RANDOLPH-MACON COLLEGE FINANCIAL REPORT

FINANCIAL REPORT JUNE 30, 2006

FINANCIAL REPORT

CONTENTS Page INDEPENDENT AUDITOR S REPORT... 3 FINANCIAL STATEMENTS Statements of Financial Position... 4 Statements of Activities... 5 Statements of Cash Flows... 7 Notes to Financial Statements... 8

INDEPENDENT AUDITOR S REPORT To the Board of Trustees Randolph-Macon College Ashland, Virginia We have audited the accompanying statements of financial position of Randolph-Macon College as of and 2005, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the College 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 College 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 Randolph-Macon College as of and 2005, and its changes in net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Roanoke, Virginia August 25, 2006 CERTIFIED PUBLIC ACCOUNTANTS Providing Professional Business Advisory & Consulting Services 319 McClanahan Street, S.W. P.O. Box 12388 Roanoke, VA 24025-2388 540-345-0936 Fax: 540-342-6181 www.becpas.com Member: SEC and Private Companies Practice Sections of American Institute of Certified Public Accountants

STATEMENTS OF FINANCIAL POSITION and 2005 ASSETS Cash and cash equivalents $ 3,548,947 $ 6,798,831 Receivables and other assets 511,669 491,746 Inventories 276,476 251,238 Cash surrender value of life insurance policies 310,048 314,880 Notes receivable, college and government student loans 3,624,636 3,714,859 Contributions receivable (Note 2) 2,396,669 4,161,498 Investments (Note 3) 117,846,202 104,099,653 Deferred loan costs, net of accumulated amortization 276,769 309,294 Funds designated for investment in land, buildings and equipment 3,842,452 5,327,149 Land, buildings and equipment, net of accumulated depreciation (Note 4) 45,016,342 42,855,107 Funds held in trust by others 1,737,430 1,711,575 Total assets $ 179,387,640 $ 170,035,830 LIABILITIES AND NET ASSETS Accounts payable $ 1,499,606 $ 2,335,657 Accrued and other liabilities 1,104,719 1,159,031 Student and other deposits 1,557,528 1,601,814 Postretirement benefit obligation (Note 5) 9,525,715 8,970,337 Trust and annuity obligations 1,216,408 1,240,592 U.S. government grants refundable 2,270,000 2,262,728 Debt (Note 6) 24,141,136 24,809,170 Total liabilities 41,315,112 42,379,329 Net assets (Note 7) Unrestricted 72,253,629 64,283,561 Temporarily restricted 33,792,273 32,187,580 Permanently restricted 32,026,626 31,185,360 Total net assets 138,072,528 127,656,501 Total liabilities and net assets $ 179,387,640 $ 170,035,830 The Notes to Financial Statements are an integral part of these statements. 4

STATEMENT OF ACTIVITIES Year Ended 2006 Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING REVENUES Tuition and fees $ 25,900,418 $ - $ - $ 25,900,418 Less financial aid (9,775,141) - - (9,775,141) Net tuition and fees (Note 8) 16,125,277 - - 16,125,277 Contributions 846,442 3,367,484-4,213,926 Investment income, endowment, and other (Note 3) 2,317,972 1,408,724 3,343 3,730,039 Investment income, temporary investments (Note 3) 170,567 68,232 50,086 288,885 Government and private grants - 387,385-387,385 Auxiliary services 7,550,944 - - 7,550,944 Other 309,667 86,837 15,708 412,212 Net assets released from restrictions and reclassifications (Note 9) 6,357,812 (6,357,812) - - Total operating revenues 33,678,681 (1,039,150) 69,137 32,708,668 OPERATING EXPENSES Educational and general: Instruction 11,029,297 - - 11,029,297 Academic support 3,258,068 - - 3,258,068 Student services 8,053,622 - - 8,053,622 Institutional support 6,849,135 - - 6,849,135 Auxiliary services 4,738,957 - - 4,738,957 Total operating expenses (Note 10) 33,929,079 - - 33,929,079 Change in net assets, operating (250,398) (1,039,150) 69,137 (1,220,411) NON-OPERATING INCOME Contributions 30,921 373,520 764,652 1,169,093 Investment income (Note 3) 209,432 12,726 17,140 239,298 Investment return, net of amount available to support current operations (Note 3) 8,018,657 2,828,556 5,667 10,852,880 Other 38,117 - (8,832) 29,285 Change in value of split-interest agreements (53,623) (23,035) (22,082) (98,740) Change in postretirement benefit obligation (Note 5) (555,378) - - (555,378) Expenses directly related to Hurricane Isabel - - - - Net assets released from restrictions and reclassifications (Note 9) 532,340 (547,924) 15,584 - Change in net assets, non-operating 8,220,466 2,643,843 772,129 11,636,438 Change in net assets 7,970,068 1,604,693 841,266 10,416,027 NET ASSETS Beginning 64,283,561 32,187,580 31,185,360 127,656,501 Ending $ 72,253,629 $ 33,792,273 $ 32,026,626 $ 138,072,528 The Notes to Financial Statements are an integral part of these statements. 5

STATEMENT OF ACTIVITIES Year Ended June 30, 2005 2005 Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING REVENUES Tuition and fees $ 24,540,140 $ - $ - $ 24,540,140 Less financial aid (8,688,626) - - (8,688,626) Net tuition and fees (Note 8) 15,851,514 - - 15,851,514 Contributions 3,829,607 2,965,216 200 6,795,023 Investment income, endowment, and other (Note 3) 2,185,225 1,274,233 3,196 3,462,654 Investment income, temporary investments (Note 3) 141,602 (558) 9,676 150,720 Government and private grants - 303,271-303,271 Auxiliary services 7,148,534 - - 7,148,534 Other 269,936 126,959 21,514 418,409 Net assets released from restrictions and reclassifications (Note 9) 3,218,723 (3,218,723) - - Total operating revenues 32,645,141 1,450,398 34,586 34,130,125 OPERATING EXPENSES Educational and general: Instruction 10,321,837 - - 10,321,837 Academic support 3,220,503 - - 3,220,503 Student services 6,918,210 - - 6,918,210 Institutional support 6,777,767 - - 6,777,767 Auxiliary services 4,232,343 - - 4,232,343 Total operating expenses (Note 10) 31,470,660 - - 31,470,660 Change in net assets, operating 1,174,481 1,450,398 34,586 2,659,465 NON-OPERATING INCOME Contributions 22,265 635,524 342,982 1,000,771 Investment income (Note 3) 91,661 13,595 22,467 127,723 Investment return, net of amount available to support current operations (Note 3) 2,334,378 2,501,698 20,697 4,856,773 Other 94,081-22,725 116,806 Change in value of split-interest agreements (45,760) 9,310 (31,722) (68,172) Change in postretirement benefit obligation (Note 5) (740,779) - - (740,779) Expenses directly related to Hurricane Isabel - - - - Net assets released from restrictions and reclassifications (Note 9) 653,317 (666,788) 13,471 - Change in net assets, non-operating 2,409,163 2,493,339 390,620 5,293,122 Change in net assets 3,583,644 3,943,737 425,206 7,952,587 NET ASSETS Beginning 60,699,917 28,243,843 30,760,154 119,703,914 Ending $ 64,283,561 $ 32,187,580 $ 31,185,360 $ 127,656,501 The Notes to Financial Statements are an integral part of these statements. 6

STATEMENTS OF CASH FLOWS Years Ended and 2005 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 10,416,027 $ 7,952,587 Adjustments to reconcile change in net assets to net cash provided by operating activities: Non-operating and noncash items: Contributions restricted for plant expansion and endowment (1,193,215) (2,357,933) Net realized and unrealized gains on investments (13,133,247) (7,098,721) Noncash contributions and increase in cash surrender value 4,832 (57,766) Change in funds held in trust (25,855) (31,594) Loss on disposal of fixed assets 34,417 47,464 Depreciation and amortization 2,351,344 2,273,973 Change in certain operating assets and liabilities: (Increase) decrease in: Receivables and other assets (19,923) 96,164 Inventories (25,238) (20,268) Contributions receivable 1,764,829 (388,269) (Decrease) increase in: Accounts payable, accrued and other liabilities 338,929 (98,505) Student and other deposits (44,286) 25,158 Postretirement benefit obligation 555,378 740,779 Trust and annuity obligations, net of payments 136,183 105,757 U.S. government grants refundable 7,272 59,228 Net cash provided by operating activities 1,167,447 1,248,054 CASH FLOWS FROM INVESTING ACTIVITIES Change in notes receivable, net 90,223 37,310 Purchases of land, buildings and equipment (5,743,763) (3,332,689) Change in funds designated to investment in land, building and equipment 1,484,697 (3,181,491) Change in investments, net of proceeds from sales (613,302) (534,098) Net cash used in investing activities (4,782,145) (7,010,968) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from contributions restricted for plant expansion and endowment 1,193,215 2,357,933 Payments of trust and annuity obligations (160,367) (164,463) Additions to deferred loan costs - (59,895) Proceeds from issuance of debt - 4,950,000 Payments of debt (668,034) (347,452) Net cash provided by financing activities 364,814 6,736,123 Increase (decrease) in cash and cash equivalents (3,249,884) 973,209 CASH AND CASH EQUIVALENTS Beginning 6,798,831 5,825,622 Ending $ 3,548,947 $ 6,798,831 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for interest, net of amounts capitalized 2006 $41,604; 2005 $119,786 $ 477,980 $ 477,980 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING Land, bulding and equipment purchases included in accounts payable $ 587,714 $ 1,817,006 Contributions of non cash assets $ - $ 22,265 The Notes to Financial Statements are an integral part of these statements. 7

Note 1. Nature of Operations and Significant Accounting Policies Randolph-Macon College (the College ) is a private, undergraduate, coeducational liberal arts college located in Ashland, Virginia. The College s curriculum emphasizes the liberal arts and sciences and includes 25 major fields of study. Significant sources of revenue include tuition and fees, contributions, and investment returns. The Board of Trustees is responsible for all management and policy making of the College. The Trustees appoint the President, Vice President, Treasurer, and Deans who operate the College on a daily basis. The significant accounting policies followed by the College are described below: Basis of financial statement presentation and accounting: The financial statements of the College have been prepared in accordance with accounting principles generally accepted in the United States of America. 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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying financial statements present information regarding the College s financial position and activities according to three classes of net assets: unrestricted, temporarily restricted and permanently restricted. The three classes are differentiated based on the existence or absence of donorimposed restrictions, as described below: Unrestricted net assets are free of donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. Revenues, gains and losses that are not temporarily or permanently restricted by donors are included in this classification. Expenses are reported as decreases in this classification. Temporarily restricted net assets are limited in use by donor-imposed stipulations that expire either by the passage of time or that can be fulfilled by action of the College pursuant to those stipulations. Permanently restricted net assets are amounts required by donors to be held in perpetuity; however, generally the income on these assets is available to meet various restricted and other operating needs. These net assets primarily include permanent endowment funds. Cash and cash equivalents: The College considers all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents. Cash equivalents are stated at cost, which approximates market value. Cash held for long-term investment is classified as investments or funds designated to investment in land, buildings and equipment. The College follows the common cash management practice of consolidating certain of its operating cash and cash equivalent accounts into one account, which includes various designated and restricted current operating and plant accounts. As a result of this practice, cash and cash equivalents specifically associated with the original gift of certain designated and restricted monies can be spent from the consolidated account. When this occurs the activity is accounted for by maintaining receivables and payables between the net asset classes. The College has sufficient unrestricted funds not included in the consolidated account to cover the designated or restricted monies spent. (Continued) 8

Note 1. Nature of Operations and Significant Accounting Policies (Continued) Inventories: Inventories are stated at the lower of cost or market, with cost determined primarily on the first-in, firstout method. Investments: Investments in marketable securities with readily determinable fair values and all investments in debt securities are reported at their fair values, as determined by quoted market prices, in the statements of financial position. Net unrealized and realized gains or losses are reflected in the statements of activities. Certain land and other investments which are not readily marketable are carried at cost. Gifts of investments are recorded at their fair value (based upon quotations or appraisals) at the date of gift. Purchases and sales of investments are recorded on the trade date. The estimated fair value of certain alternative investments, such as absolute return and venture capital, is based on valuations provided by the external investment managers. The College believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Because alternative investments are not readily marketable, their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed. Such difference could be material. Income and realized and unrealized net gains on investments of endowment and similar net asset classes are reported as follows: As increases in permanently restricted net assets if the terms of the gift require that they be added to the principal of a permanent endowment fund; As increases in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income; As increases in unrestricted net assets in all other cases. Land, buildings, and equipment: Land, buildings and equipment is stated at cost at the date of acquisition, or fair value at the date of gift, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Equipment is removed from the records and any gain or loss is recognized at the time of disposal. Expenditures for new construction, major renewals and replacements and equipment exceeding $5,000 are capitalized. The College capitalizes interest costs as part of the construction cost of buildings where it relates to the financing of major projects under development. Interest capitalized for the years ended and 2005 was $41,604 and $119,786, respectively. (Continued) 9

Note 1. Nature of Operations and Significant Accounting Policies (Continued) Deferred loan costs: Deferred loan costs are being amortized on the straight-line basis over the term of the related financing agreement. Accrued compensation: The College accrues for salaries and all other compensation earned but not paid. Student and other deposits: Deposits and student fees applicable to academic sessions subsequent to the current year are deferred and recognized as revenues in subsequent periods. Notes receivable and U.S. government grants refundable: The College participates in the Federal Perkins Loan Program sponsored by the United States Government. Under this program, funds are loaned to qualified students and may be reloaned after collection. Student loan receivables related to this program are recorded as notes receivable. The portion of those funds contributed by the U.S. Government (that is, exclusive of the College s match funds) is ultimately refundable to the government. The College accounts for its notes receivable at cost and recognizes interest income as it is earned. An allowance for doubtful accounts is based on prior collection history and individual circumstances of the borrower. Notes are considered past due after 30-45 days and accrue interest until written off when considered uncollectible. Split-interest agreements: The College participates in various split-interest agreements that are unconditional and irrevocable. These arrangements are established when a donor makes a gift to the College or a trust in which the College shares benefits with other beneficiaries. Generally, the College accounts for these agreements by recording its share of the related assets at fair market value (which approximates the present value of the estimated future cash receipts). Liabilities are recorded for any portion of the assets held for donors or other beneficiaries equal to the present value of the expected future payments to be made. The liabilities are adjusted annually for changes in the value of the assets, accretion of the discount, and other changes in the estimates of future benefits. Contribution revenues are recognized at the dates the agreements are established for the difference between the assets and the liabilities. If the College holds the assets or is the trustee, the assets are included in investments, and the liabilities are included in trust and annuity obligations. If a third party is the trustee until the termination of the trust and then the remaining assets are transferred to the beneficiaries, the assets less related liabilities are included in contributions receivable. If the donor establishes a perpetual trust with a third party as trustee (the College will never receive the principal of the trust), the assets less related liabilities are included in funds held in trust by others. (Continued) 10

Note 1. Nature of Operations and Significant Accounting Policies (Continued) Contributions: Contributions, including unconditional promises to give or contributions receivable, are recognized as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions, in the period the donor s commitment is received. Unrestricted, unconditional promises to give are recognized as temporarily restricted operating revenues unless the donor explicitly stipulates its use to support current period activities. Conditional promises to give are not recognized until they become unconditional that is, 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 at an appropriate discount rate commensurate with the risks involved. Amortization of the discount is recorded as additional contribution revenue in accordance with donor-imposed restrictions, if any, on the contributions. An allowance for uncollectible contributions receivable is provided based upon management s judgment, including such factors as prior collection history, type of contribution and nature of the fundraising 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, and a reclassification to unrestricted net assets is made to reflect the expiration of such restrictions. Contributions of land, buildings and equipment without donor stipulations concerning the use of such long-lived assets are reported as revenues of the unrestricted net asset class. Contributions of cash or other assets, to be used to acquire land, buildings and equipment, with such donor stipulations are reported as revenues of the temporarily restricted net asset class; the restrictions are considered to be released at the time of acquisition of such long-lived assets. Postretirement benefits: The College provides certain healthcare, dental and life insurance benefits for all retired and active employees who meet eligibility requirements. The College s share of the estimated costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the employees active service periods to the dates they are fully eligible for benefits. Operating results: Operating activities in the statements of activities illustrate a measure of how the College is maintaining the resources available for its current operations. Operations reflect all transactions increasing or decreasing unrestricted net assets except those of a capital nature that is, capitalized for long-term investment or as land, buildings and equipment and the change relating to the postretirement benefit obligation. Temporarily restricted net assets released from restrictions which satisfy an operating purpose are also classified as operating. In accordance with the College s total return policy, as described further in Note 3, only the portion of total investment return available under this policy to meet operating needs is included in operating revenues. (Continued) 11

Note 1. Nature of Operations and Significant Accounting Policies (Continued) Operating results: (Continued) Costs related to the operation and maintenance of physical plant, including depreciation of plant assets, are allocated to operating programs and supporting activities based upon periodic inventories of facilities. Interest expense on external debt is allocated to the activities that have most directly benefited from the proceeds of the external debt. Employee and staff benefits are allocated to operating programs and supporting activities based upon salary expenses of these programs and activities. Advertising costs: The College follows the policy of charging advertising costs to expenses as incurred. Advertising expense was approximately $40,000 and $46,000 for the years ended and 2005, respectively. Credit risk concentrations: Financial instruments which potentially subject the College to concentrations of credit risk consist principally of cash, marketable securities, and student accounts receivable and loans receivable. The College places its cash with high-credit, quality financial institutions. A portion of the College s bank deposits are in excess of federally insured limits. Concentration of credit risk for marketable securities is limited by the College s policy of diversification of investments. Concentration of credit risk for student accounts receivable and loans receivable are limited, due to a large base and geographic dispersion. Fair value of other financial instruments: Except for notes receivable from students and long-term debt, the fair value of all financial instruments is substantially the same as the carrying value. It was not considered practical to determine fair value of notes receivable from students under the U.S. Government loan programs and related government advances because the notes receivable are nonmarketable and can only be assigned to the U.S. Government or its designees. These installment notes are due over terms of ten years, with interest at five percent per annum, and are carried at face value. The fair value of long-term debt is determined using the present value of future cash flows. Based upon current borrowing rates available to the College for similar borrowings, the carrying value of long-term debt approximates fair value. Income taxes: The College is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. Reclassifications: Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation. (Continued) 12

Note 2. Contributions Receivable Contributions receivable consist of the following as of June 30: Unconditional promises to give cash $ 1,801,298 $ 3,426,273 Various charitable trusts held by others 595,371 735,225 $ 2,396,669 $ 4,161,498 Expected to be collected in: Less than one year $ 1,141,036 $ 2,336,102 One to five years 1,104,787 1,568,346 More than five years 1,208,079 1,911,808 3,453,902 5,816,256 Less: Actuarial present value of future payments (680,208) (1,142,130) Discount to net present value at 3%-6% (272,290) (342,363) Allowance for uncollectible contributions at 12.5% (104,735) (170,265) $ 2,396,669 $ 4,161,498 The ownership of contributions receivable for each class of net assets as of June 30 is as follows: Temporarily restricted $ 2,313,728 $ 4,023,514 Permanently restricted 82,941 137,984 $ 2,396,669 $ 4,161,498 For the years ended and 2005, the College recorded contributions from five donors and four donors that totaled approximately 49% and 45% of contributions, respectively. (Continued) 13

Note 3. Investments Investments are comprised of the following as of June 30: Equities $ 74,780,691 63.5% $ 61,837,219 59.4% Bonds 16,893,643 14.3 16,953,325 16.3 Absolute return 10,390,128 8.8 9,039,946 8.7 Venture capital 3,460,563 2.9 3,369,925 3.2 Cash and cash equivalents 5,248,079 4.5 6,641,257 6.4 Real estate/mortgages and other 6,378,354 5.4 5,561,520 5.3 Mutual funds 694,744 0.6 696,461 0.7 $ 117,846,202 100.0% $ 104,099,653 100.0% The ownership of investments for each class of net assets as of June 30 is as follows: Unrestricted $ 59,261,100 $ 49,018,473 Temporarily restricted 28,898,465 26,439,990 Permanently restricted 29,686,637 28,641,190 $ 117,846,202 $ 104,099,653 The market value of investment asset classifications are as follows as of June 30: Endowment Held by Trustees $ 112,198,809 $ 98,614,045 Held by College 24,086 103,189 Trusts and annuities 2,305,299 2,346,909 Unrestricted current funds 252,420 262,697 Restricted current funds 29,792 29,203 Loan funds 1,959,839 1,671,033 Plant funds 1,075,957 1,072,577 $ 117,846,202 $ 104,099,653 (Continued) 14

Note 3. Investments (Continued) Investment activity for the years ended June 30 is reflected in the table below: (Continued) 15 Investments, beginning $ 104,099,653 $ 96,466,834 Funds available for investment 3,205,510 3,726,778 107,305,163 100,193,612 Investment returns (net of expenses 2006 $559,583; 2005 $532,128): Dividends, interest, and rental income 1,802,193 1,421,184 Investment return, net of amount available to support current operations per statements of activities 10,852,880 4,856,773 Add spending in excess of cash yield 2,280,367 2,241,948 Net realized and unrealized gains 13,133,247 7,098,721 Total return on investments 14,935,440 8,519,905 Amounts appropriated for operations, net transfers to operational accounts, debt payments, and other activity (4,394,401) (4,613,864) Investments, ending $ 117,846,202 $ 104,099,653 The following schedule summarizes total investment return and its classification in the statements of activities for the years ended June 30: Investment income $ 1,802,193 $ 1,421,184 Net realized and unrealized gains on investments 13,133,247 7,098,721 Total return on investments $ 14,935,440 $ 8,519,905 Included in the statement of activities as follows: Operating revenues investment income, endowment, and other amount distributed to support current operations pursuant to the endowment spending policy $ 3,730,039 $ 3,462,654 Operating revenues investment income, temporary investments 288,885 150,720 Non-operating income investment income, less amounts earned on cash restricted for land, buildings, and equipment of 2006 $175,662; 2005 $77,965 63,636 49,758 Investment return, net of amount available to support current operations 10,852,880 4,856,773 $ 14,935,440 $ 8,519,905

Note 3. Investments (Continued) The College employs a total-return, endowment spending policy that establishes the amount of endowment investment return that is available to support current needs and restricted purposes. This policy is designed to insulate program spending from capital market fluctuations and increase the amount of return that is reinvested in the corpus of the fund in order to enhance its long-term value. For the years ended and 2005, the Board-approved spending formula for the endowment was an annual spending rate of not more than 5.0% of the twelve-quarter trailing average endowment market value, with certain modifications. If cash yield (interest and dividends) is less than the spending rate, realized gains can be used to make up the deficiency. Any income in excess of the spending rate is to be reinvested in the endowment. Note 4. Land, Buildings and Equipment Land, buildings and equipment consists of the following at June 30: Estimated Useful Life Buildings 40 years $ 56,952,783 $ 52,348,204 Vehicles, furniture and equipment 3-30 years 14,902,861 14,074,516 71,855,644 66,422,720 Less accumulated depreciation (31,882,957) (29,911,457) 39,972,687 36,511,263 Land 2,650,840 2,494,874 Construction in progress 1,166,260 2,632,665 Art collection 1,226,555 1,216,305 $ 45,016,342 $ 42,855,107 During 2006 and 2005, approximately $1.9 million and $1.6 million was paid to a construction company for two separate contracts. Additionally, approximately $678,000 and $300,000 owed to the construction company is included in accounts payable at and 2005, respectively. A shareholder of this construction company resides on the College s Board of Trustees. At, total amounts remaining on both contracts approximate $624,000. Note 5. Postretirement Benefits The College has a plan that provides postretirement health and life insurance benefits to substantially all of its employees and dependents who were hired prior to January 1, 2001 and who retire after age 60 with ten years of service. Generally, the plan pays a stated percentage of health and life insurance premiums on behalf of retired employees. The College accrues the cost of postretirement health and life insurance benefits within the employees active service periods. (Continued) 16

Note 5. Postretirement Benefits (Continued) The postretirement benefit obligation as of June 30 is as follows: (Continued) 17 Accumulated postretirement benefit obligation: Retirees $ 2,570,292 $ 2,775,812 Fully eligible, active plan participants 4,124,077 6,308,471 6,694,369 9,084,283 Unrealized (gain) loss 2,831,346 (113,946) Postretirement benefit obligation $ 9,525,715 $ 8,970,337 The components of net periodic postretirement benefit cost for the years ended June 30 were as follows: Service cost (benefits attributed to employee service during the year) $ 380,668 $ 387,375 Employer contributions/benefits paid (net of employee contributions of 2006 $120,492; 2005 $99,271) (294,485) (320,114) Amortization of prior year loss - 72,045 Interest cost on accumulated postretirement benefit obligation 469,195 601,473 Net periodic postretirement benefit cost $ 555,378 $ 740,779 In 2005, the College elected to reflect the effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act ) on its postretirement benefit obligation. Authoritative guidance on accounting for the Act s federal subsidy, however, is pending and that guidance, when issued, could require changes to previously reported information. Assumptions used in determination of the costs of postretirement benefits consisted of the following for the years ended June 30: Discount rate used in determining the accumulated postretirement benefit obligation 6.25% 5.25% Assumed healthcare cost trend used in measuring the accumulated postretirement benefit obligation (declining to 5.00% in 2014) 9.00% 9.00% The healthcare cost trend rate assumption can have a significant effect on the amounts reported. For example, if the healthcare cost trend rate assumptions were increased by 1.0%, the APBO would be increased by approximately $893,000. The effect of this change on the sum of the service cost and interest cost components of net periodic postretirement benefit cost would be an increase of approximately $170,000.

Note 5. Note 6. Postretirement Benefits (Continued) Estimated future benefits expected to be paid over the next ten years is as follows: Debt June 30, 2007 $ 297,661 2008 $ 339,984 2009 $ 369,389 2010 $ 396,919 2011 $ 413,781 2012 2016 $ 9,162,918 The College s debt consists of the following as of June 30: Unsecured Virginia College Building Authority Educational Facilities Revenue Bonds, payable to bank, interest payable semi-annually at 4.125%. Principal is payable in 2013. At, the College has set aside approximately $7.7 million in the quasi endowment to settle the obligation when due. $ 9,830,000 $ 9,830,000 Unsecured Industrial Development Authority of the Town of Ashland Education Facilities Revenue Bonds, Series 2002A, and Education Facilities Refunding Revenue Bonds, Series 2002B. Interest on the Series 2002A bonds is due semi-annually at 2.84% through December 2007, at which time the rate can be reset. Principal payments on the Series 2002A bonds are due annually in varying amounts from $255,000 commencing in December 2005 to $470,000 in December 2027. Interest on the series 2002B bonds is payable semi-annually at 1.97% through December 2005. Principal payments on the series 2002B bonds are due annually in varying amounts from $245,000 in December 2003 to $255,000 in December 2005. Proceeds were used for the renovation of Thomas Branch dorm and the south quad of the freshman village. 7,800,000 8,310,000 Unsecured Industrial Development Authority of the Town of Ashland Education Facilities Revenue Bonds, Series 2001, payable to a bank annually in varying amounts from $75,000 to $380,000 through December 2009. The interest rate on the bonds is 3.98% payable semi-annually beginning December 2001. Original proceeds were used to refinance previous obligations. 1,435,000 1,510,000 (Continued) 18

Note 6. Debt (Continued) The College s debt consists of the following as of June 30: (Continued) Industrial Revenue Authority of Town of Ashland Educational Facilities Revenue Debt: Series 2004A Bond, unsecured, principal is due annually in varying amounts from $45,000 commencing in December 2005 to $275,000 in December 2029. Interest is due semi-annually at 3.49% through December 2014, at which time it can be reset. Proceeds used to renovate the north quad of the freshman village. 4,855,000 4,900,000 Series 2004B Note, unsecured, with total advances not to exceed $1.6 million. Interest is due semi-annually at 68% of the one month LIBOR plus.35% as quoted semi-annually on June 13 and December 13. The interest totaled 3.8% at. Principal is due June 2015. Proceeds are to be used to renovate the Crenshaw Gymnasium, if needed. Ultimately, the College intends to fund this project with gifts. This note was obtained as a bridge loan and to fund any cost not covered by gifts. 50,000 50,000 3.00% bond payable to General Electric Credit Corporation (sold by Department of Housing and Urban Development in May 1988), payable semi-annually in varying amounts ranging from $5,000 to $15,000, with final maturity in May 2010. Collateralized by a deed of trust on the Conrad Dormitory building and site. 120,000 150,000 8.75% note payable to bank, principal and interest of $1,084 payable monthly through November 2011. Collateralized by a deed of trust attached to a campus building. 51,136 59,170 $ 24,141,136 $ 24,809,170 Debt matures as follows: Year ended June 30, 2007 $ 684,887 2008 824,692 2009 855,584 2010 890,544 2011 490,429 2012 and later years 20,395,000 $ 24,141,136 (Continued) 19

Note 7. Net Assets Net assets as of June 30 consisted of the following: (Continued) 20 Unrestricted Funds functioning as endowment: Quasi endowment funds and accumulated endowment investment return, net of amounts spent $ 56,708,276 $ 48,121,984 Amounts held for trust and annuity payments 296,074 325,406 Investment in land, buildings and equipment, net of debt 23,198,675 23,590,307 College contributions to student loan funds 545,232 543,714 Other (8,494,628) (8,297,850) 72,253,629 64,283,561 Temporarily restricted Funds functioning as endowment: Accumulated endowment investment return, net of amounts spent 27,597,625 24,790,113 Amounts held for trust and annuity payments 645,817 635,079 Restricted for future operations 2,042,432 1,535,369 Restricted for buildings and equipment 1,192,671 1,203,505 Contributions receivable 2,313,728 4,023,514 33,792,273 32,187,580 Permanently restricted Restricted in perpetuity; only the income is expendable: Endowment principal 27,253,212 26,453,063 Trusts and annuities 147,000 145,832 Funds held in trust by others 1,737,430 1,711,575 Contributions receivable 82,941 137,984 Student loan funds 2,806,043 2,736,906 32,026,626 31,185,360 Total net assets $ 138,072,528 $ 127,656,501 Temporarily restricted net assets are subject to both purpose and time restrictions. Temporarily restricted accumulated endowment investment return, net of amounts spent, is restricted for future operations, financial aid and maintenance and acquisition of land, buildings and equipment. Permanently restricted net assets are restricted to investment in perpetuity, the income from which is expendable to support future operations, financial aid and maintenance and acquisition of land, buildings and equipment.

Note 8. Tuition and Fees, Net of Financial Aid Tuition and fees include regular session tuition for the College s undergraduate regular and summer sessions as well as miscellaneous fees, such as application, graduation, automobile and interest. Revenues received for student tuition and fees, net of financial aid, consist of the following for the years ended June 30: Tuition and fees $ 25,900,418 100% $ 24,540,140 100.0% Less financial aid: Institutional, non-funded (8,705,975) (33.6) (7,653,118) (31.2) Funded: Endowed and other (977,036) (3.8) (931,332) (3.8) Grants (92,130) (0.4) (104,176) (0.4) 9,775,141 (37.8) (8,688,626) (35.4) $ 16,125,277 62.2% $ 15,851,514 64.6% Financial aid is awarded to students based upon need and merit and is applied to billed tuition and fees, and room and board. Financial aid does not include payments made to students for services rendered to the College. However, the College does participate in work study programs; these expenses, which totaled $177,900 and $232,479 for the years ended and 2005, respectively, are included in the appropriate functional expense categories on the statements of activities. Of these amounts, the federal government contributed $106,353 and $157,406, respectively. Note 9. Net Assets Released from Restrictions and Reclassifications Net assets were released from donor restrictions when expenses were incurred to satisfy the restricted purposes, or by occurrence of other events as specified by donors. Restrictions were satisfied as follows for the years ended June 30: (Continued) 21 Operating: Financial aid $ 1,069,166 $ 1,035,508 General operations and maintenance 2,247,771 1,695,400 Expiration of time restrictions 3,040,875 487,815 Total operating 6,357,812 3,218,723 Non-operating: Buildings and equipment 547,924 588,191 Other reclassifications - 78,597 Total non-operating 547,924 666,788 $ 6,905,736 $ 3,885,511

Note 10. Operating Expenses Operating expenses incurred for the years ended June 30 are as follows: Salaries and wages $ 15,429,115 45.5% $ 14,494,529 46.1% Employee benefits, including payroll taxes 3,697,426 10.9 3,353,545 10.7 19,126,541 56.4 17,848,074 56.8 Utilities 1,495,334 4.4 1,376,840 4.4 Supplies 788,766 2.3 869,949 2.8 Travel 581,393 1.7 500,680 1.6 Food services contract 1,985,540 5.8 1,885,546 6.0 Postage and printing 374,605 1.1 441,721 1.4 Depreciation and amortization 2,351,344 6.9 2,273,973 7.2 Interest 830,151 2.5 686,982 2.1 Other 6,395,405 18.9 5,586,895 17.7 $ 33,929,079 100.0% $ 31,470,660 100.0% Program services $ 25,989,675 76.6% $ 24,106,526 76.6% Support services 7,939,404 23.4 7,364,134 23.4 $ 33,929,079 100.0% $ 31,470,660 100.0% (Continued) 22

Note 10. Operating Expenses (Continued) Costs related to the operations and maintenance of the physical plant, including depreciation, and interest expense are allocated to operating programs and supporting activities, as follows: Year Ended Expenses Total Final Before Expense Allocated Allocation Allocation Expenses Education and general: Instruction $ 7,012,093 $ 4,017,204 $ 11,029,297 Academic support 1,747,071 1,510,997 3,258,068 Student services 5,207,902 2,845,720 8,053,622 Institutional support 5,667,164 1,182,001 6,849,165 Auxiliary services 3,594,336 1,144,591 4,738,927 Operations and maintenance of physical plant 3,821,592 (3,821,592) - Depreciation and amortization 2,351,344 (2,351,344) - Interest expense 830,151 (830,151) - Staff benefits 3,697,426 (3,697,426) - Year Ended June 30, 2005 $ 33,929,079 $ - $ 33,929,079 Expenses Total Final Before Expense Allocated Allocation Allocation Expenses Education and general: Instruction $ 6,510,737 $ 3,811,100 $ 10,321,837 Academic support 1,738,610 1,481,893 3,220,503 Student services 4,315,086 2,603,124 6,918,210 Institutional support 5,555,969 1,221,798 6,777,767 Auxiliary services 3,453,544 778,799 4,232,343 Operations and maintenance of physical plant 3,573,210 (3,573,210) - Depreciation and amortization 2,273,973 (2,273,973) - Interest expense 686,982 (686,982) - Staff benefits 3,362,549 (3,362,549) - $ 31,470,660 $ - $ 31,470,660 (Continued) 23

Note 10. Operating Expenses (Continued) Allocation of costs related to staff benefits and the operation and maintenance of the physical plant, including depreciation and interest expense to functional expense categories for the years ended and 2005 approximated: Instruction 37.5% 38.5% Academic support 14.1 15.0 Student services 26.6 26.3 Institutional support 11.1 12.3 Auxiliary 10.7 7.9 100.0% 100.0% Fundraising costs totaled $658,000 and $684,000 for the years ended and 2005, respectively. Note 11. Employee Benefits Retirement benefits are provided for eligible faculty and staff employees by a contributory pension plan for annuity contracts with Teachers Insurance and Annuity Association, MetLife Resources and/or College Retirement Equities Fund. All participants have a fully vested interest in the total contributions made on their behalf. Under the plan, the College contributed approximately $1.1 million and $1.0 million in 2006 and 2005, respectively, which was charged to operating expenses. Note 12. Commitments and Contingencies Final expenditure reports of grants and contracts submitted to certain granting agencies in current and prior years are subject to audit by such agencies. As a result, the reimbursed expenditures are subject to adjustment. The effect of such adjustments, if any, is not determinable at this time. Management is of the opinion that the liability, if any, would not have a material effect on the College s financial position. The College s students receive a substantial amount of support from state and federal Student Financial Assistance Programs. A significant reduction in the level of this support, if this were to occur, may have an adverse effect on the College s programs and activities. The College contracts with an outside party for its food service under a five year contract which expires June 30, 2010. Costs are expected to be approximately $2.1 million for the year ended June 30, 2007. Costs are determined each year based on student purchases of meal plans. The College has been named in a personal injury lawsuit. The suing party sustained injuries while attending a football game on campus. Legal counsel representing the College s insurance carrier intends to vigorously contest the case. At this time, an evaluation of the outcome as well as potential exposure cannot be made. As such, no liability has been recorded in the financial statements. (Continued) 24

Note 13. Endowment Endowment is a commonly used term to refer to the resources that have been restricted by the donor or designated by the Board that will be invested to provide future revenue to support the College s activities. A summary of assets, liabilities and net assets of the endowment, including trust and annuity funds, is as follows as of June 30: ASSETS Contributions receivable $ 82,941 $ 137,984 Investments 114,528,194 101,064,143 Cash surrender value of life insurance policies 197,029 205,728 Funds held in trust by others 1,737,430 1,711,575 Due from other funds - 442,198 Total assets $ 116,545,594 $ 103,561,628 LIABILITIES AND NET ASSETS Trust and annuity obligations $ 1,216,408 $ 1,240,592 Due to other funds 860,811 - Total liabilities 2,077,219 1,240,592 Net assets: Unrestricted: Funds functioning as endowment 56,708,276 48,121,984 Trust and annuities 296,074 325,406 57,004,350 48,447,390 Temporarily restricted: Accumulated endowment investment return, net of amounts spent 27,597,625 24,790,113 Trusts and annuities 645,817 635,079 28,243,442 25,425,192 Permanently restricted: True endowment funds 27,253,212 26,453,063 Trusts and annuities 147,000 145,832 Funds held in trust by others 1,737,430 1,711,575 Contributions receivable 82,941 137,984 29,220,583 28,448,454 Total net assets 114,468,375 102,321,036 Total liabilities and net assets $ 116,545,594 $ 103,561,628 (Continued) 25

Note 13. Endowment (Continued) A reconciliation of endowment net assets for the years ended June 30 follows: Year Ended Trust and Funds Held Contributions Endowment Annuities In Trust Receivable Total Net assets, beginning $ 99,365,160 $ 1,106,317 $ 1,711,575 $ 137,984 $ 102,321,036 Contributions 2,162,203 30,921 - (55,043) 2,138,081 Investment income, net of expenses 1,547,825 44,267 - - 1,592,092 Net realized and unrealized gains on investments 12,984,953 52,008 - - 13,036,961 Other - - 25,855-25,855 14,532,778 96,275 25,855-14,654,908 Payments on trust and annuity obligations - (160,367) - - (160,367) Actuarial change in trust and annuity obligations - 61,627 - - 61,627 Endowment spending distributions (3,730,039) - - (3,730,039) Other (770,989) (45,882) - - (816,871) (4,501,028) (144,622) - - (4,645,650) Net assets, ending $ 111,559,113 $ 1,088,891 $ 1,737,430 $ 82,941 $ 114,468,375 Year Ended June 30, 2005 Trust and Funds Held Contributions Endowment Annuities In Trust Receivable Total Net assets, beginning $ 89,877,240 $ 1,318,152 $ 1,679,981 $ 568,926 $ 93,444,299 Contributions 4,946,283 20,105 - (430,942) 4,535,446 Investment income, net of expenses 1,220,803 59,292 - - 1,280,095 Net realized and unrealized gains (losses) on investments 7,320,771 52,223 - - 7,372,994 Other - - 31,594-31,594 8,541,574 111,515 31,594-8,684,683 Payments on trust and annuity obligations - (164,463) - - (164,463) Actuarial change in trust and annuity obligations - 96,291 - - 96,291 Endowment spending distributions (3,462,654) - - - (3,462,654) Other (537,283) (275,283) - - (812,566) (3,999,937) (343,455) - - (4,343,392) Net assets, ending $ 99,365,160 $ 1,106,317 $ 1,711,575 $ 137,984 $ 102,321,036 26