FINANCIAL REPORT JUNE 30, 2007

FINANCIAL REPORT

JUNE 30, 2007

MARY BALDWIN COLLEGE

FINANCIAL REPORT

June 30, 2007

CONTENTS

Page

INDEPENDENT AUDITOR’S REPORT.............................................................................................. 3

FINANCIAL STATEMENTS

Statements of Financial Position......................................................................................................... 4

Statements of Activities ..................................................................................................................... 5

Statements of Cash Flows .................................................................................................................. 7

Notes to Financial Statements ............................................................................................................ 9

Providing Professional Business Advisory & Consulting Services

319 McClanahan Street, S.W. • P.O. Box 12388 • Roanoke, VA 24025-2388 • 540-345-0936 • Fax: 540-342-6181 • www.BEcpas.comMember: SEC and Private Companies Practice Sections of American Institute of Certified Public Accountants

INDEPENDENT AUDITOR’S REPORT

To the Board of Trustees of Mary Baldwin College

Staunton, Virginia

We have audited the accompanying statements of financial position of Mary Baldwin College as of June 30, 2007 and 2006, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the College’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the College’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mary Baldwin College as of June 30, 2007 and 2006, and its changes in net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

CERTIFIED PUBLIC ACCOUNTANTS

Roanoke, VirginiaOctober 3, 2007

www.BEcpas.com

2007 2006

ASSETSCash and cash equivalents 4,041,935$ 2,376,995$ Accounts receivable, less allowance for doubtful accounts

2007 $332,000; 2006 $334,000 936,252 999,677 Prepaid expenses, inventories and other 257,874 268,674 Notes receivable, college and government student loans, less

allowance for doubtful accounts 2007 $265,000; 2006 $257,000 1,023,238 967,429 Contributions receivable (Note 2) 4,975,575 7,901,639 Investments (Note 3) 38,007,502 35,589,982 Cash value of life insurance policies 470,707 455,505 Deferred bond costs, net of accumulated amortization 352,863 382,635 Land, buildings, and equipment, net of accumulated depreciation (Note 4) 16,302,621 17,150,382

Total assets 66,368,567$ 66,092,918$

LIABILITIES AND NET ASSETSAccounts payable and accrued expenses 763,210$ 640,422$ Accrued compensation and other benefits 419,497 365,152 Accrued interest payable 87,456 88,312 Student and other deposits 800,004 727,279 Deferred revenue 176,451 159,126 Trust and annuity obligations 153,161 160,415 U.S. government grants refundable 925,603 936,987 Debt (Note 5) 17,123,713 17,883,908

Total liabilities 20,449,095 20,961,601

Net assets (Note 6)Unrestricted 6,691,647 4,283,001 Temporarily restricted 9,786,218 11,766,597 Permanently restricted 29,441,607 29,081,719

Total net assets 45,919,472 45,131,317

Total liabilities and net assets 66,368,567$ 66,092,918$


STATEMENTS OF FINANCIAL POSITIONJune 30, 2007 and 2006

The Notes to Financial Statements arean integral part of these statements.

4

Temporarily PermanentlyUnrestricted Restricted Restricted Total

OPERATING REVENUESTuition and fees 21,868,582$ -$ -$ 21,868,582$ Less financial aid (8,006,095) - - (8,006,095)

Net tuition and fees (Note 7) 13,862,487 - - 13,862,487 Contributions 1,148,911 1,612,147 - 2,761,058 Investment income, endowment and other (Note 3) 758,402 2,235,188 - 2,993,590 Investment income, temporary investments 212,865 8,750 - 221,615 Government and private grants 761,486 446,444 - 1,207,930 Auxiliary services 3,888,801 - - 3,888,801 Other 159,991 - - 159,991 Net assets released from restrictions and

reclassifications (Note 8) 7,436,317 (7,436,317) - -

Total operating revenues 28,229,260 (3,133,788) - 25,095,472

OPERATING EXPENSESEducational and general:

Instruction 12,131,026 - - 12,131,026 Public service 27,136 - - 27,136 Academic support 988,442 - - 988,442 Student services 2,937,978 - - 2,937,978 Institutional support 6,478,034 - - 6,478,034

Auxiliary services 4,418,371 - - 4,418,371

Total operating expenses (Note 9) 26,980,987 - - 26,980,987

Change in net assets, operating 1,248,273 (3,133,788) - (1,885,515)

NON-OPERATING INCOMEContributions 2,617 21,300 186,613 210,530 Investment income, endowment and other (Note 3) - 6,410 - 6,410 Investment return, net of amount available

to support current operations (Note 3) 689,461 1,522,289 165,001 2,376,751 Change in value of split-interest agreements - 71,705 8,274 79,979 Loss on early extinguishment of debt (Note 5) - - - - Net assets released from restrictions and

reclassifications (Note 8) 468,295 (468,295) - -

Change in net assets, non-operating 1,160,373 1,153,409 359,888 2,673,670

Change in net assets 2,408,646 (1,980,379) 359,888 788,155

NET ASSETSBeginning 4,283,001 11,766,597 29,081,719 45,131,317

Ending 6,691,647$ 9,786,218$ 29,441,607$ 45,919,472$


STATEMENT OF ACTIVITIESYear Ended June 30, 2007

2007

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

5


OPERATING REVENUESTuition and fees 20,951,712$ -$ -$ 20,951,712$Less financial aid (7,365,732) - - (7,365,732)

Net tuition and fees (Note 7) 13,585,980 - - 13,585,980 Contributions 1,240,919 2,022,049 - 3,262,968 Investment income, endowment and other (Note 3) 786,893 2,283,775 - 3,070,668 Investment income, temporary investments 102,926 9,428 - 112,354 Government and private grants 766,510 606,444 - 1,372,954 Auxiliary services 3,703,553 - - 3,703,553 Other 59,979 - - 59,979 Net assets released from restrictions and

reclassifications (Note 8) 7,904,471 (7,904,471) - -

Total operating revenues 28,151,231 (2,982,775) - 25,168,455

OPERATING EXPENSESEducational and general:

Instruction 12,019,826 - - 12,019,826 Public service 24,865 - - 24,865 Academic support 979,670 - - 979,670 Student services 2,755,741 - - 2,755,741 Institutional support 6,402,386 - - 6,402,386

Auxiliary services 4,332,892 - - 4,332,892

Total operating expenses (Note 9) 26,515,380 - - 26,515,380

Change in net assets, operating 1,635,851 (2,982,775) - (1,346,924)

NON-OPERATING INCOMEContributions 511 21,000 293,365 314,876 Investment income, endowment and other (Note 3) - 4,332 - 4,332 Investment return, net of amount available

to support current operations (Note 3) 244,385 219,816 3,245 467,446 Change in value of split-interest agreements - 23,856 63,170 87,026 Loss on early extinguishment of debt (Note 5) (675,538) - - (675,538) Net assets released from restrictions and

reclassifications (Note 8) 555,723 (555,723) - -

Change in net assets, non-operating 125,081 (286,719) 359,780 198,142

Change in net assets 1,760,932 (3,269,494) 359,780 (1,148,782)

NET ASSETSBeginning 2,522,069 15,036,091 28,721,939 46,280,099

Ending 4,283,001$ 11,766,597$ 29,081,719$ 45,131,317$

2006


STATEMENT OF ACTIVITIESYear Ended June 30, 2006

The Notes to Financial Statements arean integral part of these statements.

6

2007 2006CASH FLOWS FROM OPERATING ACTIVITIES

Change in net assets 788,155$ (1,148,782)$ Adjustments to reconcile change in net assets to net cash provided by

operating activities:Non-operating and noncash items:

Contributions and gains restricted for plant expansion and endowment (184,956) (291,813) Net realized and unrealized gains on investments (5,301,069) (3,291,629) Depreciation and amortization 1,671,247 1,798,432 Loss on early extinguishment of debt - 675,538 Loss on disposal of equipment 8,355 511 Change in cash value of life insurance (15,202) (2,384) Fair value of guarantee, net of collateral - (30,914)

Changes in certain operating assets and liabilities:(Increase) decrease in:

Accounts receivable 63,425 175,436 Prepaid expenses, inventories and other 10,800 99,816 Contributions receivable 2,926,064 2,432,901

(Decrease) increase in:Accounts payable, accrued expenses and deferred revenue 148,372 (116,964) Student and other deposits 72,725 (32,470) Trust and annuity obligations, net 16,321 (43,539) U.S. government grants refundable (11,384) 8,223

Net cash provided by operating activities 192,853 232,362 CASH FLOWS FROM INVESTING ACTIVITIES

Change in notes receivable, net (55,809) 62,884 Purchases of land, buildings, and equipment (802,269) (612,875)

Change in accounts payable incurred on purchases 45,230 87,386 Proceeds from sale of fixed assets 200 26,234 Change in investments, net of proceeds from sales 2,883,549 3,651,627

Net cash provided by investing activities 2,070,901 3,215,256 CASH FLOWS FROM FINANCING ACTIVITIES

Contributions and gains restricted for plant expansion and endowment 184,956 291,813 Payments of trust and annuity obligations (23,575) (37,448) Cash used to extinguish debt - (290,980) Deferred bond costs incurred - (318,694) Payments on debt (760,195) (862,423)

Net cash used in financing activities (598,814) (1,217,732) Increase in cash and cash equivalents 1,664,940 2,229,886

CASH AND CASH EQUIVALENTSBeginning 2,376,995 147,109 Ending 4,041,935$ 2,376,995$

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid 715,835$ 887,824$

The Notes to Financial Statements are 7an integral part of these statements.


STATEMENTS OF CASH FLOWSYears Ended June 30, 2007 and 2006

2007 2006


STATEMENTS OF CASH FLOWSYears Ended June 30, 2007 and 2006

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTINGAND FINANCING ACTIVITIES

Purchase of land, buildings, and equipment included in accounts payable 132,616$ 87,386$ Early extinguishment of debt:

Assumption of new debt -$ 11,345,000$ Extinguishment of old debt - (11,150,000)Debt reserve on old debt used to payoff old debt - 606,071 Interest accrued and paid on old debt - (92,676) Deferred bond costs incurred - (222,415) Write-off of deferred bond costs on old debt - 189,558

Loss on early extinguishment of debt - 675,538 Debt reserve on old debt used to payoff old debt - (606,074) Interest accrued and paid on old debt - 92,676 Deferred bond costs incurred - 222,415

Cash used in early extinguishment of debt -$ (290,983)$

The Notes to Financial Statements are 8an integral part of these statements.

(Continued) 9


NOTES TO FINANCIAL STATEMENTSJune 30, 2007

Note 1. Nature of Operations and Significant Accounting Policies

Nature of operations:

Mary Baldwin College (the “College”) is a private, single sex, liberal arts college located in Staunton, Virginia. Significant sources of revenue include tuition and fees, contributions, auxiliary services, and investment returns.

The College also has coeducational adult and graduate programs with sites throughout the Commonwealth of Virginia. The adult program’s operating revenues and operating expenses are 19.0%and 10.2%, respectively, of total operating revenues and operating expenses for the year ended June 30, 2007, and 19.0% and 10.3% for the year ended June 30, 2006.

The significant accounting policies followed by the College are described below:

Basis of financial statement presentation and accounting:

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

The accompanying financial statements present information regarding the College’s financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. The three classes are differentiated based on the existence or absence of donor-imposed restrictions, as described below:

Unrestricted net assets are free of donor imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. Revenues, gains, and losses that are not temporarily or permanently restricted by donors are included in this classification. Expenses are reported as decreases in this classification.

Temporarily restricted net assets are limited in use by donor-imposed stipulations that either expire by passage of time or can be fulfilled by action of the College pursuant to those stipulations.

Permanently restricted net assets are amounts required by donors to be held in perpetuity; however, generally, the income on these assets is available to meet various and other operating needs. These net assets primarily include permanent endowment funds.

(Continued) 10



Note 1. Nature of Operations and Significant Accounting Policies (Continued)

Cash and cash equivalents:

Cash on hand, deposits in banks, and short-term investments with original maturities of three months or less are considered cash and cash equivalents. A certificate of deposit worth $10,500 is included in cash and cash equivalents at June 30, 2007 and 2006. Cash held for long-term investment is classified as investments.

As of June 30, 2007 and 2006, temporarily restricted net assets, exclusive of contributions receivable and trusts and annuities, exceeded available operating cash and cash equivalents, investments, and other available assets. The College has sufficient unrestricted quasi endowment funds to cover the designated or restricted monies spent. However, Board approval would be required on any such transaction. To prevent this shortfall going forward, the College opened a new cash account specifically for restricted gifts received.

The College is required to maintain a minimum cash balance of $70,000 in a Maintenance and Equipment Reserve account. This amount is included in cash and cash equivalents at June 30, 2007 and 2006, respectively. In addition, the College had approximately $704,000 and $956,000 earmarked for restricted and plant purposes, and loan fund operations at June 30, 2007 and 2006, respectively.

Inventories:

Inventories related to auxiliary services are stated at the lower of cost or market with cost determined principally on the first-in, first-out (FIFO) basis.

Investments:

Investments in marketable securities with readily determinable fair values and all investments in debt securities are reported at their fair values, as determined by quoted market prices, in the statements of financial position. Net unrealized and realized gains or losses are reflected in the statements of activities. Certain land and other investments which are not readily marketable are carried at cost.

Gifts of investments are recorded at their fair value (based upon quotations or appraisals) at the date of gift. Purchases and sales of investments are recorded on the trade date.

Income and realized and unrealized net gains and losses on investments of endowment and similar net asset classes are reported as follows:

• As changes in permanently restricted net assets if the terms of the gift require that they be added to the principal of a permanent endowment fund;

• As changes in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income;

• As changes in unrestricted net assets in all other cases.

(Continued) 11




Investments: (Continued)

Except for certain investments which are not readily marketable, endowment assets are pooled on a market-value basis, with each individual fund subscribing to or disposing of units on the basis of the market value per unit at the beginning of the calendar quarter within which the transaction takes place. Units of participation are computed and assigned to gifts based upon their market values on the date of donation. Distribution of annual income of the investment pool is based upon the number of units of participation, determined quarterly, assigned to each participating fund. The units of participation in the pooled endowment at June 30, 2007 and 2006 were 238,239 and 237,236 with a unit value of $169.79 and $160.30, respectively.

The estimated fair value of certain alternative investments, such as private equity interest, is based on valuations provided by the external investment managers. The College believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Because alternative investments are not readily marketable, their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed. Such difference could be material.

“Underwater” endowments:

Underwater endowments occur when the market value of permanently restricted endowments decreasebelow their historic dollar value (usually the original gift adjusted for amounts required to be added to it either by the donor or law) as of June 30. The College accounts for such losses, when applicable, on a fund-by-fund basis by first reducing temporarily restricted net assets to the extent that donor-imposed temporary restrictions on net appreciation of the fund have not been met before the loss occurs. Any remaining loss reduces unrestricted net assets. Permanently restricted net assets are maintained at an amount equal to the historic dollar value of the fund. Subsequent gains restore unrestricted net assets until any deficiency is eliminated and then they would restore temporarily restricted net assets.

The College does not have any obligation to restore these funds to their original value.

As of June 30, 2007 and 2006, the College has underwater endowment funds where market value is below historic dollar value by a total of approximately $226,000 and $791,000, respectively.

Split-interest agreements:

The College participates in various split-interest agreements that are unconditional and irrevocable. These arrangements are established when a donor makes a gift to the College or a trust in which the College shares benefits with other beneficiaries. Generally, the College accounts for these agreements by recording its share of the related assets at fair market value (which approximates the present value of the estimated future cash receipts). Liabilities are recorded for any portion of the assets held for donors or other beneficiaries equal to the present value of the expected future payments to be made. The liabilities are adjusted annually for changes in the value of the assets, accretion of the discount, and other changes in the estimates of future benefits. Contribution revenues are recognized at the dates the agreements are established for the difference between the assets and the liabilities.

(Continued) 12




Split-interest agreements: (Continued)

If the College holds the assets or is the trustee, the assets are included in investments and the liabilities are included in liabilities under trust and annuity obligations. If a third party is the trustee until the termination of the trust and then the remaining assets are transferred to the beneficiaries, the assets less related liabilities are included in contributions receivable.

Land, buildings, and equipment:

Land, buildings, and equipment are stated at cost at date of acquisition, or fair value at date of gift, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets.

Equipment is removed from the records and any gain or loss is recognized at the time of disposal. Expenditures for new construction, major renewals and replacements, and equipment exceeding $1,000 are capitalized. Library books, which do not meet the College’s capitalization policy, are expensed in the year acquired.

Deferred loan costs:

Deferred loan costs are being amortized on the straight-line basis over the term of the related financing agreements.

Accrued compensation:

The College accrues for salaries and all other compensation earned but not paid.

Deposits and deferred revenues:

Deposits and student fees applicable to academic sessions subsequent to the current year are deferred and recognized as revenues in subsequent periods.

Asset retirement obligation (AROs):

An asset retirement obligation is a legal liability to the College for the cost of retiring a tangible long-lived asset (e.g., a building containing asbestos) that results from the acquisition, construction, or development and/or the normal operation of the long-lived asset. A conditional ARO is a legal obligation in which the timing and/or method of retirement are conditional on a future event that may or may not be within the control of the College. To reasonably estimate these liabilities, the College must be able to determine (1) the settlement date – the estimated date or range of dates that disposal is anticipated or legally required, and (2) the settlement method – how the disposal will take place. The College follows the policy of recording the fair value of such liabilities when they can be reasonably estimated.

(Continued) 13




Notes receivable and U.S. government grants refundable:

The College participates in the Federal Perkins Loan Program sponsored by the United States Government. Under this program, funds are loaned to qualified students and may be reloaned after collection. Student loan receivables related to this program are recorded as notes receivable. The portion of those funds contributed by the U.S. Government (that is, exclusive of the College’s match funds) is ultimately refundable to the government.

The College accounts for its notes receivable at cost and recognizes interest income as it is earned. An allowance for doubtful accounts is based on prior collection history and individual circumstances of the borrower. Notes are considered past due after 30-45 days and accrue interest until written off when considered uncollectible.

Contributions:

Contributions, including unconditional promises to give, or contributions receivable, are recognized as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions, in the period the donor’s commitment is received. Unrestricted, unconditional promises to give for future operations are recognized as temporarily restricted revenues unless the donor explicitly stipulates its use to support current period activities.

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

Contributions received with donor-imposed restrictions that are met in the same year as received are reported as revenues of the temporarily restricted net asset class, and a reclassification to unrestricted net assets is made to reflect the expiration of such restrictions.

Contributions of land, buildings, and equipment, or of cash or other assets to be used to acquire them, without donor stipulations concerning the use of such long-lived assets, are reported as revenues of the temporarily restricted net asset class; the restrictions are considered to be released when the asset isplaced in service.

Operating results:

Operating activities in the statement of activities illustrate a measure of how the College is maintaining the resources available for its “current operations.” Operations reflect all transactions increasing or decreasing unrestricted net assets except those of a capital nature – that is, capitalized for long-term investment or as land, buildings, and equipment. Temporarily restricted net assets released from restrictions which satisfy an operating purpose are also classified as operating.

(Continued) 14




Operating results: (Continued)

In accordance with the College’s total return policy, as described further in Note 3, only the portion of total investment return available under this policy to meet operating needs is included in operating revenues.

Costs related to the operation and maintenance of physical plant, including depreciation of plant assets, are allocated to operating programs and supporting activities based upon periodic inventories of facilities. Interest expense on external debt is allocated to the activities that have most directly benefited from the proceeds of the external debt. Fringe benefits are allocated to operating and supporting activities based upon salary expenses of these programs and activities.

Advertising costs:

The College follows the policy of charging advertising costs to expense as incurred.

Concentrations of credit risk:

Financial instruments that potentially subject the College to concentrations of credit risk consist principally of cash and cash equivalents, investments, accounts receivable, and notes receivable. The College places its cash and cash equivalents with high-credit, quality institutions. From time to time,a portion of the College’s bank deposits are in excess of federally insured limits. Concentration of credit risk for investments is limited by the College’s policy of diversification of investments. Concentration of credit risk for accounts receivable and notes receivable are limited due to a large base and geographic dispersion.

Fair value of other financial instruments:

Except for notes receivable from students and long-term debt, the fair value of all financial instruments is substantially the same as the carrying value. It was not considered practical to determine fair value of notes receivable from students under the U.S. Government loan programs and related government advances because the notes receivable are nonmarketable and can only be assigned to the U.S. Government or its designees. These instalment notes are due over terms of ten years, with interest at five percent per month per annum, and are carried at face value.

The fair value of long-term debt is determined using the present value of future cash flows. Based upon current borrowing rates available to the College for similar borrowings, the carrying value of long-term debt approximates fair value.

Income taxes:

The College is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code.

Reclassifications:

Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation.

(Continued) 15



Note 2. Contributions Receivable

Contributions receivable consist of the following as of June 30:

2007 2006Unconditional promises to give cash $ 2,422,480 $ 5,487,268Charitable trusts held by others 2,553,095 2,414,371

$ 4,975,575 $ 7,901,639Expected to be collected in:

Less than one year $ 1,746,095 $ 2,879,926One year to five years 1,474,330 3,418,695Over five years 3,620,956 3,530,810

Total contributions receivable, gross 6,841,381 9,829,431Actuarial present value of future payments (1,567,860) (1,616,439)Less allowance for doubtful accounts (179,164) (177,534)Discount to net present value at 3.0% - 6.0% (118,782) (133,819)

$ 4,975,575 $ 7,901,639

The ownership of contributions receivable for each class of net assets as of June 30 is as follows:

2007 2006Temporarily restricted $ 4,283,076 $ 7,309,902Permanently restricted 692,499 591,737

$ 4,975,575 $ 7,901,639

Approximately 26% of contributions receivable was due from two donors at June 30, 2007 and approximately 37% was due from one donor as of June 30, 2006.

Note 3. Investments

Investments at June 30 consist of the following:

2007 2006Equities:

Large Cap $ 9,462,891 24.9% $ 6,027,593 16.9%Medium Cap 1,285,401 3.4 2,827,011 7.9Small Cap 1,288,068 3.4 2,673,310 7.5Foreign 8,672,305 22.8 8,436,650 23.7Other 318,220 0.8 449,017 1.3

Fixed income 3,249,508 8.5 3,805,933 10.7Real estate 5,240,180 13.8 2,562,343 7.2Alternative investments 7,821,776 20.6 6,832,498 19.2Money market funds 639,153 1.7 1,950,627 5.5Other investments 30,000 0.1 25,000 0.1

$ 38,007,502 100.0% $ 35,589,982 100.0%

(Continued) 16



Note 3. Investments (Continued)

The market value of investment asset classifications are as follows as of June 30:

2007 2006

Endowment:Externally managed $ 37,339,373 $ 34,893,877Internally managed 177,981 200,460

Trusts and annuities 278,115 267,107Current funds 212,033 228,538

$ 38,007,502 $ 35,589,982

Investment activity for the years ended June 30 is reflected in the table below:

2007 2006

Investments, beginning $ 35,589,982 $ 35,949,978Gifts available for investment and

investment income reinvestment 160,946 420,730

35,750,928 36,370,708

Investment returns:Dividends, interest, and rental income 75,682 250,817

Investment return, net of amount available to supportcurrent operations per statements of activities 2,376,751 467,446

Add spending in excess of cash yield 2,924,318 2,824,183

Net realized and unrealized gains 5,301,069 3,291,629

Total return on investments 5,376,751 3,542,446

Amounts appropriated for operations, net transfers tooperational accounts and other activity (3,120,177) (4,323,172)

Investments, ending $ 38,007,502 $ 35,589,982

Investment returns for the years ended June 30, 2007 and 2006 are net of related management and custodial expenses of approximately $187,000 and $188,000, respectively.

(Continued) 17



Note 3. Investments (Continued)The following schedule summarizes total investment return and its classification in the statements of activities for the years ended June 30:

2007 2006Investment income $ 75,682 $ 250,817Net realized and unrealized gains on investments 5,301,069 3,291,629

Total return on investments $ 5,376,751 $ 3,542,446Investment income, endowment, and other:

Amount distributed to support current operationspursuant to the endowment spending policy:

Operating $ 2,993,590 $ 3,070,668Non-operating 6,410 4,332

3,000,000 3,075,000Investment return, net of amount available to

support current operations 2,376,751 467,446$ 5,376,751 $ 3,542,446

The College employs a total return endowment spending policy that establishes the amount of endowment investment return that is available to support current and capital needs. This policy is designed to insulate program spending from capital market fluctuations and increase the amount of return that is reinvested in the corpus of the fund in order to enhance its long-term value. The Board-approved standard spending formula for the endowment provides for spending that ranges from 5% - 7% of the 12-quarter moving average of endowment market values determined as of June 30 each year. For the fiscal year ending June 30, 2007, the Board approved a special increase in the spending rate to 8.0% in connection with an overall plan to enhance the college’s working capital. The spending rate for June 30, 2006 was 8.5%. If cash yield (interest and dividends) is less than the spending rate, accumulated realized gains can be used to make up the deficiency. Any income in excess of the spending rate is reinvested in the endowment.

Note 4. Land, Buildings, and EquipmentLand, buildings, and equipment consist of the following as of June 30:

EstimatedUseful Life 2007 2006

Land improvements 15 years $ 1,382,113 $ 1,376,315Buildings 50 years 36,186,020 35,679,285Equipment 4-20 years 8,078,148 8,073,810

45,646,281 45,129,410Less accumulated depreciation (30,424,925) (29,032,039)

15,221,356 16,097,371Land 951,028 951,028Construction in progress 130,237 101,983

$ 16,302,621 $ 17,150,382

(Continued) 18



Note 5. Debt

Debt consists of the following as of June 30:

2007 2006

Industrial Development Authority (IDA) Note datedDecember 15, 2005, as collateral for $11,345,000

Educational Facilities Revenue BondsSeries 2005 – 3.625% - 5.000%, $250,000- $1,010,000 payable on November 1, annually until 2021, unsecured. $ 11,095,000 $ 11,345,000

Industrial Development Authority (IDA) Note datedSeptember 1, 2004, as collateral for $5,308,000

Educational Facilities Revenue BondsSeries 2004 – 3.39% to October 1, 2009, variable thereafter, principal of $22,117, plus interest, payable monthly from November 1, 2004 until October 1, 2024, unsecured. 4,600,245 4,820,295

Bonds issued to the U.S. Commissioner of Education3-3/8%, $23,000 - $40,000 payable on May 1 annually until 2012. 173,000 208,000

Term NoteVariable rate five-year, uncollateralized term note, principal and interest of $5,833 payable monthly until August 2008. 81,667 151,667

Renewable Line of CreditPayable on demand, up to $2.0 million bearing interest at the 30 day LIBOR plus 1.25% (6.57% and 6.60% at June 30, 2007 and 2006, respectively); unsecured, expires November 2007. 1,173,801 1,358,946

$ 17,123,713 $ 17,883,908

The loan agreement covering the 3-3/8% bonds requires the maintenance of a collateral account and a Maintenance and Equipment Reserve. The agreement stipulates that the quoted market value of investments within the collateral account equal or exceed $90,000. The agreement further requires the Maintenance and Equipment Reserve fund hold a balance of $70,000. The fair market value of this investment, which is held in United States Treasury obligations that have matured, was $70,000 at June 30, 2007 and June 30, 2006. The bonds are also collateralized by a lien on general student tuition and fees.

(Continued) 19



Note 5. Debt (Continued)

Assets pledged in the collateral account for the 3-3/8% bonds are as follows:

2007 2006

Investments, at market $ 94,123 $ 93,728First deed of trust, at net book value:

Spencer Hall 166,041 184,049

$ 260,164 $ 277,777

During the year ending June 30, 2006, the College refunded $11,150,000 of the outstanding principal amount of the Series 1996 IDA Bonds with issuance of $11,345,000 of 2005 Series IDA Bonds. Issuance costs related to the new debt totalled $318,694. The refund of the old debt resulted in a loss on extinguishment of $675,538.

Debt matures as follows:

June 30,2008 $ 2,084,2052009 872,0712010 885,4042011 910,4042012 918,4042013 and later years 11,453,225

$ 17,123,713

(Continued) 20



Note 6. Net Assets

Net assets as of June 30 consist of the following:

2007 2006

Unrestricted:Funds functioning as endowment:

Quasi endowment, net of amounts spent * $ 4,981,128 $ 4,317,037Investment in land, buildings, and equipment,

net of debt 705,572 1,008,055Other, net of amounts due to the endowment * 1,004,947 (1,042,091)

6,691,647 4,283,001

Temporarily restricted:Available for general operations and financial aid 989,417 1,550,957Accumulated endowment investment return,

net of amounts spent, restricted for generaloperations and financial aid 4,426,475 2,828,646

Available for general operations and financial aid and with time restrictions:

Contributions receivable 4,283,076 7,309,901Trusts and annuities 87,250 77,093

9,786,218 11,766,597

Permanently restricted:Restricted in perpetuity, the income from which is

expendable to support the following:General operations 5,746,778 5,542,790Financial aid 12,671,162 12,529,032Instruction and academic support 11,023,667 11,009,897

29,441,607 29,081,719

Total net assets $ 45,919,472 $ 45,131,317

*The quasi-endowment, net of amounts spent, is also net of amounts due from the College totaling $2,879,525 and $2,884,580 at June 30, 2007 and 2006, respectively. These amounts are interest-free, unsecured and are expected to be paid back over an unspecified time frame. They are reflected as a reduction to the quasi-endowment (due from) and an increase to other unrestricted net assets(due to).

(Continued) 21



Note 6. Net Assets (Continued)The College elected to change its method of allocating realized and unrealized gains and losses on investments. The change essentially reclassifies accumulated unspent investment return as temporarily restricted net assets rather than unrestricted net assets. This properly reflects such returns, and accordingly net assets to follow the income on the applicable net asset class. The cumulative effect of this change in accounting principle and the impact on previously issued financial statements is reflected as follows:


Balance of net assets as ofJuly 1, 2005, as

previously reported $ 4,942,059 $ 12,286,268 $ 29,051,772 $ 46,280,099Reflect the

cumulative effectof the change inallocation method (2,419,990) 2,749,823 (329,833) -

Balance of net assets asof July 1, 2005, as

adjusted 2,522,069 15,036,091 28,721,939 46,280,099

Change in net assets – 2006as previously reported 848,003 (2,168,457) 171,672 (1,148,782)

Reclassify allocation ofinvestment income,endowment and other,operating (2,113,320) 2,268,821 - 155,501

Reclassify net assetsreleased fromrestrictions andreclassifications,operating 2,283,775 (2,283,775) - -

Reclassify allocation ofinvestment income,endowment andother, non-operating - 4,332 (159,833) (155,501)

Reclassify allocation ofinvestment return,net of amountsavailable to supportcurrent operations 738,142 (1,086,083) 347,941 -

Reclassify net assets released from restrictions andreclassifications,non-operating 4,332 (4,332) - -

Change in net assets – 2006,as adjusted 1,760,932 (3,269,494) 359,780 (1,148,782)

Balance of net assets as ofJune 30, 2006, as adjusted $ 4,283,001 $ 11,766,597 $ 29,081,719 $ 45,131,317

(Continued) 22



Note 7. Tuition and Fees, Net of Financial Aid

Tuition and fees include regular session tuition for the College’s undergraduate and graduate regular and summer sessions as well as miscellaneous fees, such as application, graduation, automobile, and interest.

Revenues received for student tuition and fees, net of financial aid, consist of the following for the years ended June 30:

2007 2006

Tuition and fees, residential andgraduate programs $ 17,100,245 100.0% $ 16,177,993 100.0%

Less financial aid:Institutional, non-funded (7,110,131) (41.6) (6,349,815) (39.2)Funded:

Endowed and other (356,970) (2.1) (404,674) (2.5)Grants (520,794) (3.0) (586,042) (3.7)

(7,987,895) (46.7) (7,340,531) (45.4)

Net tuition andfees, residentialand graduateprograms 9,112,350 53.3% 8,837,462 54.6%

Adult degree program:Tuition and fees 4,768,337 4,773,719Less financial aid (18,200) (25,201)

4,750,137 4,748,518

$ 13,862,487 $ 13,585,980

Financial aid is awarded to students based upon need and merit and is applied to billed tuition and fees, and room and board. Financial aid does not include payments made to students for services rendered to the College. However, the College does participate in work study programs; these expenses, which totaled $326,621 and $328,907 for the years ended June 30, 2007 and 2006, respectively, are included in the institutional support on the statements of activities. Of these amounts, the federal government contributed $121,272 and $133,335, respectively.

(Continued) 23



Note 8. Net Assets Released from Restrictions

Net assets are released from donor restrictions when expenses are incurred to satisfy the restricted purposes or by occurrence of other events as specified by donors. Restrictions were satisfied as follows for the years ended June 30:

Operating:General operations $ 3,089,261 $ 3,956,968Financial aid 493,153 558,693Expiration of time restrictions 3,853,903 3,388,810

Total operating 7,436,317 7,904,471

Non-operating:Buildings and equipment 468,295 555,723

$ 7,904,612 $ 8,460,194

Note 9. Operating Expenses

Operating expenses incurred for the years ended June 30 are as follows:

2007 2006

Salaries and wages $ 13,234,362 49.1% $ 13,069,749 49.3%Employee benefits,

including payroll taxes 3,233,963 12.0 2,697,213 10.2

16,468,325 61.1 15,766,962 59.5

Utilities 965,592 3.6 1,021,409 3.8Supplies 983,324 3.6 1,023,433 3.9Travel 588,075 2.2 555,354 2.1Professional services:

Service master 751,357 2.8 743,677 2.8Food management 353,685 1.3 335,244 1.3Other 580,274 2.1 686,173 2.6

Postage and printing 580,558 2.2 563,132 2.1Repairs and maintenance 753,602 2.8 692,968 2.6Depreciation and amortization 1,671,247 6.2 1,798,432 6.8Interest 714,979 2.6 847,235 3.2Other 2,569,969 9.5 2,481,361 9.3

$ 26,980,987 100.0% $ 26,515,380 100.0%

Program services $ 22,016,485 81.6% $ 21,636,550 81.6%Support services 4,964,502 18.4 4,878,830 18.4

$ 26,980,987 100.0% $ 26,515,380 100.0%

2007 2006

(Continued) 24



Note 9. Operating Expenses (Continued)

Costs related to staff benefits and the operations and maintenance of the physical plant, including depreciation, and interest expense are allocated to operating programs and supporting activities, as follows:

Year Ended June 30, 2007

Expenses Total FinalBefore Expense Allocated

Allocation Allocation ExpensesEducation and general:

Instruction $ 9,453,228 $ 2,677,798 $ 12,131,026Public service 19,435 7,701 27,136Academic support 698,071 290,371 988,442Student services 2,472,468 465,510 2,937,978Institutional support 5,506,227 971,807 6,478,034

Auxiliary services 2,147,840 2,270,531 4,418,371Operations and maintenance

of physical plant 2,049,938 (2,049,938) - Depreciation and amortization 1,671,247 (1,671,247) - Interest expense 714,979 (714,979) - Fringe benefits 2,247,554 (2,247,554) -

$ 26,980,987 $ - $ 26,980,987

Year Ended June 30, 2006

Expenses Total FinalBefore Expense Allocated

Allocation Allocation ExpensesEducation and general:

Instruction $ 9,493,305 $ 2,526,521 $ 12,019,826Public service 17,459 7,406 24,865Academic support 712,666 267,004 979,670Student services 2,349,709 406,032 2,755,741Institutional support 5,524,670 877,716 6,402,386

Auxiliary services 2,107,856 2,225,036 4,332,892Operations and maintenance

of physical plant 1,945,968 (1,945,968) - Depreciation and amortization 1,798,432 (1,798,432) - Interest expense 847,235 (847,235) - Fringe benefits 1,718,080 (1,718,080) -

$ 26,515,380 $ - $ 26,515,380

(Continued) 25



Note 9. Operating Expenses (Continued)

Allocation of costs related to staff benefits and the operation and maintenance of the physical plant, including depreciation, and interest expense, to functional expense categories for the years ended June 30, 2007 and 2006 approximated:

2007 2006

Instruction 40.1% 40.1%Public service 0.1 0.1Academic support 4.3 4.2Student services 7.0 6.4Institutional support 14.5 13.9Auxiliary services 34.0 35.3

100.0% 100.0%

Fundraising costs totaled approximately $721,000 and $783,000 for the years ended June 30, 2007and 2006, respectively.

Note 10. Employee Benefits

Retirement benefits are provided for all employees through a defined contribution retirement plan funded by direct payments to the Teacher’s Insurance and Annuity Association – College Retirement Equities Fund. The amount charged to operations under this plan was approximately $814,000 and $782,000 at June 30, 2007 and 2006, respectively.

Note 11. Funds Held in Trust by Others

The accompanying Statement of Financial Position does not include the College's one-fifth interest in a perpetual trust held by a foundation for the benefit of the College and others under an inter vivos deed of trust established by Mrs. Margaret C. Woodson. In the opinion of legal counsel for the College, the provisions of Mrs. Woodson’s will were not sufficient to give the College a vested right to either income or principal, but the provisions do constitute a powerful precatory inducement to the trustees to continue to distribute one-fifth of the foundation's net income to the College. The College’s share of the trust income for the years ended June 30, 2007 and 2006 amounted to $85,000and $83,000, respectively. As of June 30, 2007 and 2006, the market value could not be estimated or determined by management.

(Continued) 26



Note 12. Other Commitments and Contingencies

The College’s students receive a substantial amount of support from federal and state student financial assistance programs. A significant reduction in the level of this support, if it were to occur, might have an adverse effect on the College’s programs and activities.

Final expenditure reports of grants and contracts submitted to certain granting agencies in current and prior years are subject to audit by such agencies. As a result, the reimbursed expenditures are subject to adjustment. The effect of such adjustments, if any, is not determinable at this time. Management is of the opinion that the liability, if any, would not have a materially adverse effect on the College’s financial position.

The College is unable to estimate the range of settlement dates and the related probabilities for certain asbestos remediation asset retirement obligations (AROs). These conditional AROs are primarily related to encapsulated asbestos that is not subject to abatement unless the buildings containing them are demolished and non-encapsulated asbestos that the College would remediate only if it performed major renovations of the applicable buildings. Because these conditional obligations have indeterminate settlement dates, the College could not develop a reasonable estimate of their fair values. The College will continue to assess its ability to estimate fair values at each future reporting date. The related liability, if any, will be recognized once sufficient additional information becomes available.

The College leases certain equipment, vehicles, and classroom and office facilities under noncancelable operating lease agreements. Facilities leased are primarily related to the operations of regional Adult Degree programs in Richmond, Roanoke, and other Virginia locations. These leases terminate at various times through September 2014. The total future minimum lease payments under operating leases at June 30, 2007 are as follows:

June 30,2008 $ 264,3692009 143,9262010 75,6202011 74,5152012 76,3782013 and later years 179,097

$ 813,905

Note 13. Guarantee Agreement

On November 13, 2003, the College entered into an agreement with American Shakespeare Company, Inc. and Planters Bank and Trust Company of Virginia to guarantee a thirty year mortgage loan that the American Shakespeare Center, Inc. (“Shenandoah” – an unrelated party) had on its Blackfriar’s Theatre (“Theatre”). The guarantee obligates the College to cure any non-payment default by Shenandoah, as long as the outstanding balance of the mortgage remains above $1.0 million. At June 30, 2007, approximately $2.5 million remains outstanding. Under the provisions of the guarantee, in the event the College has to cure a non-payment default, ownership of the Theatre shall immediately transfer from Shenandoah to the College. As of June 30, 2007 and 2006, the College estimates the present value of the salvage value of the Theatre was greater than the guarantee obligation.

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Note 14. Endowment

“Endowment” is a commonly used term to refer to the resources that have been restricted by the donor or designated by the Board that will be invested to provide future revenue to support the College’s activities. The College’s endowment (including trusts and annuities) consists of the following net assets as of June 30:

2007 2006

Unrestricted:Funds functioning as endowment:

Quasi-endowment, net of amounts spent * $ 4,981,128 $ 4,317,037

Temporarily restricted:Amounts held for trust and annuity payments 87,250 77,093Accumulated endowment investment return, net

of amounts spent 4,426,475 2,828,646

4,513,725 2,905,739

Permanently restricted:Contributions receivable 692,499 591,738Amounts held for trust and annuity payments 99,980 107,061True endowment principal 28,649,128 28,382,920

29,441,607 29,081,719

$ 38,936,460 $ 36,304,495

*The quasi-endowment, net of amounts spent, is also net of amounts due from the College totaling $2,879,525 and $2,884,580 at June 30, 2007 and 2006, respectively. These amounts are interest-free, unsecured and are expected to be paid back over an unspecified time frame.

FINANCIAL REPORT JUNE 30, 2007

Business

Transcript of FINANCIAL REPORT JUNE 30, 2007