STONEHILL COLLEGE, INC. Financial Statements June 30, 2014 and 2013
Independent Auditor's Report To the Board of Trustees of Stonehill College, Inc.: We have auditedd the accompanying financial statementss of Stonehilll College, Inc. (the College ), which comprise the statements of financial position as of Junee 30, 2014 and 2013, and the related statements of activities and of cash flows for the years then ended. Management's Responsibility for the Financiall Statements Management is responsible for the preparation and fairr presentationn of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the College's preparation and fair presentation of the financial statements in order to design 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. Accordingly, we express no such opinion. An audit t also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as welll as evaluating the overall presentation of the financial statements. We believe that the audit evidencee we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the College at June 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then endedd in accordance with accounting principles generally accepted in the United States of America. October 22, 2014 PricewaterhouseCoopers LLP, Boston, MA, 125 High St., Boston, MA 02110 T: (617) 530-5000, F:(617) 530-5001, www.pwc.com/us
STONEHILL COLLEGE, INC. STATEMENTS OF FINANCIAL POSITION ASSETS 2014 2013 Cash and cash equivalents $ 9,231,884 $ 16,780,569 Accounts receivable, net 254,825 285,424 Other assets 1,640,332 1,767,666 Pledges receivable, net 2,997,798 3,943,031 Loans receivable, net 1,563,940 1,684,925 Perpetual trusts held by third parties 2,114,560 1,871,998 Restricted cash 1,321,312 6,941,184 Investments 205,669,426 178,293,334 Property, plant and equipment, net 135,224,507 137,341,788 Total assets $ 360,018,584 $ 348,909,919 LIABILITIES Accounts payable $ 1,406,862 $ 2,043,364 Accrued payroll and other benefits 3,414,158 4,058,527 Tuition received in advance 1,019,189 1,312,772 Other liabilities 4,848,544 4,943,849 Government advances for student loans 1,029,327 1,086,079 Interest rate swap agreements 8,594,967 8,382,940 Annuity obligations 287,288 297,913 Note and bonds payable 83,124,019 91,778,175 Total liabilities 103,724,354 113,903,619 NET ASSETS Unrestricted 200,505,465 184,464,406 Temporarily restricted 23,024,524 19,537,159 Permanently restricted 32,764,241 31,004,735 Total net assets 256,294,230 235,006,300 Total liabilities and net assets $ 360,018,584 $ 348,909,919 The accompanying notes are an integral part of the financial statements. 2
STONEHILL COLLEGE, INC. STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014 (with comparative totals for 2013) Temporarily Restricted Permanently Restricted Unrestricted Operating Revenues and other support Tuition and fees, net $51,930,526 $51,930,526 $54,159,978 Federal and state grants 707,860 707,860 647,389 Private gifts 684,979 684,979 569,636 Short-term investment income 1,444 1,444 2,102 Auxiliary services 31,654,649 31,654,649 31,740,448 Other income 2,420,007 2,420,007 2,062,176 Nonoperating assets used for operations 4,745,792 $3,099,568 7,845,360 7,785,283 Net assets released from restrictions 3,099,568 (3,099,568 ) - - Total operating revenues and other support 95,244,825-95,244,825 96,967,012 Expenses Instruction Research 32,665,570 298,613 32,665,570 298,613 33,053,003 344,873 Public service 128,619 128,619 301,546 Academic support Student services 7,169,783 17,728,117 7,169,783 17,728,117 6,744,525 18,561,417 Institutional support 14,965,540 14,965,540 14,928,833 Auxiliary services 20,024,475 20,024,475 19,616,311 Total operating expenses 92,980,717 - - 92,980,717 93,550,508 Total 2014 Total 2013 Increase in net assets from operations 2,264,108 - - 2,264,108 3,416,504 Nonoperating revenues and expenses Private gifts and grants 306,826 1,913,888 $1,516,944 3,737,658 13,992,927 Investment return 18,988,160 5,874,778 242,562 25,105,500 17,577,533 Realized/unrealized (loss) gain on interest rate swap agreements Nonoperating assets used for operations (1,973,976) (1,973,976) 2,942,668 (4,745,792) (3,099,568) (7,845,360) (7,785,283) Net assets reclassed/released from restrictions 1,201,733 (1,201,733) - - Increase in net assets from nonoperating activities 13,776,951 3,487,365 1,759,506 19,023,822 26,727,845 Total change in net assets 16,041,059 3,487,365 1,759,506 21,287,930 30,144,349 NET ASSETS, BEGINNING OF YEAR 184,464,406 19,537,159 31,004,735 235,006,300 204,861,951 NET ASSETS, END OF YEAR $200,505,465 $23,024,524 $ 32,764,241 $256,294,230 $235,006,300 The accompanying notes are an integral part of the financial statements. 3
STONEHILL COLLEGE, INC. STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2013 Temporarily Restricted Permanently Restricted Unrestricted Total Operating Revenues and other support Tuition and fees, net $54,159,978 $54,159,978 Federal and state grants 647,389 647,389 Private gifts 569,636 569,636 Short-term investment income 2,102 2,102 Auxiliary services 31,740,448 31,740,448 Other income 2,062,176 2,062,176 Nonoperating assets used for operations 4,920,197 $2,865,086 7,785,283 Net assets released from restrictions 2,865,086 (2,865,086) - Total operating revenues and other support 96,967,012 - - 96,967,012 Expenses Instruction Research 33,053,003 344,873 33,053,003 344,873 Public service 301,546 301,546 Academic support 6,744,525 6,744,525 Student services 18,561,417 18,561,417 Institutional support 14,928,833 14,928,833 Auxiliary services 19,616,311 19,616,311 Total expenses 93,550,508 - - 93,550,508 Increase in net assets from operations 3,416,504 - - 3,416,504 Nonoperating revenues and expenses Private gifts and grants 4,202,692 4,071,686 $5,718,549 13,992,927 Investment return 13,766,060 3,668,253 143,220 17,577,533 Realized/unrealized gain on interest rate swap agreements 2,942,668 - - 2,942,668 Nonoperating assets used for operations Net assets released from restrictions (4,920,197) 766,182 (2,865,086) (766,182) - - (7,785,283) - Increase in net assets from nonoperating activities 16,757,405 4,108,671 5,861,769 26,727,845 Total change in net assets 20,173,909 4,108,671 5,861,769 30,144,349 NET ASSETS, BEGINNING OF YEAR 164,290,497 15,428,488 25,142,966 204,861,951 NET ASSETS, END OF YEAR $184,464,406 $19,537,159 $31,004,735 $235,006,300 The accompanying notes are an integral part of the financial statements. 4
STONEHILL COLLEGE, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 2014 2013 Cash flows from operating activities: Change in net assets $21,287,930 $30,144,350 Adjustments to reconcile change in net assets to net cash provided by operating activities: Change in government advances for student loans (56,752) (44,743) Amortization of discounts, premiums and issuance costs 134,102 105,066 Depreciation and other amortization 6,818,667 6,710,566 Net realized and unrealized gains on investments (23,171,034) (16,142,642) Unrealized losses/(gains) on interest rate swap agreements 212,027 (4,724,797) Change in pledge discount/allowance and other (66,847) 67,898 Change in operating assets and liabilities Accounts receivable 30,599 (68,305) Pledges receivable 1,012,080 (1,627,671) Other assets 54,085 (204,595) Accounts payable (592,831) 43,098 Accrued payroll and other benefits (644,369) 705,782 Tuition received in advance (297,109) (1,865,601) Other liabilities (293,583) (187,306) Contributions to be used for long-term investment (3,888,213) (7,207,598) Net cash provided by operating activities 538,752 5,703,502 Cash flows from investing activities Loans granted (183,260) (229,250) Loans collected 304,245 277,398 Purchase of property, plant and equipment (4,714,843) (4,493,109) Purchase of investments (41,272,408) (13,977,074) Proceeds from sale of investments 36,824,789 9,156,978 Change in restricted cash 5,619,872 (4,767,961) Net cash used for investing activities (3,421,605) (14,033,018) Cash flows from financing activities Payments on long-term debt and capital lease obligations Net proceeds from long-term debt Debt issuance costs (8,554,045) - - (3,922,920) 5,653,085 (192,279) Contributions to be used for long-term investment 3,888,213 7,207,598 Net cash (used)provided/by for financing activities (4,665,832) 8,745,484 Net (decrease)/increase in cash and cash equivalents (7,548,685) 415,968 Cash and cash equivalents, beginning of year 16,780,569 16,364,601 Cash and cash equivalents, end of year $9,231,884 $16,780,569 Supplemental Disclosure: Cash paid for interest, net of capitalized interest $1,005,336 $1,285,806 Interest paid on interest rate swap agreements 1,761,950 1,782,128 Amounts included in accounts payable and accrued expenses related to property, plant and equipment 644,482 688,153 The accompanying notes are an integral part of the financial statements. 5
1. Summary of Significant Accounting Policies Stonehill College, Inc. (the College ) was founded in 1948 by members of the Congregation of Holy Cross. It is an independent, undergraduate, church-related institution in Easton, Massachusetts and offers Bachelor s degrees in the Arts and Sciences. Basis of Presentation The accompanying financial statements have been prepared on the accrual basis and in accordance with the reporting principles of not-for-profit accounting. Certain information for the year ended June 30, 2013 has been reclassified to confirm with the presentation for the year ended June 30, 2014. The College has classified net assets and its revenues, expenses, gains and losses into three categories based on the existence or absence of externally-imposed restrictions. The categories unrestricted, temporarily restricted, and permanently restricted net assets, are defined as follows: Unrestricted - Net assets which are not subject to donor-imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees (the Board ). Temporarily Restricted - Net assets whose use is limited by law or donor-imposed stipulations that will either expire with the passage of time or be fulfilled by actions of the College. Permanently Restricted - Reflects the historical value of gifts subject to donor-imposed stipulations, which require the corpus to be invested in perpetuity to produce income for general or specific purposes. Revenues are reported as increases in unrestricted net assets unless use of the related asset is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Realized and unrealized gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporary restrictions on net assets are reclassified as net assets released from restrictions in the Statement of Activities. Gifts and investment return with donor-imposed restrictions, which are reported as temporarily restricted revenues, are reclassified to unrestricted net assets when an expense is incurred that satisfied that restriction. Gifts restricted for the purchase of property, plant and equipment are reported as temporarily restricted revenues and are reclassified to unrestricted net assets upon the asset being placed into service, or when a time restriction expires. Fundraising expenses totaled $2,174,962 and $2,127,924 in the years ended June 30, 2014 and 2013, respectively. Gifts received for annual operating purposes are recorded as operating revenues. Nonoperating revenues and expenses include all other gifts and grants, investment income, and realized and unrealized gains and losses on long-term investments held during the year and realized and unrealized gains and losses related to the College s interest rate swap agreements. To the extent investment return is authorized by the Board and gifts are permitted by the donor to fund operations, they are reclassified as nonoperating assets used for operations on the Statement of Activities. All other activity is classified as operating revenue. 6
Summary of Significant Accounting Policies (continued) The College recognizes tuition and fees revenue in the period in which the educational instruction is performed. Accordingly, tuition and fees received in advance are deferred until the educational instruction is provided and related expenses incurred. Auxiliary revenues include the operation of student housing and dining services. Use of Estimates The preparation of the accompanying financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Cash and Cash Equivalents Cash and cash equivalents include operating cash accounts and short-term investments with maturities from date of purchase of three months or less. The carrying amount of these cash equivalents is a reasonable estimate of fair value due to their short-term nature. Income from these instruments is reflected in operating revenue under short-term investment income. The remaining restricted cash represents amounts on deposit with the Trustee in accordance with bond requirements. These securities are primarily invested in money market funds and are recorded at cost which approximates fair value. Cash is deposited in several institutions; however, at times cash held in a single institution may exceed federally insured limits. The College has not experienced any losses in such accounts. A portion of money market funds are classified as cash and cash equivalents on the financial statements. These funds are classified as cash and cash equivalents as it is anticipated that they may be needed for immediate cash needs. The remaining balance of money market funds is classified as investments since it is anticipated that these funds are not to be used for immediate needs. Investments Investments are recorded at fair value. The value of securities listed on a national exchange is based upon quoted market prices and net asset values. The value of securities that represent interests in partnerships or other nonmarketable securities for which there are no market quotations available are valued by the managers of those entities and reviewed by management. The majority of alternative investments are carried at estimated fair value provided by the management of the alternative investment partnerships or funds as of June 30, 2014 and 2013. Purchases and sales of investments are recorded on a trade date basis. Gains or losses from the sale of investment securities are computed on the specific identification cost basis, or for pooled funds, on the average cost basis. 7
Summary of Significant Accounting Policies (continued) Perpetual Trusts Held by Third Parties The College is the beneficiary of certain perpetual trusts held and administered by others. The estimated fair values of trust assets, which approximate the present values of expected future cash flows from the trusts, are recognized as assets and as gift revenue when the trusts are established. The College had $2,114,560 and $1,871,998 in perpetual trusts held by third parties at June 30, 2014 and 2013, respectively. Property, Plant and Equipment Property, plant and equipment are recorded at cost at the date of acquisition or at fair value at the date of gift for donated assets. Depreciation is computed on a straight-line basis over the estimated useful lives of the individual assets: land improvements (20 years), buildings (30-60 years) and equipment (5-15 years). Depreciation and amortization, totaling $6,924,872 and $6,794,075 for the years ended June 30, 2014 and 2013, respectively, has been allocated to functional expenses based on square foot usage calculations. Property, plant, and equipment are removed from the College s records at the time of disposal and any resulting gain or loss is reflected in the Statement of Activities. Replacements and major improvements are capitalized; expenses for maintenance and repairs are charged as incurred. Operation and maintenance expense totaling $13,040,274 and $12,989,237 for the years ended June 30, 2014 and 2013, respectively, has been allocated to functional expenses based on square foot usage calculations. Contracts and Grants Government grants and contracts normally provide for the recovery of direct and indirect costs. These amounts are subject to government audits. The College recognizes revenue associated with direct costs as the related costs are incurred. Recovery of related indirect costs is generally recorded at fixed rates negotiated with the government. Collections The College maintains a collection of historical artifacts for public exhibition and education in furtherance of public service and not for financial gain. The College does not capitalize its collection of historical artifacts. The cost of collection items purchased is recorded as a decrease in the appropriate category of net assets in the non-operating section. Gifts Gifts, including unconditional promises to give (pledges), are recorded as revenue when the donor s commitment is received. Unconditional pledges are recorded at the present value of their expected cash flows, net of allowances for unfulfilled pledges, using a discount factor based on the appropriate United States Treasury Bill rates adjusted for credit risk at the date of the pledge or June 30, 2014 and 2013. 8
Summary of Significant Accounting Policies (continued) Accounts and Loans Receivable Accounts and loans receivable are stated net of allowances for doubtful accounts of $96,214 and $81,365 for the years ended June 30, 2014 and 2013, respectively. Loans receivable are principally amounts due from students under federally sponsored loan programs, which are subject to significant restrictions. The College regularly assesses the adequacy of the allowance for doubtful accounts related to Loans to Students by performing ongoing evaluations of the student loan portfolio, including such factors as the economic environment in which the borrowers operate and the level of delinquent loans. The College also performs a detailed review of the aging of the student loan receivable. The level of the allowance is adjusted based on the results of this analysis. The College considers the allowances recorded at June 30, 2014 and 2013 to be reasonable and adequate to absorb the potential credit losses inherent in the student loan portfolio. Federal Income Tax The College is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Service Code and, accordingly, does not provide for income taxes. 2. Fair Value Measurements The College applies the fair value measurements and disclosure guidance contained in Accounting Standards Codification (ASC) 820, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1 - Observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2 Observable inputs, other than the quoted prices in active markets, that are observable either directly or indirectly for similar assets and liabilities; and Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Following is a description of the College's valuation methodologies for assets and liabilities measured at fair value. Fair value for Level 1 is based upon quoted prices in active markets that the College has the ability to access for identical assets and liabilities. Market price data is generally obtained from exchange or dealer markets. The College does not adjust the quoted price for such assets and liabilities. 9
Fair Value Measurements (continued) Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets, inputs other than quoted prices that are observable for the instruments, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). The quoted prices, observable inputs and calculations reflect the assumptions market participants would use in pricing the instruments. They are obtained from sources including dealers, brokers and market data providers and are independent of the College. Fair value for Level 3 is based on valuation techniques that use significant inputs that are unobservable as they trade infrequently or not at all. The College utilizes the best available information in measuring fair value. The following tables summarize the valuation of our financial instruments by the above ASC 820 pricing levels as of: Total Level 1 Level 2 Level 3 Liquidity Day s Notice ASSETS Investments: Cash and equivalents $18,115,564 $18,115,564 - - Daily 1 Equities: Domestic 11,056,928 11,056,928 - - Daily 1 International 24,757,656 24,757,656 - - Daily 1 Fixed Income 17,348,774 17,348,774 - - Daily 1 Hedge Funds: June 30, 2014 Commingled 29,729,904 - $29,729,904 - Daily/Monthly 1 Alternative 91,180,875-43,741,868 $47,439,007 Monthly-Annually* 1-90 days Private Equities 13,479,725 - - 13,479,725 Subject to lock up Not applicable Total Investments $205,669,426 $71,278,922 $73,471,772 $60,918,732 Perpetual Trusts 2,114,560 - - 2,114,560 Total Assets $207,783,986 $71,278,922 $73,471,772 $63,033,292 LIABILITIES Interest Rate Swap $8,594,967 - $8,594,967 - Total Liabilities $8,594,967 - $8,594,967 - Note * - Includes a new investment of approximately $7,000,000 which has an initial two year lockup. 10
Fair Value Measurements (continued) June 30, 2013 Total Level 1 Level 2 Level 3 Liquidity Day s Notice ASSETS Investments: Cash and equivalents $14,136,685 $14,136,685 - - Daily 1 Equities: Domestic 16,993,406 16,993,406 - - Daily 1 International 9,126,471 9,126,471 - - Daily 1 Fixed Income 15,800,865 15,800,865 - - Daily 1 Hedge Funds: Commingled 27,433,145 - $27,433,145 - Daily/Monthly 1 Alternative 82,676,804-41,073,867 $41,602,937 Monthly-Annually 1-90 days Private Equities 12,125,958 - - 12,125,958 Subject to lock up Not applicable Total Investments $178,293,334 $56,057,427 $68,507,012 $53,728,895 Perpetual Trusts 1,871,998 - - 1,871,998 Total Assets $180,165,332 $56,057,427 $68,507,012 $55,600,893 LIABILITIES Interest Rate Swap $8,382,940 - $8,382,940 - Total Liabilities $8,382,940 - $8,382,940 - Investments included in Level 3 primarily consist of the College's ownership in alternative investments. The College s total investment in comingled, alternative and private equity investments have an estimated fair market value of $134,390,504 and $122,235,907 in 2014 and 2013, respectively. As of June 30, 2014, the College is committed to investing an additional $8,051,361 in alternative investments. The net asset values ( NAV ) of the securities held by limited partnerships that do not have readily determinable fair values are determined by the general partner and are based on appraisals, or other estimates that require varying degrees of judgment. If no public market exists for the investment securities, the fair value is determined by the general partner taking into consideration, among other things, the cost of the securities, prices of recent significant placements of securities of the same issuer, and subsequent developments concerning the companies to which the securities relate. The College has performed due diligence around these investments to ensure NAV is an appropriate measure of fair value as of June 30, 2014 and 2013. Alternative investments with quarterly redemption provisions are classified as Level 2, others with redemption provisions exceeding three months are classified as Level 3. 11
Fair Value Measurements (continued) The College s interest rate swaps are valued using a model by an independent valuation consultant to the College. The value of the interest rate swaps depend upon the contractual terms of, and specific risks inherent in, the instruments as well as the availability and reliability of observable inputs. Such inputs include market prices for reference securities, yield curves, credit curves, measures of volatility, prepayment rates, assumptions for nonperformance risk, and correlations of such inputs. The inputs can be corroborated by market data and are therefore classified within Level 2. Perpetual trusts held by third parties are valued based upon quoted market prices of the underlying assets, which approximates the present value of the future distributions expected to be received over the term of the agreements. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the College believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date. The following table is a rollforward of the Statement of Financial Position amounts for financial instruments classified by the College within Level 3 of the fair value hierarchy defined above. Perpetual Trusts Investments Total Fair value, July 1, 2013 $ 1,871,998 $ 53,728,895 $ 55,600,893 Net realized gains 1,958,637 1,958,637 Net unrealized gains 242,562 2,816,542 3,059,104 Purchases 9,790,212 9,790,212 Sales (7,375,554) (7,375,554) Fair value, June 30, 2014 $ 2,114,560 $60,918,732 $ 63,033,292 The net unrealized gain on level three investments held on June 30, 2014 that were also held at June 30, 2013 was $ 2,477,258. 12
Fair Value Measurements (continued) Perpetual Trusts Investments Total Fair value, July 1, 2012 $1,728,778 $49,929,616 $51,658,394 Net realized gains 256,026 256,026 Net unrealized gains 143,220 2,139,273 2,282,493 Purchases 2,911,747 2,911,747 Sales (1,507,767) (1,507,767) Fair value, June 30, 2013 $1,871,998 $53,728,895 $55,600,893 The net unrealized gain on level three investments held on June 30, 2013 that were also held at June 30, 2012 was $2,105,555. All net realized and unrealized gains in the table above are reflected in the accompanying Statement of Activities in the investment return line item. Net unrealized gains relate to those financial instruments held by the College at June 30, 2014. 3. Pledges Receivable Pledges receivable as of June 30, 2014 and 2013 are expected to be realized in the following time frame: 2014 2013 In one year or less $1,829,716 $1,522,715 Between one year and five years 1,326,745 2,645,826 Total 3,156,461 4,168,541 Less: Discount to present value (85,602) (130,113) Allowance for unfulfilled pledges (73,061) (95,397) Pledges Receivable, net $2,997,798 $3,943,031 The discount on pledges was calculated using the U.S. Treasury note rate, for the length of the pledge, for the date the pledge was made, plus a.5% premium to incorporate credit risk into the discount rate. 13
4. Endowments The College s endowment consists of approximately 185 individual restricted endowment funds and 21 Board-designated endowment funds for a variety of purposes plus the following where the assets have been designated for endowment: pledges receivables and split interest agreements. The net assets associated with endowment funds including funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donor imposed restrictions. The Board has interpreted the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ) as requiring the preservation 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 College classifies as permanently restricted net assets, (a) the original value of gifts donated to the permanent endowment and (b) the original value of subsequent gifts to the permanent endowment. 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 College in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the College also considers the following factors in making a determination to appropriate endowment funds: 1) The duration and preservation of the fund; 2) The purposes of the College 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 the appreciation of investments; 6) Other resources of the College; and 7) The investment policies of the College. Endowment net asset composition by type of fund as of June 30, 2014 Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $16,254,919 $30,090,931 $46,345,850 Board-designated endowment funds $144,641,267 -- -- 144,641,267 Total endowment funds $144,641,267 $16,254,919 $30,090,931 $190,987,117 14
Endowments (continued) Endowment net asset composition by type of fund as of June 30, 2013 Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $11,925,187 $28,583,987 $40,509,174 Board-designated endowment funds $ 130,713,619 -- -- 130,713,619 Total endowment funds $ 130,713,619 $11,925,187 $28,583,987 $171,222,793 Changes in endowment net assets for the year ended June 30, 2014 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $130,713,619 $11,925,187 $28,583,987 $ 171,222,793 Investment return: Investment income 1,488,711 459,809-1,948,520 Net appreciation (realized and unrealized) 17,512,321 5,406,970-22,919,291 Total investment return 19,001,032 5,866,779-24,867,811 Contributions 32,380 2,500 1,506,944 1,541,824 Distribution of endowment assets for expenditure (5,105,764) (1,539,547 ) - (6,645,311 ) Endowment net assets, end of year $144,641,267 $ 16,254,919 $ 30,090,931 $190,987,117 15
Endowments (continued) Changes in endowment net assets for the year ended June 30, 2013 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $114,727,524 $9,109,044 $22,865,430 $146,701,998 Investment return: Investment income 1,226,006 200,659-1,426,665 Net appreciation (realized and unrealized) 12,611,322 3,417,303-16,028,625 Total investment return 13,837,328 3,617,962-17,455,290 Contributions 7,038,519 500,000 5,718,557 13,257,076 Distribution of endowment assets for expenditure (4,889,752) (1,301,819) - (6,191,571) Endowment net assets, end of year $130,713,619 $11,925,187 $28,583,987 $171,222,793 Description of Amounts Classified as Permanently Restricted Net Assets and Temporarily Restricted Net Assets (Endowment Only) Permanently restricted net assets The portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by UPMIFA: 2014 2013 Restricted for scholarship support $26,118,618 $24,823,658 Restricted for faculty support 2,808,867 2,802,867 Restricted for program support 1,163,446 957,462 Total endowment assets classified as permanently restricted net assets $30,090,931 $28,583,987 Temporarily restricted net assets The portion of temporary endowment funds that is required to be retained until spent according to explicit donor stipulation or by UPMIFA: Restricted for scholarship support $14,660,372 $10,846,649 Restricted for faculty support 550,217 225,761 Restricted for program support 1,044,330 852,777 Total endowment assets classified as temporarily restricted net assets $ 16,254,919 $11,925,187 16
Endowments (continued) Endowment Funds with Deficits From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (deficit). When donor endowment deficits exist, they are classified as a reduction of unrestricted net assets. Deficits of this nature reported in unrestricted net assets were immaterial as of June 30, 2014 and 2013. These deficits resulted from unfavorable market fluctuations that occurred shortly after the investment of newly established endowments, and authorized distribution that was deemed prudent. Return Objectives and Risk Parameters The investment objective of the endowment funds, through the careful management of assets, is designed to preserve the funds purchasing power and to ensure a total return (income plus capital appreciation) necessary to preserve and enhance (in real dollar terms) the principal of the funds, and at the same time provide a dependable source of income for current operations and programs. To accomplish this objective, the funds seek to generate a total return that will exceed not only its spending authority, but also the eroding effects of inflation and its operating expenses over the long term. To meet this long-term objective, all total return (interest income, dividends, realized gains and unrealized gains), above and beyond the amount approved for expenditure, will be reinvested in the funds. Strategies Employed for Achieving Investment Objectives The funds have a long-term investment horizon with relatively low liquidity needs. For this reason the funds can tolerate short- and intermediate-term volatility provided that long-term returns meet or exceed its investment objective. Consequently, the funds can take advantage of less liquid investments, such as private equity, hedge funds, and other partnership vehicles, which typically offer higher risk-adjusted return potential as compensation for forfeiture of liquidity. Nonetheless, to ensure liquidity for distributions and to facilitate rebalancing, the maximum allocation to illiquid assets, defined as funds locked-up for greater than one year, shall be limited to 30% of the funds market value. Endowment Spending Allocation and Relationship of Spending Policy to Investment Objectives The Board of the College determines the method to be used to distribute endowment funds for expenditure. Under the College s endowment spending policy for the years ended June 30, 2014 and 2013, the College applied a rate of 4.5% to a weighted average calculation based on the previous year s ending endowment value and the previous year s endowment spending. In establishing this policy, the Board considered the expected long term rate of return on its endowment. Accordingly, over the long term, the College expects the current spending policy to allow its endowment to grow, consistent with its intention to maintain the purchasing power of the endowment assets as well as to provide additional real growth through new gifts. 17
5. Investments The following schedule summarizes total investment return and its classification in the Statements of Activities for the years ended June 30: 2014 2013 Investment income $1,934,466 $1,430,650 Net realized and unrealized gains on investments 23,171,034 16,146,883 Total return on investment $25,105,500 $17,577,533 Management, custodial and performance fees for the endowment investments and other College investments are charged to the investment portfolios and were estimated to be $2,014,014 and $1,883,642 in the years ending June 30, 2014 and 2013, respectively. Net realized and unrealized results include these fees. 6. Property, Plant and Equipment Property, plant and equipment at June 30, 2014 and 2013 are as follows: 2014 2013 Land $752,119 $ 752,119 Land improvements 18,205,363 17,155,502 Buildings and improvements 162,631,981 159,804,327 Leasehold improvements 485,032 485,032 Equipment 35,322,172 34,947,018 Construction in progress 1,399,589 1,294,220 $218,796,256 $214,438,218 Less: Accumulated depreciation (83,571,749) (77,096,430) $135,224,507 $ 137,341,788 Included in property, plant and equipment as of June 30, 2014 are assets under capital lease for equipment with a cost of $918,983 and related accumulated amortization of $660,364. Capital lease obligations as of June 30, 2014 and 2013 were $265,835 and $426,800, respectively. For the years ended June 30, 2014 and 2013, fully depreciated assets with an original cost of $312,793 and $3,046,239, respectively were written off. 18
Property, Plant and Equipment (continued) The changes in the carrying value of the College s asset retirement obligations for years ended June 30, 2014 and 2013 are as follows: 2014 2013 Beginning balance $ 858,061 $ 835,988 Settlement of liability (9,136) (16,500) Accretion expense 39,350 38,573 Ending balance $888,275 $ 858,061 7. Note and Bonds Payable Note and bonds payable at June 30, 2014 and 2013 are as follows: 2014 2013 Series H, revenue, dated August 1, 2003, interest rates ranging from 3% to 5%. $ - $ 5,505,000 Series K, variable rate demand, dated April 1, 2008 interest rates ranging from.01% to.12% due serially from May 1, 2008 to July 1, 2037, inclusive (2) (Note 14) 58,935,000 60,345,000 Series L, revenue, dated July 14, 2010, interest rates ranging from 2.5% to 5.375% due serially on July 1, from July 1, 2011 to July 1, 2029, inclusive 19,500,000 20,355,000 J.P. Morgan direct placement loan, dated May 31, 2013, at an interest rate of 1.8% due serially from July 1, 2013 to July 1, 2020, inclusive 4,708,075 5,653,085 $83,143,075 $ 91,858,085 Less unamortized original issue discount (19,056) (79,910) $83,124,019 $91,778,175 In 2008, MHEFA Series J Variable Rate Revenue Bonds were issued in the amount of $30,000,000 to finance construction of a new science building. During 2008, the MHEFA Series J Variable Rate Revenue Bonds were redeemed with the issuance of MHEFA Series K Variable Rate Demand Bonds. In 2010, MHEFA Series L Variable Rate Revenue Bonds were issued in the amount of $22,000,000 to finance construction of a new residence building. 19
Notes and Bonds Payable (continued) In 2013, the College entered into a seven year taxable note in the amount of $5,653,085 to partially refinance both a United States Department of Education Note Payable (paid off during fiscal year 2013) and the MHEFA Series H Variable Rate Revenue Bonds (paid off on July 1, 2013 fiscal year 2014). All outstanding notes and bonds payable are collateralized by tuition receipts. At June 30, 2014, the approximate fair value of outstanding debt on the Statement of Financial Position is $85,079,721 based on estimates using current interest rates available for debt with similar remaining maturities. The valuation inputs used to value the debt are level 2 inputs. Under its bonds payable agreements, the College is subject to certain restrictive financial covenants, the most restrictive of which is that the College must maintain a 60% ratio of non-donor restricted fund balances to plant debt. In accordance with bond requirements for construction funds, the College has on deposit with the Trustee (classified as restricted cash) at June 30, 2014 and 2013 the following amounts: 2014 2013 MHEFA $1,320,762 $6,938,846 Mandatory annual principal payments on long-term debt for the next five fiscal years and thereafter are as follows. 2015 $2,924,556 2016 3,007,148 2017 3,087,298 2018 2,766,057 2019 3,298,707 Thereafter 68,059,309 $83,143,075 Interest expense and fees on debt were $1,337,483 and $1,636,373 for the years ended June 30, 2014 and 2013, respectively. In addition, interest payments on our swap agreements were $1,761,950 and $1,782,128, respectively. These payments are included in realized/unrealizec (loss) gain on interest rate swap agreements in the statement of activities. Included in the College s debt is $58,935,000 of variable rate demand bonds (VRDBs). The College has entered into a letter of credit (LOC) with J.P. Morgan, to secure bond repayment and interest obligations associated with its VRDBs. If the VRDBs are unable to be remarketed, the trustee for the VRDB will request purchase under the LOC scheduled repayment terms. Based on the existing repayment and maturity terms of the underlying LOC, the scheduled principal payments under the VRDB related LOC would be $14,733,750 for the next four years assuming all of the VRDBs failed to remarket. 20
8. Net Assets The net assets as of June 30, 2014 are summarized as follows: Detail of Net Assets Unrestricted Temporarily Restricted Permanently Restricted Total Operating funds: Undesignated Investment in Plant $11,063,712 43,505,521 $11,063,712 43,505,521 College designated 195,057 195,057 Donor restricted $4,811,311 4,811,311 Total Operating $54,764,290 $4,811,311 $59,575,601 Funds for facilities and student loans 1,092,037 1,969,260 3,061,297 Annuity, and life income funds (10,965) $2,673,310 2,662,345 Endowment funds and other investments 144,649,138 16,254,918 30,090,931 190,994,987 Total Net Assets $200,505,465 $23,024,524 $32,764,241 $256,294,230 The net assets as of June 30, 2013 are summarized as follows: Detail of Net Assets Unrestricted Temporarily Restricted Permanently Restricted Total Operating funds: Undesignated Investment in Plant $9,779,537 42,810,956 $9,779,537 42,810,956 College designated 305,020 305,020 Donor restricted $6,451,264 6,451,264 Total Operating $52,895,513 $6,451,264 $59,346,777 Funds for facilities and student loans 838,132 1,167,172 2,005,304 Annuity, and life income funds (6,464) $2,420,748 2,414,284 Endowment funds and other investments 130,730,761 11,925,187 28,583,987 171,239,935 Total Net Assets $184,464,406 $19,537,159 $31,004,735 $235,006,300 9. Scholarships and Other Awards Tuition and fees are presented net of tuition discounts, which include the following for the years ended June 30, 2014 and 2013: 2014 2013 Institutional scholarships (funded by the College) $34,788,655 $33,809,263 Endowed scholarships (funded) 1,180,340 1,156,214 External grants (federal) 177,694 210,368 External grants (donor funded) 397,485 526,147 $36,544 174 $35,701,992 In addition, a total of $2,203,181 and $2,078,794 of tuition remission expenses are included in functional expenses at June 30, 2014 and 2013, respectively. 21
10. Lease Commitments The College leases property for terms ranging from one to fifteen years. The annual minimum operating lease commitments through the year 2019 are as follows: 2015 $ 298,008 2016 332,912 2017 282,485 2018 286,722 2019 291,023 Total rental expense for the College was $399,723 and $391,874 for the years ended June 30, 2014 and 2013, respectively. The following is a schedule of future minimum lease payments under capital leases included in other liabilities, together with the present value of the net minimum lease payments at June 30, 2014. 2015 $171,250 2016 97,920 2017-2018 - 2019 - $269,170 Interest (3,335) $265,835 11. Employee Benefit Plans The College offers its employees a defined contribution plan and participates in the Teachers Insurance and Annuity Association contributory retirement program. This program covers substantially all full-time employees of the College. The College made contributions of $3,278,397 and $3,137,098 for the fiscal years ended June 30, 2014 and 2013, respectively. The College also maintains a self-funded medical plan for its employees. The self-funded medical plan is funded by both employee and College contributions. 12. Related Parties Certain members of the Board are members, employees or officers of companies which do business with the College. The College engaged in these transactions as part of its normal course of business and substantially all are operating expenses. Related party transactions were $2,360,312 and $2,599,741for the fiscal years ended June 30, 2014 and 2013, respectively. The College had $48,428 recorded in accounts payable due to related parties as of June 30, 2014. 22
13. Commitments and Contingencies The College is engaged in numerous activities which expose the College to risk of litigation. These matters may include disputes with contractors, subcontractors, students and other claims arising from employment matters with the College. The College does not expect that these matters will require any amounts to be paid which, in the aggregate, will be material to the results of operations. As of June 30, 2014, the College has outstanding construction/engineering contracts of approximately $613,015. 14. Interest Rate Swap Agreements The College entered into an interest rate swap agreement with a financial institution counterparty in October 2005 on HEFA Series I variable rate bonds. The purpose of the agreement was to swap the variable rate on the HEFA Series I bonds for a fixed rate of 3.369% for the life of the bonds. The College entered into this agreement to manage the cash flows attributable to interest payments on the HEFA Series I bonds and does not use such instruments for speculative purposes. The swap s fair value as of June 30, 2014 and 2013 of ($2,846,914) and ($2,934,374), respectively is reported on the Statement of Financial Position. On May 1, 2007, the College entered into a swap agreement with a financial institution counterparty on HEFA Series G variable rate bonds. The purpose of the agreement is to swap the variable rate on the HEFA Series G bonds for a fixed rate. The agreement is effective as of April 3, 2008 and provides for a fixed interest rate of 3.594% from May 1, 2008 to July 1, 2028. The swap s fair value as of June 30, 2014 and 2013 of ($1,602,196) and ($1,584,609), respectively is reported on the Statement of Financial Position. On September 6, 2007, the College entered into a swap agreement with a financial institution counterparty on $19,000,000 of the $30,000,000 outstanding HEFA Series J variable rate bonds. The purpose of the agreement is to swap the variable rate on that portion of the HEFA Series J bonds for a fixed rate of 3.651% for the life of the bonds. The swap s fair value as of June 30, 2014 and 2013 of ($4,145,857) and ($3,863,957), respectively is reported on the Statement of Financial Position. All of the swaps remain in place against HEFA Series K bonds which were issued during 2008 to refinance HEFA I and HEFA J and advance refund HEFA G. 15. Consideration of Subsequent Events In accordance with ASC 855, the College has reviewed subsequent events through October 22, 2014 which is the date the financial statements were issued. The College has concluded that no material events have occurred that are not accounted for in the accompanying financial statements or disclosed in the accompanying notes. 23