70,696,049 Auxiliary enterprises 3,235,495 3,235,495 3,213,459 3,213,459 Net investment return recognized in operations 10,958,409 6,883,544 17,841,953 11,044,725 7,402,879 18,447, ,799,552 24,533, ,333, ,552,406 19,323, ,875,410 Net assets released from restrictions 20,696,217 (20,696,217) 20,426,830 (20,426,830) Total operating revenues 189,495,769 3,837, ,333, ,979,236 (1,103,826) 185,875,410 Expenses: Educational services 87,842,008 87,842,008 79,281,864 79,281,864 Health services 79,385,959 79,385,959 68,449,554 68,449,554 Auxiliary enterprises 3,834,836 3,834,836 3,711,756 3,711,756 Management and general 19,078,120 19,078,120 17,535,597 17,535,597 Development and public relations 4,604,192 4,604,192 4,442,185 4,442,185 Total operating expenses 194,745, ,745, ,420, ,420,956 (Deficit) excess of operating revenues over operating expenses (5,249,346) 3,837,640 (1,411,706) 13,558,280 (1,103,826) 12,454,454 Nonoperating activities: Endowment and property and equipment acquisition contributions 7,514,443 11,701,788 19,216,231 7,203,957 8,783,152 15,987,109 Net investment return in excess of amounts recognized in operations 20,164,033 3,840, ,786 24,320,582 31,678,537 2,301, ,286 34,423,626 Early departure program expenses (3,384,723) (3,384,723) Net assets released from restrictions 5,431,895 (5,431,895) 3,446,210 (3,496,684) 50,474 Total nonoperating activities 22,211,205 5,923,311 12,017,574 40,152,090 35,124,747 6,009,076 9,276,912 50,410,735 Total change in net assets 16,961,859 9,760,951 12,017,574 38,740,384 48,683,027 4,905,250 9,276,912 62,865,189 Net assets: Beginning of year 428,521, ,791,428 74,699, ,012, ,838, ,886,178 65,422, ,147,049 End of year $ 445,482, ,552,379 86,717, ,752, ,521, ,791,428 74,699, ,012,238 See accompanying notes to financial statements. 3

5 Statements of Cash Flows Years ended Cash flows from operating activities: Total change in net assets $ 38,740,384 62,865,189 Adjustments to reconcile total change in net assets to net cash (used in) provided by operating activities: Depreciation 10,881,375 10,278,524 Provision for (recovery of) doubtful accounts and grants receivable 5,475,613 (3,642,412) Contributions restricted for endowment and property and equipment acquisitions (19,216,231) (15,987,109) Net appreciation in fair value of investments (36,548,208) (48,018,723) Contributions of property and equipment (515,000) (36,047) Increase in accounts and grants receivable (33,266,823) (3,540,074) (Increase) decrease in inventories and prepaid expenses (278,059) 1,714,475 (Increase) decrease in contributions receivable, excluding amounts restricted for endowment and property and equipment acquisitions (2,859,392) 102,342 Increase (decrease) in accounts payable and accrued expenses 5,499,444 (5,309,347) Increase in deposits and deferred revenues 3,487 4,672,991 Increase (decrease) in accrued end-of-service benefits 4,300,000 (1,900,000) Net cash (used in) provided by operating activities (27,783,410) 1,199,809 Cash flows from investing activities: Proceeds from sale of investments 299,399, ,402,627 Purchase of investments (272,875,487) (231,139,468) Purchase of property and equipment (21,027,031) (18,605,209) Increase in amounts related to plant assets included in accounts payable and accrued expenses 1,549,075 Net cash provided by (used in) investing activities 7,045,994 (22,342,050) Cash flows from financing activities: Proceeds from contributions restricted for: Investment in endowment 6,684,395 5,756,867 Investment in property and equipment 12,246,030 8,336,064 Income and net gains restricted for investment 315, ,286 Net cash provided by financing activities 19,246,211 14,536,217 Net decrease in cash and cash equivalents (1,491,205) (6,606,024) Cash and cash equivalents at beginning of year 15,690,640 22,296,664 Cash and cash equivalents at end of year $ 14,199,435 15,690,640 Supplemental data: Interest paid $ 936, ,356 See accompanying notes to financial statements. 4

6 (1) Nature of Operations American University of Beirut (the University) is an independent, not-for-profit, coeducational, nonsectarian institution of higher learning located in Beirut, Lebanon, where it also operates a 421-bed medical center. The University was granted its charter in 1863 by the State of New York and was founded in It is exempt from federal income taxes under the provisions of Section 501(c)(3) of the Internal Revenue Code. The purpose of the University, as an institution of higher learning, is to share in the education of the youth of the Middle East, in service of its people, and in the advancement of knowledge. The University presently serves approximately 5,700 undergraduate students and 1,300 graduate and professional students in the faculties of Arts and Sciences, Agriculture and Food Sciences, Engineering and Architecture, Medicine, and Public Health, and in the schools of Business and Nursing. At September 30, 2006, approximately 41% of the University s assets are located in the Republic of Lebanon. Approximately 59% of those assets are property and equipment. (2) Summary of Significant Accounting Policies Basis of Presentation The financial statements are prepared on the accrual basis of accounting. The University reports its net assets in one of the following three classes: Unrestricted net assets Net assets not subject to donor-imposed restrictions. Temporarily restricted net assets Net assets subject to donor-imposed restrictions that will be met by actions of the University or the passage of time. Permanently restricted net assets Net assets subject to donor-imposed restrictions that stipulate they be maintained permanently, but permit the use of part or all of the income derived from them. Substantially all gains, both realized and unrealized, arising from investment of the University s endowment resources and expendable resources designated by the Board for investment purposes (quasi-endowment) are classified as either unrestricted net assets or temporarily restricted net assets in the accompanying financial statements. The University, however, intends to continue its management of endowment and similar resources in the manner employed in prior years, which considers gains as part of the original contribution and unexpendable except as permitted by the University s spending policy, based on total return. Such policy allows expenditure of 4.75% of the average of the prior 20 quarters market value. Expendable amounts exceeding current yield (i.e., interest and dividends) are charged against accumulated gains. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by explicit donor-imposed restrictions or by law. When such restrictions expire, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Expenses are reported as decreases in unrestricted net assets. 5 (Continued)

7 Contributions, including unconditional promises to give (pledges and grants), are reported as revenues in the appropriate net asset class in the period received at the estimated present value of future cash flows, net of an allowance for estimated uncollectible contributions receivable. Amortization of the present value discount is recorded as additional contribution revenue in the appropriate net asset class. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash, including property and equipment, are recorded at their estimated fair value as increases in unrestricted net assets unless the donor restricts their use. Health services revenues are recorded at the University s established rates, with provisions for third-party contractual adjustments, charity care, and bad debts deducted to arrive at net patient service revenues. Estimated contractual adjustments, including prospective rate adjustments arising under third-party agreements, are accrued in the period services are rendered. Differences between estimated retroactive third-party settlements for prior periods and subsequent final settlements are recorded as current period adjustments to revenues. The estimated settlements at September 30, 2006 relate to the years ended September 30, 2006, 2005, and The majority of 2003 third-party billings have been settled, and final settlements have been made for all other prior years. Grants and contracts are reported as revenues when expenses are incurred in accordance with the terms of the agreements. Contract amounts received in advance are recognized as deferred revenues. Expenses are charged to the functions incurring or benefiting from their occurrence. Certain expenses are allocated between medical educational services and health services based on actual levels of effort of the faculty members providing services to each function. Other expenses are allocated among functions on the basis of direct salary cost, metered usage, or other appropriate measures of the expenses incurred. Operations Operations include all revenues earned and expenses incurred by the University except for net appreciation and depreciation in fair value of investments in excess of amounts allowed to support operations under the spending rate, contributions for property and equipment acquisitions or for permanently restricted purposes, net assets released from restrictions for capital expenditures, exchange gains and losses on translation of assets and liabilities denominated in Lebanese pounds, and other nonrecurring transactions. Cash Equivalents Cash equivalents include all investments with maturities of three months or less at time of purchase, except for such assets held by the University s investment managers as part of their long-term investment strategies. Property and Equipment Land, buildings, and improvements are stated at values from an appraisal made in 1965 by the University, plus subsequent additions at cost. Equipment and construction in progress are stated at cost. Library books are valued at $1 per volume, except for 1,233 volumes of rare books valued at a total amount of $41,820, based on appraisals made in 1967 and (Continued)

8 Depreciation is determined on the straight-line method over the estimated useful lives of the assets. Depreciation is not computed in the year of acquisition of assets, but a full year s depreciation is reflected as expense in the year of asset disposal. Depreciable lives for land improvements and buildings and building improvements range from 20 to 50 years, and estimated useful lives of equipment range from 3 to 20 years. Inventories Inventories are stated at the lower of cost (stated at average cost) or market. Currency Exchange As indicated in note 1, the University conducts its educational, health, and auxiliary activities from facilities located in the Republic of Lebanon. The local currency is the Lebanese pound, and many of the University s transactions are denominated in that currency. Other transactions occur in U.S. dollars. Assets, liabilities, and related net assets are recorded in the currency in which they are denominated (i.e., Lebanese pounds or U.S. dollars). To provide for reporting of revenue and expense transactions in U.S. dollars at the time of their occurrence, the University establishes exchange rates between the pound and the dollar at the beginning of each month and translates assets and liabilities at the month-end rate. Exchange gains or losses are recognized as revenue or expense. Accounting 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 contingencies at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could be different from those estimates. Reclassifications Certain 2005 balances have been reclassified to conform to the 2006 presentation. Other Significant Accounting Policies Other significant accounting policies are set forth in the following notes. (3) Currency Rate During 2006 and 2005, established monthly exchange rates between the Lebanese pound and the U.S. dollar were L 1,508 = $1. The rates at were L 1,508 = $1. 7 (Continued)

9 (4) Investments The University reports its investments at fair value based upon quoted market values. Alternative investments, such as private equity and real estate, which are not readily marketable, are carried at fair values provided by external investment managers and are reviewed by management for reasonableness. Those fair values may differ significantly from values that would be determined if ready markets for these securities existed. The following tabulation summarizes the composition of investments at September 30, 2006 and 2005: Cost Fair value Cost Fair value Cash $ 966 1,025 Due (to) from brokers (1,109,664) (1,109,664) 187, ,932 Money market funds 7,625,694 7,625,694 7,270,010 7,270,010 U.S. Government obligations 15,882,491 15,266,293 20,519,121 19,848,029 Mutual funds fixed income 18,587,016 19,201,918 34,512,048 35,369,892 Alternative investments: Real estate 13,279,549 17,333,823 11,191,705 11,804,312 Other 54,913,703 82,249,822 53,885,204 73,503,154 Mutual funds equities 77,504,163 98,195,740 25,641,573 42,468,942 Corporate stocks 121,060, ,331, ,691, ,582,853 International equities 5,174,840 6,523,593 10,942,213 12,732,492 Accrued income, net of accrued fees (198,257) (198,300) (54,205) (54,205) $ 312,721, ,421, ,787, ,713,411 Although the University does not directly employ investment-related derivatives, it does approve of strategic use of derivatives by external investment managers. At September 30, 2006, the University had funding commitments outstanding of approximately $8.9 million under the terms of certain investment agreements. The University maintains sufficient liquidity in its investment portfolio to cover such commitments. Certain securities, with a fair value of $84.8 million and $81.8 million, are pledged as collateral for the term loan payable to bank at, respectively (see note 11). 8 (Continued)

10 The following table summarizes the University s total investment return and its classification in the financial statements for years ended : Temporarily Permanently 2006 Unrestricted restricted restricted Total Dividends and interest on investments, net of expenses of $1,287,142 $ 2,624,962 2,569,429 3,441 5,197,832 Net appreciation in fair value of investments 28,184,726 8,113, ,280 36,548,208 Net return on investments 30,809,688 10,682, ,721 41,746,040 Interest on cash equivalents 312,754 41,676 62, ,495 Total return on investments and cash equivalents 31,122,442 10,724, ,786 42,162,535 Net investment return recognized in operations 10,958,409 6,883,544 17,841,953 Net investment return in excess of amounts recognized in operations $ 20,164,033 3,840, ,786 24,320,582 Temporarily Permanently 2005 Unrestricted restricted restricted Total Dividends and interest on investments, net of expenses of $1,102,561 $ 2,141,000 2,447,920 29,388 4,618,308 Net appreciation in fair value of investments 40,410,776 7,256, ,185 48,018,723 Net return on investments 42,551,776 9,704, ,573 52,637,031 Interest on cash equivalents 171,486 62, ,199 Total return on investments and cash equivalents 42,723,262 9,704, ,286 52,871,230 Net investment return recognized in operations 11,044,725 7,402,879 18,447,604 Net investment return in excess of amounts recognized in operations $ 31,678,537 2,301, ,286 34,423,626 9 (Continued)

11 (5) Contributions Receivable Contributions receivable consist of the following at : Amounts expected to be collected in: Less than one year $ 25,394,230 13,880,350 One to five years 30,485,541 38,516,652 55,879,771 52,397,002 Less: Discount to present value at 3% 2,180,704 3,049,549 Allowance for doubtful collection 2,398,057 1,191,641 $ 51,301,010 48,155,812 (6) Property and Equipment Property and equipment at consist of the following: Land and land improvements $ 69,497,012 69,383,572 Buildings and building improvements 107,500, ,452,516 Equipment 108,763, ,683,054 Library books 720, ,213 Construction in progress 38,866,100 26,408, ,348, ,638,916 Less accumulated depreciation 118,672, ,623,905 $ 206,675, ,015,011 (7) Employee Benefit Plans The University has contributory and noncontributory employee benefit plans designed to provide pension benefits and, in accordance with Lebanese law, end-of-service indemnities. Total expense under these plans for the years ended was $13,651,000 and $4,442,000, respectively. Accrued end-of-service benefits consist of accumulated benefits for non-u.s. citizen employees. 10 (Continued)

12 (8) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets at are available for the following purposes: Educational services: Instruction $ 29,473,689 21,164,237 Research 9,372,703 13,035,447 Academic support 1,560, ,305 Student aid 29,090,234 26,501,010 Health services 2,560,920 2,506,035 Property and equipment 39,512,290 39,662,045 College Hall Fund 3,206,098 3,001,365 Other 1,775, ,984 $ 116,552, ,791,428 Permanently restricted net assets at are restricted for investment in perpetuity, with investment return available to support the following activities: Educational services: Instruction $ 55,046,605 45,443,710 Research 1,557,055 1,587,745 Academic support 2,216,645 2,216,145 Student aid 21,391,367 19,058,695 Health services 3,415,053 3,313,221 Other 3,090,614 3,080,249 $ 86,717,339 74,699,765 (9) Fair Value of Financial Information The fair value of the University s investments is discussed in note 4. The fair value of the University s other financial instruments, other than term loan payable, approximates their carrying value because of the short maturity of these instruments. The fair value of the University s term loan payable is based on the discounted future cash payments to be made. The discount rate used approximates current market rates for loans of similar maturities and credit quality. At, the carrying amount of the loans payable approximates fair value. 11 (Continued)

13 (10) Medical Malpractice Insurance and Litigation The University has obtained medical malpractice liability coverage, under public liability insurance coverage from a commercial carrier, for claims made during the policy period with coverage limits dependent on the time of occurrence of the alleged event and subject to deductibles dependent on the jurisdiction in which the claim arises. The cost of providing the public liability insurance coverage, including that for medical malpractice, was $408,000 and $351,000 for the years ended September 30, 2006 and 2005, respectively. The University is a defendant to various claims alleging medical malpractice or arising out of the operations of its educational programs at its Beirut campus. The outcome of these actions, seeking damages potentially in excess of the University s insurance coverage, cannot be determined at this time. University management believes that the University has good and meritorious defenses against these claims, and does not expect the ultimate resolution of these actions to have a material adverse effect on the University s financial position. (11) Term Loan Payable In connection with the purchase of an office condominium in September 2002 and in anticipation of commencing construction of a student activity center on the Beirut campus, on January 15, 2003, the University obtained a ten-year term loan from a commercial bank in the amount of $25 million at an interest rate of 3.74% per annum for the first five years; thereafter, the University has an option to change to a rate of the London Interbank Offered Rate plus 0.25%. Monthly principal payments of $416,677 will commence in 2008, with final payment due in January The term loan is secured by a pledge of certain securities of the University s investment portfolio. Interest for the years ended September 30, 2006 and 2005 was $936,492 and $934,356, respectively, of which $606,205 and $603,908, respectively, was capitalized in property and equipment. (12) Credit Agreement In July 2005, the University entered into a credit agreement with a bank that allows borrowing of up to $5.5 million on or prior to July 22, 2008 in connection with the renovation of a facility for a Medical Arts Building to house clinical offices for physicians of the University s Medical Center. Through September 30, 2006, the University had not taken any advances against the commitment. However, on March 21, 2007 the University drew down $3 million against the commitment. (13) Construction Commitments In connection with a number of projects now in the construction phase and others still in the design phase, the University has commitments aggregating $14.8 million at September 30, (Continued)

14 (14) Subsequent Event On December 5, 2006, the University signed an agreement with International College (IC) to sell the portion of the University campus currently occupied by IC, together with all buildings thereon, to IC for $22 million and title to a building (the Embassy Premises) currently owned by IC (the Transaction). A deposit of $1 million has been received from IC, and an additional $1 million placed in escrow to be released to the University upon closing of the Transaction. The closing of the transaction has not taken place and is contingent on IC curing any encroachments of the Embassy Premises onto surrounding onto surrounding plots and the University realigning its physical campus boundaries to conform to the dimensions as provided in the agreement, as well as the obtaining of required governmental approvals. The agreement can be terminated by either party if closing does not take place by June 30, 2011, unless IC elects to an extension of the termination date to June 30,