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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS CONSOLIDATED FINANCIAL REPORT JUNE 30, 2013
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Page 1: CHANCERY OFFICE OF THE ROMAN CATHOLIC DIOCESE OF …managed by the Pastoral Center and for the benefit of third parties, as well as the accounts of Catholic Community Appeal, Inc.

THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS CONSOLIDATED FINANCIAL REPORT JUNE 30, 2013

Page 2: CHANCERY OFFICE OF THE ROMAN CATHOLIC DIOCESE OF …managed by the Pastoral Center and for the benefit of third parties, as well as the accounts of Catholic Community Appeal, Inc.

C O N T E N T S

Page INDEPENDENT AUDITOR’S REPORT..................................................................................... 1 FINANCIAL STATEMENTS

Consolidated Statements of Financial Position .................................................................... 3 Consolidated Statements of Activities ................................................................................. 4 Consolidated Statements of Cash Flows ............................................................................. 6 Notes to Consolidated Financial Statements ....................................................................... 7

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INDEPENDENT AUDITOR’S REPORT Most Reverend Kevin J. Farrell, D.D. Bishop of the Roman Catholic Diocese of Dallas We have audited the accompanying consolidated financial statements of the Pastoral Center of the Roman Catholic Diocese of Dallas (a nonprofit organization), which comprise the consolidated statements of financial position as of June 30, 2013 and 2012, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 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 the auditor’s 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, the auditor considers internal control relevant to the entity’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 entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Pastoral Center of the Roman Catholic Diocese of Dallas Page 2

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Pastoral Center of the Roman Catholic Diocese of Dallas as of June 30, 2013 and 2012, and the changes in their consolidated net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

WEAVER AND TIDWELL, L.L.P. Dallas, Texas October 14, 2013

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION JUNE 30, 2013 AND 2012

The Notes to Consolidated Financial Statements are an integral part of these statements.

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2013 2012

10,734,453$ 26,371,327$ Cash and cash equivalents held for parishes 5,397,531 6,105,208 Restricted cash and cash equivalents 6,532,856 7,082,239 Investments for designated purposes, at fair value 20,658,003 3,311,537 Restricted investments, at fair value 29,493,292 24,828,830 Pledges and other receivables, net of allowance

for collection 6,761,478 6,684,891 1,922,262 1,808,348 4,652,779 4,812,022

TOTAL ASSETS 86,152,654$ 81,004,402$

LiabilitiesAccounts payable and other accrued liabilities 5,705,950$ 5,683,628$ Note payable - 140,461 Parish deposits 5,401,830 6,206,086 Deferred obligation for priests' pension plan 5,214,892 6,365,583 Deferred obligation for priests' postretirement benefits 8,488,280 8,771,672

Total liabilities 24,810,952 27,167,430

Net assetsUnrestricted 22,759,350 19,685,031 Temporarily restricted 34,931,388 30,537,179 Permanently restricted 3,650,964 3,614,762

Total net assets 61,341,702 53,836,972

Commitments and contingencies - -

TOTAL LIABILITIES AND NET ASSETS 86,152,654$ 81,004,402$

ASSETS

LIABILITIES AND NET ASSETS

Property and equipment, net

Cash and cash equivalents

Prepaid expenses and other assets

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

CONSOLIDATED STATEMENTS OF ACTIVITIES YEARS ENDED JUNE 30, 2013 AND 2012

The Notes to Consolidated Financial Statements are an integral part of these statements.

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Temporarily PermanentlyUnrestricted Restricted Restricted Total

REVENUES, GAINS, AND OTHER SUPPORTContributions and bequests 1,025,240$ 9,826,002$ 36,202$ 10,887,444$ Parish assessments 8,702,229 - - 8,702,229 Interest and dividends 355,239 419,062 - 774,301 Gains (losses) on investments 440,402 2,626,206 - 3,066,608 Casualty and medical insurance

premiums earned 23,700,930 - - 23,700,930 Other income and fees 2,111,379 1,472,825 - 3,584,204 Net assets released in satisfaction of:

Annual appeal restrictions 7,137,367 (7,137,367) - - Other program restrictions 2,812,519 (2,812,519) - -

Total revenues, gains, and other support 46,285,305 4,394,209 36,202 50,715,716

EXPENSESInsurance premiums, claims,

and related costs 23,103,746 - - 23,103,746 Financial aid and grants to schools 3,942,580 - - 3,942,580 Catholic education 1,429,571 - - 1,429,571 Grants to parishes 749,790 - - 749,790 Pastoral ministries and missions 2,182,922 - - 2,182,922 Clergy assistance 2,383,427 - - 2,383,427 Seminarian education and assistance 1,821,036 - - 1,821,036 Subsidy of seminaries 1,206,200 - - 1,206,200 Catholic Charities 602,583 - - 602,583 Catechesis and worship 727,872 - - 727,872 Tribunal 483,244 - - 483,244 Retreat center 396,207 - - 396,207 Marriage and family ministries 241,553 - - 241,553 Annual and capital campaigns 2,574,420 - - 2,574,420 Diocesan administration 830,606 - - 830,606 Business operations 2,624,359 - - 2,624,359

Total expenses 45,300,116 - - 45,300,116

Change in net assets 985,189 4,394,209 36,202 5,415,600

NET ASSETS, beginning of year 19,685,031 30,537,179 3,614,762 53,836,972

Pension and postretirement benefits credits (charges) for changes other than net periodic pension and postretirement benefit costs 2,089,130 - - 2,089,130

NET ASSETS, end of year 22,759,350$ 34,931,388$ 3,650,964$ 61,341,702$

2013

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Temporarily PermanentlyUnrestricted Restricted Restricted Total

1,880,874$ 8,095,251$ 17,631$ 9,993,756$ 8,452,305 - - 8,452,305

92,981 398,502 - 491,483 (40,348) (548,855) - (589,203)

23,146,202 - - 23,146,202 1,208,438 1,887,114 - 3,095,552

6,535,521 (6,535,521) - - 2,250,712 (2,250,712) - -

43,526,685 1,045,779 17,631 44,590,095

19,266,679 - - 19,266,679 1,493,987 - - 1,493,987 1,306,462 - - 1,306,462

22,863 - - 22,863 1,997,292 - - 1,997,292 1,734,607 - - 1,734,607 1,913,558 - - 1,913,558 1,229,860 - - 1,229,860

596,322 - - 596,322 731,239 - - 731,239 448,731 - - 448,731 351,628 - - 351,628 236,131 - - 236,131

1,096,168 - - 1,096,168 737,031 - - 737,031

2,369,783 - - 2,369,783

35,532,341 - - 35,532,341

7,994,344 1,045,779 17,631 9,057,754

16,182,695 29,491,400 3,597,131 49,271,226

(4,492,008) - - (4,492,008)

19,685,031$ 30,537,179$ 3,614,762$ 53,836,972$

2012

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2013 AND 2012

The Notes to Consolidated Financial Statements are an integral part of these statements.

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2013 2012CASH FLOWS FROM OPERATING ACTIVITIES

Change in net assets 5,415,600$ 9,057,754$ Adjustments to reconcile change in net assets to net cash

provided by operating activities:Depreciation 201,213 172,869 Provision for collection allowances, net 95,000 443,000 Net unrealized investment (gains) losses (3,050,092) 589,203 Contributions restricted for endowment (36,202) (17,631) Increase in pledges and other receivables (231,587) (1,824,442) Increase in prepaid expenses and other assets (113,914) (90,417) Increase (decrease) in accounts payable

and other accrued liabilities 22,322 (984,964) Increase in priests' benefit plan obligations 655,047 264,826

Net cash provided by operating activities 2,957,387 7,610,198

CASH FLOWS FROM INVESTING ACTIVITIESPurchases of investments (36,777,150) (17,562,038) Proceeds from sales of investments 17,816,314 10,838,964 Purchases of property and equipment (41,970) (45,258) Collections of notes receivable 60,000 1,515,839 Loans made to parishes - (1,376,494)

Net cash used in investing activities (18,942,806) (6,628,987)

CASH FLOWS FROM FINANCING ACTIVITIESContributions permanently restricted for endowment 36,202 17,631 Payments on note payable (140,461) (50,216) Additions to parish deposits 1,448,258 2,112,888 Withdrawals from parish deposits (2,252,514) (2,792,796)

Net cash used in financing activities (908,515) (712,493)

Net increase (decrease) in cash and cash equivalents (16,893,934) 268,718

CASH AND CASH EQUIVALENTS, beginning of year 39,558,774 39,290,056

CASH AND CASH EQUIVALENTS, end of year 22,664,840$ 39,558,774$

Reconciliation to Consolidated Statements of Financial PositionCash and cash equivalents 10,734,453$ 26,371,327$ Cash and cash equivalents held for parishes 5,397,531 6,105,208 Restricted cash and cash equivalents 6,532,856 7,082,239

CASH AND CASH EQUIVALENTS, end of year 22,664,840$ 39,558,774$

SUPPLEMENTAL DATAInterest paid 8,223$ 17,174$

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 1. ORGANIZATION

The Pastoral Center of the Roman Catholic Diocese of Dallas (Pastoral Center) is the administrative entity of the Roman Catholic Diocese of Dallas (Diocese). The Pastoral Center provides planning and direction in the administration of pastoral, vocational, educational, and other services to its parishes and other Diocesan institutions. The Pastoral Center also provides financing, investing, and other advisory services to the organizations of the Diocese. The Diocese is an ecclesiastical territory which encompasses nine counties in the north central portion of the state of Texas. Record title to all parish, parish school, and church properties in the Diocese is held in the name of the Bishop and his successors for the benefit of the individual parishes, churches, chapels, and certain charitable trusts. Record title to other properties in the Diocese is held in the name of the Bishop and his successors. The Bishop has ecclesiastical responsibility for approximately 75 parishes and a number of other institutions, such as elementary schools, high schools, cemeteries, and other charitable organizations. Each parish is an operating entity distinct from the Pastoral Center that maintains separate financial records and carries on its own services and programs.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, and include the assets, liabilities, and related financial activity managed by the Pastoral Center and for the benefit of third parties, as well as the accounts of Catholic Community Appeal, Inc. (the Appeal). The Appeal is a nonprofit corporation which manages the Bishop’s Annual Appeal that raises funds for certain ministries of the Pastoral Center. Total annual campaign revenues were $7,393,000 and $6,809,000 for the years ended June 30, 2013 and 2012, respectively. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements do not include the Diocesan parishes, schools, churches, missions, chapels, seminaries and other similar organizations, including Catholic Charities of Dallas, Inc., Calvary Hill Cemetery, St. Joseph’s Residence, Inc. and the Texas Catholic Publishing Company.

Display of Net Assets by Class

The Pastoral Center maintains its accounts in accordance with the principles of fund accounting. Resources for various purposes are classified into various funds in accordance with activities or restrictions specified by donors. Separate accounting is maintained for each fund. For reporting purposes herein, however, the Pastoral Center classifies net assets into three categories according to the existence or absence of donor-imposed restrictions.

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Display of Net Assets by Class – Continued

Accordingly, net assets of the Pastoral Center and changes therein are classified and reported as follows:

Unrestricted net assets represent resources available for support of Pastoral Center operations and for other charitable purposes that are not subject to donor-imposed restrictions.

Temporarily restricted net assets represent available resources subject to donor-imposed restrictions that may or will be met either by actions of the Pastoral Center and/or the passage of time. These include various trusts and accumulated appreciation on donor restricted endowments.

Permanently restricted net assets represent funds that are subject to restrictions of gift instruments requiring that the principal be invested in perpetuity and only the income may be used for specific purposes. Permanently restricted net assets include endowment contributions. From time to time, the fair value of assets associated with permanently restricted funds may fall below the level that the donor requires to be maintained in perpetuity. Deficiencies of this nature result from unfavorable market value fluctuations and are reported in unrestricted net assets. Subsequent gains restoring the fair value of such funds to the required level are classified as an increase in unrestricted net assets. Expirations of temporary restrictions on net assets, such as the fulfillment of donor imposed stipulations, are reported as net assets released from restrictions between the applicable classes of net assets in the consolidated statements of activities.

Revenue Recognition

Contributions and bequests, including unconditional promises to give (pledges), are recognized as revenues when the donor’s commitment is received, net of allowance for collection. Promises to give that are scheduled to be received in future periods are shown as increases in temporarily restricted net assets and are reclassified to unrestricted net assets when the purpose or time restrictions are met. Promises to give subject to donor-imposed stipulations that the corpus be maintained permanently are recognized as increases in permanently restricted net assets. Conditional promises to give are not recognized until the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value.

Dividends, interest, and net gains on investments of permanently restricted net assets are reported as increases in temporarily restricted net assets since the terms of these gifts impose restrictions on the income and net gains.

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Financial Instruments

The Pastoral Center’s financial instruments consist of cash and cash equivalents, investment securities, notes and accounts receivable, and accounts and note payable. The recorded values of cash and cash equivalents and accounts receivable and payable approximate their fair values based on their short-term nature. The recorded values of the investment securities are stated at fair value and the unrealized gains and losses are recorded. The amortized cost of notes receivable and payable approximate fair value, as the stated interest rate approximates market rates.

Cash and Cash Equivalents

Cash and cash equivalents are liquid assets with minimal interest rate risk and maturities of three months or less when purchased. Such assets, reported at fair value, primarily consist of depository account balances, money market funds, and certificates of deposit.

Restricted cash is comprised of donor restricted cash contributions for operational purposes.

Investments

Investments in marketable securities are reported at fair value in the consolidated statements of financial position using the three-level hierarchy established by generally accepted accounting principles. Purchases and sales of securities are recorded on the trade date, and unrealized gains and losses are included in the consolidated statements of activities.

Receivables

Notes, pledges and other receivables are stated at unpaid principal balances, less the allowance for collection, which is determined by management based on historical collection experience and ongoing analyses of each debtor's financial condition. Notes, pledges or other receivables that are deemed to be uncollectible are charged to the allowance.

Property and Equipment

Property and equipment acquisitions are capitalized at cost, when purchased or at fair value at date of gift, when donated. Depreciation on property and equipment is provided on a straight-line basis over the estimated useful lives of assets, which range from 5 to 40 years (see Note 5). Major expenditures for property and those which substantially increase the useful lives of assets are capitalized. Maintenance, repairs, and minor renewals are expensed as incurred.

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Parish Deposits

Parish deposits represent funds deposited with the Pastoral Center primarily by parishes, churches, missions, chapels, and other related entities within the Diocese. These funds may be used for loans to other parishes within the Diocese. Withdrawals are subject to certain restrictions determined by the Pastoral Center.

The interest rate paid on funds on deposit is 0.1% per annum compounded semiannually for the years ended June 30, 2013 and 2012.

Income Taxes

Under a group ruling issued by the Internal Revenue Service to the United States Conference of Catholic Bishops, the Pastoral Center, as an institution of the Roman Catholic Church in the United States, is exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code (the Code). Accordingly, the Pastoral Center is a tax-exempt organization as described in Section 501(c)(3) of the Code, and no such provision for income taxes has been made in the accompanying consolidated financial statements.

The Pastoral Center is, however, subject to federal income tax on unrelated business income, and provision for such taxes, when appropriate, is included in the accompanying consolidated financial statements. Additionally, the Pastoral Center evaluates tax positions and has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain amounts during the reporting period as well as the disclosure of contingent liabilities. Accordingly, actual results could ultimately differ from those estimates.

Reclassifications Certain 2012 amounts have been reclassified to conform to the 2013 presentation. These reclassifications had no impact on the change in net assets.

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Concentration of Credit Risk

In the course of the Pastoral Center’s operations, the cash balances maintained at financial institutions used by the Pastoral Center are in excess of the amount insured by the FDIC. The Pastoral Center has not suffered any losses as a result of the excess balances in the past and management does not anticipate losses in the future.

Subsequent Events

Subsequent events, occurring after the statement of financial position date but before the statements are available to be issued, are evaluated by management for appropriate recognition and disclosure. All significant events or transactions have been evaluated subsequent to June 30, 2013, and through the date on which the consolidated financial statements were available for issuance, October 14, 2013. During this period there were no material recognizable subsequent events.

NOTE 3. INVESTMENTS

Investment securities are stated at fair value. Generally accepted accounting principles establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 inputs) and the lowest priority to unobservable inputs (level 3 inputs). The three levels of the fair value hierarchy are described below:

Level 1 inputs: Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The majority of investments included in level 1 are common stock and mutual funds typically valued at the closing price reported on the active market on which the individual securities are traded.

Level 2 inputs: Inputs (other than quoted market prices included within level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and fair value is determined through the use of models or other valuation techniques. The majority of investments included in level 2 are fixed income securities, privately issued mutual funds, alternative investments in long/short equity funds and emerging markets, typically valued based on information received from the custodian.

Level 3 inputs: Prices or valuations that require inputs that are both significant to the fair measurement and unobservable. Fair value for these investments are determined using valuation methodologies that consider a range of factors including but not limited to the nature of the investment, market conditions, current and projected operating performance and changes in operating characteristics of the investment. The investments included in level 3 consist of investments in absolute return funds and multi-strategy funds.

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 3. INVESTMENTS – CONTINUED

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There have been no changes in the methodologies used at June 30, 2013 and 2012.

The table below summarizes the investment securities by level:

Level 1 Level 2 Level 3 Total

Mutual funds: Money Market 1,684,947$ -$ -$ 1,684,947$

Growth and Value 5,615,013 605,668 - 6,220,681 Fixed Income 15,642,120 - - 15,642,120 International 7,852,487 - - 7,852,487 Large Cap 6,227,490 - - 6,227,490 Small Cap 766,561 - - 766,561

Multi-Strategy - - 879,715 879,715 Fixed Income - 2,077,047 - 2,077,047 Alternative Investments: Absolute Return - 2,856,676 2,799,105 5,655,781 Long/Short Equity - 3,970,960 - 3,970,960 Emerging Markets - 779,014 - 779,014

Total investments at fair value 37,788,618$ 10,289,365$ 3,678,820$ 51,756,803$

Cash and equivalents (1,684,947) Investment carried at cost 79,439

50,151,295$

June 30, 2013

Level 1 Level 2 Level 3 Total

Common stock 4,990,400$ -$ -$ 4,990,400$ Mutual funds: Money Market 1,973,540 - - 1,973,540

Growth and Value 1,961,856 330,565 - 2,292,421 Fixed Income 4,983,690 - - 4,983,690 International 4,324,257 - - 4,324,257 Large Cap 3,620,514 - - 3,620,514 Small Cap 252,130 - - 252,130

Multi-Strategy - - 812,337 812,337 Fixed Income - 1,946,870 - 1,946,870 Alternative Investments: Absolute Return - 1,081,144 1,103,590 2,184,734 Long/Short Equity - 2,077,721 - 2,077,721 Emerging Markets - 575,854 - 575,854

Total investments at fair value 22,106,387$ 6,012,154$ 1,915,927$ 30,034,468$

Cash and equivalents (1,973,540) Investment carried at cost 79,439

28,140,367$

June 30, 2012

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13

NOTE 3. INVESTMENTS – CONTINUED

An investment in a nonprofit insurance company is carried at cost, as there is no ready market to derive the current fair value of the investment. The carrying value was $79,439 at June 30, 2013 and 2012. The table below sets forth a summary of changes in the fair value of level 3 investment assets for the years ended June 30, 2013 and 2012:

Alternative Investments Multi-Strategy

Absolute Return Fund

Balance, beginning of year 1,103,590$ 812,337$

Purchases, sales, issuances and settlements (net) 1,265,000 -

Total gains or losses (realized and unrealized) included in changes in net assets 430,515 67,378

Balance, end of year 2,799,105$ 879,715$

Year ended June 30, 2013 Level 3 Assets

Alternative Investments Multi-Strategy

Absolute Return Fund Balance, beginning of year -$ 823,581$

Purchases, sales, issuances and settlements (net) 1,325,000 -

Total gains or losses (realized and unrealized) included in changes in net assets (221,410) (11,244)

Balance, end of year 1,103,590$ 812,337$

Level 3 AssetsYear ended June 30, 2012

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTE 3. INVESTMENTS – CONTINUED

The following tabulation summarizes investment income and its related classification in the consolidated statements of activities for the years ended June 30, 2013 and 2012:

Temporarily TemporarilyUnrestricted Restricted Unrestricted Restricted

Interest and dividends 355,239$ 419,062$ 85,693$ 398,502$ Interest income on

notes receivable - - 7,288 - Net unrealized gain (loss)

on investments 444,630 2,605,462 (40,348) (548,855) Realized gain (loss)

on investments (4,228) 20,744 - -

Total investment income 795,641$ 3,045,268$ 52,633$ (150,353)$

20122013

NOTE 4. PLEDGES AND OTHER RECEIVABLES

Pledges and other receivables consist of the following at June 30, 2013 and 2012:

2013 2012

Pledges receivable due within one year 3,595,429$ 3,890,067$ Parish assessments and accounts receivable 2,377,471 2,403,698 Casualty and medical insurance premiums receivable

from parishes and other related organizations 2,259,274 2,012,124 Miscellaneous accounts 1,109,304 864,002

9,341,478 9,169,891 Less allowance for collection (2,580,000) (2,485,000)

Total pledges and other receivables, net of allowance 6,761,478$ 6,684,891$

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THE PASTORAL CENTER OF THE ROMAN CATHOLIC DIOCESE OF DALLAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15

NOTE 5. PROPERTY AND EQUIPMENT

At June 30, 2013 and 2012, property and equipment consist of the following:

2013 2012

Land 1,111,073$ 1,111,073$ Land held for future use or disposition 517,307 517,307 Buildings and improvements 5,952,715 5,910,745 Equipment 551,145 551,145

8,132,240 8,090,270 Less accumulated depreciation (3,479,461) (3,278,248)

4,652,779$ 4,812,022$

Depreciation expense was $201,213 and $172,689 for the years ended June 30, 2013 and 2012, respectively.

NOTE 6. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

Accounts payable and other accrued liabilities consist of the following at June 30, 2013 and 2012:

2013 2012

Self-insurance claims incurred but not reported 2,531,000$ 2,660,000$ Unearned casualty insurance premiums 1,427,189 1,398,537 Accounts payable 376,856 478,440 Accrued legal fees 85,411 189,367 Accrued grants payable 100,000 200,000 Special collections payable 540,837 603,944 Miscellaneous accounts 644,657 153,340

Total liabilities 5,705,950$ 5,683,628$

NOTE 7. NOTE PAYABLE

At June 30, 2012, there was $140,461 outstanding under a mortgage loan. This note bore interest at a fixed rate of 7% and was collateralized by residential real estate. The loan was fully repaid in September 2012.

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NOTE 8. SELF-INSURANCE PROGRAMS

The Diocese provides casualty and group health insurance for the Pastoral Center, parishes, diocesan schools, and other related organizations (Participants) under partially self-insured programs with third-party administrators processing claims. The Pastoral Center receives insurance premiums from the Participants and, in turn, pays claims for the self-insured portion, pays premiums for conventional excess loss coverage, and pays the programs' administrative costs. The medical, prescription, and dental program offers a comprehensive health care benefit plan to all eligible employees of the Pastoral Center and Participants. Insurance is purchased for medical claims from any one individual during the year in excess of $250,000 and $200,000 for the years ended June 30, 2013 and 2012, respectively. The casualty program insures all property owned by the Participants. Property claims are insured under policies with insurance carriers, subject to $150,000 retention per occurrence, which represents the maximum self-insured portion per occurrence. The casualty program also provides commercial liability coverage under insurance carriers' policies, subject to a self-insured retention of $150,000 per claim. Workers' compensation coverage is also provided under insurance carrier policies, subject to a deductible of $50,000 per claim.

Estimated incurred but not reported claims recorded in other accrued liabilities in the accompanying consolidated financial statements at June 30, 2013 and 2012 are:

2013 2012

Medical and dental 1,771,000$ 1,310,000$ Casualty 760,000 1,350,000

2,531,000$ 2,660,000$

The estimated liability is based upon information available regarding the self-insurance programs; however, the liability could change materially in the near term.

NOTE 9. PRIESTS’ POSTRETIREMENT BENEFITS

The Diocese provides retiree health care benefits, including pharmacy benefits, for priests of the Diocese who meet minimum age and service requirements and retire from active service. The Diocese has reserved the right to change or eliminate this benefit at any time. These benefits are funded as claims are submitted for reimbursement or payment. The Diocese recognizes the underfunded status of the defined postretirement health care benefit plan as a liability in the statement of financial position and recognizes the changes in that funded status of the plan in net assets in the year in which the changes occur.

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NOTE 9. PRIESTS’ POSTRETIREMENT BENEFITS – CONTINUED

The following table sets forth the funded status and amounts recognized in the accompanying consolidated financial statements as of and for the years ended June 30:

2013 2012

Benefit obligation 8,488,280$ 8,771,672$ Fair value of assets - -

Unfunded status (8,488,280)$ (8,771,672)$

Amounts recognized in the statements of financial position as of June 30 consist of:

2013 2012

Accrued benefit liability 8,488,280$ 8,771,672$

Cumulative amounts charged to net assets which have not been recognized in net periodic benefits expense as of June 30:

2013 2012

Unrecognized actuarial losses 3,020,016$ 3,980,776$ Unrecognized prior service costs 3,014 3,879

Components of expense for the years ended June 30:

Benefit cost 928,993 620,317 Employer contribution 250,760 203,526 Benefits paid 250,760 203,526

Weighted average assumptions as of June 30:

Discount rate for benefit obligations 4.82% 4.10%Discount rate for net periodic benefit cost 4.10% 5.50%

Expected contributions for the next year ending June 30:

Expected employer contributions 316,114 295,368 Expected employee contributions - -

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NOTE 9. PRIESTS’ POSTRETIREMENT BENEFITS – CONTINUED

Estimated future benefit payments reflecting expected future service for the fiscal years ending June 30:

2014 316,114$ 2015 322,980 2016 318,440 2017 330,972 2018 359,173 2019-2023 2,374,067

The assumed health care cost trends were graded from 6.40% in 2013 to 4.50% in 2080 for medical and prescription drugs. As of June 30, 2013, $139,932 of the net actuarial loss and $865 of the prior service cost will, through amortization, be recognized as components of periodic benefit cost in 2014. The estimated liability for postretirement health care benefits is based upon information available regarding the assumptions used in the actuarial computation; however, the liability may change materially in the near term. As of June 30, 2013, the Diocese has $4,704,754 of internally designated funds and $621,089 of donor-restricted funds available to fund these obligations.

NOTE 10. PRIESTS’ PENSION PLAN

The Pension Plan for Diocesan Priests, Diocese of Dallas (Priest Plan) covers diocesan priests serving in the Diocese. Generally, the Priest Plan covers the ordained priests and certain diocesan priests from other dioceses. The Priest Plan provides monthly benefits, payable for life at age 70. In 2013 and 2012, the monthly benefit amount is $50 multiplied by the number of years of credited service, subject to plan provisions. Net periodic pension cost and projected benefit obligation in the accompanying consolidated financial statements include all benefits under the Priest Plan, and are based on years of service. The assets of the Priest Plan are separately maintained and are not part of the accompanying consolidated financial statements. Contributions to the Priest Plan are based on independent actuarial reviews. Participants are neither required nor permitted to make contributions to the Priest Plan. The Diocesan Investment Committee monitors the investments of the Priest Plan’s assets and a committee of priests monitors payment of benefits in accordance with plan provisions.

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NOTE 10. PRIESTS’ PENSION PLAN – CONTINUED

The Diocese recognizes the underfunded status of the defined benefit plan as a liability in the statement of financial position and recognizes the changes in the funded status of the plan in net assets in the year in which the changes occur. The following table sets forth the Priest Plan's funded status and amounts recognized in the accompanying consolidated financial statements measured as of and for the years ended June 30:

2013 2012

Benefit obligation 11,261,941$ 11,920,063$ Fair value of plan assets 6,047,049 5,554,480

Unfunded status (5,214,892)$ (6,365,583)$ Amounts recognized in the statements of financial position as of June 30 consist of:

2013 2012

Deferred obligation for priests' pension plan 5,214,892$ 6,365,583$

Amounts charged to net assets which have not been recognized in net periodic pension expense as of June 30:

2013 2012

Unrecognized actuarial losses 3,800,246$ 4,660,616$ Unrecognized transition obligation 831,511 969,042 Unrecognized prior service cost 1,400,753 1,530,357

Components of pension changes for the years ended June 30:

2013 2012

Benefit cost expensed 722,810$ 547,637$ Employer contribution to the plan 745,996 699,602 Plan participants' contributions - - Benefits paid to retirees 780,163 751,121

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NOTE 10. PRIESTS’ PENSION PLAN – CONTINUED

Weighted-average assumptions for the benefit obligation as of June 30:

2013 2012

Discount rate-benefit obligations 4.47% 3.90%Expected return on plan assets 7.00% 7.75%

Weighted-average assumptions for the benefit cost as of June 30:

2013 2012

Discount rate-net periodic pension cost 3.90% 5.25%Expected return on plan assets 7.00% 7.75%

Weighted average assumption for compensation increase is 0% since the benefit is not based on compensation.

As of June 30, 2013, $176,400 of the net actuarial loss, $137,531 of the transition obligation, and $129,604 of the prior service cost will, through amortization, be recognized as components of periodic benefit cost in 2014. The plan assets are principally invested in equity and fixed income type investments and the actual asset allocation is as follows:

2013 2012Plan assets

Domestic equity securities 24% 20%Fixed income securities 12% 21%International equity securities 21% 20%Long/Short equity securities 15% 14%Emerging markets securities 5% 9%Absolute return securities 22% 15%Cash and equivalents 1% 1%

Total 100% 100%

Assets atPercentage of Plan

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NOTE 10. PRIESTS’ PENSION PLAN – CONTINUED

Determination of Expected Long-term Rate of Return

The expected long-term rate of return for the plan's total assets is based on the expected return of each of the above categories, weighted based on the median of the target allocation for each class.

Target Allocation Percentage

2013 2012Plan assets

Domestic equity securities 20% 20%Fixed income securities 20% 20%International equity securities 20% 20%Long/Short equity securities 15% 15%Emerging markets securities 10% 10%Absolute return securities 15% 15%

Total 100% 100%

of Plan Assets at

Investment Policy and Strategy

The investment policy is to broadly diversify the investments in order to reduce risk and to produce incremental return, while observing the requirements and principles of prudent investment management. The investments will be diversified among economic sector, industry, quality, and size. The purpose of diversification is to provide reasonable assurance that no single security or class of securities will have a disproportionate impact on the performance of the plan. As a result, the risk level associated with the portfolio should be reduced. Investment securities are stated at fair value. Generally accepted accounting principles establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 inputs) and the lowest priority to unobservable inputs (level 3 inputs).

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NOTE 10. PRIESTS’ PENSION PLAN – CONTINUED

Investment Policy and Strategy – Continued

The three levels of the fair value hierarchy are described below:

Level 1 inputs: Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The majority of investments included in level 1 are mutual funds typically valued at the closing price reported on the active market on which the individual securities are traded. Level 2 inputs: Inputs (other than quoted market prices included within level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and fair value is determined through the use of models or other valuation techniques. The majority of investments included in level 2 are fixed income securities, privately issued mutual funds, alternative investments in long/short equity funds and emerging markets, typically valued based on information received from the custodian. Level 3 inputs: Prices or valuations that require inputs that are both significant to the fair measurement and unobservable. Fair value for these investments are determined using valuation methodologies that consider a range of factors including but not limited to the nature of the investment, market conditions, current and projected operating performance and changes in operating characteristics of the investment. The investments included in level 3 consist of investments in absolute return funds.

The fair values of the Diocese’s pension plan assets at June 30 by level is as follows:

2013 2012

Level 1 3,192,829$ 3,792,164$ Level 2 2,262,823 1,478,433 Level 3 663,278 417,965

Total investments 6,118,930$ 5,688,562$

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NOTE 10. PRIESTS’ PENSION PLAN – CONTINUED

Investment Policy and Strategy – Continued

The table below sets forth a summary of changes in the fair value of the Plan’s level 3 absolute return investment assets for the years ended June 30:

2013 2012

Balance, beginning of year 417,965$ -$

Purchases, sales, issuances and settlements (net) 215,000 415,000

Total gains or losses (realized and unrealized) included in changes in net assets 30,313 2,965

Balance, end of year 663,278$ 417,965$

Cash Flows

Expected contributions for the next year ending June 30:

Expected employer contributions 1,260,000$ Expected employee contributions -

Estimated future benefit payments reflecting expected future service for the fiscal years ending June 30:

2014 770,356$ 2015 748,971 2016 724,971 2017 720,998 2018 728,317 2019-2023 3,979,977

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NOTE 11. DEFINED CONTRIBUTION 403(b) PLAN

The Diocese has a defined contribution 403(b) plan which allows eligible lay employees to contribute, tax deferred, a portion of their compensation to the plan, subject to annual limits. The Pastoral Center contributes a required amount equal to 3% of employee compensation and makes an elective additional matching contribution of up to 4% of compensation (increased from a maximum of 3% to 4% effective January 1, 2012). The Pastoral Center’s total contributions for Pastoral Center employees in 2013 and 2012 were approximately $221,000 and $203,000, respectively.

NOTE 12. NET ASSETS

Unrestricted net assets consist of the following at June 30:

2013 2012

Undesignated operating surplus 9,783,917$ 8,522,164$ Designated for parish deposits 8,165 (28,411) Designated for casualty self-insurance program 6,615,342 4,785,579 Deficit for priests' pension and postretirement benefits (8,564,040) (11,290,094) Designated for group health self-insurance program 9,640,546 9,781,207 Designated for various Diocesan programs (786,624) 1,854,775 Designated for land and depreciable assets 6,062,044 6,059,811

22,759,350$ 19,685,031$

Temporarily restricted net assets consist of the following at June 30:

2013 2012

Gifts and related revenues available for:Financial aid for schools 17,863,685$ 16,164,276$ Bishop's annual appeal 6,353,477 6,172,111 Various other Diocesan programs or activities 10,714,226 8,200,792

34,931,388$ 30,537,179$

Permanently restricted net assets consist of the following at June 30:

2013 2012

Seminary Burse Endowment 2,650,964$ 2,614,762$ Santa Clara School Endowment 1,000,000 1,000,000

3,650,964$ 3,614,762$

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NOTE 13. ENDOWMENTS

The Pastoral Center has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. The State of Texas and the Pastoral Center have both adopted UPMIFA. As a result of this interpretation, the Pastoral Center classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment funds not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by management in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Pastoral Center considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:

(1) The duration and preservation of the fund (2) The purposes of the donor-restricted endowment funds (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 available (7) The investment policies of the Pastoral Center

A reconciliation of the endowment funds’ beginning and ending balances for the year ended June 30, 2013 is as follows:

Permanently Restricted Total

Beginning of year 3,081,192$ 3,614,762$ 6,695,954$

Interest and dividends 101,775 - 101,775 Realized and unrealized losses 545,935 - 545,935

Total investment return 647,710 - 647,710

Contributions 475,313 36,202 511,515 Appropriation of endowment

assets for expenditure (206,824) - (206,824)

End of year 3,997,391$ 3,650,964$ 7,648,355$

Temporarily Restricted

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NOTE 13. ENDOWMENTS – CONTINUED

A reconciliation of the endowment funds’ beginning and ending balances for the year ended June 30, 2012 is as follows:

Temporarily Restricted

Permanently Restricted Total

Beginning of year 3,063,079$ 3,597,131$ 6,660,210$

Interest and dividends 125,653 - 125,653 Realized and unrealized losses (37,192) - (37,192)

Total investment return 88,461 - 88,461

Contributions 284,464 17,631 302,095 Appropriation of endowment

assets for expenditure (354,812) - (354,812)

End of year 3,081,192$ 3,614,762$ 6,695,954$

All endowment assets as of June 30, 2013 and 2012 are donor restricted. Return Objectives and Risk Parameters

The Pastoral Center has adopted an Investment Policy for endowment assets that attempts to provide a predictable stream of funding to programs supported by its endowments while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor restricted funds that the Pastoral Center must hold in perpetuity. The Investment Policy provides that funds be structured in order to participate in up markets and protect in down markets with the goal of outperforming over a market cycle with an acceptable level of volatility.

Strategies Employed for Achieving Objectives

To satisfy its long-term rate-of-return objectives, a total return strategy is utilized in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Pastoral Center targets a diversified asset allocation strategy to achieve its long-term return objectives within the guidelines of its investment policy.

Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level that the donor or UPMIFA requires to be retained as a fund of perpetual duration. There were no deficiencies of this nature which resulted from unfavorable market value fluctuations that are reported in unrestricted net assets as of June 30, 2013 and 2012.

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NOTE 14. TRANSACTIONS WITH PARISHES AND OTHER RELATED ORGANIZATIONS

Transactions with parishes and other related organizations for the years ended June 30 are as follows:

2013 2012

Casualty and medical insurance premiums billedto parishes and other related organizations 23,700,930$ 23,146,202$

Parish assessments 8,702,229 8,452,305

Parish contributions originate in and are received by the parishes, and thus, are recorded on the basis of accounting determined by the parishes. The parishes calculate the assessment due to the Pastoral Center based on such contributions received, adjusted for certain defined deductions. Due to the nature of these transactions and related accounting records, the parish assessments received by the Pastoral Center are recorded based solely on such parish accounting.

NOTE 15. COMMITMENTS AND CONTINGENCIES

The Diocese contributed $2,273,365 to Bishop Dunne Catholic School for a major infrastructure project. The project is expected to cost $5.7 million. The Diocese will continue to make monthly cash grants to the School in an amount equal to that month’s invoices for these costs. At June 30, 2013, there was an outstanding payable of $543,132 to the School, and it was paid in July.

The Diocese has guaranteed a note for a parish payable to an unrelated financial entity. As of June 30, 2013 the balance of that note is $1,078,000. Should the parish fail to meet its obligation to repay the note, the Diocese would be responsible for repayment. The Pastoral Center has not included this balance as a liability in the accompanying consolidated financial statements. At June 30, 2013 and 2012, the Pastoral Center has collateralized bank letters of credit outstanding of approximately $488,000 on which no funds had been drawn. The letters of credit are pledged to workers' compensation insurance companies to secure Diocesan performance under the Diocese's self-insured obligations (see Note 9).

The Pastoral Center has a revolving line of credit in the amount of $3 million with a bank (the Credit). The Credit is collateralized by a mortgage on the Pastoral Center office building. The Pastoral Center can borrow and repay on the Credit until August 31, 2013. The line of credit was renewed in October 2013, with a maturity of August 31, 2016 and no collateral. No amounts were borrowed during fiscal 2013 and 2012.

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NOTE 15. COMMITMENTS AND CONTINGENCIES – CONTINUED

The Diocese has four unresolved claims (no lawsuits) of alleged sexual misconduct. Management of the Diocese, in consultation with its attorneys, believes that the ultimate outcome of pending sexual misconduct claims cannot be determined at this time. Accordingly, no provision for any liability that may result upon adjudication has been recognized in the accompanying consolidated financial statements. This belief is based on the available information; however, the liability for pending sexual misconduct claims may change materially in the near term. Additionally, the Diocese is engaged in certain other legal proceedings and has other unresolved claims pending. The ultimate liability from such other proceedings and claims cannot be determined at this time; however, management of the Diocese is of the opinion that any liability not already covered by insurance should not have a material adverse effect on the financial position or operations of the Pastoral Center.


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