BETA THETA PI FRATERNITY AND FOUNDATION CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 BETA THETA PI FRATERNITY AND FOUNDATION CONSOLIDATED FINANCIAL STATEMENTS

2 TABLE OF CONTENTS Page Report of Independent Auditors... 1 Consolidated Financial Statements Statements of Financial Position... 2 Statements of Activities and Changes in Net Assets... 3 Statements of Cash Flows... 5 Notes to Consolidated Financial Statements... 6

3 REPORT OF INDEPENDENT AUDITORS Board of Directors and Trustees Beta Theta Pi Fraternity and Foundation Oxford, Ohio We have audited the accompanying consolidated statement of financial position of Beta Theta Pi Fraternity and Foundation (the Organization ) as of May 31, 2010 and the related consolidate ed statements of activities and changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the Organization s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Organization as of May 31, 2009 were audited byy other auditors whose report dated December 2, 2009, expressed an unqualified opinion. We conducted our audit in accordance with auditingg standardss generally accepted in the United States of America. Those standards requiree that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 usedd and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Betaa Theta Pi Foundationn and Fraternity as of May 31, 2010, and the changes in their nett assets and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. November 17,

4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Assets Assets Cash and cash equivalents $ 1,095,143 $ 832,521 Member fees receivable, net 105, ,297 Contributions receivable, net 834,323 1,113,158 Other receivables 95,997 28,791 Prepaid expenses 143,978 80,672 Supplies 50,797 41,673 Investments 13,356,169 11,290,625 Chapter loans, net 57, ,594 Property and equipment, net 2,824,153 2,989,242 Total assets $ 18,563,459 $ 16,615,573 Liabilities and Net Assets Liabilities Accounts payable $ 86,475 $ 81,440 Accrued expenses 63,997 91,574 Convention deposits 224, ,981 Annuities payable 279, ,056 Assets held for others 227, ,148 Deferred revenue 81,621 80,672 Insurance reserve 146, ,000 Notes payable to bank - 275,000 Long-term debt 899,210 1,005,944 Total liabilities 2,008,029 2,419,815 Net assets Unrestricted 7,044,608 5,731,729 Temporarily restricted 4,312,461 3,440,976 Permanently restricted 5,198,361 5,023,053 Total net assets 16,555,430 14,195,758 Total liabilities and net assets $ 18,563,459 $ 16,615,573 See Accompanying Notes to Consolidated Financial Statements. 2

5 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED MAY 31, 2010 Unrestricted Temporarily Restricted Permanently Restricted 2010 Total Revenues, gains and other support Membership revenue $ 2,567,891 $ - $ - $ 2,567,891 Meetings and conferences 420, ,903 Contributions 908, , ,308 1,677,878 Royalties 78, ,710 Investment return 1,112,443 1,341,211-2,453,654 Other income 25, ,755 Net assets released from restrictions 1,064,034 (1,064,034) - - Total revenues, gains and other support 6,177, , ,308 7,224,791 Expenses General administration 456, ,102 Chapter services 1,203, ,203,660 Convention 506, ,102 Leadership development 636, ,592 Communications and magazine 469, ,331 Foundation 880, ,078 Grants and scholarships 541, ,992 Building and grounds 171, ,262 Total expenses 4,865, ,865,119 Change in net assets 1,312, , ,308 2,359,672 Net assets, beginning of year 5,731,729 3,440,976 5,023,053 14,195,758 Net assets, end of year $ 7,044,608 $ 4,312,461 $ 5,198,361 $ 16,555,430 See Accompanying Notes to Consolidated Financial Statements. 3

6 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED MAY 31, 2009 Unrestricted Temporarily Restricted Permanently Restricted 2009 Total Revenues, gains and other support Membership revenue $ 2,537,999 $ - $ - $ 2,537,999 Meetings and conferences 495, ,843 Contributions 987, ,505 9,524 1,315,325 Royalties 77, ,406 Investment return (2,162,643) (1,937,218) - (4,099,861) Other income 27, ,881 Net assets released from restrictions 783,389 (783,389) - - Reclassification of net assets (2,034,484) 2,029,484 5,000 - Total revenues, gains and other support 712,687 (372,618) 14, ,593 Expenses General administration 671, ,189 Chapter services 1,218, ,218,360 Convention 492, ,500 Leadership development 770, ,293 Communications and magazine 419, ,154 Foundation 926, ,516 Grants and scholarships 253, ,862 Building and grounds 177, ,365 Total expenses 4,929, ,929,239 Change in net assets (4,216,552) (372,618) 14,524 (4,574,646) Net assets, beginning of year 9,948,281 3,813,594 5,008,529 18,770,404 Net assets, end of year $ 5,731,729 $ 3,440,976 $ 5,023,053 $ 14,195,758 See Accompanying Notes to Consolidated Financial Statements. 4

7 BETA THETA PI FRATNERITY AND FOUNDATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED Operating activities Change in net assets $ 2,359,672 $ (4,574,646) Adjustments to reconcile change in net assets to net cash from operating activities Depreciation and amortization 320, ,011 Net realized and unrealized (gains)/losses on investments (2,216,754) 4,566,159 Contributed investments - (47,457) Changes in Membership fees receivable 14,872 39,731 Contributions receivable 278, ,925 Other receivables (67,206) (6,125) Prepaid expenses (63,306) 39,281 Supplies (9,124) 20,759 Accounts payable 5,035 (52,172) Accrued expenses (27,577) (20,460) Convention deposits (966) 18,204 Deferred revenue 949 (210,512) Insurance reserve (60,000) 66,463 Net cash from operating activities 534, ,161 Investing activities Collections of chapter loans 61,120 12,938 Change in investments 235,324 (575,783) Purchase of property and equipment (155,105) (54,247) Net cash from investing activities 141,339 (617,092) Financing activities Net borrowing under line-of-credit agreement (275,000) 215,005 Proceeds from issuance of long-term debt - 1,044,000 Principal payments on long-term debt (81,967) (851,415) Principal payments on capital lease obligations (24,765) (30,389) Payment of annuities payable (31,607) 7,745 Net cash from financing activities (413,339) 384,946 Change in cash and cash equivalents 262, ,015 Cash and cash equivalents Beginning of year 832, ,506 End of year $ 1,095,143 $ 832,521 Supplemental disclosure of cash flow information Interest paid $ 63,442 $ 76,271 See Accompanying Notes to Consolidated Financial Statements. 5

8 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Principles of Consolidation The Beta Theta Pi Fraternity (the "Fraternity") was founded by eight young men at Miami University in The all-male society was formed to recognize the value of intellectual development and scholastic achievement, as well as cultivate friendly feelings among brothers. Since its inception, membership in the Fraternity has grown to over 150,000, with 122 active chapters and colonies throughout the United States and Canada. The accompanying consolidated financial statements include the accounts of the Fraternity and the Beta Theta Pi Foundation (the Foundation ) (collectively, the Organization ). The Foundation is a public charity as described in Sections 509(a)(1) and 170(b)(1)(A)(vi) of the Internal Revenue Code. The Foundation has received a favorable ruling from the Internal Revenue Service allowing the Foundation to operate as a non-private foundation. Contributions received by the Foundation are used to provide scholarships, leadership programs, grants and other educational programming to the members of the Fraternity. Although contributions to the Foundation are ordinarily not restricted as to use, certain gifts are accepted subject to reasonable restrictions such as a contribution that should be held in the name of a specified member of the Fraternity and the income should be applied to award scholarships in the name of such member to persons selected by the Trustees. All significant intercompany accounts and transactions have been eliminated in consolidation. The Foundation and Fraternity generally operate and conduct business utilizing the following funds: Foundation Operating Fund - The Foundation Operating Fund is used for the educational expenses of the Fraternity and general public and includes the Foundation Trust and Charitable Gift Annuity Investment funds. A/O (Administrative Office) Building and Grounds Fund - The A/O Building and Grounds Fund was established to account for the Foundation's management of Brennan Hall and grounds. Fraternity Operating Fund - The Fraternity Operating Fund is used to account for the general operating expenses of the Fraternity. Baird Fund - The Baird Fund in the Fraternity is used for the communication expenses of the Fraternity, including The Beta Theta Pi magazine. The Baird Fund includes the Baird Investment and the chapter house loan program funds. Housing Trust Fund - The Housing Trust Fund is used to account for the Fraternity's management of funds held for house corporations. Risk Management Fund - The Risk Management Fund was established to account for the Fraternity's group insurance program. This fund has been designated by the Board of Trustees to fund the estimated liability of the group insurance program (see Note 8). 6

9 Use of Estimates The preparation of financial statements in conformity 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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Fraternity considers all liquid investments with original maturities of three months or less to be cash equivalents. On May 31, 2010 and 2009, cash equivalents consisted primarily of money market funds. The financial institution holding the Organization's cash accounts is participating in the FDIC's Transaction Account Guarantee Program effective through June 30, Under that Program, all non-interest bearing transaction accounts are fully guaranteed by the FDIC. The financial institution has since opted-out of the program effective July 1, Investments and Investment Return Investments in equity securities having a readily determinable fair value and all debt securities are carried at fair value. Investment return includes dividend, interest and other investment income and realized and unrealized gains and losses on investments carried at fair value. The Organization maintains pooled investment accounts for its individual fund balances. Investment income and realized and unrealized gains and losses from securities in the pooled investment accounts are allocated monthly to the individual fund balances based on the relationship of the fair value of the interest of each fund balance to the total fair value of the pooled investments accounts, as adjusted for additions to or deductions from those accounts. Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful life of each asset. Assets under capital lease obligations are depreciated over the shorter of the lease term or their respective estimated useful live. Supplies Inventories consist of supplies and merchandise. Inventories are stated at the lower of cost or market with cost being determined using the first-in, first-out (FIFO) method. 7

10 Accounts, Contributions, and Notes Receivable Accounts receivable represent rents due from chapters and other tenants, amounts due from chapters for member, management and other fees. Accounts receivable are stated at the amount billed. Delinquent receivables are written off based on individual credit evaluations and specific circumstances of the member, chapter or tenant. Contributions receivable consist of amounts that have been unconditionally promised to the Foundation. Management estimates an allowance for uncollectible contributions receivable based on current economic conditions, historical trends, and current and past experience with their donor base. The Allowance for uncollectible contributions as of May 31, 2010 and 2009 was $196,108 and $201,103, respectively. Deferred Revenue Revenue from fees for insurance is deferred and recognized ratably over the course of the policy, up to the cost of the insurance premiums. Revenue from fees for insurance in excess of the cost of the insurance premiums are recognized as received. Convention Deposits It is the practice of the Organization to hold national conventions for members throughout the year. Chapters register for events and pay for participation and the Organization registers as a group. Revenue and expenses related to the conventions are recorded in the year of the program. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Organization has been limited by donors primarily to support scholarships, individual chapter houses and other various programs. Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes specified by donors which included scholarships, individual chapter houses and other various programs. Permanently restricted net assets have been restricted by donors to be maintained by the Organization in perpetuity, the income of which is expendable to primarily support scholarships and other various programs. Earnings, gains or losses on restricted net assets are classified as unrestricted unless specifically restricted by the donor or by applicable law. Contributions Gifts of cash and other assets received without donor stipulations are reported as unrestricted revenue and net assets. Gifts received with a donor stipulation that limits their use are reported as temporarily or permanently restricted revenue and net assets. When a donor stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities and changes in net assets as net assets released from restrictions. 8

11 Gifts and investment income that are originally restricted by the donor and for which the restriction is met in the same time period are recorded as temporarily restricted and then released from restriction. Income Taxes The Fraternity and Foundation are exempt from income taxes under Section 501 of the Internal Revenue Code and a similar provision of state law. However, the Fraternity and Foundation are subject to federal income tax on any unrelated business taxable income. Reclassifications During 2009, the Organization identified certain net assets that had been misclassified between unrestricted, temporarily and permanently restricted. The following net assets were reclassified in the financial statements to appropriately recognize the restricted nature of certain net asset fund balances: 2009 Unrestricted $ (2,034,484) Temporarily Restricted 2,029,484 Permanently Restricted 5,000 Certain 2009 expenses were reclassified to conform to the 2010 presentation. The reclassifications had no effect on changes in net assets. Subsequent Events The Organization has evaluated events or transactions occurring subsequent to the consolidated statement of financial position for recognition and disclosure in the accompanying financial statements through the date the financial statements are available to be issued which is November 17,

12 2. CONTRIBUTIONS RECEIVABLE Contributions receivable at May 31, 2010 and 2009 consists of the following: Due within one year $ 689,665 $ 610,542 Due in one to five years 349, ,552 Due in more than five years 2,107 31,484 Total 1,041,733 1,335,578 Less Allowance for uncollectible contributions (196,109) (201,103) Unamortized discount (11,301) (21,317) Total $ 834,323 $ 1,113,158 Contributions receivable that extend beyond one year are discounted at 0.76%. 3. INVESTMENTS Investments at May 31, 2010 consist of the following: Baird Investment Fund Housing Fund Foundation Trust Fund Charitable Gift Annuity Investment Fund Total Equity securities $ 162,350 $ 7,055 $ 1,099,009 $ - $ 1,268,414 Mutual funds 2,307, ,962 9,301, ,435 12,087,755 Total $ 2,470,255 $ 152,017 $ 10,400,462 $ 333,435 $ 13,356,169 10

13 Investments at May 31, 2009 consisted of the following: Baird Investment Fund Housing Fund Foundation Trust Fund Charitable Gift Annuity Investment Fund Total Equity securities $ 242,269 $ 11,888 $ 1,094,677 $ - $ 1,348,834 Mutual funds 1,818, ,563 7,675, ,930 9,941,791 Total $ 2,061,252 $ 142,451 $ 8,769,992 $ 316,930 $ 11,290,625 The Board of Directors of the Foundation has appointed an investment committee to provide direction and oversight with respect to the investments in securities of both the Foundation and the Baird Fund. The investment committee has engaged the services of a fund manager to invest these funds within the guidelines and other parameters set forth by the committee. The Foundation's and the Fraternity's investment portfolios are concentrated in equity securities mutual funds. As a result, a significant downturn in the securities market could adversely affect the fair value of these investments. The investment accounts of the Baird Investment Fund, Foundation Trust Fund and Housing Fund are maintained at Charles Schwab. The Charitable Gift Annuity Investment Fund investment accounts are maintained at PNC Bank. Total investment return is comprised of the following: Interest and dividend income $ 236,900 $ 466,298 Net unrealized gains/(losses) on investments 2,703,624 (4,089,783) Net realized gains on investments (486,870) (476,376) Total $ 2,453,654 $ (4,099,861) 4. CHAPTER LOANS Chapter loans are due in periodic installments over terms which range from 1 to 5 years and are generally collateralized by investments. The periodic installments include interest, which is charged annually at 10.5% for three of the outstanding loans and 8.7% for the fourth loan. An allowance of $127,232 and $114,931 was provided for losses on chapter loans at May 31, 2010 and 2009 respectively. 11

14 5. PROPERTY AND EQUIPMENT Property and equipment at May 31, 2010 and 2009 consists of the following: Land and land improvements $ 613,703 $ 613,703 Buildings and building improvements 3,625,797 3,618,088 Furniture, office and computer equipment and software 1,229,261 1,205,884 Total 5,468,761 5,437,675 Less accumulated depreciation and amortization (2,644,608) (2,448,433) $ 2,824,153 $ 2,989,242 Depreciation and amortization for the year ended May 31, 2010 and 2009 totaled $320, 192 and $320,011 respectively. 6. ANNUITIES PAYABLE The Organization has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The Fraternity has recorded a liability of $279,449, and $311,056 at May 31, 2010 and 2009, respectively, which represents the present value of the future annuity obligations. The liability has been determined using a discount rate of 0.76% and applicable mortality tables. 7. ASSETS HELD FOR OTHERS The Organization holds, invests and administers the proceeds of the sale of a chapter house, when a chapter has been closed and the alumni prefer to not be responsible for the assets of the chapter house corporation. The proceeds (including earnings) would be returned by the Organization to the chapter house corporation, if and when the chapter has re-established the housing is warranted. The proceeds are accounted for separately by agreement. Currently, alumni chapter house corporations at Eastern Kentucky University and Rutgers University are participating in this arrangement. 12

15 8. RISK MANAGEMENT PROGRAM The Organization purchases general liability insurance policies covering all of its chapters. Each chapter is billed $120 per member for the period covered. The portion of risk management billing equaling the amount of the insurance premium is recognized as revenue on a straight-line basis over the policy period, which currently runs from October 1, 2010 to April 1, Under the current policy, the Fraternity is liable for a deductible of up to $50,000 per claim and $200,000 (per policy year) in the aggregate, for the duration of the policy. The current policy expired September 30, 2010 and was renewed through April 1, A reserve for insurance claims has been established based upon the aggregate of the liability for reported claims and estimated liability for claims incurred but not reported. 9. LINES OF CREDIT The Fraternity had a $300,000 revolving line of credit that expired in March, 2010 which was not renewed. At May 31, 2009, there were no borrowings against this line. The line was collateralized by the investments and guaranteed by the Foundation. Interest varied with LIBOR plus 1.84% and was payable monthly. The Fraternity had a $250,000 revolving line of credit that expired in March, 2010 which was not renewed. At May 31, 2009, there were no borrowings against this line. The line was collateralized by the investments and guaranteed by the Foundation. Interest varied with LIBOR plus 1.84% and was payable monthly. The Foundation had a $300,000 revolving line of credit that expired in March, 2010 which was not renewed. At May 31, 2009, there was $275,000 borrowed against this line. This line was repaid during The line was collateralized by the Foundation s investments. Interest varied with LIBOR plus 1.84% and was payable monthly. 10. LONG-TERM DEBT Note payable, bank (A) $ 616,076 $ 644,007 Note payable, bank (B) 184, ,308 Note payable, bank (C) 79, ,518 Capital lease obligations (D) 19,344 44,111 Total debt $ 899,210 $ 1,005,944 (A) Due June 2023; payable $5,727 monthly with interest of 6.00% at May 31, 2010 and 2009, respectively. Secured by the endowment funds. Incurred for the purchase of the Keystone Commons property. 13

16 (B) Due June 2018; payable $2,413 monthly with interest of 5.75% at May 31, 2010 and 2009, respectively. Secured by the endowment funds. Incurred for improvements of the University Avenue property. (C) Due June 2012; payable $3,492 monthly with interest of 5.48% at May 31, 2010 and 2009, respectively. Secured by the endowment funds. Incurred for the upgrade of computer systems. (D) Capital leases include leases covering office equipment for 2 years expiring January Aggregate annual maturities of long-term debt and payments on capital lease obligations at May 31, 2010 are: Long-term Debt (Excluding Leases) Capital Lease Obligations 2011 $ 89,239 $ 19, , , , ,477 - Thereafter 513,648 - Total $ 879,866 19,800 Less amount representing interest 456 Present value of future minimum lease payments $ 19,344 Interest expense totaled $63,442 and $76,271 for the years ended May 31, 2010 and 2009 respectively. Property and equipment include the following property under capital leases at May 31, 2010 and 2009: Office equipment $ 119,340 $ 119,340 Less accumulated depreciation (98,690) (73,910) $ 20,650 $ 45,430 14

17 11. TEMPORARILY AND PERMANENTLY RESTRICTED NET ASSETS Temporarily restricted net assets are available for the following purposes: Scholarship $ 1,417,789 $ 1,138,391 Leadership 1,722,468 1,419,803 Other 1,172, ,782 $ 4,312,461 $ 3,440,976 Income from permanently restricted net assets is available for use by the Fraternity for Scholarship, Leadership and Other operational expenses. 12. ENDOWMENT The Organization s endowment consists of approximately 82 individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the governing body to function as endowments (board-designated endowment funds). As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including boarddesignated endowment funds, are classified and reported based on the existence or absence of donor-imposed restrictions. The Organization s governing body has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring preservation of the fair value of the original gift as of the date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Organization classifies as permanently restricted net assets (a) the original value of the gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of donorrestricted endowment funds is classified as unrestricted or temporarily restricted net assets as required by the donor. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donorrestricted endowment funds: 15

18 (1) The duration and preservation of the fund (2) The purposes of the Organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and appreciation of investments (6) Other resources of the fraternity (7) The investment policies of the Foundation The composition of net assets by type of endowment fund at May 31, 2010 was: Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $ - $ 1,383,295 $ 5,198,361 $ 6,581,656 Board-designated endowment funds 2,207, ,207,783 Total endowment funds $ 2,207,783 $ 1,383,295 $ 5,198,361 $ 8,789,439 The composition of net assets by type of endowment fund at May 31, 2009 was: Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $ (435,995) $ 694,536 $ 5,023,053 $ 5,281,594 Board-designated endowment funds 2,016, ,016,830 Total endowment funds $ 1,580,835 $ 694,536 $ 5,023,053 $ 7,298,424 16

19 Changes in endowment net assets for the years ended May 31, 2010 and 2009 follows: Unrestricted Temporarily Restricted Permanently Restricted 2010 Total Endowment net assets, beginning of year $ 1,580,835 $ 694,536 $ 5,023,053 $ 7,298,424 Investment return: Investment income (109,929) (260,516) - (370,445) Net appreciation 594,460 1,415,087-2,009,547 Total investment return 484,531 1,154,571-1,639,102 Contributions 171,381 14, , ,985 Appropriation of endowment assets for expenditure (28,964) (480,108) - (509,072) Endowment net assets, end of year $ 2,207,783 $ 1,383,295 $ 5,198,361 $ 8,789,439 Unrestricted Temporarily Restricted Permanently Restricted 2009 Total Endowment net assets, beginning of year $ 2,647,402 $ 2,131,459 $ 5,008,529 $ 9,787,390 Investment return: Investment income 75, , ,773 Net depreciation (1,129,011) (1,414,491) - (2,543,502) Total investment return (1,053,209) (1,220,520) - (2,273,729) Contributions 218,826 8,864 9, ,214 Appropriation of endowment assets for expenditure (123,799) (220,267) - (344,066) Other changes - reclassifications (108,385) (5,000) 5,000 (108,385) Endowment net assets, end of year $ 1,580,835 $ 694,536 $ 5,023,053 $ 7,298,424 17

20 Amounts of donor restricted endowment funds classified as permanently and temporarily restricted net assets at May 31, 2010 and 2009, consisted of: Permanently restricted net assets - portion of perpetual endowment funds required to be retained permanently by explicit donor stipulation of UPMIFA $ 5,198,361 $ 5,023,053 Temporarily restricted net assets With purpose restrictions 1,383, ,536 Total $ 6,581,656 $ 5,717,589 From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level the Organization is required to retain as a fund of perpetual duration pursuant to donor stipulation. In accordance with GAAP, deficiencies of this nature are reported to unrestricted net assets and aggregated $435,995 at May 31, These deficiencies resulted from unfavorable market fluctuations that occurred shortly after investment of new permanently restricted contributions and continued appropriation for certain purposes that was deemed prudent by the governing body. The Organization has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs and other items supported by its endowment while seeking to maintain the purchasing power of the endowment. Endowment assets include those assets of donor-restricted endowment funds the Fraternity must hold in perpetuity or for donor-specified periods, as well as those of board-designated endowment funds. Under the Organization s policies, endowment assets are invested in a manner that is intended to produce results that exceed the need for income to fund grants that support scholarships and leadership programming while assuming medium and high levels of investment risk based on each endowment s risk tolerance and time horizon. To satisfy its long-term rate of return objectives, the Organization relies on a total return strategy in which investment returns are achieved through both current yield (investment income such as dividends and interest) and capital appreciation (both realized and unrealized). The Organization targets a diversified asset allocation that places a greater emphasis on equitybased investments to achieve its long-term return objectives within prudent risk constraints. 18

21 The Organization has a policy (the spending policy) of appropriating for expenditure each year 4% of its endowment fund s average fair value over the prior 12 quarters through the year end preceding the year in which expenditure is planned. In establishing this policy, the Fraternity considered the long-term expected return on its endowment. Accordingly, over the long term, the Organization expects the current spending policy to allow its endowment to grow at a rate capable of funding the current level of scholarships and leadership programming grants. This is consistent with the Organization s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. 13. PENSION PLAN The Organization has a 401(k) plan covering substantially all employees. The plan was effectively amended in 2007 to provide a 1% employer match. The Board of Directors annually determines the amount, if any, of the Organization s additional discretionary contributions to the plan. Pension expense was $13,447 and $9,576 for 2010 and 2009 respectively. 14. FUNCTIONAL EXPENSES The Organization s expenses on a functional basis are as follows as of May 31, 2010 and 2009: Program services $ 3,104,626 $ 2,907,919 Management and general 880,415 1,094,804 Fundraising 880, ,516 Total $ 4,865,119 $ 4,929, FAIR VALUE OF FINANCIAL INSTRUMENTS Major classes of assets and liabilities that are measured at fair value are categorized according to a fair value hierarchy that prioritizes the inputs to value techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 inputs are readily determinable using unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 inputs are derived from quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly. If the inputs used fall within different levels of the hierarchy, the categorization is based upon the lowest level input that is significant to the fair value measurement. Level 3 inputs are those that are unobservable and are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 19

22 Assets measured at fair value on a recurring basis as of May 31, 2010 and 2009 are as follows: Level 1 Level 2 Level 3 Total 2010 Assets: Equity securities $ 1,268,414 $ - $ - $ 1,268,414 Mutual funds 12,087, ,087,755 Total assets $ 13,356,169 $ - $ - $ 13,356,169 Level 1 Level 2 Level 3 Total 2009 Assets: Equity securities $ 1,348,834 $ - $ - $ 1,348,834 Mutual funds 9,941, ,941,791 Total assets $ 11,290,625 $ - $ - $ 11,290, COMMITMENTS AND CONTINGENCIES Litigation The Organization is subject to claims and lawsuits that arise primarily in the ordinary course of its activities. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the financial position of the Organization. 20