Groton School. Financial Statements. Years Ended June 30, 2012 and 2011

Transcription

1 Financial Statements

2 FINANCIAL STATEMENTS C O N T E N T S Page Independent Auditor s Report... 1 Financial Statements: Statements of Financial Position... 2 Statements of Activities Statements of Cash Flows

3 INDEPENDENT AUDITOR'S REPORT To the Board of Trustees Groton, Massachusetts We have audited the accompanying statements of financial position of (the School ) as of June 30, 2012 and 2011 and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the School 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 the School as of June 30, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Boston, Massachusetts January 11, 2013

4 Page 2 Statements of Financial Position June 30, 2012 and ASSETS Cash and cash equivalents $ 1,013,564 $ 909,972 Bond proceeds held by trustee Accounts receivable, net (less allowance for uncollectible accounts of $770,000 and $700,000) 417, ,288 Student loans receivable, net (less allowance for uncollectible accounts of $106,000) 129, ,098 Contributions receivable, net (Note 2) 9,583,914 8,040,856 Investments at fair value (Notes 3, 4, and 5) 299,040, ,718,051 Property, plant and equipment, net (Note 6) 92,780,200 93,684,413 Intangible land conservation asset (Note 7) 7,218,013 7,218,013 Other assets 1,307,005 1,370,740 Total assets $ 411,490,784 $ 421,402,610 LIABILITIES AND NET ASSETS Accounts payable and accrued liabilities (Notes 6, 10 and 13) $ 5,004,896 $ 5,190,307 Liability on charitable remainder trusts and annuity funds (Note 12) 2,257,124 1,973,172 Interest rate swap agreements (Notes 4 and 8) 13,567,887 6,967,779 Accrued pension liability (Note 10) 6,179,675 3,545,132 Deferred revenue 1,657,905 1,553,821 Bonds payable (Note 8) 49,415,000 50,165,000 Total liabilities 78,082,487 69,395,211 Commitments and contingent liability (Notes 4, 6 and 13) Net assets (Notes 5 and 9): Unrestricted 195,426, ,388,563 Temporarily restricted 71,711,399 79,322,015 Permanently restricted 66,270,397 66,296,821 Total net assets 333,408, ,007,399 Total liabilities and net assets $ 411,490,784 $ 421,402,610 See notes to financial statements.

5 Page 3 Statements of Activities Temporarily Permanently Unrestricted Restricted Restricted Operations: Revenues, gains and other support: Student tuition, room and board $ 17,585,508 $ - $ - $ 17,585,508 $ 17,011,195 Less financial aid/tuition refunds (4,725,397) - - (4,725,397) (4,768,904) Net student tuition, room and board 12,860, ,860,111 12,242,291 Student support services 655, , ,869 Annual fund 3,133, ,133,828 3,007,290 Gifts - 252, ,543 96,040 Other income 470, , ,442 Net assets released from restrictions - operating activities 175,619 (175,619) Total revenues, gains and other support 17,295,797 76,924-17,372,721 16,500,932 Expenses (Notes 8, 10, and 11): Educational programs 5,447, ,447,227 5,091,229 Educational support 3,136, ,136,177 2,998,140 Administration 4,029, ,029,071 3,947,275 Facilities operations and maintenance 9,464, ,464,702 9,392,020 Employee benefits 4,402, ,402,387 4,125,057 Interest expense and fees 2,010, ,010,919 2,138,272 Capital development 1,176, ,176,543 1,143,860 Total expenses 29,667, ,667,026 28,835,853 Net increase (decrease) in net assets from operations before transfers (12,371,229) 76,924 - (12,294,305) (12,334,921) Endowment appropriation at 4.5% in 2012 (Note 5) 12,779, ,779,362 12,545,835 Net increase from operations 408,133 76, , ,914 Non-operating activity: Net (loss) gain on investments (Note 4) (1,193,006) (1,785,246) (6,996) (2,985,248) 44,550,728 Investment income on endowment (Note 4) 606,760 1,519,919-2,126,679 3,043,208 Change in value of interest rate swap agreements (Note 8) (6,600,108) - - (6,600,108) 1,467,308 Endowment appropriation for operations (5,542,143) (7,237,219) - (12,779,362) (12,545,835) Gifts and contributions 688,605 3,707, ,431 4,596,145 1,409,342 Recovery (Provision) for uncollectible pledges - 86,451 (219,832) (133,381) (500,000) Pledge releases from time restrictions 427,407 (427,407) Change in value - split interest gifts (Note 12) - 21,540-21, ,062 Capital campaign expenses (428,741) - - (428,741) (379,603) Change in accrued pension liability (Note 10) (2,901,683) - - (2,901,683) 1,318,517 Reclassification of net assets to conform to donor's intent 3,572,714 (3,572,687) (27) - - Total other changes in net assets from non-operations (11,370,195) (7,687,540) (26,424) (19,084,159) 38,565,727 Change in net assets (10,962,062) (7,610,616) (26,424) (18,599,102) 38,776,641 Net assets, beginning of year 206,388,563 79,322,015 66,296, ,007, ,230,758 Net assets, end of year $ 195,426,501 $ 71,711,399 $ 66,270,397 $ 333,408,297 $ 352,007,399 See notes to financial statements.

6 Page 4 Statement of Activities Year Ended June 30, 2011 Temporarily Permanently Unrestricted Restricted Restricted 2011 Operations: Revenues, gains and other support: Student tuition, room and board $ 17,011,195 $ - $ - $ 17,011,195 Less - financial aid/tuition refunds (4,768,904) - - (4,768,904) Net student tuition, room and board 12,242, ,242,291 Student support services 665, ,869 Annual fund 3,007, ,007,290 Gifts - 96,040-96,040 Other income 489, ,442 Net assets released from restrictions - operating activities 138,754 (138,754) - - Total revenues, gains and other support 16,543,646 (42,714) - 16,500,932 Expenses (Notes 8, 10, and 11): Educational programs 5,091, ,091,229 Educational support 2,998, ,998,140 Administration 3,947, ,947,275 Facilities operations and maintenance 9,392, ,392,020 Employee benefits 4,125, ,125,057 Interest expense and fees 2,138, ,138,272 Capital development 1,143, ,143,860 Total expenses 28,835, ,835,853 Net decrease in net assets from operations before transfers (12,292,207) (42,714) - (12,334,921) Endowment appropriation at 4.8% (Note 5) 12,545, ,545,835 Net increase (decrease) from operations 253,628 (42,714) - 210,914 Non-operating activity: Net gain on investments (Note 4) 18,663,891 25,642, ,369 44,550,728 Investment income on endowment (Note 4) 1,473,167 1,570,041-3,043,208 Change in value of interest rate swap agreements (Note 8) 1,467, ,467,308 Endowment appropriation for operations (5,836,744) (6,709,091) - (12,545,835) Gifts and contributions 409, , ,507 1,409,342 Provision for uncollectible pledges - (244,093) (255,907) (500,000) Pledge releases from time restrictions 609,761 (609,761) - - Change in value - split interest gifts (Note12) - 202, ,062 Capital campaign expenses (379,603) - - (379,603) Change in accrued pension liability (Note 10) 1,318, ,318,517 Reclassification of net assets to conform to donor's intent 1,219,313 (1,526,548) 307,235 - Total other changes in net assets from non-operations 18,944,825 18,478,698 1,142,204 38,565,727 Change in net assets 19,198,453 18,435,984 1,142,204 38,776,641 Net assets, beginning of year 187,190,110 60,886,031 65,154, ,230,758 Net assets, end of year $ 206,388,563 $ 79,322,015 $ 66,296,821 $ 352,007,399 See notes to financial statements.

7 Page 5 Statements of Cash Flows Cash flows from operating activities: Change in net assets $ (18,599,102) $ 38,776,641 Adjustments to reconcile change in net assets to net cash used in operating activities: Net realized (gains) losses on sales of securities (11,348,260) (13,016,295) Change in unrealized net depreciation (appreciation) of investments 14,333,508 (31,534,433) Change in interest rate swap agreements 6,600,108 (1,467,307) Contributions for long-term investment (2,951,783) (788,857) Depreciation 5,584,144 5,474,826 Changes in certain assets and liabilities: Accounts receivable, net (112,456) (171,057) Student loans receivable, net 25,725 27,547 Contributions receivable, net (1,543,058) 2,490,846 Other assets 63,735 17,805 Accounts payable and accrued liabilities (403,917) 537,168 Liability on charitable remainder trusts and annuity funds 283, ,138 Accrued pension liability 2,634,543 (1,292,046) Deferred revenue 104,084 (155,067) Net cash used in operating activities (5,328,777) (936,091) Cash flows from investing activities: Proceeds from sales and maturities of investments 15,480,137 12,123,768 Purchase of investments (7,788,126) (8,416,641) Additions to property, plant and equipment (4,461,425) (2,153,053) Net cash provided by investing activities 3,230,586 1,554,074 Cash flows from financing activities: Repayment of bonds payable (750,000) (725,000) Contributions for long-term investment 2,951, ,857 Net cash provided by financing activities 2,201,783 63,857 Net change in cash and cash equivalents 103, ,840 Cash and cash equivalents: Beginning of year 909, ,132 End of year $ 1,013,564 $ 909,972 Supplemental disclosures of cash flow information: Interest paid $ 1,995,047 $ 2,006,564 Purchases of property, plant and equipment in accounts payable $ 401,158 $ 182,652 See notes to financial statements.

8 Page 6 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Nature of Activities (the School ) is a nonprofit, five-year, college preparatory, co-educational boarding school dedicated to preparing students for the active work of life. Founded in 1884 as a church school, the School seeks to set for its students the highest standards of academic achievement, intellectual growth, ethical awareness, athletic endeavor, and service to others. The School is located in Groton, Massachusetts. A summary of the School s significant accounting policies follows: Classification and Reporting of Net Assets The School follows Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 958, Financial Statements of Not-For-Profit Organizations. This standard provides guidance on the net asset classification of donor-restricted endowment funds for a notfor-profit organization that is subject to an enacted version of the Uniform Prudent Institutional Funds Act ( UPMIFA ). Among UPMIFA s most significant provisions is the elimination of the concept of historical dollar value threshold, the amount below which the School could not spend from the fund in favor of a more robust set of guidelines about what constitutes prudent spending. UPMIFA is a model act approved by the Uniform Law Commission (ULC; formerly known as the National Conference of Commissioners on Uniform State Laws) that serves as a guideline for states to use in enacting legislation. This standard also requires disclosures about an organization s endowment funds (both donor-restricted endowment funds and board-designated endowment funds), whether or not the organization is subject to UPMIFA. A description of the three net asset classes follows: Unrestricted net assets represent the portion of net assets of the School that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations. Unrestricted net assets include expendable funds available for support of the School as well as funds invested in plant including campus buildings. In addition, unrestricted net assets of the School include funds, which represent unrestricted resources designated by the Board of Trustees for specific purposes. Temporarily restricted net assets represent contributions and other inflows of assets whose use by the School is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the School pursuant to those stipulations. Temporarily restricted net assets also include, under Massachusetts law, cumulative interest, dividends, appreciation and reinvested gains on permanently restricted endowment funds, which are subject to prudent appropriation by the Board of Trustees in accordance with donor use restrictions and provisions of Massachusetts law. Permanently restricted net assets represent contributions and other inflows of assets whose use by the School is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled and removed by actions of the School pursuant to those stipulations. Permanently restricted net assets also include realized and unrealized gains and interest and investment income on certain contributions, as stipulated by the donor.

9 Page 7 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Use of 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates. Cash and Cash Equivalents The School defines cash equivalents as highly liquid short-term investments with a maturity of ninety days or less at time of purchase. The School maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The School has not experienced any losses in such accounts. The School believes it is not exposed to any significant credit risk on cash and cash equivalents. Cash and cash equivalents do not include invested cash of investment accounts. Accounts Receivable Accounts receivable are carried at original billings less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by evaluating individual student receivables while considering the student s financial situation and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded as revenue when received. Amounts are considered past due when they have been outstanding for 90 days. Student Loans Receivable The School has provided tuition loans to students as part of its financial aid program. The minimum amount of any loan granted by the School is $100 and generally does not exceed $2,000 in any academic year. Principal payments are deferred until four years after termination of enrollment. At that time, principal payments are made in 24 quarterly installments commencing on July 1. Prepayment may be made at any time without penalty. Interest payments are deferred until July 1 after termination of enrollment. Interest payments are payable in 16 quarterly installments for the first four years after termination of enrollment and, thereafter, will be payable in conjunction with the principal payments. Interest accrues on the unpaid principal balance at a rate of 5% per year. The student loan program is no longer issuing new loans effective July 1, Student loans are reported net of an allowance for doubtful accounts. The allowance for doubtful accounts, write-offs and recoveries for student loans receivable are determined consistent with those for accounts receivable. Investments Investments, excluding non-marketable alternatives, are carried at fair value, as established by the major securities markets. Purchases and sales of securities are recorded on trade dates, and realized gains and losses are determined on the basis of the average cost of securities sold. Investment income and realized and unrealized gains are reflected in the statement of activities.

10 Page 8 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Investments continued The School invests in alternative investments, consisting of hedge funds, non-marketable asset partnerships, and various inflation hedging vehicles. These types of investment vehicles may be included within each investment classification except for fixed income. Alternative investments utilize a variety of investment strategies incorporating marketable securities and, in some cases, derivative instruments, all of which are reported at estimated fair value by the fund managers. The underlying investments of the hedge funds are principally publicly-priced securities and derivatives. These investments provide broader diversification, offering sources of return that are not generally correlated with traditional equity and fixed income markets. Hedging strategies may include securities denominated in foreign currencies, options, futures, forward contracts, short sales or other financial instruments whose value and performance are derived, at least in part, from the performance of an underlying asset or index and the creditworthiness of the counterparty to the transactions. Non-marketable asset partnerships (investments for which there may not be a value established by major securities markets) are valued on a quarterly basis and are carried at estimated fair value based upon the most recent financial information provided by the general partners. Because the investment in non-marketable asset partnerships is not readily marketable, the estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a readily available market for the investments existed, and such differences could be material. Investment income from unrestricted investments is reported as unrestricted revenue. Investment income and gains (losses) on investments of permanently restricted net assets are reported as increases (decreases) in temporarily restricted net assets unless permanently restricted by the donor, in which case they are recorded as increases (decreases) in permanently restricted net assets. These gains are classified as temporarily restricted and remain in temporarily restricted net assets until appropriated by the Board of Trustees (the Board ). Investment interest and gains (losses) on investments of temporarily restricted net assets are reported as increases (decreases) in temporarily restricted net assets. The Board has interpreted Massachusetts General Law as requiring realized and unrealized gains and interest and dividend income of permanently restricted net assets to be retained in a restricted net asset classification until appropriated by the Board and expended. Massachusetts General Law allows the Board to appropriate for expenditure or accumulate so much of an endowment fund as the School determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established. In making a determination to appropriate or accumulate, the School shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following factors: the duration and preservation of the endowment fund; the purposes of the School and the endowment fund; general economic conditions; the possible effect of inflation or deflation; the expected total return from income and the appreciation of investments; other resources of the School; and the investment policy of the School.

11 Page 9 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Investments continued The School 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 School must hold in perpetuity or for donor-specified purposes as well as board designated funds. The School expects its endowment funds, over time, to provide an average rate of return of approximately 8% annually. Actual returns in any given year may vary from this amount. To satisfy its long-term rate-of-return objectives, the School 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 School 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. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results that exceed a policy index. The School has a policy of appropriating for distribution each year a percentage of its endowment fund s fair value. This spending calculation was based on the Yale Rule for June 2012 and a twelve quarter rolling average for June The spending calculation according to the Yale Rule is calculated by taking a weighted average comprising 70% of the prior year's spending adjusted for inflation and 30% percent of the amount that results when the endowment's policy spending rate is applied to the rolling endowment market value as of June The School calculates its twelve month rolling average to correspond with its operating budget cycle. The final month included in the average was June 2010 for fiscal year 2012 and the final quarter included in the average was June 2010 for fiscal year The percentage of appropriation as approved by the Board of Trustees was 4.5% for 2012 and 4.8% for The amount derived from this calculation is referred to as endowment appropriation and is disclosed as such in the Statements of Activities. In establishing this policy, the School considered the long-term expected return on its endowment. Accordingly, over the long term, the School expects the current spending policy to allow its endowment to grow at a rate exceeding expected inflation. This is consistent with the School s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term, as well as, to provide additional real growth through new gifts and investment return. If the actual return (interest, dividends, realized gains and losses, and change in unrealized appreciation) is greater or less than the calculated spending policy amount, the difference is added to or availed of the unrestricted or temporarily restricted portion of the realized and unrealized appreciation as appropriate. A portion of the investments held by the School are pooled and maintained on a fair value unit basis. Purchases and sales of pooled investments, as well as income and gains on investments, are allocated to each fund on the basis of fair value per unit at the end of the previous quarter in which the transaction takes place.

12 Page NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Fair Value Measurements The School follows Accounting Standards Update ( ASU ) , Improving Disclosures about Fair Value Measurements. This accounting guidance under ASC 820, Fair Value Measurements and Disclosures, requires additional disclosures about fair value measurements including, among other things, (a) the amounts and reasons for certain significant transfers among the three hierarchy levels of inputs, (b) the gross, rather than net, basis for certain Level 3 roll-forward information, (c) use of a class basis rather than a major category basis for assets and liabilities, and (d) valuation techniques and inputs used to estimate Level 2 and Level 3 fair value measurements. The following information incorporates these new disclosure requirements. Under the FASB s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the School uses various methods including market, income and cost approaches. In addition the School reports certain investments using the net asset value per share as determined by the investment managers under the so called practical expedient. The practical expedient allows net asset value per share to represent fair value for reporting purposes when the criteria for using this method are met. Based on these approaches, the School often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The School utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques or in accordance with net asset value practical expedient rules, which allow for Level 2 or Level 3 reporting depending on lock-up and notice periods associated with the underlying funds, the School is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 2 - Observable inputs other than Level 1, including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. Level 2 also includes practical expedient investments with redemption periods of 90 days of less. Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data. Level 3 also includes practical expedient investments with redemption periods more than 90 days.

13 Page NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Fair Value Measurements continued The following is a description of the valuation methodologies used for instruments measured at fair value: Equity Securities, Mutual Funds, Bonds, and U.S. Treasury Obligations The fair value of equity securities, mutual funds, bonds, and U.S. treasury obligations is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use unobservable inputs due to the limited market activity of the instrument. Derivative Financial Instruments Derivatives are fair valued according to their classification as over-the-counter ( OTC ). OTC derivatives consist of interest rate swaps. These derivatives are fair valued under Level 2 using third party services. Observable market inputs include yield curves (the LIBOR swap curve and applicable basis swap curves). Interests in Charitable Remainder Trusts The fair value of interests in charitable remainder trusts is based on quoted market prices and present value techniques. There have been no changes to the valuation methodologies as of June 30, 2012 and Derivative Financial Instruments The School follows FASB ASC 815, Derivatives and Hedging, that establishes accounting and reporting standards for derivative and hedging activities, and require organizations to record derivative instruments as assets or liabilities, measured at fair value. These instruments are classified on the statements of financial position as interest rate swap agreements, and the recognition of gains or losses resulting from changes in the values of the interest rate swap agreements are recorded as non operating changes in unrestricted net assets. Fair Value of Financial Instruments The carrying amounts of financial instruments, including cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short maturity of these instruments. Rates currently available to the School for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The School uses quoted market prices for its long-term debt when traded as an asset in an active market. When quoted market prices are not available, fair value of long-term debt is estimated using an expected present value technique.

14 Page NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over the following estimated useful lives: Years Campus buildings and improvements Faculty houses and renovations 50 Furniture, fixtures and equipment 8-15 Mechanical, electric and plumbing improvements 20 Computers and software 3-5 Vehicles and other assets 5-10 Expenditures for major improvements are capitalized and depreciated over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense as incurred. Costs incurred in connection with construction in progress are capitalized until the asset is placed in service, at which time the cost is transferred to the appropriate property, plant and equipment account and depreciated over the useful life of the asset. Revenue Recognition Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by interpretation of law. Expirations of temporary restrictions on net assets by fulfillment of the donor stipulated purpose, or by passage of the stipulated time period, are reported as reclassifications from temporarily restricted net assets to unrestricted net assets. The School defers recognition of registration, tuition, room and board revenue to the period in which the related educational instruction is performed and the related expenses incurred. Accordingly, registration, tuition, room and board fees received for the next school term are deferred until the first day of the new fiscal year, at which point they are recognized as revenue on a pro-rata basis over the school term. Student services revenue is recognized at the time the related services are performed. Contributions Contributions, including unconditional promises to give, are initially recognized as revenues at fair value in the period received. Conditional promises to give are not recognized until they become unconditional, that is, at the time when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value. Contributions to be received after one year are discounted using a discount factor commensurate with the risk involved.

15 Page NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Contributions continued Amortization of discount is recorded as additional contribution revenue in accordance with donorimposed restrictions, if any, on the contributions. An allowance for uncollectible contributions receivable is provided based upon management's judgment of potential defaults. The determination includes such factors as prior collection history, type of contribution and nature of fund raising activity. Contributions received with donor-imposed restrictions that are met in the same year as received are reported as revenues of the temporarily restricted net asset class. A reclassification to unrestricted net assets is made to reflect the expiration of such restrictions. Contributions received where donors have not determined the specific details of their restrictions are recorded as revenues of the temporarily restricted net asset class. A reclassification of net assets to conform to donor s intent is recorded once the final determination is made by the donor or if the donor later changes the nature of any restrictions. Intangible Land Conservation Asset Intangible land conservation asset represents costs incurred to designate land adjacent to the School s campus as conservation land. Intangible assets determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of the standard. Intangible assets are evaluated annually for impairment. There was no impairment recorded as of June 30, 2012 and Split Interest Agreements The School is the beneficiary of a number of charitable remainder trusts whereby it receives an immediate contribution, as well as a remainder interest, in the underlying investment from which a specified percentage of the fair value of the trusts assets each year is currently being paid to the donors. Actuarial methods are used to calculate that portion of the investment representing the present value of the liability to the donor and that portion representing the contribution. The discount rate used for the actuarial calculations is based on similar term U.S. Treasury notes at the time of the gift ranging from 4-5%. Under the charitable remainder trust agreements the School is the trustee; therefore, the assets held in trust are recorded as investments at fair value, and the liabilities to the donors are recorded at the present value of the estimated future payments to be distributed over the life of the donor and/or donor s spouse. The amount of the contribution is the difference between these amounts. Adjustments to the asset and liability accounts are reflected as changes in the value of split-interest gifts in the statement of activities. The contributions related to these agreements are recorded as permanently restricted net assets if the ultimate disposition of the funds to be received is to be permanently invested. If the ultimate disposition of the funds is unrestricted, the contributions are recorded as temporarily restricted until such time as all donor commitments are met.

16 Page NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Operating Activities The statement of activities reflects a subtotal for net increase (decrease) from operations. This subtotal reflects revenues that the School received for operating purposes, including investment return used for operations and operating expenses. Depreciation has been allocated based on the use of buildings. Non-operating activity reflects contributions for endowment and plant purposes; the change in appreciation/depreciation on long-term investments; endowment appropriation for operations, gains/losses on the disposal of property and equipment; change in value of split interest agreements; as well as the release from restrictions of contributions restricted to the construction or acquisition of capital assets. Non-operating activities also include transfers of net assets that occur when donors change the restrictions on certain gifts; and unrealized gain or loss on interest rate swap agreements. Liquidity In order to provide information about liquidity, assets are sequenced according to their nearness of conversion to cash and liabilities according to their estimated maturity. Advertising The School expenses advertising costs as incurred. Tax Status The School qualifies as a tax-exempt, nonprofit organization under Section 501(c)(3) of the Internal Revenue Code (the Code ) and is exempt from federal and state income tax on related income pursuant to Section 501(a) of the Code. The School is subject to federal and state income taxes on unrelated business income, if any. Uncertainty of Income Taxes The School follows FASB ASC 740, Income Taxes, which clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Management believes that the School has no material uncertain tax positions. The School is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for fiscal years before 2009.

17 Page NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES continued Recently Issued Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update ( ASU ) No , Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ( IFRS ). The amendments in this ASU result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the FASB s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The School will adopt this guidance on July 1, It is not expected to have a material impact on the School s financial statements. 2. CONTRIBUTIONS RECEIVABLE Contributions receivable at June 30 consisted of the following: Receivable in less than one year $ 2,036,087 $ 2,467,911 Receivable in one to five years 5,265,829 3,974,857 Receivable in more than five years 6,216,615 5,656,615 13,518,531 12,099,383 Less - allowance for uncollectible pledges 922, ,152 Unamortized discount at rates ranging from 4% to 5% 3,012,289 3,308,375 Contributions receivable, net $ 9,583,914 $ 8,040,856

18 Page FAIR VALUE MEASUREMENTS The following table summarizes the valuation of the School s investments using the ASC 820 fair value hierarchy levels as of June 30: Assets and Liabilities Measured at Fair Value on a Recurring Basis Fair Value Measurements Using Quoted Prices In Active Markets for Significant Other Observable Significant Unobservable Inputs 2012 Level 1 Level 2 Level 3 Total US Treasury and invested cash $ 7,225,568 $ - $ - $ 7,225,568 Mutual funds 5,179, ,179,524 Investment funds - 81,308,853-81,308,853 Domestic common stocks 41,872, ,872,124 International common stocks 6,746, ,746,540 U.S. bonds and government bonds 10,944,044 16,279,475-27,223,519 Corporate bonds 9,918, ,918,825 Other bonds 625, ,242 Hedge funds - 59,591,080 17,367,282 76,958,362 Private equity - - 8,858,984 8,858,984 Real assets ,450,316 15,450,316 Venture capital ,043,752 16,043,752 Domestic preferred stocks 1,629, ,629,184 Total assets $ 84,141,051 $157,179,408 $ 57,720,334 $299,040,793 Liabilities: Interest rate swap agreements $ - $ 13,567,887 $ - $ 13,567,887

19 Page FAIR VALUE MEASUREMENTS continued Assets and Liabilities Measured at Fair Value on a Recurring Basis Fair Value Measurements Using Quoted Prices In Active Markets for Significant Other Observable Significant Unobservable Inputs 2011 Level 1 Level 2 Level 3 Total US Treasury and invested cash $ 15,162,140 $ - $ - $ 15,162,140 Mutual funds 5,342, ,342,082 Investment funds - 77,107,100-77,107,100 Domestic common stocks 46,019, ,019,478 International common stocks 6,645, ,645,099 U.S. bonds and government bonds 12,677,734 13,396,779-26,074,513 Corporate bonds 9,485, ,485,266 Other bonds 809, ,194 Hedge funds - 58,473,504 27,103,607 85,577,111 Private equity - - 8,217,953 8,217,953 Real assets ,439,492 15,439,492 Venture capital ,140,338 12,140,338 Domestic preferred stocks 1,698, ,698,285 Total assets $ 97,839,278 $ 148,977,383 $ 62,901,390 $309,718,051 Liabilities: Interest rate swap agreements $ - $ 6,967,779 $ - $ 6,967,779

20 Page FAIR VALUE MEASUREMENTS continued The changes in investments measured at fair value for which the School has used Level 3 inputs to determine fair value are as follows: Private Equity & Global Venture Hedge and Equity Capital Real Assets Total Balance June 30, 2011 $ - $ 20,358,291 $ 42,543,099 $ 62,901,390 Realized and unrealized gains (losses) - 2,270,256 (1,260,624) 1,009,632 Interest and dividends - 44, , ,739 Purchases of investments - 3,554, ,648 4,153,202 Withdrawals of investments - (1,325,099) (9,376,530) (10,701,629) Balance June 30, 2012 $ - $ 24,902,737 $ 32,817,597 $ 57,720,334 Private Equity & Global Venture Hedge and Equity Capital Real Assets Total Balance June 30, 2010 $ 18,063,376 $ 13,794,723 $ 48,447,460 $ 80,305,559 Realized and unrealized gains 3,750,104 4,130,457 9,130,167 17,010,728 Interest and dividends 536,788 78, ,595 1,003,443 Purchases of investments - 3,839, ,059 4,459,229 Withdrawals of investments (22,350,268) (1,484,119) (16,043,182) (39,877,569) Balance June 30, 2011 $ - $ 20,358,291 $ 42,543,099 $ 62,901,390 All net realized gains and losses and net change in unrealized appreciation in the tables above are reflected in the accompanying Statements of Activities. The net change in unrealized gains (losses) of investments included in the Statement of Activities for Level 3 investments still held at June 30, 2012 and 2011 is ($6,990,273) and $8,203,642, respectively. The School records as expense, investment fees paid directly to investment managers and fees for services paid to custodians and investment consultants as well as any unrelated business tax paid or accrued. These costs are netted with investment income. Investment fees which are based on the total return of the investments are netted against realized and unrealized gains and losses. Management fees paid directly by the School were $1,359,052 and $1,158,655 for the years ended June 30, 2012 and 2011, respectively. The components of total investment return are as follows: Net investment income $ 2,126,679 $ 3,043,208 Change in unrealized (losses) gains (14,333,508) 31,534,433 Net realized gains 11,348,260 13,016,295 $ (858,569) $ 47,593,936

21 Page FAIR VALUE MEASUREMENTS continued The School uses the net asset value ( NAV ) to determine the fair value of all the following investments which (a) do not have a readily determinable fair value and (b) prepare their financial statements consistent with the measurement principles of an investment company. The following table lists investments in investment companies by major category at June 30, NAV in # Unfunded Redemption Redemption Funds Funds Commitment Notice Period Restriction Investment Funds (a) $ 81,308,854 4 $ - Ranges between bi-monthly redemption with four to six weeks notice to monthly redemption with 45 days notice U.S. Bonds (b) 16,279, Annually - Redemption requires 90 days notice Hedge Funds (c) 76,958, Ranges from Monthly redemption with 14 days notice to quarterly redemption with 60 days notice. Private Equity (d) 8,858, ,676,000 Closed ended LP - Redemptions do not apply Real Assets (e) 15,450, ,253,320 Closed ended LP - Redemptions do not apply Venture Capital (f) 16,043, ,828,890 Closed ended LP - Redemptions do not apply One fund requires Canadian government clearance to receive tax free redemption. Up to 1/3 of NAV at a time Two funds are in a lock-up period and one fund requires a minimum redemption of $250,000. N/A N/A N/A $ 214,899, $ 18,758,210 a) Includes funds that invest in global emerging markets, global developed markets and marketable real assets. b) Includes a fund that invests in U.S. fixed income. c) Includes funds that invest in marketable alternative strategies including global long/short, absolute return, diversified arbitrage, and distressed debt. d) Includes investments in private equity funds that invest in non-marketable equities, warrants and options, venture capital in developed markets, and marketable alternatives. e) Includes funds that invest in commodities with a principle objective of appreciation of capital and non-marketable real assets with an emphasis on crude oil, natural gas, and timberland. f) Includes funds that invest in emerging growth companies with a long-term objective, emerging growth companies which invest in equity, equity related, and debt securities, and companies with early stage technology and life sciences.

22 Page FAIR VALUE MEASUREMENTS continued The School uses the net asset value ( NAV ) to determine the fair value of all the following investments which (a) do not have a readily determinable fair value and (b) prepare their financial statements consistent with the measurement principles of an investment company. The following table lists investments in investment companies by major category at June 30, NAV in # Unfunded Redemption Redemption Funds Funds Commitment Notice Period Restriction Investment Funds (a) $ 77,107,100 3 $ - Ranges between monthly redemption with four days notice to monthly redemption with 30 days notice U.S. Bonds (b) 13,396, Annually - Redemption requires 90 days notice Hedge Funds (c) 85,577, Ranges from Monthly redemption with 14 days notice to quarterly redemption with 60 days notice. Private Equity (d) 8,217, ,911,000 Closed ended LP - Redemptions do not apply Real Assets (e) 15,439, ,920,500 Closed ended LP - Redemptions do not apply Venture Capital (f) 12,140, ,264,410 Closed ended LP - Redemptions do not apply One fund pays 90% on term and the balance by the 15 th of the month. Up to 1/3 of NAV at a time Two funds are in a lock-up period and one fund requires a minimum redemption of $250,000. N/A N/A N/A $ 211,878, $ 18,095,910 a) Includes funds that invest in global emerging markets, global developed markets and marketable real assets. b) Includes a fund that invests in U.S. fixed income. c) Includes funds that invest in marketable alternative strategies including global long/short, absolute return, diversified arbitrage, and distressed debt. d) Includes investments in private equity funds that invest in non-marketable equities, warrants and options, venture capital in developed markets, and marketable alternatives. e) Includes funds that invest in commodities with a principle objective of appreciation of capital and non-marketable real assets with an emphasis on crude oil, natural gas, and timberland. f) Includes funds that invest in emerging growth companies with a long-term objective, emerging growth companies which invest in equity, equity related, and debt securities, and companies with early stage technology and life sciences.

23 Page ENDOWMENT ASSETS Endowment net assets composition by type of fund as of June 30, 2012: Temporarily Permanently Unrestricted Restricted Restricted Total Donor restricted endowment funds: General purposes $ - $ 5,217,852 $ 4,462,303 $ 9,680,155 Faculty compensation - 30,144,576 26,402,684 56,547,260 Instruction and special programs - 4,803,378 3,628,236 8,431,614 Financial aid - 15,382,976 17,910,914 33,293,890 Plant maintenance - 5,676,885 7,737,732 13,414,617 Other - 4,264, ,870 5,100,550 Board designated endowment and other unrestricted funds: General purposes 61,416, ,416,956 Faculty compensation 53,211, ,211,898 Instruction and special programs 5,749, ,749,591 Financial aid 24,411, ,411,610 Plant maintenance 22,364, ,364,617 Other 1,957, ,957,413 Total endowment net assets $ 169,112,085 $ 65,490,347 $ 60,977,739 $ 295,580,171 Changes in endowment net assets for the year ended June 30, 2012 were as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Balance at June 30, 2011 $170,339,945 $ 75,617,802 $ 60,095,732 $ 306,053,479 Investment return: Net investment income 1,091,179 1,519,919-2,611,098 Net realized and unrealized loss (1,193,006) (1,785,246) (6,996) (2,985,248) Total investment return (101,827) (265,327) (6,996) (374,150) Gifts to endowment 1,164, , ,030 3,001,319 Endowment appropriation (5,542,143) (7,237,219) - (12,779,362) Release of board designation of funds (321,115) - - (321,115) Reclassification based on Donor intent 3,572,714 (3,572,687) (27) - Balance at June 30, 2012 $ 169,112,085 $ 65,490,347 $ 60,977,739 $ 295,580,171