Georgetown University Financial Statements For the years ended June 30, 2005 and 2004 and Report Thereon

Transcription

1 Financial Statements For the years ended and Report Thereon

2 Report of Independent Auditors To the Board of Directors Georgetown University America. These financial statements are the responsibility of the University's management; our States of America, which 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. September 9, 2005

3 Statements of Financial Position As of (in thousands) Assets Cash and cash equivalents $ 37,482 $ 11,704 Accounts receivable, net 41,905 32,986 Prepaid expenses and other assets 63,832 70,819 Contributions receivable, net 121, ,257 Loans receivable, net 37,405 38,150 Unexpended bond proceeds 44,471 92,983 Investments 776, ,055 Land, buildings and equipment, net 773, ,997 Total assets $ 1,896,818 $ 1,876,951 Liabilitie s and Ne t Asse ts Liabilities Accounts payable and accrued liabilities $ 157,326 $ 142,914 Pension liability 71,664 39,707 Refundable deposits on grants 54,479 41,331 Deferred revenue and gains 43,266 22,563 Collateral due broker 7,526 32,394 Other liabilities 15,024 16,690 Notes payable and long-term debt 702, ,726 Total liabilities 1,051,406 1,017,325 Net assets Unrestricted 192, ,170 Temporarily restricted 218, ,417 Permanently restricted 434, ,039 Total net assets 845, ,626 Total liabilities and net assets $ 1,896,818 $ 1,876,951 The accompanying notes are an integral part of these financial statements 2

4 Statement of Activities For the year ended June 30, 2005 Temporarily Permanently (in thousands) Unrestricted Restricted Restricted Total Operating revenues Tuition and fees, net $ 318,422 $ - $ - $ 318,422 Grants and contracts 188, ,023 Sales and services of auxiliary enterprises 77, ,489 Contributions 38, ,291 Other investment income 5, ,411 Sales and services of educational departments 8, ,619 Investment return designated for current operations 10,044 25,468-35,512 Interest income on unexpended bond proceeds 2, ,709 Other sources 20, ,493 Net assets released from restrictions 20,334 (20,334) - - Total operating revenues 689,679 6, ,969 Operating expenses Salaries and fringe benefits 393, ,134 Supplies and services 145, ,325 Depreciation 31, ,019 Interest on indebtedness 33, ,825 Rent 19, ,344 Utilities 20, ,281 Insurance 11, ,236 Travel 22, ,479 Repairs and maintenance 5, ,706 Books and periodicals 10, ,705 Other 18, ,793 Total operating expenses 711, ,847 Operating subtotal (22,168) 6,290 - (15,878) Non operating revenues and expenses Capital contributions 1,218 11,473 20,001 32,692 Other net realized gains ,026-48,927 Other net unrealized losses (4,987) (11,495) - (16,482) Unrealized loss on swaps (31,252) - - (31,252) M inimum pension liability adjustment (32,221) - - (32,221) Net assets released from restrictions 37,336 (37,336) - - Non operating change in net assets (29,005) 10,668 20,001 1,664 Change in net assets (51,173) 16,958 20,001 (14,214) Net assets at beginning of year 244, , , ,626 Net assets at end of year $ 192,997 $ 218,375 $ 434,040 $ 845,412 The accompanying notes are an integral part of these financial statements 3

5 Statement of Activities For the year ended June 30, 2004 Temporarily Permanently (in thousands) Unrestricted Restricted Restricted Total Operating revenues Tuition and fees, net $ 299,688 $ - $ - $ 299,688 Grants and contracts 183, ,296 Sales and services of auxiliary enterprises 72, ,555 Contributions 29, ,953 Other investment income 7, ,086 Sales and services of educational departments 5, ,969 Investment return designated for current operations 10,367 24,899-35,266 Interest income on unexpended bond proceeds 3, ,635 Other sources 18, ,117 Net assets released from restrictions 21,670 (21,670) - - Total operating revenues 651,875 4, ,565 Operating expenses Salaries and fringe benefits 379, ,194 Supplies and services 136, ,587 Depreciation 33, ,586 Interest on indebtedness 32, ,227 Rent 19, ,159 Utilities 18, ,044 Insurance 10, ,892 Travel 21, ,336 Repairs and maintenance 5, ,676 Books and periodicals 9, ,412 Other 14, ,383 Total operating expenses 680, ,496 Operating subtotal (28,621) 4,690 - (23,931) Non operating revenues and expenses Capital contributions 8,962 12,962 17,143 39,067 Other net realized losses (5,914) (15,485) - (21,399) Other net unrealized gains 24,516 62,497-87,013 Unrealized gain on swaps 36, ,210 Minimum pension liability adjustment 10, ,602 Net assets released from restrictions 5,333 (5,333) - - Non operating change in net assets 79,709 54,641 17, ,493 Change in net assets 51,088 59,331 17, ,562 Net assets at beginning of year 193, , , ,064 Net assets at end of year $ 244,170 $ 201,417 $ 414,039 $ 859,626 The accompanying notes are an integral part of these financial statements 4

6 Statements of Cash Flows For the years ended (in thousands) Cash flows from operating activities Change in net assets $ (14,214) $ 127,562 Adjustments to reconcile change in net assets to cash and cash equivalents provided by (used in) operating activities Depreciation and amortization 31,019 33,586 Net realized and unrealized losses on investments (53,617) (96,958) Change in estimated cost to terminate swap 31,252 (36,210) Minimum pension liability adjustment 32,221 (10,602) Provision (recovery) for bad debts 4,156 (3,715) Gain on disposal of fixed assets (6,213) (66) Increase in accounts receivable (10,632) (4,343) Decrease (increase) in prepaid expenses and other assets 6,721 (8,459) Decrease (increase) in collateralized securities 24,868 (20,675) Decrease in contributions receivable 4,811 15,648 Increase(decrease) increase in accounts payable and accrued liabilities 14,412 (3,521) Increase (decrease) in refundable deposits on federal grants 13,148 (3,841) Increase in deferred revenues and gains 20,703 1,130 Increase in other liabilities (1,666) (1,177) Decrease (increase) in collateral due broker (24,868) 20,675 Less interest income on revolving student loan funds (1,372) (1,415) Less contributions restricted for: Investment in endowment (18,230) (21,217) Investment in plant (19,354) (28,906) Investment from revolving student loan funds (10) (30) Net cash and cash equivalents provided by (used in) operating activities 33,135 (42,534) Cash flows from investing activities Purchases of land, buildings and equipment (116,914) (77,429) Proceeds from sales of land, buildings and equipment 81,314 - Proceeds from sales of investments 330, ,544 Purchases of investments (340,035) (102,713) Net cash and cash equivalents used in investing activities (44,723) (71,598) Cash flows from financing activities Proceeds from contributions restricted for: Investment in endowment 18,230 21,217 Investment in plant 19,354 28,906 Payments on notes payable and long-term debt (50,392) (10,248) Proceeds from issuance on notes payable and long-term debt - 39,000 Net change in unexpended bond proceeds 48,512 39,133 Payments on capital lease obligations (465) (38) Disbursements for new student loans receivable (6,507) (10,363) Repayments on student loans receivable 8,260 7,985 Write-offs and other administrative costs of loans receivable (1,008) (372) Interest income on revolving student loan funds 1,372 1,415 New contributions for revolving student loan funds Net cash and cash equivalents provided by financing activities 37, ,665 Net increase in cash and cash equivalents 25,778 2,533 Cash and cash equivalents at beginning of year 11,704 9,171 Cash and cash equivalents at end of year $ 37,482 $ 11,704 The accompanying notes are an integral part of these financial statements 5

7 Statements of Cash Flows (Continued) For the years ended (in thousands) Supplemental Data Noncash investing and financing activities Gifts of securities $ 9,749 $ 12,317 Other non cash gifts 2,746 3,541 Interest paid 27,987 26,724 6

8 1. Nature of Operations Georgetown University (the University), located in Washington, D.C., is the nation s oldest Catholic and Jesuit University. Today the University is a major international research university, which includes four undergraduate schools; a school for summer and continuing education; graduate schools in the arts and sciences, nursing and health studies; business, and foreign service; and professional schools in law and medicine. In addition to providing educational services, the University performs research, training, and other services under grants, contracts, and similar agreements with sponsoring organizations, primarily departments and agencies of the United States Government. 2. Significant Accounting Policies Accrual Basis The financial statements of the University have been prepared on the accrual basis of accounting. Classification of Net Assets The University s net assets have been classified and reported as follows: Unrestricted All net assets which are not subject to donor imposed restrictions. Temporarily Restricted Assets whose use is subject to donor imposed restrictions that either expire by the passage of time or can be fulfilled and removed by actions of the University pursuant to these donor restrictions. Permanently Restricted Net assets that are subject to donor-imposed restrictions that require the original contribution be maintained in perpetuity by the University, but permits the use of the investment earnings for general or specific purposes. Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying value of land, buildings and equipment, non-traditional investments, certain real estate holdings, contingency reserves, retirement benefits, and accounts and contributions receivable. Actual results could differ materially, in the near term, from the amounts reported. Cash and Cash Equivalents The University defines cash and cash equivalents as cash on hand, demand deposits and short term investments with original maturities of three months or less when purchased. The carrying amount of cash equivalents approximates fair value. The University records in unexpended bond proceeds, on the statement of financial position, cash and cash equivalents held for bond financed land, buildings and equipment. Investments Investments are reported at fair value. Fair value is based on quoted prices for securities traded on public exchanges. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities, or other reasonable valuation methodologies such as appraisals. Fair values for certain private equity and real estate investments held through limited partnerships or commingled fund shares are estimated by the respective external investment managers if market values are not readily ascertainable. These valuations necessarily involve 7

9 assumptions and estimation methods which are uncertain, and therefore the estimates could differ materially from actual results. The cost of investments sold is determined by use of the average cost method on the trade date. Investment income on endowments and other investments are reported net of management fees, unless otherwise stipulated by the specified donor. Receivables and Revenue Recognition The University reports receivables at their net realizable value. Unconditional pledges are recognized, in the appropriate net asset categories, at their net present value, discounted using a risk-free rate of return effective the last day of the quarter in which the date of gift occurs and net of an allowance for uncollectible accounts. Tuition and fee revenues consist of all tuition and fee revenue earned, net of all student financial aid, University sponsored and donor sponsored. The University recognizes unrestricted revenues from student tuition and fees totally within the fiscal year in which the academic term is predominantly conducted. Deferred tuition and fees are included in deferred revenue and gains in the statement of financial position. Sponsored Programs The University receives grant and contract revenue from governmental and private sources. In 2005 and 2004, grant and contract revenue earned from governmental sources totalled $157,787,000 and $153,534,000, respectively. The University recognizes revenue associated with the direct costs of sponsored programs as the related costs are incurred. Indirect costs recovered on federally-sponsored programs are generally based on predetermined reimbursement rates negotiated with the University s cognizant federal agency, the Department of Health and Human Services. Indirect costs recovered on all other grants and contracts are based on rates negotiated with the respective sponsor. Funds received for sponsored research activity are subject to audit. Based upon information currently available, management believes that any liability resulting from such audits will not materially affect the financial position or operations of the University. Classification of Contributions Contributions are recorded as increases in the appropriate net asset category based on donor restrictions. Expirations of temporary restrictions on net assets are reported as net asset released from restrictions. Contributions with donor stipulated restrictions which are met within the same reporting period are reported as unrestricted. Absent explicit donor stipulations about the length of time long lived assets must be maintained, the University reports expiration of donor restrictions as unrestricted when donated or acquired long lived assets are placed in service. There are no significant contributed services that are required to be reported. Cash received prior to conditions being met is recorded as deferred revenue and gains on the statement of financial position. Because of uncertainties with regard to their realization and valuation, bequest intentions and other conditional promises are not estimated by management and are recognized only if and when the specified conditions are met. 8

10 Concentration of Credit Risk Financial instruments that potentially subject the University to significant concentrations of credit risk principally consist of cash and cash equivalents, accounts receivable and investments. The University places its cash and investments in various financial institutions that are federally insured under the Federal Depository Insurance Corporation Act (FDICA) and Securities Investor Protection Corporation (SIPC). At, the aggregate balances were in excess of the insurance limits by $53,852,000 and $29,914,000, respectively, and therefore, bear some risk since they are not collateralized. The University has not experienced any losses on its cash and cash equivalents, and investments to date as it related to FDICA and SIPC insurance limits. Inventories Inventories are valued at cost, principally using the first-in, first-out method, which is not in excess of net realizable value. Inventories are included in prepaid expenses and other assets on the statement of financial position. Collections The University has elected not to capitalize the cost or value of its collection of works of art, historical treasures, and similar assets. There were no deaccessions during the year. Land, Buildings and Equipment Land, buildings and equipment are stated at cost on date of acquisition, or fair value on date of donation, including interest capitalized on related borrowings during the period of construction, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the University's assets are as follows: Buildings and improvements Computer software (purchased and internally developed) Furniture and equipment years 5-10 years 5-20 years Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in the statement of activities. The University reviews its property and equipment assets for impairment in value whenever events or circumstances indicate that the carrying value may not be recoverable. In performing the review, if the fair value, less selling costs from the disposition of the asset, is less than its carrying value, an impairment loss is recognized. Income Taxes Under provisions of the Internal Revenue Code and the applicable income tax regulations of the District of Columbia, the University is exempt from taxes on income other than unrelated business income under code Section 501(c)(3). The University had no material net unrelated business income during the years ended, and therefore no provision for income taxes has been made. Financial Assistance The University maintains a policy of offering qualified applicants admission to the University without regard to financial circumstance. Student financial need is generally fulfilled through a combination of scholarships and fellowships, loans, and employment during the academic year. Tuition and fees have been reduced by certain scholarships and discounts. 9

11 Net tuition and fee revenue is calculated as follows for the years ended June 30 (in thousands): Tuition and fees, gross $ 387,634 $ 361,333 Less discounts: University sponsored (60,896) (52,952) Donor sponsored (8,316) (8,693) $ 318,422 $ 299,688 Measure of Operations The University uses a spending rate methodology to determine the amount of endowment income and gains that is included in operating income. Realized and unrealized gains (losses), including endowment income in excess of the spending rate and the effect of derivative financial instruments, minimum pension liability adjustment, and all capital contributions, are reported as non operating. Spending Rate The University has adopted an endowment spending policy governing the expenditure of the total return of funds by the pooled endowment fund (see Note 5). The spending policy is designed to stabilize annual spending levels and to preserve the portfolio and is independent of the actual yield and appreciation of investments for the year. To achieve this objective, additions to an endowment fund will receive, in the year of the addition, a distribution from the earnings in the pooled endowment fund equal to 4% of the initial market value of the addition prorated over the number of full quarters remaining in the fiscal year. Thereafter, the distribution is based on 5% of a five year moving average of the pooled endowment market value. Reclassification Certain 2004 amounts have been reclassified to conform with the 2005 presentation. 3. Accounts Receivable The major components of accounts receivable, net of applicable allowances for doubtful accounts were as follows at June 30 (in thousands): Research grants $ 35,651 $ 24,610 Students 7,166 7,970 Due from third party 3,035 4,357 Other 3,347 3,836 49,199 40,773 Less: allowance for doubtful accounts (7,294) (7,787) Total accounts receivable, net $ 41,905 $ 32,986 Bad debt expenses for the years ended were $1,713,000 and $1,254,000, respectively, and are included in other expenses in the accompanying statements of activities. 10

12 4. Contributions Receivable and Split-Interest Agreements Contributions Receivable Contributions receivable are summarized as follows at June 30 (in thousands): Gross contributions receivable expected to be collected in: Less than one year $ 43,900 $ 60,940 One year to five years 36,717 33,524 Over five years 9,459 3,400 90,076 97,864 Less: Discount to present value (4,809) (5,600) Allowance for doubtful accounts (30,103) (27,659) $ 55,164 $ 64,605 The above amounts do not include split-interest agreements held by outside trustees of $65,839,000 and $63,652,000 at, respectively. Discount rates used ranged from 3.49% to 6.42% in 2005 and Split Interest Agreements The University receives certain planned gift donations that benefit not only the University, but also another beneficiary designated by the donor. These contributions are termed split-interest agreements which include, perpetual trusts, charitable lead and remainder trusts, a gift annuity fund and a pooled income fund, and are generally gifts to be received by the University in the future. The University receives income from certain lead and perpetual trusts. The assets held by the respective trustees for these trusts will not revert to the University at any time and the income received is used according to donor stipulations. The University is also a remainderman to certain charitable remainder trusts. Upon the death of the beneficiaries of these charitable remainder trusts, the assets will revert to the University to be used according to the donors wishes. The University s share of split-interest agreements is included in either investments or contributions receivable on the statement of financial position. Assets held in trust by and for the University are $15,325,000 and $14,267,000 for the years ended, respectively, and are valued at fair-value or at the discounted present value of the estimated future receipts from the trusts. Where applicable, estimated future payments are discounted at a risk-free rate of return based on the expected term of the split-interest agreements at the time the agreements are created, ranging from 4.2% to 10.6%. The change in value of these assets was an unrealized gain of $4,539,000 and $106,000 at, respectively. Amounts payable to beneficiaries, gift annuities payable, and pooled income fund liabilities of $8,218,000 and $7,537,000 are in either accrued liabilities or deferred revenue and gains on the statements of financial position as of, respectively. 11

13 5. Investments At the cost and fair value of investments were (in thousands): Cost Value Fair Value Cost Value Fair Value Cash and cash equivalents $ 55,781 $ 55,781 $ 15,304 $ 15,304 Investments: U.S. Gov't/Corp. bonds 108, , , ,850 Equity securities 370, , , ,173 Securities held as collateral 7,526 7,526 32,394 32,394 Real estate 6,256 38,500 6,256 38,500 Non-traditional 128, ,710 80,015 77,164 Notes/other assets 4,443 2,580 5,639 3,670 Total $ 681,712 $ 776,928 $ 629,461 $ 739,055 The use of the cash and cash equivalents reported above is limited and it is, therefore, excluded from cash and cash equivalents on the accompanying statements of financial position. Included in investments at are assets of the self-insurance trusts as described in Note 11. Fees incurred in the management of the investments for the years ended were approximately $3,435,000 and $2,890,000, respectively. Non-traditional investments primarily include hedge funds, private equities and venture capital. Investment Income Total net investment income for the years ended June 30, consists of the following: Other investment income $ 5,411 $ 7,086 Investment income on endowments 14,686 9,943 Net realized gains 77,933 9,945 Unrealized losses (gains) (16,482) 87,013 Less investment management expenses (3,435) (2,890) Less other expenses Total net investment income $ (4,745) 73,368 $ (3,131) 107,966 Investment return used for current operations $ 40,923 $ 42,352 Amounts in excess of investment return used for current operations 32,445 65,614 Total net investment income $ 73,368 $ 107,966 Pooled Endowment Investments At, some of the University s investments are pooled and are carried at market value. Included in the pooled funds are quasi endowments, which are internally designated and invested as endowed funds. The market value of these funds for the years ended, respectively, was $145,263,000 and $130,424,000. Excluded from pooled investments are separately invested life income endowments of $15,325,000 and $14,267,000 and other separately invested funds of $55,483,000 and $47,762,000, at June 30, 2005 and 2004, respectively. Individual pooled endowment funds acquire and dispose of units 12

14 based on the per unit market value at the beginning of the calendar month within which the transaction occurs. June 30, June 30, Pooled endowment units 1,821,400 1,719,008 Market value per unit $ $ Increase in market value per unit $ $ Distributions per unit $ $ Total annual rate of return 9.4% 19.7% Investment earnings are distributed to the individual funds of the pool based on each fund s proportionate share of assets in the pool at a rate of distribution determined by the University. Earnings in excess of the distributions are reinvested into the pool. The University engages in securities lending of its endowment pool investments whereby certain securities in its portfolio are loaned to other institutions generally for short periods of time. By the end of the business day on which securities are delivered to the borrower, collateral equal to 102% of the market value of a loaned U.S. security and/or 105% of a non-u.s. security, including any accrued interest, is obtained from the borrower. Throughout the duration of the loan, it is marked-to-market on a daily basis. On any given day, if the collateral currently held is less than 100% of a loaned U.S. security or 105% of a loaned non-u.s. security, the borrower is required to deliver 102% and 105% respectively, including accrued interest. It is understood that certain standard industry practices may from time-to-time preclude the lending agent from obtaining additional collateral for loans of non-u.s. issues by the close of the next business day unless the market value of the collateral previously delivered by the borrower is less than 100% of the market value of such loaned securities, including the interest. The University has recorded the amount held as collateral of $7,526,000 and $32,394,000 respectively, at, in investments and collateral due broker in the accompanying financial statements. A deficiency occurs when the market value of an individual donor-restricted pooled fund is less than the cost of the investment. Deficiencies of $13,510,000 and $13,238,000 for donor-restricted pooled endowment funds have been recorded in unrestricted net assets at, respectively. Deficiencies of $1,863,000 and $2,081,000 for donor-restricted separately invested endowment funds have been recorded in unrestricted net assets at, respectively. These deficiencies are the result of declines in market values. 6. Land, Buildings and Equipment 13

15 At June 30, the components of the University's fixed assets were as follows (in thousands): Buildings and improvements $ 950,132 $ 941,004 Furniture and equipment 19,337 45,610 Construction in progress 60,875 36,449 Land and improvements 59,653 60,732 Computer software 29,359 29,220 Equipment under capital leases 8,579 7,829 Subtotal 1,127,935 1,120,844 Less: accumulated depreciation and amortization (354,143) (357,847) Total $ 773,792 $ 762,997 Buildings with a net book value of approximately $61,759,000 and $63,625,000 were pledged as collateral at, respectively. The University acquired $2,115,100 and $1,844,100 in property through grants for the years ended, respectively. Amortization of computer software was $1,779,300 and $1,444,100 for the years ended June 30, 2005 and 2004, respectively. The Green Building located at 2001 Wisconsin Avenue and The Harris Building located at 3300 Whitehaven Street were sold by the University on September 15, 2004 for $73,300,000 and will be leased back for future use. The gain from the sale of $19,800,000 will be deferred and recognized over the 15 year lease term which began in FY2005. The University recognized $1,300,000 of the gain as non-operating revenue for the year ended June 30, Accounts Payable and Accrued Liabilities The major components of accounts payable and accrued liabilities, were as follows at June 30 (in thousands): Trade payables $ 33,579 $ 33,433 Deferred compensation 28,692 29,214 Accrued interest 26,802 21,042 Retiree non-pension benefit cost 17,061 14,255 Accrued transaction costs (Note 12) 16,794 15,412 Employee costs 26,305 24,290 Other 8,093 5,268 Total accounts payable and accrued liabilities $ 157,326 $ 142,914 14

16 8. Notes Payable and Long-Term Debt Notes payable and long-term debt at June 30 are shown in the following tables (in thousands): Description Bonds payable to General M otors Commercial Credit Corporation, 3%; semi annual payments; matures 2005 $ - $ 209 Bonds payable to Chase M anhattan Bank; 3%-4%; annual payments; matures in ,229 8,604 Series A Bonds of 1998; 4.65%-6.07%; annual payments; matures in ,400 49,600 Series A Bonds of 1988; 3.75%-5.35%; annual payments; matures in ,250 44,850 Series A Bonds of Taxable; 4.03%; annual payments; matures in , ,000 Series A Bonds of 1999; 3.08%; annual payments; matures in , ,800 Series A 2001; 5.75%-6.08%; annual payments; matures in ,149 79,149 Series B 2001; 2.75%; annual payments; matures in ,600 73,600 Series C 2001; 2.85%; annual payments; matures in ,600 73,600 Series D 2001; 2.89%; annual payments; matures in ,650 73,650 Bonds payable to the U.S. Government; 3%-5%; semi-annual payments; matures in ,733 3,944 M ortgage loans payable to the U.S. Public Health Service - DCM F; 2.5%; annual payments; matures in ,690 8,937 Capitalized lease obligations, with monthly payments of principal and interest of $12 and $8, respectively; matures in ,318 1,783 Bank line of credit - I (Bank of America); LIBOR+ 35 bps - 12,400 Bank line of credit - II (Wachovia); LIBOR + 35 bps - 13,000 Bank line of credit - III (Riggs Bank); LIBOR + 40 bps - 13,100 Various mortgages and notes payable; various %; annual payments; maturing at various dates through Subtotal 654, ,726 Estimated cost to terminate swap 47,252 16,000 Total $ 702,121 $ 721,726 * These were the variable rates at. The fair value of the University s debt obligations was approximately $705,341,000 and $689,825,000 at, respectively. The fair value represents the quoted present value of debt service cashflows of DC Revenue Bonds and carrying amounts for all other debt which approximates fair value. Maturities of debt obligations for the years ending June 30 (in thousands) are as follows: 2006 $ 13, , , , ,974 Thereafter 580,498 Total $ 654,869 15

17 Covenants of the bond agreements restrict the University from incurring additional indebtedness without the approval of the governmental entity if, after incurring the additional debt, the University's maximum annual pro forma payments of principal and interest on the total debt would exceed 20% of the University's unrestricted current fund expenditures and mandatory transfers, as defined in the bond agreement, for the period during which the bonds will be outstanding. The University has available five unsecured lines of credit at financial institutions totalling $215,000,000 with interest payable on the outstanding balance calculated daily based upon 35, 40, 30, 40 and 35 basis points respectively over 30 day LIBOR. There are no outstanding balances at June 30, The University has entered into various interest rate swap agreements to manage the interest cost and risk associated with its outstanding debt. The interest rate swap agreements were not entered into for trading or speculative purposes. Under the terms of these agreements, the University pays a fixed rate, determined at inception, and receives a variable rate on the respective notional principal amounts. The accumulated unrealized depreciation that was recognized for these swaps as of was approximately $47,252,000 and $16,000,000, respectively, and is included in notes payable and long term debt in the statement of financial position. An unrealized loss of $31,252,000 and an unrealized gain of $36,210,000 were recognized for the years ended, respectively, and is included in non operating revenue and expenses on the statement of activities. The following schedule presents the notional principal amounts of the University s interest rate swaps at June 30. Es timated Es timate d Cost to Cost to Terminate-swap Terminate-swap Notional Expiration At June 30 At June 30 Amount Date $ 28,300,000 47,450, ,650,000 35,350,000 73,600,000 73,600,000 73,650,000 $ 436,600,000 A pril 9, 2018 $ (1,825,000) $ (1,658,000) A pril 13, 2020 (4,672,000) (3,807,000) M ay 3, 2021 (11,359,000) (9,010,000) M ay 3, 2024 (8,015,000) (4,960,000) M arch 28, 2031 (6,545,000) 848,000 A pril 25, 2034 (7,270,000) 1,240,000 M ay 1, 2036 (7,566,000) 1,347,000 $ (47,252,000) $ (16,000,000) These financial instruments necessarily involve counter-party credit exposure. The counterparties for these swap transactions are major financial institutions that meet the University s criteria for financial stability and credit-worthiness. The fair value of the interest rate swaps was computed by a third-party evaluator using the net present value of fixed and floating future cash flows, with floating future flows determined by projecting forward rates. 16

18 9. Restricted Net Assets Temporarily Restricted Net Assets Temporarily restricted net assets at June 30 are available for the following purposes (in thousands): Buildings and improvements $ 10,813 $ 32,342 Time and other restrictions 167, ,267 Financial aid 26,986 25,812 Term endowments 3,228 3,293 Instruction and research 10,315 10,703 Total $ 218,375 $ 201,417 Permanently Restricted Net Assets Permanently restricted net assets at June 30 are restricted to investment in perpetuity, the income from which is expendable to support (in thousands): General operations $ 167,953 $ 165,758 Instruction and research 129, ,885 Financial aid 127, ,127 Other restrictions 9,269 9,269 Total $ 434,040 $ 414,039 Net Assets Released From Restrictions Donor restrictions met were as follows for the years ended June 30 (in thousands): Financial aid $ 9,445 $ 9,751 Instruction and research 6,160 6,201 Time and other restrictions 4,544 5,987 Term endowments Buildings and equipment 37,305 4,864 Total $ 57,670 $ 27,003 17

19 10. Operating Expenses by Function Expenses were incurred for the following functions for the years ended repectively (in thousands): Program: Instruction $ 222,706 $ 214,795 Research 136, ,008 Scholarships and fellowships 9,843 10,779 Auxiliary enterprises - direct 33,639 32,988 Public service 44,870 42,834 Other 6,385 1,124 Support: Institutional support 101, ,410 Academic support 156, ,708 Total $ 711,847 $ 680,646 Operation and maintenance of plant and depreciation are allocated to functional classifications based on square footage. Interest expense is allocated to the functional classifications that directly benefited from the proceeds of the debt. 11. Pension and Other Postretirement Benefit Costs Postretirement Benefit Plans In addition to providing pension benefits, the University provides certain health care and life insurance benefits to retired employees who meet certain eligibility requirements. As of July 1, 1993, the unfunded accumulated postretirement benefit obligation was $4,762,000 (the "transition obligation"). The University elected to defer this transition obligation and recognize it on a straight-line basis over 13 years. The University s policy is to fully fund its accrued postretirement health and life insurance benefits on an annual basis. The funding policy for the pension plans is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as we may determine to be appropriate. The assumed rates of increase in the per capita cost of covered health care benefits for plan participants who are under and over age 65 is 6.75%, for 2005 and Both rates are assumed to decrease gradually from 10% in 2005 and 2004 to 5.0% over the next seven years and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation $948,000 and $1,065,000 at, respectively. The aggregate of the service and interest cost components of net periodic postretirement benefit expense would increase by $67,000 and $63,000, respectively, for the years ended. Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit obligation $842,000 and $958,000 at, respectively, and would decrease the aggregate of the service and interest cost components of the net periodic postretirement benefit expense by $60,000 and $57,000 for the years ended June 30, 2005 and 2004, respectively. 18

20 The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 5% and 6.25% at, respectively. The expected long-term rate of return on plan assets used in determining net postretirement benefit expense was 8.0% and 7.0% respectively. Defined Benefit Retirement Plan The Georgetown University Retirement Plan ("the Plan"), originally effective January 1, 1954, and thereafter amended, covers eligible faculty members, staff employees, and certain employees of the University. Benefits under the Plan are based on years of service and the participants' highest compensation for a specified period of employment. The University's policy is to satisfy minimum funding requirements. The Plan is currently subject to the full funding limitations. The discount rate used in determining the actuarial present value of the projected benefit obligation was 5% and 6.25% at, respectively. The rate of increase in future compensation levels was based on an age-graded salary scale averaging 4.50% at both June 30, 2005 and The expected long-term rate of return on plan assets used in determining net pension expense was 8.0% and 7.0% respectively. Defined Contribution Retirement Plan Faculty members and certain staff not participating in the Plan are eligible to join the Defined Contribution Retirement Plan. The University s policy is to contribute a percentage of the employee s salary. The University s contribution is 12% for employees hired prior to January 1, 1996 and 10% for employees hired on or after that date. The expense recorded under the Defined Contribution Retirement Plan was $18,459,000 and $17,958,000 for the years ended June 30, 2005 and 2004, respectively. Health and Life Insurance Plans The purpose of the Georgetown University Health and Life Insurance Plans portfolio (the Portfolio ) is to provide funding to pay the benefits and expense obligations of Georgetown University s postretirement welfare plan when due. Prior to the 2001 fiscal year, it was the University s funding policy to contribute an amount equal to the actuarial determined expense. In keeping with this purpose and funding policy, the Portfolio strives to maximize total return within reasonable and prudent levels of risk and maintain sufficient liquidity to meet disbursement needs. The Portfolio has a target asset allocation of 60% equities and 40% fixed income. The performance of individual investment managers and the incremental return achieved from active management will generally be evaluated over three year periods or over a full market cycle against a relevant peer universe and against standard market benchmarks. 19

21 The following information summarizes activity in the pension and postretirement benefit plans: Other Other Pension Postretirement Pension Postretirement Benefits Benefits Benefits Benefits Change in benefit obligation: Benefit obligation, beginning of year $ 131,881 $ 38,757 $ 130,407 $ 37,352 Service cost 3,587 1,007 3, Interest cost 8,121 2,253 7,795 2,279 Plan participants' contributions - 1, Actuarial (gain) loss 35,825 8,505 (1,310) (166) Benefits paid (9,131) (3,183) (8,533) (2,694) Benefit obligation, end of year $ 170,283 $ 48,347 $ 131,881 $ 38,757 Change in plan assets: Fair value of plan assets $ 91,486 $ 11,587 $ 75,804 $ 12,000 beginning of year Actual return on plan assets 6, ,092 1,083 Employer contributions 2, , Plan participants' contributions - 1, Benefits paid (9,131) (3,183) (8,533) (2,694) Fair value of plan assets, end of year $ 90,884 $ 10,322 $ 91,486 $ 11,587 The asset allocation for the University s pension plans and postretirement welfare plans at the end of fiscal year 2005 and fiscal year 2004, and the target allocation for June 30, 2005, by asset category, follows: Pension Plan T arg e t A llo c atio n P e rce ntag e o f P o s tre tire m e nt W e lfare P lan A s s e ts Asset Category for June 30, 2005 June 30, 2005 June 30, 2004 Equity securities 60.0% 60.0% 60.0% D ebt securities 40.0% 40.0% 40.0% R eal estate 0.0% 0.0% 0.0% O the r 0.0% 0.0% 0.0% Total 100.0% 100.0% 100.0% The purpose of the Georgetown University Retirement Plan portfolio is to provide funding to pay the benefits and expense obligations of the Plan when due. In keeping with this purpose, the portfolio strives to achieve the following objectives: 1. To maintain fully funded status with regard to the Accumulated Benefit Obligation (ABO); 2. To maintain flexibility in determining the future level of contributions; and 3. To maximize total return within reasonable and prudent levels of risk in order to 20

22 minimize contributions and maintain sufficient liquidity to meet disbursement needs. The portfolio has a target asset allocation of 65% equities and 35% fixed income. The performance of individual investment managers and the incremental return achieved from active management will generally be evaluated over three year periods or over a full market cycle against a relevant peer universe and against standard market benchmarks. Postretirement Welfare Plans Target Allocation Percentage of Postretirement Welfare Plan Assets Asset Category for June 30, 2005 June 30, 2005 June 30, 2004 Equity securities 60.0% 60.0% 60.0% Debt securities 40.0% 40.0% 40.0% Real estate 0.0% 0.0% 0.0% Other 0.0% 0.0% 0.0% Total 100.0% 100.0% 100.0% The purpose of the portfolios for the post retirement welfare plans is to provide funding to pay the benefits and expense obligations of The Georgetown University s postretirement welfare plans when due. Since the 2001 fiscal year, the University has not contributed to this trust. Prior to the 2001 fiscal year, it was the University s funding policy to contribute an amount equal to the FAS#106 cost. In keeping with this purpose and funding policy, the Portfolio strives to maximize total return within reasonable and prudent levels of risk and maintain sufficient liquidity to meet disbursement needs. The portfolio has a target asset allocation of 60% equities and 40% fixed income. The performance of individual investment managers and the incremental return achieved from active management will generally be evaluated over three year periods or a full market cycle against a relevant peer universe and against standard market benchmarks. 21

23 Other Other Pension Postretirement Pension Postretirement Benefits Benefits Benefits Benefits Reconciliation of funded status: Funded status $ (79,399) $ (38,025) $ (40,395) $ (27,170) Unrecognized net actuarial loss 82,236 23,246 48,706 15,102 Unrecognized prior service cost 465 (1,742) 729 (1,902) Prepaid (accrued) benefit cost $ 3,302 $ (16,521) $ 9,040 $ (13,970) Amounts recognized in the statement of financial position consist of: Prepaid (accrued) benefit cost $ 3,302 $ (16,521) $ 9,040 $ (13,970) A dditional minimum liability (71,664) - (39,707) - Intangible asset Accumulated non operating income 71,199-38,978 - Net amount recognized $ 3,302 $ (16,521) $ 9,040 $ (13,970) Components of net periodic benefit cost: Service cost $ 3,587 $ 1,007 $ 3,522 $ 994 Interest cost 8,121 2,253 7,795 2,279 Expected return on assets (7,015) (828) (5,674) (760) A mortization of prior service cost 264 (160) 264 (160) Amortization of transition asset 2, , Net periodic benefit cost $ 7,888 $ 2,824 $ 9,839 $ 3,175 An additional minimum pension liability adjustment of $(32,221,000) and $10,602,000 was recognized at, respectively. The minimum pension liability adjustment represents the accumulated benefit obligation in excess of the fair value of the plan s assets plus the amount of the prepaid benefit cost. The unrecognized transition obligation is recorded as an intangible asset included in prepaid expenses on the 2005 and 2004 statements of financial position. 12. Commitments and Contingent Liabilities The University receives a substantial amount of its revenues from U.S. Government grants and contracts. The ultimate determination of amounts received under these programs generally is based upon allowable costs, which are subject to audit, and are reported to the U.S. Government. Recovery of indirect costs is based on predetermined rates negotiated with the government. The University is of the opinion that adjustments, if any, arising from such audits will not have a material effect on the financial statements. The University may enter into service agreements with service providers in which it agrees to indemnify the service provider against certain losses and liabilities arising from the service provider's performance under the agreement. Generally, such indemnification obligations do not apply in situations in which the service provider is grossly negligent, engages in willful misconduct, or acts in bad faith. The indemnifications serve to place the University in a liability position no different than if it had performed the services for itself. The University was not aware of any liability under such service agreements for the years ended June 30, 2005 or The University has capital call commitments with twelve private equity managers totalling 22

24 $123,000,000. Remaining capital call commitments as of totalled $30,820,000 and $42,739,000, respectively. The University carries insurance policies on insurable risks, which it believes to be appropriate. The University generally has self-insured retention limits and has obtained fully insured layers of coverage in excess of self-insured retention limits. Accruals for self-insurance losses are made based on the University s claims experience and actuarial assumptions. The University has certain liabilities with respect to existing or potential claims, lawsuits, and other proceedings. The University accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. The University self insures for Hospital Professional and Comprehensive General Liability as well as Worker s Compensation, Property and Casualty Liabilities. As of June 30, 2004, the University maintained separate Trusts for the Hospital Professional and Comprehensive General Liability and the Worker s Compensation, Property and Casualty Liabilities of $4,016,000 and $4,678,000, respectively. During the year ended June 30, 2005, the University dissolved the Worker s Compensation, Property and Casualty Self-Insurance Trust but maintained a separate Trust for the Hospital Professional and Comprehensive General Liability with liabilities of $2,909,000 at June 30, These amounts are included in investments and other liabilities in the accompanying financial statements. The University is a defendant in a number of malpractice lawsuits, all of which are pending in trial or appellate courts of the District of Columbia. According to legal counsel for the Hospital Professional and Comprehensive General Liability Trust, each of the cases is being defended pursuant to the coverage afforded by the respective malpractice insurance policies. Such coverage is subject to the terms and provisions of those policies, including limitations of liability and any applicable exceptions or exclusions. The University considers its liability, if any, to be adequately covered by insurance from its commercial carriers and/or from the Hospital Professional and Comprehensive General Liability Trust. The University is involved in various other claims and legal actions arising in the ordinary course of business. Based upon information currently available, management believes the ultimate disposition of these matters will not have a material adverse effect on the University's financial position, change in net assets or cash flows. Contractual commitments authorized by the Board of Directors were approximately $32,108,000 and $52,249,000 at, respectively. The commitments pertain to construction and major maintenance projects. Bonds, loans, federal grants and other University revenues are expected to provide the necessary funding for these commitments. Effective February 17, 2000, the University adopted a plan to transfer the Georgetown University Hospital, the Community Practice Network and the Faculty Practice Group (the transferred business), to Medstar Health Inc. Accrued estimates of $72,931,000 were recorded to recognize expenses related to the transaction. Reversals and adjustments against these accrued estimates were $3,091,000 and $3,841,000 in the years ended, respectively. At, the remaining transaction cost estimated liabilities were $14,097,000 and $11,006,000, respectively. The statement of financial position includes accrued liabilities relating to the transferred businesses for third party settlements of $2,697,000 and $4,406,000 for the years ended, respectively. On May 17, 2005, the University entered into an agreement with an unrelated Foundation to 23