BATTLE GROUND ACADEMY OF FRANKLIN, TENNESSEE FINANCIAL STATEMENTS. June 30, 2012 and 2011

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1 BATTLE GROUND ACADEMY OF FRANKLIN, TENNESSEE FINANCIAL STATEMENTS

2 TABLE OF CONTENTS Independent Auditor s Report... 2 Financial Statements: Statements of Financial Position... 3 Statements of Activities Statements of Cash Flows... 6 Notes to the Financial Statements

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4 STATEMENTS OF FINANCIAL POSITION Assets Current assets: Cash and cash equivalents $ 2,683,219 $ 979,777 Pledge contributions receivable, net 938,763 1,338,991 Tuition receivables, net of allowance for doubtful accounts of $138,927 and $173,874, respectively 49, ,733 Inventories 158, ,896 Prepaid expenses and other receivables 27,439 21,087 Total current assets 3,857,073 2,626,484 Investments 7,206,122 7,635,211 Land, buildings, and equipment, net 28,857,213 25,658,705 Unamortized bond issue costs, net of accumulated amortization of $145,426 and $143,891, respectively 19,192 20,727 Pledge contributions receivable, net 817, ,545 Beneficial interests in perpetual trusts 1,743,256 1,800,131 Other assets 50,001 50,001 Total assets $ 42,550,124 $ 38,790,804 Liabilities and Net Assets Current liabilities: Accounts payable $ 84,715 $ 552,966 Funds held for others 202,297 5,000 Deferred tuition income 1,943,563 1,448,126 Capitalized lease liability 195,845 - Deferred compensation 87,372 91,141 Interest rate swap liability 326, ,927 Current portion of construction loan 683,529 - Current portion of bonds payable 765, ,000 Total current liabilities 4,288,355 3,193,160 Construction loan, net of current portion 2,550,000 - Bonds payable, net of current portion 9,240,000 9,936,000 Total liabilities $ 16,078,355 13,129,160 Net assets: Unrestricted 17,433,264 16,543,888 Temporarily restricted 4,002,109 4,029,985 Permanently restricted 5,036,396 5,087,771 Total net assets 26,471,769 25,661,644 Total liabilities and net assets $ 42,550,124 $ 38,790,804 See accompanying notes. -3-

5 STATEMENT OF ACTIVITIES Year Ended June 30, 2012 Temporarily Permanently Unrestricted Restricted Restricted Total Public support and revenue: Tuition, net of financial aid $ 13,228,940 $ - $ - $ 13,228,940 Auxiliary activities 1,730, ,730,089 Contributions, net of allowance 576, , ,059,907 Investment gain 91,284 65, ,996 Scholarship trust income 44, ,405 Loss on beneficial interest in trust - - (56,875) (56,875) Net assets released from restrictions 571,645 (576,898) 5,253 - Total public support and revenue 16,242,713 (27,876) (51,375) 16,163,462 Expenses: Program services: Academic programs 8,014, ,014,428 Auxiliary programs 2,192, ,192,692 Occupancy expense 1,212, ,212,842 Interest expense 284, ,619 Bad debt expense 111, ,715 Unrealized loss on interest rate swap 79, ,107 Total program services 11,895, ,895,403 Supporting services: General and administrative 2,885, ,885,449 Institutional advancement 572, ,485 Total expenses 15,353, ,353,337 Change in net assets 889,376 (27,876) (51,375) 810,125 Net assets at beginning of year, as restated 16,543,888 4,029,985 5,087,771 25,661,644 Net assets at end of year $ 17,433,264 $ 4,002,109 $ 5,036,396 $ 26,471,769 See accompanying notes. -4-

6 STATEMENT OF ACTIVITIES Year Ended June 30, 2011 (as restated) Temporarily Permanently Unrestricted Restricted Restricted Total Public support and revenue: Tuition, net of financial aid $ 12,883,086 $ - $ - $ 12,883,086 Auxiliary activities 1,809, ,809,144 Investment gain 853, ,383-1,584,200 Contributions, net of allowance 1,526,035 - (50,265) 1,475,770 Gain on beneficial interest in trust , ,362 Scholarship trust income 42, ,535 Net assets released from restrictions 1,650,206 (1,675,701) 25,495 - Total public support and revenue 18,764,823 (945,318) 92,592 17,912,097 Expenses: Program services: Academic programs 7,789, ,789,895 Auxiliary programs 2,382, ,382,600 Occupancy expense 1,172, ,172,885 Bad debt expense 800, ,257 Interest expense 289, ,714 Unrealized loss on interest rate swap 5, ,215 Total program services 12,440, ,440,566 Supporting services: General and administrative 2,655, ,655,159 Institutional advancement 589, ,572 Total expenses 15,685, ,685,297 Change in net assets 3,079,526 (945,318) 92,592 2,226,800 Net assets at beginning of year 14,340,888 4,975,303 4,118,653 23,434,844 Net assets at end of year 17,420,414 4,029,985 4,211,245 25,661,644 Restatement (876,526) 876,526 - Net assets at end of year, as restated $ 16,543,888 $ 4,029,985 $ 5,087,771 $ 25,661,644 See accompanying notes. -5-

7 STATEMENTS OF CASH FLOWS Years Ended Cash flows from operating activities: Change in net assets $ 810,125 $ 2,226,800 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 1,136,657 1,085,916 Amortization of bond costs 1,535 1,535 Provision for uncollectible pledges 36, ,195 Provision for doubtful accounts, net (34,947) (49,778) Realized/unrealized loss (gain) on investments 33,931 (1,327,808) Change in fair value of interest rate swap agreement 79,107 5,215 Contributions restricted for long term purposes (702,515) (1,137,640) Change in fair value of beneficial interests in perpetual trusts 73,843 (359,149) Change in operating assets: Pledge contributions receivable 27,245 29,014 Tuition receivables 99, ,730 Inventories 14,881 (41,264) Prepaid expenses and other receivables (6,352) 54,967 Change in operating liabilities: Accounts payable (468,251) 433,136 Funds held for others 202,297 - Deferred tuition income 495, ,259 Accrued liabilities (5,000) (845,122) Deferred compensation (3,769) 16,136 Net cash provided by operating activities 1,790,136 1,538,142 Cash flows from investing activities: Purchases of investments (1,282,297) (6,472,986) Proceeds from sale of investments 1,677,455 6,453,468 Purchases of property and equipment (4,038,145) (2,225,484) Reinvestment of perpetual trusts earnings (16,968) - Net cash used in investing activities (3,659,955) (2,245,002) Cash flows from financing activities: Proceeds from construction loan 3,233,529 - Collection of pledges restricted for long term purposes 1,220, ,121 Payments on bonds payable (780,000) (575,000) Payments on capital lease (101,175) - Net cash provided by financing activities 3,573, ,121 Net (decrease) increase in cash and cash equivalents 1,703,442 (372,739) Cash and cash equivalents at beginning of year 979,777 1,352,516 Cash and cash equivalents at end of year $ 2,683,219 $ 979,777 Supplemental disclosure of cash flow information: Interest paid $ 284,619 $ 289,714 Non-cash investing and financing activities Equipment purchased through capital lease obligation $ 297,020 $ - See accompanying notes. -6-

8 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS Battle Ground Academy of Franklin, Tennessee (the Academy ) is a private elementary and secondary school in Franklin, Tennessee. The Academy, founded in 1889, is a college preparatory school dedicated to developing the intellectual, moral, creative and physical aspects of each student, and to assisting students in the realization of their potential for personal fulfillment and service to others. Tuition represents the Academy s primary source of revenue. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Academy are presented on the accrual basis of accounting. The significant accounting policies followed are described below. Unrestricted, Temporarily Restricted and Permanently Restricted Net Assets Net assets and revenues, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Academy and changes therein are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of the Academy and/or the passage of time Permanently restricted net assets Net assets subject to donor-imposed stipulations that must be maintained permanently by the Academy Cash Equivalents The Academy considers all highly liquid investments with original maturities of less than three months to be cash equivalents. Cash and cash equivalents, as reported in the statements of financial position and the statements of cash flows, exclude cash designated for long-term investment. Investments and Investment Income Investments in marketable securities are stated at fair value as determined by the custodian and/or investment manager primarily based on quoted market prices or net asset values. Real estate investments without readily determinable fair values are stated at acquisition cost or fair value, if donated, at the date of contribution. See further discussion of fair value measurements at Note

9 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments and Investment Income (Continued) Investment income and net realized and unrealized gains and losses are reported as an increase or decrease in unrestricted net assets if earned from unrestricted net assets or if earned from permanently restricted net assets and expended during the same year it is earned. Investment income and net realized and unrealized gains and losses are reflected as increases or decreases in temporarily restricted net assets if earned from permanently restricted net assets, until appropriated for expenditure. The Academy designates only a portion of its cumulative unrestricted investment return for support of current operations; the remainder is retained to support operations of future years and to offset potential market declines. Pledge Contributions Receivable Contributions are recognized when the donor makes a promise to give to the Academy that is, in substance, unconditional. Unconditional promises to give are recorded when the promises are made. Donor restricted contributions are reported as increases to temporarily or permanently restricted net assets. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets. Unconditional promises to give due in the next year are reflected as current pledges receivable and are recorded at their net realizable value. Unconditional promises to give due in subsequent years are reflected as long-term pledges receivable and are recorded at present value using interest rates applicable to the years in which the pledges are received. The Academy uses the allowance method to determine uncollectible pledges receivable. The allowance is based on prior years experience and management s analysis of specific promises made. Tuition Receivables Tuition receivables are stated at uncollected balances, less an allowance for doubtful accounts, if necessary. The Academy provides for losses on receivables using the allowance method. The allowance for uncollectible tuition receivables is based on experience, third-party contracts and other circumstances, which may affect the ability of students to meet their obligations. It is the Academy s policy to charge off uncollectible accounts when management determines the receivable will not be collected. Inventories Inventories consist of school text books and supplies and are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market (net realizable value). -8-

10 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Land, Buildings and Equipment Land, buildings and equipment are stated at cost if purchased or fair value if contributed. Donated property and equipment are recorded at estimated market value at the date of the gift. Depreciation is provided over the assets estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals or betterments are capitalized. When property is retired or sold, the cost and the related accumulated depreciation are removed from the accounts, and the resulting gain or loss is included in changes in unrestricted net assets. Useful lives range from 3 to 5 years for various furniture and equipment and up to 40 years for buildings. Bond Issuance Costs Bond issuance costs are amortized on a straight-line basis over the scheduled repayment period of the related debt. Deferred Tuition Income Deposits received for tuition or fees for subsequent school years are shown as deferred revenues until earned. Income Taxes The Academy is exempt from federal income taxes under the provisions of Internal Revenue Code Section 501(c)(3), and, accordingly, no provision for income taxes is included in the financial statements. The Academy follows Financial Accounting Standards Board Accounting Standards Codification ( FASB ASC ) guidance clarifying the accounting for uncertainty in income taxes recognized in an entity s financial statements. This guidance prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Academy has no tax penalties or interest reported in the accompanying financial statements. Tax years that remain open for examination include years ended June 30, 2009 through June 30, The Academy had no uncertain tax positions at. -9-

11 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition Tuition and related fees are recognized as income during the related respective school year. The school year generally runs from August to June. In-kind contributions are recorded based on their estimated fair value at the date of the contribution. Advertising and Promotion Costs Advertising and promotion costs are expensed as incurred. Advertising and promotion costs totaled $34,558 and $110,684 for the years ended, respectively. Long-Lived Assets The carrying values of long-lived assets are reviewed whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If this review indicates that the asset will not be recoverable, as determined based on the undiscounted cash flows of the operating entity or asset over the remaining amortization period, the carrying value of the asset will be reduced to its fair value. Interest Rate Swap The Academy uses derivatives to manage risks related to interest rate movements. An interest rate swap contract designated and qualifying as a cash flow hedge is reported at fair value. The Academy s interest rate risk management strategy is to stabilize cash flow requirements by maintaining an interest rate swap contract to convert a portion of its variable-rate debt to a fixed rate. Use of 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 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. Actual results could differ from those estimates. -10-

12 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted Endowment Funds The Uniform Prudent Management Institutional Funds Act ( UPMIFA ) was enacted in Tennessee effective July 1, The FASB ASC provides guidance on the net asset classification of donorrestricted endowment funds for a nonprofit organization that is subject to an enacted version of UPMIFA. The guidance requires that the amount of permanently restricted net assets cannot be reduced by losses on investments of the funds or by an organization s expenditures from the fund unless the donor required the gift to be held in specific investments. It also requires disclosure of a description of the governing board s interpretation of the law that underlies the organization s net asset classification of donor-restricted endowment funds, a description of the organization s policies for the appropriation of endowment assets for expenditures (its endowment spending policies), a description of the organization s endowment investment policies, and additional disclosures not previously required. These disclosures are provided in Note 15. Subsequent Events The Academy evaluated subsequent events through, 2012, when these financial statements were available to be issued. The Academy is not aware of any significant events that occurred subsequent to the statement of financial position date but prior to the filing of this report that would have a material impact on the financial statements. NOTE 3 CREDIT RISK AND OTHER CONCENTRATIONS The Academy generally maintains cash on deposit at banks in excess of federally insured amounts. The Academy has not experienced any losses in such accounts and management believes the Academy is not exposed to any significant credit risk related to cash. The Academy also obtains financing primarily from one bank. NOTE 4 PLEDGE CONTRIBUTIONS RECEIVABLE A summary of pledge contributions receivable is as follows as of June 30: Gross pledge contributions receivable $ 3,021,345 $ 3,829,135 Less discount to present value (91,407) (66,692) Present value of pledge contributions receivable 2,929,938 3,762,443 Less allowance for uncollectible pledges (1,173,908) (1,423,907) Pledge contributions receivable, net $ 1,756,030 $ 2,338,

13 NOTE 4 PLEDGE CONTRIBUTIONS RECEIVABLE (Continued) The discount rates used to determine the present value of pledge contributions receivable ranged from 4.89% to 1.28% at, respectively. Pledge contributions receivable are scheduled to be received as follows: Receivable in less than one year $ 938,763 $ 1,338,991 Receivable in one to five years, net 817, ,545 NOTE 5 INVESTMENTS AND FAIR VALUE MEASUREMENTS $ 1,756,030 $ 2,338,536 The Academy has adopted the provisions of the Fair Value Measurement Topic of the FASB ASC. This guidance establishes a framework for measuring fair value for financial assets and financial liabilities. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in actives markets for identical assets (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 Level 2 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Academy has the ability to access. Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by the observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. -12-

14 NOTE 5 INVESTMENTS AND FAIR VALUE MEASUREMENTS (Continued) The asset s or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. There have been no changes in the methodologies used at. A description of the valuation methodologies used for assets measured at fair value is described below. The fair value of level 1 assets was determined by obtaining quoted market prices in active markets. The fair value of the swap liability (level 2) was determined based on valuation models that provide a market to market estimate. The fair value of the beneficial interest in trust held by a third party (Jordan trust) (level 3) was valued using information obtained from third party sources, including detail listings of holdings from the trust. The valuation is based upon the percent interest in future trust earnings. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Academy believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The overall investment strategy of the Academy is a total return strategy that is achieved through diversified asset allocations that places a greater emphasis on equity-based investments. The following table sets forth by level, within the fair value hierarchy, the Academy s assets at fair value as of June 30, 2012: Level 1 Level 2 Level 3 Total Investments: Equities $ 3,333,743 $ - $ - $ 3,333,743 Mutual funds: Growth and income funds 1,481, ,481,679 Growth funds 465, ,684 Index funds 450, ,814 Income funds 322, ,525 Other 87, ,372 2,808, ,808,

15 NOTE 5 INVESTMENTS AND FAIR VALUE MEASUREMENTS (Continued) Certificates of deposit 498, ,375 Fixed income securities 127, ,525 Money market funds 438, ,405 Total investments at fair value $ 7,206,122 $ - $ - $ 7,206,122 Beneficial interests in trusts: Corn trust $ 859,432 $ - $ - $ 859,432 Jordan trust , ,824 Total beneficial interests in trusts $ 859,432 $ - $ 883,824 $ 1,743,256 Interest rate swap liability $ - $ 326,034 $ - $ 326,034 The following table sets forth by level, within the fair value hierarchy, the Academy s assets at fair value as of June 30, 2011: Level 1 Level 2 Level 3 Total Investments: Equities $ 2,919,542 $ - $ - $ 2,919,542 Mutual funds: Growth and income funds 1,834, ,834,382 Growth funds 552, ,933 Index funds 427, ,615 Income funds 307, ,642 Other 90, ,559 3,213, ,213,131 Certificates of deposit 494, ,291 Fixed income securities 132, ,585 Money market funds 875, ,662 Total investments at fair value $ 7,635,211 $ - $ - $ 7,635,211 Beneficial interests in trusts: Corn trust $ 876,526 $ - $ - $ 876,526 Jordan trust , ,605 Total beneficial interests in trusts $ 876,526 $ - $ 923,605 $ 1,800,131 Interest rate swap liability $ - $ 246,927 $ - $ 246,

16 NOTE 5 INVESTMENTS AND FAIR VALUE MEASUREMENTS (Continued) The summary of changes in the fair value of the Academy s level 3 assets for the years ended June 30, 2012 and 2011 are as follows: Beneficial Beneficial Interest in Interest in Jordan Trust Jordan Trust Balance, beginning of year $ 923,605 $ 806,243 Realized and unrealized gain (loss) (39,781) 117,362 Balance, end of year $ 883,824 $ 923,605 The following schedule summarizes the investment return at June 30: Investment income $ 123,065 $ 256,392 Realized and unrealized gain 33,931 1,327,808 Net investment gain $ 156,996 $ 1,584,200 The Academy also utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of financial position. NOTE 6 BENEFICIAL INTERESTS IN PERPETUAL TRUSTS The Academy is the beneficiary of the Jennie Ruth Corn ( Corn ) and the John A. Jordan, Jr. ( Jordan ) trusts. The assets of the Corn trust are held in the Academy s general investments. The assets of the Jordan trust are not in the possession of the Academy. The Academy has legally enforceable rights and claims to such assets, including the sole right to income from the assets it holds for the Corn trust and 33% of income from the Jordan trust. Income from the Corn trust is restricted to financial aid, and the Jordan trust income is unrestricted. Net realized and unrealized gains (losses) related to the beneficial interests are reported as changes in permanently restricted net assets based on explicit donor restrictions. -15-

17 NOTE 7 LAND, BUILDINGS AND EQUIPMENT A summary of land, buildings and equipment at is as follows: Land $ 3,815,395 $ 3,815,395 Buildings 33,913,496 28,414,775 Furniture, fixtures and equipment 2,899,277 3,055,743 Vehicles 397, ,463 Construction in progress 90,987 2,144,655 41,116,542 37,936,031 Accumulated depreciation (12,259,329) (12,277,326) Total land, buildings and equipment $ 28,857,213 $ 25,658,705 Depreciation expense for the years ended was $1,136,657 and $1,085,916, respectively. Building additions for the years ended included capitalized interest of $35,758 and $0, respectively. At, the Academy incurred costs amounting to $90,987 and $2,144,655, respectively, which have been capitalized as construction in progress. At June 30, 2012, these costs consist of a construction surety bond. At June 30, 2011, theses costs consist of expenses related to the construction of the visual arts building, as well as the athletic and wellness center. During the year ended June 30, 2012, the visual arts building was completed and the building was placed into service. Also during the year ended June 30, 2012, Phase I of the athletic and wellness center was completed and the building was placed into service. Phase II of the athletic and wellness center will commence once estimated costs to complete of $1.1 million are raised. Agreements for both projects were entered into with a construction company that is owned by a member of the Board of Trustees. NOTE 8 BONDS PAYABLE During 1994, the Academy entered into a loan agreement with the Health and Education Facilities Board of the City of Franklin ( Upper School Bond ). The agreement will remain in effect until December 2024 or until such time as all the bonds, fees, and expenses under the agreement have been fully paid. Under the terms of the agreement, a note to a financial institution was issued in the amount of $10,000,000 in Educational Facilities Revenue Bonds. -16-

18 NOTE 8 BONDS PAYABLE (Continued) The bonds are tax-exempt and require the Academy to comply with various bond covenants typical for this type of financing. Interest accrues on the bonds at a variable interest rate (1.87% at June 30, 2012 and Principal payments on the bonds vary from year to year. The bonds are secured by real and personal property of the Academy. The Academy owed $4,965,000 and $5,260,000 at June 30, 2012 and 2011, respectively. The Letter of Credit Agreement with the bank contains certain financial covenants, including requirements for the maintenance of specified levels of endowment funds. At, respectively, the Academy was in compliance with these financial covenants. During 2010, the Academy entered into a new bond agreement with a local bank which replaced three existing credit instruments of the school: the Middle School Bonds (originally issued in 2002) and two promissory notes (issued in 2009), without changing the total indebtedness of the school. The new bond instrument ( 2009 Bond ) totaling $6,435,000 was issued effective October 7, 2009 and is a bank qualified loan issued through the Health and Education Facilities Board of the City of Franklin. The borrowings are tax-exempt and require the Academy to comply with various bond covenants typical for this type of financing under the letter of credit agreement with the bank. The Academy was in compliance with these covenants at. The Academy owed $5,040,000 and $5,525,000 at, respectively under the 2009 Bond. The primary difference between the 2009 Bond agreement and the replaced Middle School Bond is that the 2009 Bond is no longer tied to pricing backed by a letter of credit of the issuing bank. The newly issued $6,435,000 debt is subject to variable interest accruals based on 67% of 30 day LIBOR plus 2.25% (1.67% and 1.64% at, respectively). In March 2005, the Academy entered into an interest rate swap agreement with a 10 year term in the original notional amount of $4,000,000. This swap agreement was entered into to manage a portion of the variable rate obligation related to the Middle School Bond, and remains in effect for the newly issued 2009 Bond. Based on the swap agreement, the Academy will pay interest monthly calculated by multiplying the notional amount times a fixed rate of 3.31% per annum. In return, the counterparty will pay interest based on a variable rate. At, the notional amount is $2,443,333 and $2,640,000, respectively. The fair value of the interest rate swap was $326,034 and $246,927 as of, respectively, and was included as a liability in the statement of financial position. During 2012 and 2011, the Academy incurred interest expense of $284,619 and $289,714, respectively. -17-

19 NOTE 8 BONDS PAYABLE (Continued) A summary of future maturities of bonds payable as of June 30, 2012 is as follows: Upper Year School Bond 2009 Bond Total 2013 $ 260,000 $ 505,000 $ 765, , , , , , , , , , , , , and later years 3,480,000 2,265,000 5,745,000 NOTE 9 CONSTRUCTION LOAN $ 4,965,000 $ 5,040,000 $ 10,005,000 Effective March 29, 2011, the Academy executed a commitment letter regarding a non-revolving construction loan not to exceed $3,500,000. The loan matures February 2016, accrues at the 30-day LIBOR rate plus 2.25% (2.48% at June 30, 2012), and is secured by a negative pledge on property. Borrowings outstanding at were $3,233,529 and $0, respectively. A summary of future maturities of the construction loan as of June 30, 2012 is as follows: Year Construction Loan 2013 $ 683, , , ,350,000 $ 3,233,529 NOTE 10 FACULTY AND STAFF BENEFITS The Academy sponsors a defined contribution plan for employees qualified under Section 403(b) of the Internal Revenue Code. The Academy contributed up to 5% of each employee s eligible compensation. The Academy also has a deferred compensation plan for senior management. The Academy made contributions of $304,236 and $246,076 to the plans in 2012 and 2011, respectively. -18-

20 NOTE 11 RELATED PARTY TRANSACTIONS The Academy sometimes purchases goods or services at commercially reasonable rates from companies or organizations that are affiliated with or owned, directly or indirectly, by members of the Board of Trustees. All such contracts are reviewed and approved by the Board of Trustees in accordance with the Academy s policy. During the year ended June 30, 2012, the Academy incurred purchasing from a related party in the amount of $2,597,162 and amounts due to the related party at the year ended totaled $0. During the year ended June 30, 2011, the Academy incurred purchasing from a related party in the amount of $1,336,538 and amounts due to the related party at year end totaled $222,801. NOTE 12 UNRESTRICTED NET ASSETS The Board of Trustees has placed voluntary designations on certain unrestricted net assets. A summary of unrestricted net assets is as follows as of June 30: Board designated endowment: General endowment $ 3,016,526 $ 3,014,826 Financial aid 600, ,000 Facility maintenance reserve 400, ,405 Technology - 200,000 Total board designated endowment 4,016,697 4,304,231 Undesignated 13,416,567 12,239,657 Total unrestricted net assets $ 17,433,264 $ 16,543,888 NOTE 13 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are available for the following purposes as of June 30: Annual fund pledges receivable $ 7,144 $ 24,145 Capital campaign pledges receivable 1,655,312 2,199,401 Capital campaign purpose restricted - 14,693 Bricks & mortar purpose restricted 483,310 - Designated gifts 3,468 4,581 Cumulative appreciation of permanently restricted net assets 1,852,875 1,787,165 Total temporarily restricted net assets $ 4,002,109 $ 4,029,

21 NOTE 14 TEMPORARILY RESTRICTED CONTRIBUTIONS AND RELATED EXPENSES Temporarily restricted contributions and related expenses consist of the following for the years ended June 30: Expenses/ Expenses/ Contributions Releases Contributions Releases Annual fund pledges receivable $ - $ 17,002 $ - $ 19,608 Capital campaign pledges receivable - 543, ,122 Capital campaign purpose restricted - 14,693-1,209,181 Legacy pledges receivable ,371 Bricks and mortar purpose restricted 483, Designated gifts - 1,383 - (4,581) Cumulative appreciation of permanently restricted net assets 65, ,383 - Total $ 549,022 $ 576,898 $ 730,383 $ 1,675,701 NOTE 15 PERMANENTLY RESTRICTED NET ASSETS Permanently restricted net assets are required by donors to be held in perpetuity with the income from such assets expendable to support certain programs. A summary of the permanently restricted net assets by the program for which the related income is expendable as of is as follows: Permanently restricted endowment: Undesignated $ 100,114 $ 99,714 Financial aid 1,886,874 1,868,242 Faculty support 909, ,544 Language, technology and museum 158, ,073 Achievement awards 148, ,658 Total permanently restricted endowment 3,202,763 3,177,231 Endowment pledges receivable 90, ,409 Beneficial interest in Corn trust 859, ,526 Beneficial interest in Jordan trust 883, ,605 Total permanently restricted net assets $ 5,036,396 $ 5,087,

22 NOTE 15 PERMANENTLY RESTRICTED NET ASSETS (Continued) Interpretation of Relevant Law The Board of Trustees of the Academy has interpreted the UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Academy classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by UPMIFA Endowment Net Asset Composition by Type of Fund as of June 30, 2012: Temporarily Permanently Unrestricted Restricted Restricted Total Board designated endowment funds $ 4,016,697 $ - $ - $ 4,016,697 Donor restricted endowment funds - - 3,202,763 3,202,763 Total $ 4,016,697 $ - $ 3,202,763 $ 7,219,460 Changes in Endowment Net Assets for the fiscal year ended June 30, 2012: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 4,304,231 $ - $ 3,177,231 $ 7,481,462 Contributions/allocations ,532 25,532 Board designated releases (287,534) - - (287,534) Endowment net assets, end of year $ 4,016,697 $ - $ 3,202,763 $ 7,219,

23 NOTE 15 PERMANENTLY RESTRICTED NET ASSETS (Continued) 2011 Endowment Net Asset Composition by Type of Fund as of June 30, 2011: Temporarily Permanently Unrestricted Restricted Restricted Total Board designated endowment funds $ 4,304,231 $ - $ - $ 4,304,231 Donor restricted endowment funds - - 3,177,231 3,177,231 Total $ 4,304,231 $ - $ 3,177,231 $ 7,481,462 Changes in Endowment Net Assets for the fiscal year ended June 30, 2011: Endowment net assets, beginning of year $ 3,904,231 $ - $ 3,144,831 $ 7,049,062 Contributions/allocations 400,000-32, ,400 Endowment net assets, end of year $ 4,304,231 $ - $ 3,177,231 $ 7,481,462 Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Academy to retain as a fund of perpetual duration. No endowment funds had fair values below the level that the donor or UPMIFA required at. Endowment Investment Policy and Risk Parameters The Academy has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for a donor-specified period, as well as amounts designated by the Board of Trustees to be held in perpetuity. At, under the Academy s revised policy, as approved by the Board of Trustees, endowment assets are to be invested under the following allocation guidelines: Asset Class Cash/bonds/fixed income 30% Equities 70% -22-

24 NOTE 15 PERMANENTLY RESTRICTED NET ASSETS (Continued) Effective July 1, 2012 the Academy s endowment investment policy was amended with assets to be invested under the following guidelines for each asset class: Asset Class Minimum Maximum Domestic equity large 15% 25% Domestic equity mid 5% 10% Domestic equity small 5% 15% Domestic real estate 0% 10% International equity 0% 25% International small cap 0% 15% Emerging markets 5% 20% International real estate 0% 10% Fixed income 0% 25% Low volatility 5% 20% Commodities 0% 10% Stable value 0% 15% Strategies Employed for Achieving Investment Objectives To satisfy its long-term rate-of-return objectives, the Academy relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Academy targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy The Academy has a policy of appropriating an annual distribution from the endowment funds that shall not exceed 5% of the total endowment value as of the most recent fiscal year end. Specific agreements with donors for income taken relative to their specific endowment gifts are exempted. NOTE 16 FUNDRAISING Fundraising expenses totaling approximately $335,000 and $239,000 in 2012 and 2011, respectively, are included in institutional advancement and general and administrative expenses on the statements of activities. -23-

25 NOTE 17 LEASE COMMITMENTS The Academy leases computers under a noncancelable lease that is recorded as a capital lease. The lease agreement, which expires in 2014, contains a bargain purchase option at the end of the lease term. During 2012, the computers leased were recorded as equipment totaling $297,020, which was the estimated present value of the required lease payments upon inception. The computers are depreciated over the life of the lease and such expense is included in total depreciation expense on the statement of activities. Future minimum lease payments under the capital lease are as follows: Year ending June 30, 2013 $ 101, ,175 Total future lease payments 202,350 Less: discount to present value (6,505) Total $ 195,845 NOTE 18 RESTATEMENT Permanently restricted net asset balances were restated as of June 30, 2011 to include the Academy s interest in the Corn trust, which is a perpetual trust held for the benefit of the Academy. The restatement has no effect on the change in net assets or the total net assets at June 30, A summary of net asset balances is as follows: As Previously Recorded Restated As Restated Net assets: Unrestricted $ 17,420,414 $ (876,526) $ 16,543,888 Temporarily restricted 4,029,985-4,029,985 Permanently restricted 4,211, ,526 5,087,771 Total net assets $ 25,661,644 $ - $ 25,661,