THE CHOATE ROSEMARY HALL FOUNDATION, INCORPORATED

Transcription

1 THE CHOATE ROSEMARY HALL FOUNDATION, INCORPORATED FINANCIAL STATEMENTS JUNE 30, 2012 AND 2011

2 CONTENTS Independent Auditors Report 1 Statements of Financial Position - June 30, 2012 and Statement of Activities for the Year Ended June 30, Statement of Activities for the Year Ended June 30, Statements of Cash Flows for the Years Ended June 30, 2012 and Notes to Financial Statements 6-25

3 29 South Main Street P.O. Box West Hartford, CT Tel Fax blumshapiro.com 2 Enterprise Drive P.O. Box 2488 Shelton, CT Tel Fax blumshapiro.com Independent Auditors Report To the Board of Trustees The Choate Rosemary Hall Foundation, Incorporated We have audited the accompanying statements of financial position of The Choate Rosemary Hall Foundation, Incorporated, 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the School s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Choate Rosemary Hall Foundation, Incorporated, 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. October 23, 2012 An Independent Member of Baker Tilly International -1-

4 STATEMENTS OF FINANCIAL POSITION JUNE 30, 2012 AND 2011 ASSETS Cash and cash equivalents $ 13,762,769 $ 12,216,793 Accounts receivable, net 38,568 76,434 Student loans receivable, net 404, ,967 Other receivables 366,377 1,619,438 Pledges receivable, net 25,236,895 27,869,474 Prepaid expenses and other assets 2,404,439 2,431,897 Investments 297,982, ,409,875 Split-interest agreements 7,109,202 7,243,842 Land, buildings and equipment, net 123,336, ,046,916 Total Assets $ 470,641,964 $ 464,327,636 LIABILITIES AND NET ASSETS Liabilities Accounts payable and accrued expenses $ 6,134,208 $ 4,457,205 Accrued wages and other benefits 201, ,601 Interest rate swap valuation 10,018,968 5,170,041 Deferred revenue and deposits 11,265,300 10,177,659 Liability under split-interest agreements 2,599,858 2,725,307 Agency funds 142, ,695 Bonds payable 38,095,000 39,015,000 Total liabilities 68,457,704 62,217,508 Net Assets Unrestricted 177,465, ,154,201 Temporarily restricted 113,210, ,860,930 Permanently restricted 111,508, ,094,997 Total net assets 402,184, ,110,128 Total Liabilities and Net Assets $ 470,641,964 $ 464,327,636 The accompanying notes are an integral part of the financial statements -2-

5 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2012 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, Gains and Other Support Student related revenue: Tuition and fees $ 42,152,382 $ - $ - $ 42,152,382 Less financial aid (9,331,961) - - (9,331,961) 32,820, ,820,421 Program supporting revenues 2,823, ,823,671 Total student related revenue 35,644, ,644,092 Investment activity: Interest and dividend income 557, ,708-1,458,352 Realized and unrealized gains 777, ,144-1,646,716 Benefits paid on annuity obligations - (414,569) - (414,569) Investment management fees (1,247,993) (1,837,481) - (3,085,474) Change in value of split-interest obligations - 125, ,449 Total investment activity, net 87,223 (356,749) - (269,526) Net gifts and pledges 13,792,769 7,103,013 1,413,160 22,308,942 Net assets released from restrictions 19,688,386 (19,688,386) - - Total revenues, gains and other support 69,212,470 (12,942,122) 1,413,160 57,683,508 Expenses Instructional 34,481, ,481,830 Student support services 7,707, ,707,584 Administrative 7,336, ,336,874 Development 3,234, ,234,161 Total expenses 52,760, ,760,449 Change in Net Assets from Operations 16,452,021 (12,942,122) 1,413,160 4,923,059 Other Changes in Net Assets Unrealized loss on interest rate swap (4,848,927) - - (4,848,927) Restricted endowment funds with deficiencies (291,619) 291, Total other changes in net assets (5,140,546) 291,619 - (4,848,927) Change in Net Assets 11,311,475 (12,650,503) 1,413,160 74,132 Net Assets - Beginning of Year 166,154, ,860, ,094, ,110,128 Net Assets - End of Year $ 177,465,676 $ 113,210,427 $ 111,508,157 $ 402,184,260 The accompanying notes are an integral part of the financial statements -3-

6 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2011 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, Gains and Other Support Student related revenue: Tuition and fees $ 41,026,363 $ - $ - $ 41,026,363 Less financial aid (8,779,712) - - (8,779,712) 32,246, ,246,651 Program supporting revenues 2,036, ,036,949 Total student related revenue 34,283, ,283,600 Investment activity: Interest and dividend income 279, , ,132 Realized and unrealized gains 19,128,374 30,702,462-49,830,836 Benefits paid on annuity obligations - (380,004) - (380,004) Investment management fees (1,005,696) (1,504,858) - (2,510,554) Change in value of split-interest obligations - 130, ,745 Total investment activity, net 18,402,135 29,402,020-47,804,155 Net gifts and pledges 10,858,016 14,196,169 4,241,675 29,295,860 Net assets released from restrictions 17,720,307 (17,720,307) - - Total revenues, gains and other support 81,264,058 25,877,882 4,241, ,383,615 Expenses Instructional 32,621, ,621,297 Student support services 7,457, ,457,548 Administrative 7,037, ,037,446 Development 3,505, ,505,554 Total expenses 50,621, ,621,845 Change in Net Assets from Operations 30,642,213 25,877,882 4,241,675 60,761,770 Other Changes in Net Assets Unrealized gain on interest rate swap 939, ,116 Restricted endowment funds with deficiencies 2,921,179 (2,921,179) - - Total other changes in net assets 3,860,295 (2,921,179) - 939,116 Change in Net Assets 34,502,508 22,956,703 4,241,675 61,700,886 Net Assets - Beginning of Year 131,651, ,904, ,853, ,409,242 Net Assets - End of Year $ 166,154,201 $ 125,860,930 $ 110,094,997 $ 402,110,128 The accompanying notes are an integral part of the financial statements -4-

7 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2012 AND 2011 Cash Flows from Operating Activities Change in net assets $ 74,132 $ 61,700,886 Adjustments to reconcile change in net assets to net cash provided by operating activities: Net unrealized and realized gains on investments (1,646,716) (49,830,836) Current provision for depreciation and amortization 8,281,121 7,913,427 Contributions and investment income restricted for long-term investments (6,412,140) (16,004,844) Increase in allowance for doubtful pledges 514, ,086 Decrease in discount for pledges (930,789) (518,345) (Increase) decrease in operating assets: Accounts and student loans receivable, net 46,538 (25,313) Other receivables 1,253,061 (1,397,823) Pledges receivable (457,014) (996,182) Prepaid expenses and other assets 27,458 (536,284) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses 1,677, ,872 Accrued wages and other benefits (335,174) (280,174) Deferred revenue and deposits 1,087,641 (257,698) Liability under split-interest interest agreements (125,449) (130,745) Agency funds 7,248 17,282 Net cash provided by operating activities 3,061, ,309 Cash Flows from Investing Activities Purchases of plant assets and equipment (20,571,075) (11,226,089) Proceeds from sales of investments 117,965, ,178,921 Purchases of investments (112,757,294) (157,267,512) Net cash used in investing activities (15,362,393) (24,314,680) Cash Flows from Financing Activities Proceeds from contributions restricted for long-term investments 9,918,413 22,989,424 Change in fair value of interest rate swap 4,848,927 (939,116) Principal payments on bonds (920,000) (895,000) Net cash provided by financing activities 13,847,340 21,155,308 Net Increase (Decrease) in Cash and Cash Equivalents 1,545,976 (2,929,063) Cash and Cash Equivalents - Beginning of Year 12,216,793 15,145,856 Cash and Cash Equivalents - End of Year $ 13,762,769 $ 12,216,793 Cash Paid During the Year for Interest $ 1,461,400 $ 1,488,376 The accompanying notes are an integral part of the financial statements -5-

8 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization - The Choate Rosemary Hall Foundation, Incorporated (the School) is a coeducational, independent boarding and day secondary school located in Wallingford, Connecticut. Enrollment encompasses approximately 850 students from the United States and over 40 countries. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect certain reported amounts and disclosures in the accompanying financial statements. Actual results could differ from those estimates. Significant estimates include the valuation of investments, the allowance for uncollectible pledges, discount on pledges receivable, interest rate swap valuation and the liability related to asset retirement obligations. Basis of Accounting and Presentation - The financial statements of the School include the accounts of all academic and administrative departments of the School and have been prepared in accordance with GAAP. Accordingly, the School reports its resources in separate classes of net assets based on the existence or absence of donor-imposed restrictions. Unrestricted Net Assets - These net assets represent resources that may be expended at the discretion of the Board of Trustees. The Board of Trustees has designated a portion of unrestricted net assets as described in Note 11. Temporarily Restricted Net Assets - These net assets represent resources that have donorimposed restrictions as to purpose or time of expenditure and accumulated investment gains and income on endowment investments that have not been appropriated for expenditure. Permanently Restricted Net Assets - These net assets represent resources that have donorimposed restrictions that stipulate the resources be maintained in perpetuity but permit the School to expend all or a portion of the income derived thereon. Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and highly liquid investments with maturities of three months or less that are readily convertible to cash, exclusive of cash held in escrow for debt service. The School s deposits exceed federal depository insurance limits. However, management believes that the School is not subject to significant credit risk regarding these deposits. Investments - Investments in marketable equity and all debt securities are stated at fair market value, and, accordingly, realized and unrealized gains or losses are recognized in the period in which the fluctuations occur. Private equities and certain other investments not traded on the open market are valued using current information obtained from the general partner or investment manager for the respective funds. As a result, the fair value of certain partnership investments are, of necessity, based on net asset values provided by the general partners of these partnerships. Purchased investments are initially recorded at cost as of the trade date and donated investments at fair market value at the date of receipt. Investment management fees are accounted for as a charge to the individual investment accounts, except for the limited partnership and equity fund investments, which report fees retained by their general partner or investment manager as a reduction in income. See Notes 4 and 10 for additional information. -6-

9 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Land, Buildings and Equipment - Land, buildings and equipment are recorded at cost at the date of acquisition or fair value at the date of donation. Depreciation is computed using the straight-line method over the estimated useful lives of buildings, equipment and land improvements. Estimated useful lives range from 3 to 15 years for equipment and 5 to 30 years for buildings and land improvements. Any gains or losses realized from the disposition of land, buildings and equipment are recognized in the period they are incurred. The threshold for capitalizing equipment is $2,000. Improvements and major renovations in excess of $10,000 are capitalized only to the extent that they expand utility or provide alternative uses for existing facilities. Routine repairs and maintenance to existing facilities are expensed as incurred. Asset Retirement Obligations - GAAP requires that a liability be recognized for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. Certain of the School s buildings contain asbestos and lead paint that must be removed upon demolition or upon extensive renovation. In addition, the School is contractually obligated to remove certain underground storage tanks. An asset retirement obligation of approximately $309,000 and $447,000 associated with removal of the tanks and the demolition of certain buildings containing asbestos and lead paint has been included in accounts payable and accrued expenses on the accompanying statements of financial position as of June 30, 2012 and 2011, respectively. Split-Interest Agreements - The School is the beneficiary of split-interest agreements with donors, which consist primarily of life income funds and charitable remainder trusts. These arrangements provide for the payment of distributions to the grantor or other designated beneficiaries over the trust s term (usually the designated beneficiary s lifetime). At the end of the trust s term, the remaining assets are available for the School s use. The trust is carried at the fair value of the underlying investments. The portion of the trust attributable to the present value of the future benefits to be received by the School is recognized in the statements of activities as a temporarily restricted contribution in the period the trust is established. The present value of the liability to beneficiaries under life income funds or annuity arrangements is calculated using an appropriate risk-free rate of return. Gains or losses resulting from changes in actuarial assumptions and accretions of the discount are recorded as increases or decreases in the respective net asset classes in the accompanying statements of activities. Bond Discounts and Origination Costs - Bond discounts and origination costs are capitalized in the period the bonds are issued and are amortized on a straight-line basis over the term of the bonds. See Note 6 for further information. The unamortized portion of bond discounts and origination costs associated with the Series D bonds is included in prepaid expenses and other assets in the accompanying statements of financial position at June 30, 2012 and Amortization of bond discounts and origination costs for the Series D bonds totaled $10,567 for each of the years ended June 30, 2012 and The expected yearly amortization of bond discount and origination costs for the Series D bonds will be $10,567 annually through

10 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Swap Agreement - The School has entered into a swap agreement associated with its bonds payable. The agreement meets the criteria necessary to qualify as an effective hedge under GAAP. Accordingly, the School has reflected the swap agreement in the accompanying financial statements at the current market value in effect at June 30, 2012 and 2011, respectively, which is reflected as interest rate swap valuation in the accompanying statements of financial position. See Note 6 for further information. Contributions - All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts received that are restricted for future periods or restricted for specific purposes by the donor are reported as either temporarily restricted or permanently restricted support. Contributions received that are awaiting instructions from the donor are reported as temporarily restricted support. Temporarily restricted promises to give are reclassified to unrestricted net assets when the gift is collected and the donor-imposed purpose or time restrictions are met. Unconditional promises to give that are expected to be collected within one year are recorded at their net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of estimated future cash flows using an appropriate risk-free rate of return. Amortization of the discount is included in net gifts and pledges revenue. Conditional promises to give are not included as support until such time as the conditions are substantially met. Deferred Compensation - The School has entered into deferred compensation agreements with certain employees of the School. The liability for these agreements totaled $-0- and $457,230 at June 30, 2012 and 2011, respectively, and is included in accrued wages and other benefits on the accompanying statements of financial position. Income Taxes - The School is a nonprofit organization generally exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes has been made. The tax returns for the School for the years ended June 30, 2009 through June 30, 2012 are subject to examination by the Internal Revenue Service and various state jurisdictions. Tuition Revenue - The School recognizes registration and tuition revenue in the period in which the related educational instruction is performed. Accordingly, at each year-end, registration and tuition fees received for the next school term are deferred. Subsequent Events - In preparing these financial statements, management has evaluated subsequent events through October 23, 2012, which represents the date the financial statements were available to be issued. Reclassifications - Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. -8-

11 NOTE 2 - STUDENT LOANS RECEIVABLE Certain loan programs, established to provide loans to both parents and students, have been funded jointly by the School and a gift from the Independence Foundation. The loan agreements, which extend credit without requiring collateral, provide for interest at a yearly fixed rate of 5.3% and principal repayments in accordance with the loan agreements. Student loan payments generally become due beginning the year following graduation. Student loans receivable is presented net of a reserve of $95,000 and $40,000 as of June 30, 2012 and 2011, respectively. NOTE 3 - PLEDGES RECEIVABLE Pledges receivable consist of the following as of June 30, 2012 and 2011: Gross pledges receivable $ 32,628,633 $ 35,677,892 Less allowance for uncollectible accounts (6,738,150) (6,224,041) Less discount (653,588) (1,584,377) Net Pledges Receivable $ 25,236,895 $ 27,869,474 Amounts due in: Less than one year $ 13,200,376 $ 16,653,617 One to five years 18,464,034 17,333,824 More than five years 964,223 1,690,451 Total $ 32,628,633 $ 35,677,892 A risk-free rate of return of 1.65% and 3.20% as June 30, 2012 and 2011, respectively, was used to calculate the present value of pledges receivable due to be collected beyond one year. The School has not recorded approximately $41,100,000 and $50,200,000 of conditional promises to give as of June 30, 2012 and 2011, respectively. Conditional promises to give are not included as support until such time as the conditions are substantially met. -9-

12 NOTE 4 - INVESTMENTS A summary of investments at fair value as of June 30, 2012 and 2011, is as follows: Absolute return $ 85,379,079 $ 65,402,415 Fixed income 49,975,762 80,047,623 Global equity 93,181, ,173,671 Private energy 24,816,748 23,186,890 Private equity 18,653,723 11,852,724 Private real estate 25,975,835 17,746,552 $ 297,982,549 $ 301,409,875 A summary of the liquidity of the School s investments as of June 30, 2012 and 2011, is as follows: Daily $ 64,842,223 $ 102,940,328 Monthly 8,815,421 10,268,042 Quarterly 56,242,231 58,606,444 Semiannually 4,929, ,766 Annually 78,449,702 71,188,816 Illiquid 84,703,507 57,860,479 $ 297,982,549 $ 301,409,875 These investment securities and vehicles are exposed to numerous risks, including, but not limited to, interest rate fluctuation, market volatility and credit risks. Due to the level of risk associated with certain investments, changes in the value of the endowment and investment portfolio could occur, which would materially affect the School s financial statements and future financial position. The School maintains a diversified portfolio of investments and is actively monitoring the financial markets. The impact of these events on the value of the School s portfolio of investments is not known at this time. Absolute Return - The School invests with managers who, in addition to purchasing equities and fixed income securities, will also purchase derivative securities, sell securities short, utilize leverage, etc. Strategies include relative value, equity long short, event driven and fixed income arbitrage. Fixed Income - This includes investments in fixed income instruments such as bonds, bank loans, convertibles or other bond-like instruments. These may include, but are not limited to, U.S. Investment Grade Bonds, Non-U.S. Investment Grade Bonds, U.S. Non-Investment Grade Bonds, and Non-U.S. Non-Investment Grade Bonds. -10-

13 NOTE 4 - INVESTMENTS (Continued) Global Equity - Global equity is defined as a portfolio of ownership interests in companies whose securities trade on a public exchange. Geographically this includes U.S. and all international stocks. Note that the School will include in this category managers who do limited shorting and/or hold some non-equity securities as long as the primary driver of their returns are long-only equity positions. Private Energy - Managers who invest in private companies or assets primarily related to the development, production, transportation and distribution of energy of all types. Private Equity - Private equity is defined as a portfolio of ownership interests in companies whose securities are generally privately held and not traded on a public exchange. Private equity firms can be divided into two categories. The first is a buyout where managers generally invest in going concerns via straightforward acquisitions, leveraged buyouts, management buyouts, reorganizations, restructurings and spin-offs. The second is venture capital managers who invest in start-up, early stage and very high-growth companies. Private Real Estate - Managers who invest in commercial real estate equity or debt, held as individual assets or in commingled vehicles. Holdings generally are significant ownership of commercial buildings such as office, warehouse, retail shopping and apartments with the intent to earn both a high-current income and longer-term capital appreciation. NOTE 5 - LAND, BUILDINGS AND EQUIPMENT Land, buildings and equipment consist of the following as of June 30, 2012 and 2011: Land $ 2,622,278 $ 2,498,668 Land improvements 14,428,704 14,154,746 Buildings and building improvements 159,821, ,648,499 Equipment 20,746,714 19,998,993 Construction in progress 19,004,639 4,551, ,623, ,852,231 Less accumulated depreciation and amortization (93,286,951) (85,805,315) $ 123,336,870 $ 111,046,916 Depreciation expense for the years ended June 30, 2012 and 2011, was $8,281,121 and $7,913,427, respectively. The School has approximately $2.5 million of commitments related to the construction of its environmental center as of June 30,

14 NOTE 5 - LAND, BUILDINGS AND EQUIPMENT (Continued) The School has approximately $2.9 million of general commitments for capital renovations and improvements as of June 30, 2012 not included in its land, buildings and equipment above. The commitments relate to dorm sprinklers, stair repair and campus paving. NOTE 6 - BONDS PAYABLE AND FUNDS HELD WITH TRUSTEE The Connecticut Health and Educational Facilities Authority (CHEFA) bonds summarized below represent obligations under an agreement pursuant to which the School is required to make payments to CHEFA sufficient to liquidate the debt. CHEFA bonds outstanding are as follows as of June 30, 2012 and 2011: Interest Year of Outstanding Outstanding Rate Maturity Principal Principal Choate Rosemary Hall Issue, Series D: Serial bonds Variable 2037 $ 37,850,000 $ 38,700,000 Unhedged bonds Variable , ,000 Net Bonds Payable $ 38,095,000 $ 39,015,000 In April 2008, the School, through CHEFA, issued an aggregate of $42,415,000 of revenue bonds, Series D, which mature through July 1, The payment of the principal and purchase price of and interest on the Series D bonds are secured by an irrevocable, direct-pay letter of credit issued by JPMorgan Chase Bank, N.A. (the Bank). The letter of credit will expire on April 2, 2013, and had an outstanding balance of $38,533,353 at June 30, The letter of credit covers the unpaid principal balance of the Series D bonds and up to 35 days interest accrued on the Series D bonds, at an assumed maximum rate of 12% per annum. The School has to pay a letter of credit draw fee of $300 per month and an annual letter of credit fee on a quarterly basis of.31 basis points per annum. The letter of credit is secured by a security interest in gross receipts. In the event that the Series D bonds become subject to a mandatory tender, the purchase price of the bonds will be paid from the remarketing of such bonds. However, if the remarketing proceeds are insufficient, the School will be permitted to enter into a term loan with the Bank. This term loan will bear interest at the Prime Rate plus 1% for the first 60 days and Prime plus 3% thereafter and must be paid in regular equal installments over the sooner of (1) three years, (2) the date on which the Series D bonds are remarketed, or (3) the expiration date of the letter of credit. As discussed in Note 1, the School has an interest rate swap agreement with Barclays Capital. The original notional value of the swap was $41,850,000 and is reduced periodically according to a schedule. -12-

15 NOTE 6 - BONDS PAYABLE AND FUNDS HELD WITH TRUSTEE (Continued) The swap arrangement is currently for $38,700,000. The swap agreement provides the School with interest rate protection for its CHEFA Series D variable rate bonds. The School agrees to pay Barclay s Capital a fixed rate of 3.793% in exchange for receiving a floating variable rate. If the 1-month LIBOR is less than 3.5%, the School receives a rate equal to the Securities Industry and Financial Markets (SIMFA) Municipal Swap Index. If the 1-month LIBOR is equal or greater than 3.5%, the School receives 67% of 1-month LIBOR. The swap term matches the CHEFA debt and will expire on July 1, Payments are made between the School and Barclay s Capital on a monthly basis. The unrealized gain (loss) on the swap agreement was $(4,848,927) and $939,116 for the years ended June 30, 2012 and 2011, respectively, which is reflected in the accompanying statements of activities. Principal and sinking fund installment payments due on the Series D bonds are as follows: Year Ending June $ 980, ,005, ,060, ,025, ,050,000 Thereafter 32,975,000 $ 38,095,000 Interest expense on the above bonds totaled $1,461,400 and $1,488,376 for the years ended June 30, 2012 and 2011, respectively. Under the terms of the School s CHEFA bond agreement, the School is required to maintain certain financial and other restrictive covenants, including a long-term debt coverage ratio of not less than 1.25 to The bonds are collateralized by the gross receipts of the School. NOTE 7 - OPERATING LEASES The School has entered into various operating leases. Total future payments under these leases are as follows: Year Ending June $ 161, , , ,895 $ 257,

16 NOTE 8 - PENSION PLANS The School maintains a defined contribution 403(b) plan covering all of its employees subject to age and hours worked requirements. Under the current plan, the School contributes an amount equal to 15% of each participant s qualifying salary. The contribution is applied as a premium to the Teachers Insurance and Annuity Association and/or the College Retirement Equities Fund in any proportion elected by the participant. In addition, the participant can elect to make additional contributions. The School s pension expense relative to the plan approximated $2,721,000 and $2,574,000 for the years ended June 30, 2012 and 2011, respectively. NOTE 9 - NET ASSETS Temporarily restricted net assets are available for the following purposes or time periods as of June 30, 2012 and 2011: Educational programs $ 28,810,330 $ 27,953,147 Financial aid 29,251,147 31,366,248 Administration 124, ,716 Physical plant 28,287,296 40,326,837 Student support services 2,969,667 3,197,659 Pledges receivable restricted due to passage of specified time or purpose 19,475,994 18,602,300 Life income 4,291,533 4,301,023 $ 113,210,427 $ 125,860,930 Net assets released from restrictions by incurring expenses satisfying the restricted purposes or by the occurrence of other events specified by donors are as follows for the years ended June 30, 2012 and 2011: Educational programs $ 418,385 $ 1,609,117 Financial aid 599, ,060 Administration 258,534 79,557 Physical plant 12,455,804 9,627,603 Amounts appropriated by the Board for expenditure 5,955,873 5,589,970 $ 19,688,386 $ 17,720,

17 NOTE 9 - NET ASSETS (Continued) Permanently restricted net assets consist of the following as of June 30, 2012 and 2011: Investment in perpetuity, the return from which is expendable and restricted for: Educational programs $ 36,759,565 $ 33,954,642 Financial aid 49,134,577 47,027,592 Student support services 2,291,088 2,267,653 Administration 223, ,948 Physical plant 17,338,878 17,474,989 Pledges receivable 5,760,901 9,267,173 $ 111,508,157 $ 110,094,997 NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS GAAP has established a fair value hierarchy that prioritizes the inputs to valuation techniques to measure fair value. Highest rank is given to unadjusted quoted prices in active markets for identical assets (Level 1) and lowest rank to unobservable inputs (Level 3). Investments are ranked based on the lowest level of input that is significant to their fair value measurement. The three levels of the fair value hierarchy are described below: Level 1 - Quoted market prices for identical assets or liabilities in an active market to which an entity has access at the measurement date. Level 2 - Inputs and information other than quoted market indices included in Level 1 that are observable for the asset or liability, either directly or indirectly, and the School has the ability to redeem the asset or liability in the near term subsequent to the measurement date. Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs should be used to measure the fair value to the extent that observable inputs are not available, and the School does not have the ability to redeem the asset or liability in the near term. Investments in which both the investment fund s and the underlying investments values are based on quoted market prices in active markets are classified as Level 1. Investment funds classified as Level 2 may contain underlying investments that are actively traded; however, the ownership rights of the investment fund itself are not actively traded, are determined through the use of other methodologies, or are calculated by the investment manager at net asset value. Level 3 assets do not have observable pricing inputs, and fair value is significantly based upon the investment fund s judgment models and estimates. Level 3 assets generally include those characterized as alternative investments. -15-

18 NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The School s major financial instruments consist of cash and cash equivalents, contributions receivable, investments, assets held under split-interest agreements, interest rate swaps, bonds payable and liabilities under split-interest agreements. The carrying amounts of cash and cash equivalents approximate fair values due to the short maturities of those instruments. The fair value of contributions receivable are estimated based upon the net present value of estimated cash flows discounted at a treasury rate commensurate with the timing of the estimated cash flow. The fair values of investments are based upon values provided by the external investment managers or quoted market values. The fair value of assets held under split-interest agreements are based upon the carrying value of underlying investments or the present value of future benefits to be received by the School. The fair value of the interest rate swap (hedging instrument) is based on a valuation provided by the counterparty bank. The carrying amounts of the Series D variable rate bonds payable approximate fair value. The fair value of liabilities under split-interest agreements is based on the 90CM mortality table for charitable gift annuities made to the School. Assets Measured at Fair Value on a Recurring Basis - The following is a summary of the source of fair value measurements for assets that are measured at fair value on a recurring basis: June 30, Fair Value Measurements Using Description 2012 Level 1 Level 2 Level 3 Investments: Absolute return $ 85,379,079 $ - $ - $ 85,379,079 Fixed income 49,975,762 31,312,085-18,663,677 Global equity 93,181,402 33,530,138 33,569,886 26,081,378 Private energy 24,816, ,816,748 Private equity 18,653, ,653,723 Private real estate 25,975, ,975,835 Total investments 297,982,549 64,842,223 33,569, ,570,440 Contributions receivable, net 25,236, ,236,895 Assets held under splitinterest agreements, net 7,109,202 5,006,035-2,103,

19 NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) June 30, Fair Value Measurements Using Description 2011 Level 1 Level 2 Level 3 Investments: Absolute return $ 65,402,415 $ - $ - $ 65,402,415 Fixed income 80,047,623 63,488,708-16,558,915 Global equity 103,173,671 39,451,620 37,248,542 26,473,509 Private energy 23,186, ,186,890 Private equity 11,852, ,852,724 Private real estate 17,746, ,746,552 Total investments 301,409, ,940,328 37,248, ,221,005 Contributions receivable, net 27,869, ,869,474 Assets held under splitinterest agreements, net 7,243,842 5,392,746-1,851,096 Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) - The following is a summary of the changes in the balances of investments measured at fair value on a recurring basis using significant unobservable inputs: Absolute Return Fixed Income Global Equity 2012 Private Energy Private Equity Private Real Estate Total Balance - beginning of year $ 65,402,415 $ 16,558,915 $ 26,473,509 $ 23,186,890 $ 11,852,724 $ 17,746,552 $ 161,221,005 Realized gains included in change in net assets 125,703 - (1,104) 469,331 1,499, ,037 2,737,059 Unrealized gains included in the change in net assets 1,862,438 2,457,692 (206,048) (889,369) (644,391) (63,388) 2,516,934 Purchases 22,966, ,482,987 8,540,238 9,180,608 46,170,586 Withdrawals (4,367,403) (30,728) (184,979) (3,178,664) (2,141,547) (1,350,893) (11,254,214) Fees (610,827) (322,202) - (254,427) (452,393) (181,081) (1,820,930) Balance - End of Year $ 85,379,079 $ 18,663,677 $ 26,081,378 $ 24,816,748 $ 18,653,723 $ 25,975,835 $ 199,570,440 The Amount of Total (Gains) or Losses for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized (Gains) Losses Relating to Liabilities Still Held at Year End $ 2,004,769 $ 2,457,692 $ (204,840) $ (889,369) $ (644,391) $ (63,388) $ 2,660,

20 NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Absolute Return Fixed Income Global Equity 2011 Private Energy Private Equity Private Real Estate Total Balance - beginning of year $ 52,542,757 $ 15,521,296 $ 8,662,128 $ 17,466,408 $ 8,431,483 $ 9,479,250 $ 112,103,322 Realized gains included in change in net assets - (55,141) 1,593, , , ,143 2,921,614 Unrealized gains included in the change in net assets 9,068,247 1,354,941 2,199,937 2,989,044 2,255,056 2,506,404 20,373,629 Purchases 20,000, ,366 15,000,000 4,716,340 1,735,375 7,041,198 48,677,279 Withdrawals (15,720,012) (159,952) (981,996) (2,108,127) (956,600) (1,415,125) (21,341,812) Fees (488,577) (286,595) - (421,176) (206,361) (110,318) (1,513,027) Balance - End of Year $ 65,402,415 $ 16,558,915 $ 26,473,509 $ 23,186,890 $ 11,852,724 $ 17,746,552 $ 161,221,005 The Amount of Total (Gains) or Losses for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized (Gains) Losses Relating to Liabilities Still Held at Year End $ 9,068,247 $ 1,299,800 $ 3,717,192 $ 3,533,445 $ 2,848,827 $ 2,751,547 $ 23,219,058 The following is a summary of the changes in the balances of contributions receivable measured at fair value on a recurring basis using significant unobservable inputs: Contributions Receivable, Net Balance - beginning of year $ 27,869,474 $ 33,692,613 New contributions receivable 8,189,500 7,132,800 Collections on contributions receivable (8,363,241) (9,742,801) Write-offs and adjustments (2,875,519) (3,378,397) Change in allowance for uncollectible accounts (514,109) (353,086) Change in discount on contributions receivable 930, ,345 Balance - End of Year $ 25,236,895 $ 27,869,

21 NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The following is a summary of the changes in the balances of assets held under split-interest agreements measured at fair value on a recurring basis using significant unobservable inputs: Assets Held Under Split- Interest Agreements, Net Balance - beginning of year $ 1,851,096 $ 1,590,261 Change in value of trust assets (205,700) 209,022 Change in discount used for present valuation 457,771 51,813 Balance - End of Year $ 2,103,167 $ 1,851,096 Liabilities Measured at Fair Value on a Recurring Basis - The following is a summary of the source of fair value measurements for liabilities that are measured at fair value on a recurring basis: June 30, Fair Value Measurements Using Description 2012 Level 1 Level 2 Level 3 Interest rate swap agreements $ 10,018,968 $ - $ - $ 10,018,968 Liability under split-interest agreements 2,599, ,599,858 June 30, Fair Value Measurements Using Description 2011 Level 1 Level 2 Level 3 Interest rate swap agreements $ 5,170,041 $ - $ - $ 5,170,041 Liability under split-interest agreements 2,725, ,725,

22 NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) - The following is a summary of the changes in the balances of liabilities under split-interest agreements measured at fair value on a recurring basis using significant unobservable inputs: Liability Under Split- Interest Agreements Balance - beginning of year $ 2,725,307 $ 2,856,052 Valuation of new agreements 52,911 15,148 Payments to beneficiary (385,478) (380,004) Change in value of liability 207, ,111 Balance - End of Year $ 2,599,858 $ 2,725,307 The following is a summary of the changes in the balances of hedging instruments measured at fair value on a recurring basis using significant unobservable inputs: Interest Rate Swap Agreements Balance - beginning of year $ 5,170,041 $ 6,109,157 Total unrealized losses (gains) included in the change in net assets 4,848,927 (939,116) Balance - End of Year $ 10,018,968 $ 5,170,041 The Amount of Total (Gains) or Losses for the Period Included in Changes in Net Assets Attributable to the Change in Unrealized (Gains) Losses Relating to Liabilities Still Held at Year End $ 4,848,927 $ (939,116) -20-

23 NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Fair Value Measurement of Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent) - The following is a summary of investments that determine fair value through a net asset value per share calculation as well as terms and conditions upon which investment(s) may be redeemed: Type Fair Value Unfunded Commitments Redemptions Permitted Redemption Notice Period Absolute return (a.) $ 85,379,079 $ 2,136,772 Quarterly, semiannually, annually, and illiquid days Fixed income 18,663,677 - Annually 90 days Global equity (b.) 26,081,378 - Monthly, quarterly, and annually days Private energy (c.) 24,816,748 23,539,219 N/A N/A Private equity (c.) 18,653,723 18,705,067 N/A N/A Private real estate (c.) 25,975,835 25,154,386 N/A N/A Total $ 199,570,440 $ 69,535,444 (a.) Certain funds comprising approximately 18% of the balance are invested in private equity structures, with no ability to be redeemed. 6% of the investments are redeemable semiannually with 60 days notice. 13% of the investments are redeemable quarterly with 90 days notice. The remaining balance is redeemable annually. (b.) One fund comprising 34% of the balance has a minimum lock-up period with 5 years remaining before the fund can be redeemed. After the lock-up period has been met, the fund can be redeemed monthly with 90 days notice. (c.) These funds are in private equity structure, with no ability to be redeemed. These assets are in long term (typically eight or more years) private capital structures. Private capital managers make cash distributions to the school as they liquidate the underlying assets. Examples of the underlying assets are the stock of private companies, commercial real estate properties, and energy producing properties. The School does not have control over the timing of these liquidity events except that all assets must be liquidated by end of the fund s contractually agreed term. During fiscal 2012, the School received cash distributions of $7,004,960 from these managers. There are no unfunded commitments related to the School s Level 2 investments and they can all be redeemed within 90 days. -21-

24 NOTE 11 - ENDOWMENT The School s endowment consists of approximately 550 funds established for a variety of purposes, mainly designated by donor restrictions. As required by GAAP, net assets associated with endowment funds are classified and reported as permanently restricted net assets, temporarily restricted net assets or unrestricted net assets based on the existence or absence of donor-imposed restrictions. The Board of Trustees of the School has interpreted the Connecticut Prudent Management of Institutional Funds Act (CTPMIFA) as requiring 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 School classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment as of the actual date on which the gift is received by the School, (b) the original value of subsequent gifts donated to the permanent endowment as of the actual date on which the gift is received by the School, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor instrument at the time the accumulation is added to that fund. The remaining portion of the donorrestricted 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 School in a manner consistent with the standard of prudence prescribed by CTPMIFA. In accordance with CTPMIFA, the School considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (i) the duration and preservation of the fund, (ii) the purposes of the School and the donor-restricted endowment fund, (iii) general economic conditions, (iv) the possible effect of inflation or deflation, (v) the expected total return from income and the appreciation of investments, (vi) other resources of the School, and (vii) the School s investment policies. Endowment net asset composition by type of fund as of June 30, 2012 is as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 78,430,886 $ 105,747,256 $ 184,178,142 Board-designated endowment funds 100,606, ,606,642 Total $ 100,606,642 $ 78,430,886 $ 105,747,256 $ 284,784,

25 NOTE 11 - ENDOWMENT (Continued) Changes in endowment net assets for the year ended June 30, 2012 are as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets - beginning of year $ 101,510,600 $ 84,182,874 $ 100,827,823 $ 286,521,297 Investment return: Investment income 523, ,789-1,294,983 Unrealized investment income 791, ,958-1,769,884 Investment fees (1,247,993) (1,837,481) - (3,085,474) Total investment return 67,127 (87,734) - (20,607) Contributions 4,285,825-5,092,733 9,378,558 Restricted endowment funds deficiency reclassification (291,619) 291, Appropriation of endowment assets for expenditure (4,965,291) (5,955,873) - (10,921,164) Additional one-time withdrawal - - (173,300) (173,300) Endowment Net Assets - End of Year $ 100,606,642 $ 78,430,886 $ 105,747,256 $ 284,784,784 The School was directed by a donor to transfer the corpus of an endowed fund to support the purchase of land, which resulted in a one-time withdrawal of $173,300 from the School s endowment. -23-

26 NOTE 11 - ENDOWMENT (Continued) Endowment net asset composition by type of fund as of June 30, 2011 is as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 84,182,874 $ 100,827,823 $ 185,010,697 Board-designated endowment funds 101,510, ,510,600 Total $ 101,510,600 $ 84,182,874 $ 100,827,823 $ 286,521,297 Changes in endowment net assets for the year ended June 30, 2011 are as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets - beginning of year $ 75,336,789 $ 68,309,728 $ 93,482,600 $ 237,129,117 Investment return: Investment income 193, , ,555 Unrealized investment income 19,200,448 29,755,021-48,955,469 Investment fees (1,005,696) (1,504,858) - (2,510,554) Total investment return 18,388,454 28,540,016-46,928,470 Contributions 9,378,414-7,345,223 16,723,637 Restricted endowment funds deficiency reclassification 2,921,180 (2,921,180) - - Appropriation of endowment assets for expenditure (4,514,237) (5,589,970) - (10,104,207) Additional one-time withdrawal - (4,155,720) - (4,155,720) Endowment Net Assets - End of Year $ 101,510,600 $ 84,182,874 $ 100,827,823 $ 286,521,

27 NOTE 11 - ENDOWMENT (Continued) The School was directed by a donor to transfer the market value of an endowed fund to support the construction expenses of a capital project, which resulted in a one-time withdrawal of $4,155,720 from the School s endowment. Funds with Deficiencies - From time to time, the fair value of assets associated with donorrestricted endowment funds may fall below the level that the donor or CTPMIFA requires the School to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets. As of June 30, 2012 and 2011, these deficiencies totaled $433,019 and $141,400, respectively. These deficiencies resulted from the unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by the Board of Trustees. Return Objectives and Risk Parameters - The School has adopted investment and spending policies for endowment assets that attempt to provide a low volatility stream of funding supported by its endowment while maintaining the purchasing power of the endowment assets. Endowment assets include donor-restricted funds that the organization must hold in perpetuity or for a donor-specified period(s) as well as board-designated funds. The School expects its endowment funds, over time, to provide an average annual rate of return of approximately 8%. Actual returns in any given year will vary from this amount. Strategies Employed for Achieving Objectives - The School relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and cash yield (interest and dividends). The endowment assets are diversified among several asset classes and, within each asset class, among multiple investment managers. Targets for each asset class are reviewed and, if appropriate, reset annually. As necessary during the year, actual allocations are rebalanced back to these targets. In order to achieve an 8% return, the fund has a strong bias towards securities representing an ownership interest in the relative enterprise. The inherent price volatility of ownership interests is partially mitigated at the portfolio level by diversification among asset classes and strategies, as well as the employment of some fixed income investments. Spending Policy and How the Investment Objectives Relate to Spending Policy - The School has a policy of appropriating for distribution each year an amount resulting from the following formula: 50% of last year s endowment spending inflated for HEPI (Higher Education Price Index) plus 50% of 5% of the 12-quarter moving market average for the most recent calendar year end. 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. 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. -25-