LAKE FOREST COLLEGE Lake Forest, IllinoisLAKE FOREST COLLEGE STATEMENTS OF FINANCIAL POSITION May...

LAKE FOREST COLLEGE Lake Forest, Illinois

FINANCIAL STATEMENTS May 31 , 2012 and 2011

LAKE FOREST COLLEGE Lake Forest, Illinois

FINANCIAL STATEMENTS May 31, 2012 and 2011

CONTENTS

REPORT OF INDEPENDENT AUDITORS............... .......... ............ .................. ..... ............. ....... ..... ... ....... 1

FINANCIAL STATEMENTS

STATEMENTS OF FINANCIAL POSITION ... ................ ................. .... ........ ....... ..... .......... ................. 2

STATEMENTS OF CHANGES IN NET ASSETS... ...... ........ ......... ..... ..... ......... ..... .. ..... ....... .............. 3

STATEMENTS OF CASH FLOWS......................... ........................ ....... ................................... ..... ..... 5

NOTES TO FINANCIAL STATEMENTS............... .... .... ................. ....... ................ .......... ... ... .......... ... 6

Crowe Horwath

The Board of Trustees Lake Forest College Lake Forest, Illinois

REPORT OF INDEPENDENT AUDITORS

Crowe Horwath LLP Independent Member Crowe Horwall\ lnternallonal

We have audited the accompanying statements of financial position of Lake Forest College (the "College") as of May 31 , 2012 and 2011 , and the related statements of changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the College's management. Our responsibility is to express an opinfon 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lake Forest College as of May 31, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Chicago, Illinois October 26, 2012

Crowe Horwath LLP

1.

LAKE FOREST COLLEGE

STATEMENTS OF FINANCIAL POSITION May 31. 2012 and 2011

2012 2011 ASSETS Cash and cash equi'.alents $ 6,747,939 $ 3,815,427 Accounts recei'.able, net

Students, less allowance of of $509,000 in 2012 and $595,000 in 2011 633,003 530,464

Contributions (Note 2) 4,280,308 6,179,171 Other 2,688,668 1,522,755

Prepaid expense and other assets 584,606 502,247 Long-term in\estments (Note 3) 67,236,537 71 ,491 ,912 Student loan funds (primarily Perkins loan fund), net (Note 16) 2,751 ,948 2,707,580 Land, building and equipment, less

accumulated depreciation (Note 4) 63,964,638 62,355,831 Beneficial interests in trusts held by others 2,985,395 3,192,441 Bond issue costs, net of accumulated

amortization (Note 8) 883,086 m ,528

TOTAL ASSETS $ 152,756, 128 $ 153,075,356

LIABILITIES AND NET ASS ETS

LIABILITIES Accounts payable and accrued expenses $ 1,358,003 $ 2,189,395 Accrued payroll and benefits 4,060,954 4,336,512 Depos its and deferred revenue 945,623 953,537 Deferred revenue, ARAMAAK (Note 7) 3,914,500 125,000 Term note (Note 5) 250,000 500.000 Bonds payable (Note 6) 26,028,321 26,764,726 Annuities payable 745,762 663,129 Refundable U.S. Government and other student loans 2 ,316,486 2,338,401 Accrued post-retirement and

post-employment benefits (Note 10) 1,374,315 1,235,830

Total liabilities 40,993,964 39,106,530

NET ASSETS Unrestricted 35,936,717 25,280,907 Temporarily restricted 17,170,759 22,105,567 Permanently restricted 58,654,688 66,582,352

Total net assets 111 ,762,164 113,968,826

TOTAL LIABILITIES AND NET ASSETS $ 152,756,128 $ 153,075,356

See accompanying notes to financial statements.

2.

LAKE FOREST COLLEGE

STATEMENT OF CHANGES IN NET ASSETS Year ended May 31, 2012

(With summarized financial information for the year ended May 31 , 2011)

2012

Temporarily Permanently 2011

Unrestricted Restricted Restricted Total Total

Revenue Tuit.ion and fees $ 53,510.789 $ . $ . $ 53,510,789 $ 48,583,539 Scholarships (30,01 0,570) (30,010,570) (26.225,854)

Net tuition revenue 23,500.219 23,500,219 22,357,685

Private gifts 3,120,503 1,970,975 1.948,863 7,040,341 7,697,442 Private grants 1,635,637 591 ,982 2,227.619 1,385,119

Government grants 896.244 896,244 1,460,873 Investment income, net 2 .980,551 (3,739,759) (68,871 ) (828.079) 11 ,899,137 Other sources 1,575.441 14,454 1,589,895 1,456.541

Auxfliary enterprises 12,080,112 12,080,112 10,690.158 Net assets released for capital 1,184,729 (1,184.729) Net assets released from restrictiOn 1,713,962 ( 1.713,962) Olange in donor designation 10.640,443 (1,032,847) ~9.607,596)

Total revenue 59.327,841 (5,093,886) (7,727,604) 46.506,351 56,946,955

Expenses Programs

Instruction and research 16.286,761 16.286.761 15,606,734 Academic support 4.993,266 4.993.266 4,867,760 Student services 10,540,106 10.540,106 10,564,913

Management and general 5,625,663 5,625,663 5,696,206

Fundralslng and alumni 1,843,108 1,843.108 1,813,932

Total program and support 39,288.904 3g,288.904 38,54g,545

Auxiliary enterprises 9.244,642 9,244 ,642 8.472,357

Total expenses 48,533,546 48,533,546 47,021,902

Increase (decrease) in net assets

before non-ope rating 10,794,295 (5.093,886) (7.727,604) (2.027.195) 9.925,053

Olange ln split interest agreements (87,797) (87,797) (4,678) Olange in value of beneficial interest

and pledge discount amortization 246,875 {200,060) 46,815 518,376

Change in in post retiremenV post eflllloymentliability (Note 10) (138,485) ( 138,485) (283,609)

Increase (decrease) in net assets 10,655,810 ( 4,934,808) (7,927,664) (2.206,662) 10,155.142

Net assets at beginning of year 25,280,907 22,105,567 66,582.,352 113,968.826 103,813,684

Net assets at end of year $ 35,936,717 $ 17,170,759 $ 58.654,688 $ 111,762,164 s 113,968,826

(Continued)

3.

LAKE FOREST COLLEGE

STATEMENT OF CHANGES IN NET ASSETS Year ended May 31, 2011

2011

Tel'fllOrarily PerrrenenUy

Unrestricted Restricted Restricted Total Revenue

Tuition and fees $ 48,583,539 $ $ - $ 48,583,539 Scholarships (26,225,854) (26,225,854)

Net tultlon revenue. 22,357,685 22.357,685

Frivate gifts 3,076,118 1,881,472 2,739,852 7,697,442 Frivate grants 629,000 756.119 1,385,119 Government grants 1,460,873 1,460,873 Investment income, net 4,853,511 6,856,525 189,101 11,899,137 Other sources 1,369,252 87.289 1.456,541 Auxiliary enterprises '10,690,158 10.690,158 Net assets released from res triction 3,025,501 (3,025,501)

Change in donor designation (382,123) 382,123

Total revenue 47.462,098 6,173,781 3,311 ,076 56,946,955

Expenses Frog rams

Instruction and research 15,606,734 15,606,734 Academe support 4,867,760 4,867,760 Student services 10,564,913 10,564,913

Mlnagement and general 5,696,206 5,696,206 Ftlndraising and alurrni 1,813.932 1,813,932

Total program and support -:38,549,545 38,549,545 Auxiliary enterprises 8.472,357 8,472,357

Total expenses 47.021 ,902 47,021 ,902

Increase In net assets before non-operating 440,196 6,173,781 3,311,076 9,925,053

Olange in split interest agreements (4,678) (4,678) Olange in value of beneficial interest

and pledge discount arrortizatlon 137,722 380,654 518,376 Change in in post rettrement/ post

eflllloyment liability (Note 10) (283,609) (283,609)

Increase (decrease) in net assets 156,587 6,306,825 3,691.730 10.155,142

Net assets at beginning of year 25,124,320 15,798,742 62,890,622 103,813,684

Net assets at end of year $ 25,280,907 $ 22,105,567 $ 66,582,352 .$ 113,968,826


4.

LAKE FOREST COLLEGE

STATEMENTS OF CASH FLOWS Year ended May 31, 2012 and 2011

2012 2011 Cash flows from operating activities

Increase (decrease) in net assets $ (2,206,662.) $ 10,155,142 Adjustments to reconcile increase (decrease) tn 11e1 assets to net cash provided by operating activities: Depreciation and amortization 3,237,824 2,994,170 Net change in split interest agreements 207,046 (184,014) Net gain on Investments 1,773.428 (10,667,899) Contribution of securities (2,551,214) (, 1338,467) Loss on disposal or fixed assets 41 ,461 1,087,893 Bond discount amortization 8,595 10,108 Cancellation of loans recervable 4,533 12,213 Bad debt expense 78,993 352,188 Deferred compensation expense 90,492 90,492 Private gifts and grants restricted for long-term investment (1 ,948,863) (2,739,853) Contributions restricted lor capital investments (2,897,736) (Decrease) Increase in post retiremenVpost employment

liability 138,485 283,609 Changes in assets and liabilities:

Student and other accounts receivable net (1,347,445} (772,543) Contributions receivable 1,898,863 466,251 Prepaid expenses and other assets (82,359) (50,151) Accounts payable and accrued expenses (868,758) (54,692} Accrued payroll and benefits (366,050} (65,769}

Deposits and deferred revenue (7,914) (62,677)

Net cash provided by (used in) operating activities (4,797,281 ) (483,999)

Cash flows from investing activities Purchase and contribution of investments (12,239,654) (8,057,519) Proceeds lrom sale or maturity of investments 17,272,815 11,372,954 Acquisitions of land, building and equipment (4,812.684) (3,541 ,698) Student loans disbursed (446,909) (349,436)

Principal collected on student loans 398,008 438,978

Net cash used in investing activities 171 ,576 (1 36,721 )

Cash flows from financing activities Principal payments on notes and bonds payable (955,500} (775,000) Draws on line or credit 5,000,000 3,250,000 Proceeds on deferred revenue from ARAMARK 4,000,000 Payments on line of credit and term note (5,250,000) (3,500,000) Net change in refundable U.S. Government student loans (21,915) {41 ,527} Proceeds from private gifts and grants restricted for long-term investment 1,948,863 2,739,853

Contributions restricted lor capital investments 2,897,736 Payment on bond issuance costs (143,600)

Net annuity payments 82,633 (80,355)

Net cash pro...;ded by financing activities 7,558,217 1,592,971

Net increase in cash and cash equivalents 2,932,512 972,251

Cash and cash equiva lents at beginning of year 3,815,427 2,843,1 76

Cash and cash equivalents at end of year $ 6,747,939 $ 3,815,427

Supplemental disclosure of cash flow information

Cash paid for interest $ 1 ,066,124 $ 1,111,856

Construction in process included in accounts payable $ (37 ,366) $ (79,011)


5.

LAKE FOREST COLLEGE NOTES TO FINANCIAL STATEMENTS

May 31 , 2012 and 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Lake Forest College (the College) is a co-educational undergraduate institution offering students the opportunities and challenges of a liberal arts education. Located 30 miles north of Chicago, Illinois, the College was founded in 1857. The College draws a diverse student body from virtually all states of the Union and a considerable number of foreign countries.

The financial statements of the College have been prepared on the accrual basis of accounting. Significant accounting policies followed by the College are described below.

The financial statements include certain prior year summarized comparative information in total, but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the College's financial statements for the year ended May 31 , 2011. from which the summarized information was derived.

Basis of Presentation: To ensure the observance of limitations and restrictions placed on the use of available resources, the College maintains its financial accounts in accordance with the principles and practices of fund accounting. This is the procedure by which resources tor various purposes are classified as unrestricted, temporarily restricted and permanently restricted as follows:

Unrestricted- Net assets that are not subject to donor-imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties.

Temporarily Restricted - Net assets subject to donor-imposed stipulations that may or will be met either by actions of the College and/or passage of time. Temporarily restricted net assets consist of the fol lowing as of May 31:

2012 2011

Accumulated gains on endo1Ml19nt $ 5,031 ,513 $ 10,149,921 Instruction, research and support 1,451,796 1,248,969 Facilities improvements 3,574,104 2,123,716 Pledges receivable 4,159,752 5,211,726 Other 1,648,882 1,868,651

15,866,047 20,602,983 Split interest agreements 1,304,712 1,502,584

Total temporarily restricted net assets $ 17,170,759 $ 22,105,567

Permanently Restricted - Net assets subject to donor-imposed stipulations that they be maintained permanently by the College. Generally, the donors of these assets permit the College to use all or part of the income earned or related investments for general or specific purposes, supporting the College's educational purposes. Permanently restricted net assets consist of endowment funds and of certain other funds which the College does not count yet as an endowment. These other funds could include future pledge receivables from donors and undistributed amounts from estates and terminated trusts. Additionally there are two funds included in permanently restricted at fai r value in which the College has a perpetual beneficial interest, the distributions of which are temporarily restricted for scholarships.

(Continued)

6.


May 31 , 2012 and 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue: Revenues are reported as increases in unrestricted net assets, unless use of the related assets is limited by donor-imposed restrictions . Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulations or by law. Expirations of temporary restrictions recognized on net assets (i.e. the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed} are reported as net assets released from restriction.

Private gifts, including pledges, are recognized in the period the pledge is made. Conditional pledges are not recognized until the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at estimated fair value. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the. risks involved. Accretion ot discount is recorded as additional revenue in accordance with donor-imposed restrictions, if any, on the contributions. An allowance for uncollectible pledges receivable is provided based upon management's judgment, including such factors as prior collection history, type of contribution and nature of fundraising activity.

Contributions received with donor-imposed restrictions that are met in the same year as the gifts are received are reported as revenue of the unrestricted net asset class. Private gifts and grants of land, building and equipment without donor-imposed restrictions concerning the use of such long-lived assets are reported as revenue of the unrestricted net asset class. Private gifts and grants of cash or other assets to be used to acquire land, building and equipment with such donor restrictions are reported as revenue of the temporarily restricted net asset class: the restrictions are considered to be released at the time of acquisition of such long-lived assets. Revenue from other grants and contract agreements is recognized as it is earned through expenditure in accordance with the agreements.

Split Interest Agreements with Donors: The College has various types of split interest agreements with donors. In some of these agreements, the College also serves as trustee of the related assets.

Assets held under these agreements for which the College serves as trustee are included in investments. In addition, the present value of the estimated future payments to be made to the donors and/or other beneficiaries is included in liabilities. The liabilities are adjusted during the term of the trusts for changes in the value of assets, accretion of the discount and other changes in the estimates of future benefits.

Assets held in trust for which the College does not serve as trustee are not reported as investments in the financial statements. However, contribution revenue and a beneficial interest in the trust are recognized at the date the trusts are established for the present value of estimated future payments to be received. Perpetual trusts are valued based upon the fair value of the assets contributed to the trust which approximates the fair value of the beneficial interest in the trust .

Cash and Cash Equivalents: The College considers all highly-liquid investments to be used for operating purposes with original maturities of three months or less to be cash equivalents. Certain cash held by the College is restricted for the Perkins Loan Fund. Cash and cash equivalents held for investment purposes are reported as investments.

Investments: The College's investments, excluding investments fn real estate and mortgage loans receivable, are recorded in the financial statements at fair value. The fair value of investments is based on quoted market prices, except for certain alternative investments, for which quoted market prices may not be available. Direct real estate investments and mortgage loans receivable are carried at cost and are reviewed for impairment whenever events or changes in circumstances indicate that the fair value of the asset or collateralized asset may be less than its carrying value. This loss would be recorded if it is not recoverable.

(Continued)

7.


May 31, 2012 and 2011

NOTE 1 • SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The estlmated fair value for alternative investments is based on valuations provided by the external Investment managers using net asset values as of their most recent audited financial statements, adjusted for cash receipts, cash disbursements, and other anticipated income or loss through May 31. The College believes the carrying amount of these financial instruments is a reasonable estimate of fair value.

The valuations for these alternative investments necessarily involve estimates, appraisals, assumptions, and methods which are reviewed by management. However, because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed.

Receivables: The majority of the College's receivables, other than contributions, are due from students and governmental agencies. Credit is extended based on an evaluation of financial condition. Receivables are stated at amounts due from students net of an allowance for doubtful accounts. The College determines its allowance for doubtful accounts by considering the mstitution's previous loss history. Student receivables are deemed uncollectible after five years and are written off at that time. Pledge receivables are written off after two years unless the donor presents evidence that he or she is capable and willing to fulfill the pledge on an extended time basis. The College does not charge interest on student receivables.

Collections and Works of Art: Collections (historical treasures and similar treasures held as part of collections) which were acquired through purchases or contributions since the College's inception, are not reflected in the statements of financial position. As of May 31, 2012 and 2011 , the insured value of these items was approximately $3,300,000 (unaudited).

Land. Buildings and Equipment: Land, buildings and equipment are stated at cost as the date of acquisition or their fair value at the date of donation, if received as a contribution. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from 5 to 50 years. Expenditures for land and buildings in excess of $1 0,000 and equipment in excess of $5,000 are capitalized.

Long-lived assets, such as land, buildings, and equipment are reviewed for impairment whenever events or changes in ci rcumstances indicate that the fair value of an asset may 'be less than its carrying value. An impairment loss would be recorded if it is not recoverable.

Asset Retirement Obligations: According to the Financial Accounting Standards Board (FASB) Accounting Standards Codification™, Asset Retirement and Environmental Obligations, requires all entities to recognize the fair value of legal obligations to perform asset retirement activities when incurred. The College has performed an assessment and believes it is not subject to such obligations as of May 31, 2012 and 2011 .

Deferred Revenue: Deferred revenue consists primarily of tuition and fees paid In advance of the summer and fall semesters.

Annuity Liability: The College estimates the liability for payments made to annuitants and to participants in a pooled income fund based on actuarial tables and uses an appropriate discount rate based on the age of the participants. The discount rate is determined based on the rates for investments at May 31, 2012 and 2011 , in 5 and 1 0 year Treasury notes which were 0.625% and 1. 750% for 2012. and 1.750% and 3.125%, for 2011.

(Continued)

8.


May 31 , 2012 and 2011

NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes: The College has received a determination letter from the Internal Revenue Service indicating that it is a tax-exempt organization as provided in Section 501 (c)(3) of the Internal Revenue Code of 1986 and, except for taxes pertaining to unrelated business income, Is exempt from federal and state income taxes. No provision has been made for income taxes in the accompanying financial statements as the College had no material unrelated business income in fiscal years 2012 and 2011.

The College follows guidance issued by the FASB with respect to accounting for uncertainty in income taxes as of June 1, 2007. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amouflt recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on exam1nation. For tax positions not meeting the "more likely than not'' test, no tax benefit 1s recorded. The College recognizes interest and penalties related to unrecognized tax benefits in interest and income tax expense, respectively. The College has no amounts accrued for interest or penalties as of May 31 , 2012. The College does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months.

The College has applied this criterion to all tax positions for which the statute of limitations remains open. The tax years open to examination by tax authorities under the statute of limitations include fiscal 2008 through 2010. The College has determined that its tax provisions satisfy the more likely than not criterion and that no provision for income taxes is required at May 31 , 2012.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Change in Donor Designation: Several donors notified the College during the year ended May 31, 2012, that they release their donor funds from all restriction. These amounts show on the statement of activities as a change in donor designation. There is no effect on the change in total net assets as a result of the releases from restriction.

Concentration of Credit Risk: The Colfege maintains cash balances in one financtal institution in excess of the insurance limits provided by the Federal Deposit Insurance Corporation.

Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. There is no effect on the change in net assets or net assets in total as a result of these reclassifications.

Subsequent Events: Management has performed an analysis of the activities and transactions subsequent to May 31 , 2012, to determine the need for any adjustments to and/or disclosures within the audited financial statements for the year ended May 31 , 2012. Management has performed their analysis through October 26, 2012, the date the financial statements were issued.

(Continued)

9.


May 31, 2012 and 2011

NOTE 2 - CONTRIBUTIONS RECEIVABLE

Contributions receivable consist primarily of donor pledges for facility improvements and for various scholarships. Net contributions receivable are summarized as follows for May 31:

2012 2011

Total contributions receivable $ 5,013,844 $ 7,174,755 Less adjustments to present value Mure cash flows

for contributions receivable (733,536) (995,584)

Net contributions receivable $ 4,280,308 $ 6, 179,171

The College uses a risk adjusted discount rate used to determine the present value of contributions to reflect credit risk based on the College's history with collection on receivables.

Payments on contributions receiva,ble as of May 31, 2012. are scheduled as follows:

Year ending Ma)! 31 1

2013 $ 1,619,326 2014 651,250 2015 448,313 2016 283,500 2017 786,455

Thereafter 1,225,000

$ 5,013,844

As of May 31, 2012, the College has also received communication from certain donors that they intend to give approximately $23,000,000 to the College. However, these gifts are deemed conditional promises to give and, therefore, have not been recorded as revenue or pledges receivable for fiscal year 2012.

(Continued)

10.


May 31 , 2012 and 2011

NOTE 3 - INVESTMENTS

The College's investments at fair value as of May 31 are as follows:

2012

Money market $ 802,786 Government bonds and fixed Income 7,370,738 Corporate stocks

Europe 10,206,597 North America 17,393,711 South America 50,035 Global 132,379

Mortgage loan receivables (Note 14) 1,207,741 Hedge funds 2,831 ,506 Real estate 8,679,313 Commodities 5,904 Partnerships

North America 18,555,827

Total investments $ 67,236,537

2012 Return on long-term lnl.€stments:

Interest and dividends $ 940,908 Net gain on investments:

Realized gain, net 2,001,454 Unrealized (loss) gain, net {3, 77 4, 882)

Net gain on inl.€stments ~1 '773,428) Total return on long-term investments (832,520)

Interest on short-term investments 4,441

Total return on investments $ ~828,079)

2011

$ 1,083,501 5,191 ,711

12,278,945 19,161 ,079

82,841 123,526

1,561,244 5,044,874 7,300,141

12,427

19,651,623

$ 71 ,491 ,912

2011

$ 1,230,313

1,050,184 9,617,715

10,667,899

11,898,212 925

$ 11 ,899,137

Certain investment assets are pooled and invested by several investment managers. Northern Trust is the custodian of these funds and reports monthly on the transactions of the pool. Lowery Asset Consulting, LLC, an independent consulting firm. reports quarterly on the performance of the managers and assists the College in the evaluation of these managers. Units of participation in the investment pool are determined on a fiscal quarter basis. As of May 31 , 2012 and 2011 , there were 6,911,647 and 6,996,722 units, respectively, participating in the investment pool, with a fair value per unit of $9.9269 and $10.0648, respectively.

(Continued)

, ,


May 31 , 2012 and 2011

NOTE 4 - LAND, BUILDINGS AND EQUIPMENT

The College's land, buildings and equipment as of May 31 are as follows:

Land Buildings and improvements Equipment Construction-in-progress

Less accumulated depreciation

Net land, buildings and equipment

$

$

2012

2,257,533 106,529,644

5,333,946 230,316

114,351 ,439 50,386,801

63,964,638

2011

$ 2,257,533 101 ,867,757

4,638,629 972,344

109,736,263 47,380,432

$ 62,355,831

Future commitments on construction contracts at May 31 , 2012 were approximately $300,000. Depreciation expense for the years ending May 31 , 2012 and 2011 was $3,199,782 and $2,986,128 respectively.

NOTE 5- LINE OF CREDIT AND TERM NOTE

The College has an unsecured line of credit and a term note with a bank that expire on April 21, 2014 ana May 31 , 2013, respectively. The unsecured line of credit provides for maximum borrowings of $5,000,000 and bears interest at the greater of three percent or the prime interest rate (3.25% as of May 31 , 2012) minus one percent. There were no outstanding borrowings as of May 31, 2012 and 2011 . The total borrowings outstanding on the term note were $250,000 and $500,000 as of May 31 , 2012 and 2011, with interest rates of 4.15% and 3.83%, respectively. Interest expense on the line of credit and term note was $36,693 and $29,172 for the years ended May 31, 2012 and 2011 , respectively.

(Continued)

12.


May 31 , 2012 and 2011

NOTE 6- BONOS PAY ABLE

The College has the following bonds payable as of May 31 :

Illinois Finance Authority Bonds, Series 1998, payable in annual installments, including interest paid semi-annually ranging from 3.9% to 5% tor the serial

2012 2011

bonds and 5% for the term bonds, due October 2028 $ 20,330,000 $ 21,075,000

Illinois Finance Authority Bonds, Senes 2008, payable in annual installments beginning 2031, including ~~ariable Interest (0.2% at May 31 , 201 2) calculated weekly and paid monthly, for term bonds

due 2039 6,000,000 6,000,000

26,330,000 27,075,000

Less unamortiZed bond dtscount 301 ,679 310,274

$ 26,028,321 $ 26,764,726

Aggregate maturities of bonds payable as of May 31 , 2012 are as follows:

Year ending May 31 , 2013 $ 780,000 2014 820,000 2015 860,000 2016 905,000 2017 950,000

Thereafter 22,015,000

$ 26,330,000

Interest on bonds payable was $1 ,042,668 and $1,067,629 for the years ended May 31, 2012 and 2011 , respectively. The bond agreements contain various restrictive financial covenants which College management believes they are in compliance with as of May 31 , 2012.

The Series 1998 Bonds are insured through the Municipal Bond Insurance Association and general obligation of the College.

In conjunction with the above 2008 agreement, the College has entered into a reimbursement agreement with Northern Trust which includes a letter of credit in the amount of $6,069,041. The letter of credit expires on August 21 , 2014. Because the above bond issue is operating in a floating mode and IS

remarketed at par value weekly, its carrying value approximates fair value of the outstanding balances of the bonds. Should the agent not be able to remarket the bonds, they become demand notes under the letter of credit agreement.

Subsequent to May 31, 2012, the College issued $15,960,000 in bonds payable to the Illinois Finance Authority (see Note 17).

(Continued)

13.


May 31 , 2012 and 2011

NOTE 7- DEFERRED REVENUE WITH FOOD SERVICER

In 2003, the College was issued a $500,000 non-interest bearing note payable, the proceeds of which were being used to fund renovations to food service equipment and facilities. During fiscal 2007, the College was issued an additional $150,000 non-interest bearing note. The notes are payable in annual installments of $50,000 and $15,000, respectively, both of which are paid through reductions of the amounts owed to the College by the issuer of the note under an existing agreement. The notes are secured by future food service earnings of the College. As of May 31 , 2012 and 2011 , $60,000 and $125,000, respectively, was outstanding and as of May 31 , 2012 the balance on the $500,000 note was $0. In relation to these notes, the College recorded $2,856 and $4,806 in imputed interest expense in fiscal 2012 and 2011, respectively.

In 2011 , the College entered into a contract that expires on 2025 in which the food servicer comm1tted to fund the expansion of a building on the College's campus in the amount of $4,151 ,000. The College will recognize revenue amortized over the life of the contract on a straight line basis. The amount recognized in 2012 was $296,500.

NOTE 8- BOND ISSUANCE COSTS

Bond issuance costs consist of closing expenses paid related to the issuance of the IFA Series 1998 and 2008 bonds. These costs are being amortized on a straight-line basis over the life of the bond. Bond issuance costs of $38,043 and $38,043 were amortized during fiscal years of 2012 and 201 1 • respectively. In addition, accumulated amortization of bond issue costs was $421 ,226 and $383,183 as of May 31 , 2012 and 2011 , respectively

NOTE 9- RETIREMENT PLAN

Retirement benefits are provided for salaried and hourly employees through TIAA-CREF, a national organization used to fund pension benefits for employees of educational institutions. The College makes contributions to TIAA-CREF to purchase individual annuities equivalent to retirement benefits earned. Total contributions made by the College during fiscal years 2012 and 2011, were approximately $1 ,581 ,000 and $ 1 ,553,000, respectivejy.

NOTE 10 - POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS

The College sponsors a top hat post-retirement plan that provides medical coverage to select retired employees. Spouses under age 65 of eligible retirees are also eligible for medical coverage. The postretirement plan provides benefits to select employees who retire between age 62 and 65 If they have worked for the College for at least 15 years. Medical coverage terminates at age 70. In addition, the College sponsors a post-employment disability plan that provides medical coverage for all permanently disabled fuJI-time tenured and non-tenured employees.

Financial accounting standards require the College to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its plans. Accounting standards also require that the costs of providing post-employment health insurance coverage to disabled employees be recognized when the event causing disability occurs and a reasonable estimate of the related costs can be made.

(Continued)

14.


May 31, 2012 and 2011

NOTE 10 ~ POST~RETIREMENT AND POST~EMPLOYMENT BENEFITS (Continued)

Net periodic benefit cost for fiscal years 2012 and 2011, included the following components:

Retired Disabled 2012 2011 2012 2011

Sef'Ace cost - benefits earned during the period $ 93,832 $ 75,134 $ - $

Interest cost on accumulated benefit obligation 58,455 49,736 2,995 1,839

Amortization of prior service costs (8,033) (8,033)

Amortization of gain (61 ,937) (86,038)

Net periodic benefit cost $ 82,317 $ 30,799 $ 2,995 $ 1,839

Net changes in periodic benefit cost for fiscal years 2012 and 2011 , included the following components:

Retired Disabled 2012 2011 2012 2011

Accumulated benefit obligation beginning of year $ 1.173,480 $ 916,093 $ 62,350 $ 36,128

Sef'Ace cost 93,833 75,134 Interest cost 58,455 49,736 2,995 1,839 Actuarial gain (loss) (36,301) 139,492 27,114 32.170 Disbursements (1,072) (6,975) (6,539) (7,787}

Accumulated benefit obligation end of year $ 1,288,395 $ 1,173,480 $ 85,920 $ 62,350

Fair value of plan assets for fiscal years of 2012 and 2011, including both post-retirement and postemployment benefits:

Fair value of plan assets , beginning of the year $

College contributions Benefits paid

2012 2011

. $

14,150 (14,150)

14,762 (14,762)

Fair \rcliUe of plan benefits end of year $ · $ ======

(Continued)

15.


May 31 , 2012 and 2011

NOTE 10 - POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS (Continued)

The financial status of the plans and the amounts recognized in the statement of financial position as of May 31 are shown below:

Accumulated benefit obligation:

Retirees Active employees eligible

for benefits Active employees not yet

eligible for benefits Accrued benefit cost

recognized in the statements of financial

position

Retired 2012 2011

$ 4,621 $ 62,854 $

S7,593 74,127

1,196,181 1,036,499

$ 1,288,395 $ 1,173,480 $

Disabled 2012 2011

85,920 $ 62,350

85,920 $ 62,350 = ======

The amount of amortization expected to be recognized as net periodic benefit cost (benefit) during the fiscal year ending May 31, 2012 is as follows:

Transition obligation (asset) Prior ser.;ce cost (credit)

Net gain

$ (8,033) (67,682)

$ (75,715)

The weighted average discount rate used in determining the accumulated post-retirement and postemployment benefit obligations was 3.93% in 2012 and 5.06% in 2011.

The assumed health care cost trend rate used in measuring the accumulated post-retirement and postemployment benefit obligations was 8.50% in 2012 and 10.0% in 2011 , decreasing 0.5% a year thereafter until the ultimate rate of 5.0% is reached in 2018. In 2011 the ultimate rate of 5.0% was in 2021 .

The health care cost trend rate has a significant effect on the accounts reported. For example, if the health care cost trend rate assumptions changed by 1 %, the approximate effect is as follows:

Impact of a 1% increase In medical trend:

Effect on total service and interest components Effect on benefit obligation

Impact of a 1% decrease in medical trend:

Effect on total service and interest components Effect on benefit obligations

(Continued)

$ 30,138 $ 177,657

$ (24,448) $ (150,119)

16.


May 31, 2012 and 2011

NOTE 10 · POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS (Continued)

The College's expected contributions to the retired and disabled plans are as follows:

Fiscal Year ending May 31 : Retired Disabled Total

2013 $ 15,047 $ 9,966 $ 25,013 2014 35,334 11 ,237 46,571 2015 42,484 12,609 55,093

2016 63,572 14,081 77,653 2017 61 ,019 15,749 76,768

Thereafter 410,660 58,348 469,008

$ 628,116 $ 121 ,990 $ 750,106

NOTE 11 - DEFERRED COMPENSATION PLAN

The College has a compensation agreement with a key employee that provides tor deferred compensation payments based on annual contributions as defined in the agreement. The expense related to this plan was approximately $41 ,000 in 2012 and $91,000 in 2011. The related deferred compensation liability was $41,000 and $352,500 at May 31, 2012 and 2011, respectively. In addition, the College has a voluntary relinquishment of tenure and employment plan which offers a benefit to qualifying tenured faculty members. The expense related to this plan was $0 and $0 for the years ended May 31 , 2012 and 2011 . The related liability as of May 31 , 2012 was $12,000.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Operating Leases: The rental commitments for operating leases consist of lease obligations for various copiers, postage meters, tracking software, and vehicles. The lease terms range from two to tour years. Rental Expense for operating leases during 2012 and 2011 was approximately $67,000 and $66,000, respectively.

Aggregate future minimum lease payments at May 31, 2012, are approximately as follows:

Year ending May 31, 2013 $ 60,440 2014 54,922 2015 34,664 2016 21,762 2017 12,600

$' 184,388

(Continued)

17.


May 31 , 2012 and 2011

NOTE 12 ·COMMITMENTS AND CONTINGENCIES (Continued)

The College entered into a lease agreement for dormitory and related educational facilities in the City of Chicago, for use in an educational program which began Fal l 2012. The lease agreement commenced on August 1. 2011, and ends on May 31 , 2016. Future minimum lease payments at May 31, 2012, are as follows:

Year ending Ma~ 31 , 2013 $ 244,110 2014 251 ,433 2m5 258,976 2016 266,746

$ 1,"021 ,265

Claims and Legal Action: The College is involved in various claims and legal actions arising In the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the College's financial position, changes in net assets or liquidity.

Student Financial Aid: The College receives significant student financial aid from the U.S. Department of Education. The disbursement of funds received under such programs generally requires compliance with terms and conditions specified in federal regulations and are subject to audit by the U.S. Department of Education and possible disallowance of certain expenditures. The College has not had any significant disallowance of student financial aid in the past and expects such amounts, if any, to be immaterial.

U.S. Department if Education Program Review: On October 5, 2012, the College received a Final Program Review Determination (FPRD) from the U.S. Department of Education {Department) as the result of a program review begun August 6 , 2009. The program review examined the College's administration of the federal student aid programs. The FPRD asserts that the College did not adequately verify documentation as was requ ired for 30% of its student applicant pool for the 2007-2008 and 2008-2009 award years. The FPRD concludes, as a result, that the College is liable to repay to the Department federal student aid funds disbursed in those two years to students listed by the Department as not having been adequately verified. The total claimed repayment is $777,651 for the two years for Pell, FSEOF, ACG, Smart, FWS, Perkins and subsidized FFEL student loan funds awarded to those students. The College has 45 days to appeal the FPRD findings and will do so. The College believes that it appropriately verified the required 30% of its applicant pool in both years and that it received correct and sufficient documentation for the students in question.

In 2012, the Department conducted a second program review of the College and informed the College during the exit interview that there are no findings from that review. The CoiJege is awaiting the Department's final written report on that program review.

NOTE 13 - ENDOWMENT COMPOSITION

The College's endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As required by applicable standards, net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.

(Continued)

18.


May 31 , 2012 and 2011

NOTE 13- ENDOWMENT COMPOSITION (Continued)

The schedule below excludes certain permanently restricted net assets In the statement of financial positron including future pledge receivables from donors and undistrlbuted amounts from estates and terminated trusts. Additionally there are two funds included in permanently restricted in the statement of net assets at fair value in which the College has a perpetual beneficial interest, the distributions of which are temporarily restricted for scholarships.

Endowment net asset composition by type of fund as of May 31 , 2012, is as follows:

Temporarily Permanently Unrestricted Restricted Restricteg Total

DonoHestricted endowment funds $ (9,214,691) $ 5,487,477 $ 55,897,383 $ 52,170,169

Quasi-endov.ment funds 17,320,380 17,320,380

Total funds $ 8,105,689 $ 5,487,477 $ 55,897,383 $ 69.490,549

Endowment net asset composition by type of fund as of May 31 , 201 1, is as follows:

Temporarily Permanently Unrestricted Restricted Restricted Total

Donor-restricted endowment funds $ (9, 120,498) $ 10,529,920 $ 62,827,067 $ 64,236,489

Quasi-endowment funds 6,673,354 6,673,354

Total funds $ ~2.447' 144) $ 10,529,920 $ 62,827,067 $ 70,909,843

(Continued)

19.


May 31, 2012 and 2011

NOTE 13- ENDOWMENT COMPOSITION (Continued)

Changes in endowment net assets tor years ended May 31 , 2012 and 2011 , are as follows:

Temporarily Permanently Unrestricted Restricted Restricted

Net assets,June 1, 2010 $ (3,172,538) $ 4,180,976 $ 59,035,937

Investment return: Investment income 123,601 922,396 13,690 Net appreciation (realized

and unrealized) 1,212,890 9,051,455 213,346

Total investment return 1,336,491 9,973,851 227,036

Contributions 280 3,351,955 Change in donor designation 194,698 249,938 Appropriation of endowment

assets for expenditure (611 ,377) (3,819,605) (37,799)

Net assets, May 31 , 2011 (2,447, 144) 10,529,920 62,8Z7,067

Investment return: Investment income 524,311 312,473 9,589 Net appreciation (realized

and unrealized) (1 ,041 ,079) (620,451) (41,317)

Total investment return (516,768) (307,978) (31 ,728)

Contributions 997,092 2,746,308 Change in donor designation 10,640,443 (948,634) ( 9' 607' 596) Appropriation of endowment

assets for expenditure (567,934) (3, 785,831) (36,668)

Net assets. May 31 , 2012 $ 8,105,689 $ 5,487,477 $ 55,897,383

(Continued)

Total

$ 60,044,375

1,059,687

10,477,691

11 ,537,378

3,352,235 444,636

(4,468,781)

70,909,843

846,373

(1,702,847)

(856,474)

3,743,400 84,213

( 4,390,433)

$ 69,490,549

20.


May 31 , 2012 and 2011

NOTE 13 ·ENDOWMENT COMPOSITION (Continued)

Interpretation of Relevant Law: Effective June 30, 2009 Illinois signed into law the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA modernizes the laws governing a not-forprofit organization's investment and management of donor-restricted endowment funds. The Board of Trustees of the College, serving as the body delegated to manage the College's endowments, has interpreted UPMIFA as allowing, but not requiring, the preservation of the historic dollar value of the original gift of donor-restricted endowment funds, absent explicit donor stipulations to the contrary. As a result of this interpretation, the College has chosen to classify 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 pefmanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund,

In accordance with accounting principles governing not-for-profit organizations subject to an enacted version of UPMIFA, the portions of donor-restricted endowments not classified as permanently restricted net assets are classified as temporarily restricted net assets until appropriated for expenditure. Realized and unrealized gains and losses on all College permanently restricted endowments are being recognized in temporarily restricted net assets, except for unrealized gains and losses on deferred gifts that will provide proceeds upon death of the annuitant for a permanent endowment

The aggregate amounts of funds for which the fair value of the assets held is less than the h1storrc dollar value of the original gift were $9,214,691 and $9,120,498 at May 31, 2012 and 2011 , respectively. For the year ended May 31 , 2012, a current year loss of $426,234 was reported in unrestricted net assets to reflect additional underwater donor-restricted endowment balances.

Return Objectives and Risk Parameters: The purpose of the College's long-term investments is to support the College and its mission over the long term. Thus the financial goals for the endowment fund are to preserve and increase real purchasing power, to offset the effects of inflation, to take advantage of long-term horizons and to maintain and ideally increase the contribution to the operating budget. The performance of the endowment fund against these goals shall be evaluated over roll ing three- and fiveyear periods.

The primary investment objective for the endowment is to earn equal or superior results relative to the following benchmarks: An absolute return objective-which shall be measured in real (I.e. net of inflation) rate of return and shall have the longest time horizon-of the Consumer Price Index plus 5% compounded annually net of fees over a rolling ten-year period; a relative return objective-which shall be measured at time-weighted rate of return vs. capital market indices; a comparative return objectivewhich shall be measured as performance of the fund as compared to similar funds in a balanced manager universe-of 75% equity ( 15% international equity)/25% fixed income/cash managers. The College strives over time to place in the top return quartile among peer institutions.

Strategies Employed for Achieving Objectives: The long-term investments of the College, particularly the endowment, have an indefinite time horizon that runs concurrent with the endurance of the College in perpetuity. As such, these funds can assume a time horizon that extends well beyond a normal market cycle, and can assume an above-average level of risk as measured by the standard deviation of annual returns. It is expected, however, that both professional investment management and sufficient portfolio diversification will smooth volatility, help to assure a reasonable consistency of return and a flow of income to support College operations.

(Continued)

21 .


May 31, 2012 and 2011

NOTE 13 - ENDOWMENT COMPOSITION (Continued)

Spending Polley and How the Investment Objectives Relate to Spending Policy: The draw is the amount withdrawn from the investment pool to support the College's operations and mission. The College uses a total return method to calculate the draw on funds invested. Total return is the sum of all interest, dividends and realized and unrealized gains. The draw is calculated on a trailing twelve-quarter average of the endowment's total market value ending with the prior last day of February, with the understanding that this draw plus inflation will not normally exceed total return from investment. The goal of the twelvequarter average is to minimize impacts on budgets caused by volatility in markets.

The Board of Trustees approved the annual endowment draw for the operating budget at a fixed amount of $2.425 million. The draw for operations has been held flat for six years, with the goal of decreasing the draw percentage as the capital campaign concludes. The draw for other non-operating restricted funds, $0.690 million, was calculated as 5% of the trailing twelve-quarter average fair value of the individual fund. The Board of Trustees also approved the use of accumulated unrestricted realized gains on investment to make debt service payments. During fiscal years 2012 and 201 1, respectively, the College utilized approximately $1.274 million and $1.358 million for debt service payments.

The spending policy, based on total return, will from time to time result in a draw from funds that are below fair value. The College continues to draw from these funds, in order to honor the wishes of the donors who have generously supported the functions of the College. The draw and the allocation of market losses together will be reviewed by the Executive Committee during market downturns to assess whether the spending rate is prudent for those accounts.

NOTE 14 - RELATED PARTY TRANSACTIONS

Full-time tenured teaching faculty and certain full-time administrative staff are eligible to take out second mortgages on their primary residence with the College. The interest rate on the notes is· 60% of the rate published in the Wall Street Journal seven days preceding the date of closing as the yield posted by Federal National Mortgage Association on 30-year standard conventional fixed-rate mortgage commitments tor delivery within 30 days. Interest rates varied from 3.1% to 4.9% at May 31 , 2012. Interest income on mortgages receivable is recognized over the term of the receivable based upon the effective yield method. Second mortgages outstanding were $1 ,207,741 and $1,561,244 as of May 31, 2012 and 2011, respectively. The second mortgages are classified as part of long-term investments on the statement of financial position.

Future minimum payments are scheduled as follows:

Year ending May 31, 2013 2014 2015 2016 2017

Thereafter

$ 54,686 56,798 58,993 57,301 47,352

932,611

$ 1,207,741

During the year ended May 31 , 2012, the College received approximately $3,329,000 in contributions from board members.

(Continued)

22.


May 31, 2012 and 2011

NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the price that would be received for an asset or paid to transfer a liability (an exit price) in the College's principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Cash and Cash Equivalents: The carrying amounts reported in the statement of financial position approximate their fair value.

Accounts Receivable: The carrying amounts reported in the statement of financial position approximate their fair value.

Accounts Payable and Accrued Expenses: The carrying amounts reported ln the statement of financial position approximate their fair value.

Bonds Payable: Because the bond issue is operating in a floating mode and is remarketed at par value weekly, its carrying value approximates fair value of the outstanding balances of the bonds.

Annuities Payable: The carrying amount reported in the statement of financial position approximate its fair value.

Assets and Liabilities Measured on a Recurring Basis:

The fair value hierarchy is based on maximizing observable input& and minimizing unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value.

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that ~re not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. If during the year, the fair value inputs change, the assets are reclassified between the levels.

Money market The money market held by the College is readily marketable and is determined by obtaining quoted prices on nationally recognized securities and exchanges (Level1 inputs).

Government bonds: Fair values reflect the closing price reported in the active market in which the security is traded (Level1 inputs).

Corporate stocks: College equity holdings that are readily marketable are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).

(Continued)

23.


May 31, 2012 and 2011

NOTE 15 · FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Fixed income: Fixed income funds that are readily marketable are determined by obtaining quoted prices on nationally recognized securities exchanges (Level1 inputs).

Hedge funds, parlnerships, real estate and certain fixed income and corporate stock: For other investments for which there is no active market, generally referred to as "alternative investments", fair values are determined using audited net asset values ("NA V'') as of their most recent audited financial statements, adjusted for cash receipts, cash disbursements, and other anticipated income or loss through May 31st. The NA Vs of the investment funds are determined on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States. The managers utilize standard valuation procedures and policies to assess the fair value of the underlying investment holdings to derive NAV.

College management has done considerable independent review of valuations reported by investment managers and determined that NAVis a reasonable and prudent estimate of fair value. Where the funds are able to be redeemed within 90 days of year end, the investments are considered marketable (Level 2 inputs - market approach). Otherwise, alternative investments are not readily marketable and their estimated value is subject to uncertainty. Therefore, there may be a material difference between their estimated value and the value that would have been used had a readily determinable fair value for such investments existed (Level 3 inputs -Income approach).

Beneficial interest in trusts: The fair value of the beneficial interests in various perpetual trust assets was determined based upon the College's percentage of interest in the fair value of the underlying trust assets at May 31, 2012 and 2011 . Because these units are not actively traded, the assets are deemed to be classified as level 3 assets (income approach).

Contributions are reported at fair value at the date the contribution is made. Contributions may include cash, securities, fixed assets or pledges receivable. Securities are measured using the same methodology as discussed above. Fixed assets are measured using appraisals or quoted market prices for similar assets or other market data. Pledges receivable are measured at the discounted cash flows less an allowance for collectability. The discount rate is as described above.

(Continued)

24.


May 31 , 2012 and 2011

NOTE 15- FAIR VALUE OF FINANCIAL INSTRUMENTS (ContinlJed)

Assets and liabilities measured at fair value at May 31 , 2012 and 2011 , on a recurrlng basis are summarized below:

Fair Value Measurements at Ma;i 31 , 2012

Level1 Level2 Level3 Total Assets:

Investments Money market $ 802,786 $ - $ - $ 802,786 Government bonds 134,476 134,476 Fixed income 3,065,832 4,170,430 7,236,262 Corporate stocks

Europe 7,123,274 3,083,323 10,206,597 North America 17,393,711 17,393,711 South America 50,035 50,035 Global 132,379 132,379

Hedge funds 2,831 ,506 2,831 ,506 Real estate 6,174,731 6,174,731 Commodities 5.904 5,904 Partnerships, North America 18,555,827 18,555,827

Total investments at fair value 28,708,397 7,253,753 27,562,064 63,524,214

Investments held at cost: Direct real estate 2 ,504,582 Mortgages and loans

receivable (Note 14) 1,207,741

Total investments $ 67,236,537

Beneficial interest in trusts 2,985,395 $ 2,985,395

Total assets at fair value $ 28,708,397 $ 7,253,753 $ 30,547,459

(Continued)

25.


May 31 , 2012 and 2011

NOTE 15- FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Fair Value Measurements at Ma~ 31, 2011

Level 1 Level2 Level3 Total Assets:

Investments Money market $ 1 j083,501 $ - $ - $ 1,083,501 Government bonds 171,128 171 ,128 R:xed income 1,044,346 3,976,237 5,020,583 Corporate stocks

Europe 8,229,272 4,049,673 12,278,945 North America 19,161,079 19,161 ,079 South America 82,841 82,841 Global 123.526 123,526

Hedge funds 5,044,874 5,044,874 Real estate 5,122 5,305,808 5,310,930 Commodities 12,427 12,427 Partnerships, North America 19,651 ,623 19,651 ,623

Total investments at fair value 29,913,242 8,025,910 30,002,305 67,941,457

Investments held at cost: Direct real estate 1,989,211 Mortgages and loans

receivable {Note 14) 1,561,244

Total investments $ 71,491 ,912

Beneficial interest in trusts 3,192,441 $ 3,192,441

Total assets at fair value $ 29,913,242 $ 8,025,910 $ 33,194.746

The table below presents a reconciliation and income statement classification ot gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended May 31 , 2012:

Rxed Hedge Rear Beneficial

nco me Funds Estate PartnershiQ nterest In Trusts Total

Balance, June 1, 2011 $ - $ 5,044,874 $ 5,305,808 $19,651,623 $ 3,192,441 $33,194,746

Transfers Return (533,368) 686,153 (131 ,333) {192,183) (170.731) F\Jrchases and capital 335,700 778,834 1,114,534

contributions

Distributions (1 ,680,000) (152,930) ( 1 '7 43,297) (14,863) (3,591 ,090)

Balance,

11/ay 31 ,2012 s - $ 2,831,506 $ 6,174,731 s 18,555,827 $ 2,985,395 $ 30,547,459

All unrealized gains/losses presented In the table relate to assets still held at May 31. 2012.

(Continued)

26.


May 31 , 2012 and 201 1

NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended May 31 , 2011 :

Fixed Hedge Real Beneficial hcorre Funds Estate PannershiQ hterest in Trusts Total

Balance. June 1. 20 1 0 $ 3,569,977 s 4,608,944 $ 7,613,367 s 14,276,764 $ 3,008,427 $33,077,479 Transfers (3,569,977) (2,359,337) 2,359,337 (3,569,977) Return 473,051 (329,943) 2,238,818 388,199 2,770,125 F\Jrchases and capital

contributions 653,400 1,698,379 2,351,779

Distributions (37,121 ) (271 ,679) (921,675) (204,185) (1 ,434,660)

Balance, May 31 , 2011 $ - $ 5,04.4,874 $ 5,305,808 $19,651 ,623 $ 3,192,441 $33,194,746

Oescri(;!tion of Alternative Investments and Liguidity:

The College's alternative investments consist of investments in fixed income, hedge funds, partnerships and real estate.

• Fixed Income - The focus is on investing in the senior and or secured loans of non Investment grade companies, investments may also include high yield and convertible securities. During the year ended May 31 , 2012, the terms of this investment changed such that it can be redeemed on a quarterly basis with a 60-day notice. Therefore, the investment was transferred from level 3 to level 2. There were $560,000 of unfunded commitments at May 31 , 2012.

• Hedge funds - The College invests in two hedge funds which can be categorized by the following investment strategy types:

(1) The investment objective is to achieve long-term returns commensurate with long-term returns from a portfolio Invested in the general equity markets, while experiencing volatility more like that of a portfolio invested in the general debt markets. The Fund seeks to achieve this objective by investing predominantly in interests in Portfolio Funds - i.e., limited partnerships and similar pooled invested vehicles often referred to as "hedge funds" - managed by independent Portfolio Managers that employ diverse alternative investment strategies across a variety of asset classes. Examples of such strategies may include, but are not limited to, long/short equity, event driven. relative value, and global asset allocation. This fund is subject to quarterly redemption restrictions with advance notice period of 15 days; however, in the College's experience, 90% was redeemable in 105 days with the remaining 1 0% redeemable in 135 days. (Level 3)

(2) The second investment seeks to achieve appreciation of its assets through trading in securities, primarily by using fixed rncome strategies, mortgage backed securities, government securities, corporate investment grade and noninvestment grade securities, U.S. and non-U.S. securities, distressed securities and other debt securities both in cash and derivative form, from both long and short perspectives. This fund is subject to annual redemption restrictions with advance notice by October 31. (Level 3)

(Continued)

27.


May 31 , 2012 and 2011

NOTE 15- FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The fund of funds investment has quarterly liquidity and requires 65-days prior written notification. The event driven fund has annual liquidity occurring on December 31st with 90-days prior written notification. Level 3 of the fair value hierarchy is employed by both funds for valuation purposes using the fiscal year end NAV in conformity with GAAP accounting standards.

At May 31 , 2012, the College had no unfunded commitments.

• Partnerships • The limited partnership alternative investments are comprised of 21 different partnerships. These 21 partnerships can be categorized into: U.S. private equity, U.S. distressed debt, global distressed debt, U.S. venture capital and international private equity:

(1) U.S. private equity limited partnerships are primarily investments in lower middle-market Companies in the United States and Canada including corporate carve outs, buyouts, recapitalizations and restructurings.

{2) U.S. distressed debt and Global distressed debt investment fund of funds allocates assets among a diversified, select group of experienced investment managers that focus primarily on non-investment grade investments with the knowledge and sophistication necessary to pursue a program of non-investment grade investments, purchasing Performing Restructured Debt, Stressed Securities, Distressed Securities, Mezzanine Securities and Special Situations.

(3) U.S. venture capital fund of funds objective is for long term capital appreciation and superior risk-adjusted returns through equity investments. The fund's primary strategic focus area is information technology with an early stage bias. Secondary strategic focus areas include healthcare and late state technology.

(4) International private equity fund of funds are primarily focused on long-term capital appreciation and superior risk-adjusted returns through equity investments. The strategic focus areas of the fund include European exposure and a preference for indigenous managers.

Nineteen of the partnerships do not allow for withdrawals from the partnerships or investment until the partnership is dissolved, typically eight to ten years. Two of the partnerships, representing 22% of the total, have monthly liquidity. In nearly all of the partnerships, there are special provisions that allow for the life of the partnership to be extended beyond the original dissolution date, typically two to four years. These investments are generally timed so that as one is dissolving a new investment is sought to replace it.

At May 31 . 2012. the College had $2.452,190 in unfunded partnership commitments.

(Continued)

28.


May 31. 2012 and 2011

NOTE 15 ·FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

• Real Estate - The real estate investments are comprised of twelve portfolios in six firms. The largest fund's purpose is to conduct real estate related investment activities and any business or activities incidental to or in support of such real estate related investment activities. Another fund makes opportunistic investments in commercial real estate focusing on the acquisition of equity interests in sub-performing real estate properties, principally in the United States, across a broad range of geographical markets and product types. In addition to making direct property investments, the fund may also make investments in distressed real estate debt and real estate companies. Another firm targets investment in leased office and industrial buildings, retail, and residential/commercial land development with a secondary investment pre-selling a minimum of 65% of the Independent Living Units (ILUs) before commencement of construction.

Two of the real estate investments have liquidity. The first allows for annual redemption up to 20% of the total units acquired at least five years prior to the last day of the applicable redemption notice period. The minimum term for an investment in this fund is equal to ten years. The lock up period for this investment expired in October, 2011. The other fund offers quarterly liquidity following a full six month investment period with 90-days prior written notification. The lock up period for this fund has expired. All other real estate investments are illiquid until the dissolution of the partnership. Level 3 of the fair value hierarchy is employed by all real estate investments for valuation purposes using the fiscal year end NAV in conformity with GAAP accounting standards or tax basis standards.

At May 31 , 2012. the College had $2,683,099 in unfunded real estate commitments.

NOTE 16- LOANS RECEIVABLE

The College makes uncollateralized loans to students based upon financial need. As of May 31, 2012 and 2011, the College has outstanding loans receivable, of $2,751 ,948 and $2,707,580, which represented 1.80% and 1.78% of total assets, respectively. Amounts due under the Perkins Loan program are guaranteed by the Federal government, and therefore, no reserves are placed on any past due balances under the program. Additionally, as of May 31, 2012 and 2011, the College has certain mortgages receivable from employees included on the statement of financial position in investments, of $1,207,741 and $1,561,244, which represented 0.79% and 1.02% of total assets, respectively. See Note 14 for additional detail.

(Continued)

29.


May 31 , 2012 and 2011

NOTE 16 - LOANS RECEIVABLE (Continued)

At May 31 , student loans consisted of the following:

Notes receivable Federal programs Institutional Programs

Notes receivable, gross Less allowance for doubtful accounts

Notes receivable, net

Mortgages receivable (Note 14)

Total financing receivables

Beginning of year New loans Payments on Principal

Write-offs

'End of year

2012

$ 2,826,513 179,836

3,006,349 254,401

2,751 ,948

1,207,741

$ 3,959,689

$ 4,268,824 436,320 740,922

4,533

$ 3,959,689

2011

$ 2,795,928 166,053

2,961 ,981 254,401

2,707,580

1,561 ,244

$ 4,268,824

$ 4,624,274 349,429 692,666

12,213

$ 4,268,824

The availability of funds for loans under these programs Is dependent upon reimbursements to the pool through repayments of outstanding loans as of May 31 , 2012 and 2011. The amount of funds in the Federal Perkins Loan program advanced by the Federal Government is $2,408,420 and $2,430,335, respectively; these are ultimately refundable to the government, and are classified as liabilities on the statement of financial position . Outstanding loans cancelled under the Federal Perkins Loan Program result in a reduction of funds available for loans and a decrease in the liability to the government. The College has reserved $216,226 of institutional funds against the Federal Portion of loans refundable, decreasing the liability. A second loan program is funded by the Strong Foundation, and the amount outstanding and classified as a liaibility for that program is $124,292 in both 2012 and 2011 .

At June 30, 2012 and 2011 , the following amounts were past due under the Perkins and institutional loan programs:

1 • 270 270 Days- 2-5 5 + Total

Day 2 Years Years Years Past

June 30, Past Due Past Due Past Due Past Due Due 2012 $ 174,784 107,582 44,169 220,636 $ 547,171 2011 $ 170,581 65,035 52,361 225,923 $ 513,900

(Continued)

30.


May 31 , 2012 and 2011

NOTE 17 - SUBSEQUENT EVENTS

In July 2012, the College issued variable rate revenue bonds, series 2012, payable to the Illinois Finance Authority in the amount of $15,960,000. The proceeds from the issuance will be used to finance a portion of the costs of the design, development, construction and equipping of an approximately 62,500 square toot, 233-bed student housing facility. The College entered into a contract with a developer, also in July, tor the demolition of an existing building and the construction of a new residence hall on that site on campus.

On August 10, 2012. Governor Pat Quinn signed Public Act 97-899 which amends the Fire Sprinkler Dormitory Act [11 0 ILCS 47). This public act allows for a 20 month extension of the January 1, 2013, compliance date if plans for dormitory sprinkler systems are approved by the Office of the State Fire Marshal no later than November 1, 2012, and include fire sprinkler system working drawings and hydraulic calculations, water supply analysis and a fire sprinkler system installation schedule. The College has contracted with Metropolitan Fire Protection, Inc. to complete a fire sprinkler design submittal for the six (6) dormitories impacted. Funding for the project will be the Independent Colleges Capital Program grant awarded to the College June 21, 2010. for $2 million.

31.

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