SPRING HILL COLLEGE FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION FOR THE YEARS ENDED MAY 31, 2010 AND 2009

Transcription

1 FINANCIAL STATEMENTS AND ACCOMPANYING INFORMATION FOR THE YEARS ENDED

2 CONTENTS Page Independent Auditors Report 1-2 Management s Discussion and Analysis 3-7 Statements of Financial Position 8 Statement of Activities for the Year Ended May 31, Statement of Activities for the Year Ended May 31, Statements of Cash Flows 11 Notes to the Financial Statements 12-35

3 INDEPENDENT AUDITORS' REPORT The Board of Trustees and Rev. Richard P. Salmi, S.J., President Spring Hill College Mobile, Alabama We have audited the accompanying statements of financial position of Spring Hill College (the College) (a nonprofit organization), as of May 31, 2010 and 2009, 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 and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. 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 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 Spring Hill College as of May 31, 2010 and 2009, 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. In accordance with Government Auditing Standards, we have also issued our report dated September 22, 2010, on our consideration of Spring Hill College s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and important for assessing the results of our audit.

4 Our audit was conducted for the purpose of forming an opinion on the basic financial statements of the College taken as a whole. Management s discussion and analysis is presented for purposes of additional analysis and is not a required part of the financial statements of the College. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. September 22, 2010

5 MANAGEMENT'S DISCUSSION AND ANALYSIS FISCAL YEAR 2010 FINANCIAL REPORT HIGHLIGHTS As the College s fiscal year ended on May 31, 2010, the final piece of the Campus Master Plan, the Student Center, also neared completion. From 2001 until 2010, the College has constructed, renovated or restored nearly every building on campus. In addition to the Student Center, three new residence halls and a modern library were constructed. The historic Saint Joseph s Chapel was restored. Three residence halls, the Administration Building, and other classroom and office spaces were renovated. The College s golf course also experienced renovations and upgrades. The College also continued to receive recognition in a number of areas: US News & World Report ranking of 17th out of 120 similar institutions in the south and 9th in best value category. The College was 11th out of only 15 schools ranked in the Great Schools, Great Prices category which is based on quality academic programs, affordable tuition, and significant financial aid. Spring Hill College was also listed as an A Plus School for B Students. Ranked 264th by Forbes.com out of 610 in their America s Best Colleges listing based on the quality of the education provided and student achievement. Compared to the other 27 members of the Association of Jesuit Colleges and Universities, Spring Hill College ranks 3rd, with a 24% rate, on alumni giving participation and 4th in total dollars of giving per alumnus. Spring Hill College s business students score higher than 80% of other institutions on the ETS major field exam in Business Administration. 30% of all undergraduates enroll in a graduate program within one year of graduation. Faculty to student ratio of 15:1. Increased number of faculty from 60 in 1997 to 84 in 2010, with approximately 86% holding terminal degrees. Financial Analysis Increase in Enrollment, Tuition & Fees, Room & Board Spring Hill College s enrollment has grown over the past five years, from 1,202 during the fiscal year ended May 31, 2005 to 1,314 for Preliminary enrollment data for the academic year beginning fall of 2010 reflect a continued increase. During the fiscal year ended May 31, 2006, Spring Hill College enrolled approximately 112 students from New Orleans, Louisiana schools affected by Hurricane Katrina. The college received room & board from the residential students, but tuition was remitted to the students home college, resulting in an increase in enrollment without a corresponding increase in tuition and fees. -3-

6 Enrollment results are depicted in the chart below with the fall 2005 semester shown twice, including and omitting Hurricane Katrina guest students: Tuition and fees, net of scholarships, have also increased steadily for the past five years, after a slight decline during the fiscal year ending May 31, 2005, as reflected in the chart below: The College considers the education of the under-served in the southeast region an integral part of its mission. These students are generally financially challenged, contributing to an average discount rate (unfunded scholarships divided by gross tuition) in excess of 50% for the past several years. Institutional aid (unfunded scholarships) is budgeted as an operating expense of the College. -4-

7 As reflected in the chart below, unfunded scholarships have increased each year since Since 2004, the College has constructed three new residence halls and increased the number of beds to a built capacity of 1,168. The facilities were planned for a campus community of 1,350 students. Currently the College is not at full capacity in its residence halls, although it does enjoy an increasing residential population. A number of rooms, designed to be double occupancy, have been offered to the students as single occupancy, generating additional room revenue for the College. Over time, with increases in enrollment, the College can convert these rooms back to double occupancy. As a result of the additional capacity, revenue from room and board will increase in the future as enrollment increases, without the need for additional capital investments. Net revenue will increase more dramatically however, as depreciation and utility costs do not increase proportionately with increased residency. Room and board revenue has increased from approximately $4,000,000 in 2002 to over $9,000,000 in The financial impact of the College s highly residential campus is depicted below: Opportunities for increased revenue for the College exists through increasing enrollment, both though traditional undergraduate and graduate programs, decreasing its discount rate, and optimizing its residential spaces. -5-

8 Investments and Contributions During the year, the College drew from its investments to fund both campus operations and the completion of the Student Center. Trustees of the College authorized the short-term strategy of withdrawing funds from investments to sustain the College as it becomes less dependent on contributions for operations. The strategy was developed as a response to the impact of the economic downturn of 2008 and its impact on the College s contribution revenue. The College has developed a financial model based in moderate increases in enrollment to allow the College to have a balanced operational budget within two to three years. Contributions for operating activities reflected a positive trend from the years ended May 31, 2003, increasing from approximately $2,000,000 in fiscal year ended May 31, 2002 to over $10,000,000 for fiscal year The economic downturn of 2008 had a significant impact on the College s fundraising efforts as the chart below depicts: Net Assets of the College The College s total net assets increased annually, nearly doubling from 2002 through The combination of unrealized endowment losses and the decline in contributions in 2009 created a decrease in net assets of over $20,000,000. During the year ended May 31, 2010, the College was able to increase net assets by $362,

9 Other indicators of the College s improving financial health include the following: Compliance with bond covenants, Competitive interest rates on notes and lines of credit from banking partner, Interest rates on fixed bonds range from 2.85% to 5.81%, Eighty-five percent of all College debt is related to capital improvements, Decrease in total liabilities of nearly four million dollars, and No borrowings from the endowment or individuals. Spring Hill College had many successes, opportunities, and challenges to be thankful for during fiscal year 2010 and looks forward to the challenges of the future with confidence and optimism, thankful for the support of its dedicated trustees, faculty and staff. -7-

10 STATEMENTS OF FINANCIAL POSITION ASSETS May Assets Cash and cash equivalents $ 191,060 $ 966,881 Accounts receivable, net 5,223,145 4,616,843 Contributions receivable, net 6,194,703 6,794,106 Deposits with bond trustee - 6,726,118 Investments 20,761,561 24,240,757 Property, plant and equipment, net 117,699, ,493,251 Other assets 3,405,671 3,402,150 Trusts held by third parties 19,081,268 17,666,893 $ 172,557,035 $ 175,906,999 LIABILITIES AND NET ASSETS Liabilities Managed cash overdraft $ 791,964 $ 592,479 Accounts payable-operational 1,306, ,272 Accounts payable-construction - 1,015,705 Line of credit-operational 6,197,023 6,484,377 Line of credit-construction - 63,434 Accrued and other liabilities 1,453,065 1,666,124 Capital lease obligations 419,946 80,093 Deposits and advances received 3,387,505 3,275,528 Notes and bonds payable 83,652,580 86,057,359 Liability under interest rate swap 999,020 1,728,587 Refundable advances-u.s. Government grants 696, ,936 Total liabilities 98,903, ,616,894 Net assets Unrestricted 7,228,868 7,104,805 Temporarily restricted 35,319,201 36,708,783 Permanently restricted 31,105,035 29,476,517 Total net assets 73,653,104 73,290,105 $ 172,557,035 $ 175,906,999 See accompanying notes to financial statements -8-

11 STATEMENT OF ACTIVITIES YEAR ENDED MAY 31, 2010 Temporarily Restricted Permanently Restricted Unrestricted Total Revenues, gains, and other support Education and general Tuition and fees, net $ 13,902,347 $ - $ - $ 13,902,347 Contributions 3,517,121 1,359,002-4,876,123 Contributed services 86, ,667 Contracts and other exchange transactions 1,185,185 20,000-1,205,185 Investment return on endowment, available to support current operations per spending policy 7,777, ,777,570 Net assets released from restriction, operating 256,160 (256,160) - - Net assets released from restriction, for property, plant and equipment, amortized to offset depreciation expense over life of asset(s) 1,132,827 (1,132,827) - - Investment income, net 50, ,328 Other income 1,433,786 9,985-1,443,771 Total education and general 29,341, ,341,991 Auxiliary enterprises Room and board 9,526, ,526,522 Other 702, ,817 Total auxiliary enterprises 10,229, ,229,339 Total revenues and net assets released from restrictions 39,571, ,571,330 Operating expenses Education and general Instruction 8,970, ,970,672 Academic support 3,004, ,004,112 Public service 673, ,742 Student aid 768, ,948 Student services 6,062, ,062,557 Institutional support 7,820, ,820,892 Total education and general 27,300, ,300,923 Auxiliary expenses Room and board 8,259, ,259,550 Other 1,095, ,095,462 Total auxiliary expenses 9,355, ,355,012 Total operating expenses 36,655, ,655,935 Change in net assets from operations 2,915, ,915,395 Non-operating activities Contributions - (136,709) 466, ,208 Contracts and other exchange transactions - 3,947-3,947 Other income - 46,825-46,825 Gain on interest rate swaps 729, ,567 Loss on disposal of property and equipment (55,271) - - (55,271) Investment return reinvested (reduced) by the portion of cumulative net appreciation available to support current operations (3,465,628) - - (3,465,628) Change in value of split-interest agreement - 85,342-85,342 Unrealized gain on trusts held by third parties - - 1,161,601 1,161,601 Restrictions satisfied from prior years - (1,388,987) - (1,388,987) Change in net assets from non-operating activities (2,791,332) (1,389,582) 1,628,518 (2,552,396) Change in net assets 124,063 (1,389,582) 1,628, ,999 Net assets, beginning of year 7,104,805 36,708,783 29,476,517 73,290,105 Net assets, end of year $ 7,228,868 $ 35,319,201 $ 31,105,035 $ 73,653,104 See accompanying notes to financial statements -9-

12 STATEMENT OF ACTIVITIES YEAR ENDED MAY 31, 2009 Temporarily Restricted Permanently Restricted Unrestricted Total Revenues, gains, and other support Education and general Tuition and fees, net $ 13,737,959 $ - $ - $ 13,737,959 Contributions 1,757,251 3,391,782-5,149,033 Contributed services 91, ,533 Contracts and other exchange transactions 1,407, ,408,129 Investment return on endowment, available to support current operations per spending policy 2,378, ,378,142 Net assets released from restriction, operating 2,342,062 (2,342,062) - - Net assets released from restriction, for property, plant and equipment, amortized to offset depreciation expense over life of asset(s) 1,122,643 (1,122,643) - - Investment income, net 252, ,528 Other income 1,270,106 72,032-1,342,138 Total education and general 24,359, ,359,462 Auxiliary enterprises Room and board 8,835, ,835,203 Other 1,064, ,064,817 Total auxiliary enterprises 9,900, ,900,020 Total revenues and net assets released from restrictions 34,259, ,259,482 Operating expenses Education and general Instruction 9,633, ,633,453 Academic support 3,104, ,104,854 Public service 800, ,597 Student aid 1,090, ,090,248 Student services 6,298, ,298,433 Institutional support 8,875, ,875,372 Total education and general 29,802, ,802,957 Auxiliary expenses Room and board 8,064, ,064,083 Other 1,161, ,161,894 Total auxiliary expenses 9,225, ,225,977 Total operating expenses 39,028, ,028,934 Change in net assets from operations (4,769,452) - - (4,769,452) Non-operating activities Contributions - (350,491) 980, ,703 Contracts and other exchange transactions - 102, ,918 Other income - 177, ,231 Loss on interest rate swaps (1,728,587) - - (1,728,587) Loss on disposal of property and equipment (1,329,521) - - (1,329,521) Investment return reinvested (reduced) by the portion of cumulative net appreciation available to support current operations (8,012,984) (2,113,525) - (10,126,509) Change in value of split-interest agreement - (152,089) - (152,089) Unrealized loss on trusts held by third parties - - (1,853,623) (1,853,623) Restrictions satisfied from prior years - (3,464,705) - (3,464,705) Change in net assets from non-operating activities (11,071,092) (5,800,661) (873,429) (17,745,182) Change in net assets (15,840,544) (5,800,661) (873,429) (22,514,634) Net assets, beginning of year 22,945,349 42,509,444 30,349,946 95,804,739 Net assets, end of year $ 7,104,805 $ 36,708,783 $ 29,476,517 $ 73,290,105 See accompanying notes to financial statements -10-

13 STATEMENTS OF CASH FLOWS Year Ended May Cash flows from operating activities Change in net assets $ 362,999 $ (22,514,634) Adjustments to reconcile change in net assets to net cash used in operating activities: Net unrealized and realized losses (gains) on investments and trusts (4,470,828) 9,970,279 Loss on disposal of property, plant and equipment 55,271 1,329,521 Loss (gain) on interest rate swap (729,567) 1,728,587 Depreciation and amortization 4,354,371 3,949,614 Contributions restricted for endowment (466,917) (980,194) Contributions/grants restricted for property and equipment (37,615) (183,807) Decrease (increase) in accounts receivable and contributions receivable (6,899) 2,222,356 Increase in other assets (3,521) (151,519) Decrease in accounts payable and other liabilities (567,682) (835,431) Net cash used in operating activities (1,510,388) (5,465,228) Cash flows from investing activities Purchases of property, plant and equipment (10,209,146) (10,585,928) Proceeds from sale of investments 7,150,104 2,059,835 Purchases of investments (614,455) (73,637) Net decrease in deposits with bond trustee 6,726,118 9,370,086 Net cash provided by investing activities 3,052, ,356 Cash flows from financing activities Contributions/grants restricted for property and equipment 37, ,807 Contributions restricted for endowment 466, ,194 Payments of notes and bonds payable (2,404,779) (2,342,195) Net advances (repayments) on line of credit (350,788) 5,706,385 Payments on capital leases (67,019) (23,320) Net cash provided by (used in) financing activities (2,318,054) 4,504,871 Net decrease in cash and cash equivalents (775,821) (190,001) Cash and cash equivalents, beginning of year 966,881 1,156,882 Cash and cash equivalents, end of year $ 191,060 $ 966,881 Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized $ 3,806,467 $ 2,791,317 Capital lease obligations for equipment $ 406,872 $ - See accompanying notes to financial statements -11-

14 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Spring Hill College (the College) is a private, not-for-profit, co-educational college of liberal arts and sciences. Committed to the principle of educating men and women for service to others, the College offers bachelor's degrees in 43 undergraduate majors and concentrations and master's degrees in five fields. Founded in 1830 by Bishop Michael Portier, and operated by the Society of Jesus since 1847, Spring Hill is the oldest Catholic college in the Southeast. Financial Statement Presentation The College s financial statements have been prepared on the accrual basis of accounting. The College presents a statement of cash flows and displays its activities and net assets in three classes as follows: Contributions Unrestricted net assets Net assets that are not subject to donor-imposed stipulations. Unrestricted net assets may be designated for specific purposes by actions of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of the College and/or the passage of time. Permanently restricted net assets Net assets subject to donor-imposed stipulations that the assets be maintained permanently by the College. Generally, the donors of these assets permit the College to use all or part of the income earned on related investments for general or specific purposes. Such assets primarily include the College s permanent endowment funds and irrevocable trusts held by others. Contributions received, including unconditional promises to give, are recognized as revenues at their fair values in the period received. For financial reporting purposes, the College distinguishes between contributions of unrestricted assets, temporarily restricted assets, and permanently restricted assets. Contributions for which donors have imposed restrictions, which limit the use of the donated assets, are reported as restricted support if the restrictions are not met in the same reporting period. When such donor imposed restrictions are met in subsequent reporting periods, temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions when the purpose or time restrictions are met. Contributions of assets which donors have stipulated must be maintained permanently, with only the income earned thereon available for current use, are classified as permanently restricted net assets. Contributions for which donors have not stipulated restrictions, as well as contributions for which donors have stipulated restrictions but the restrictions have been met within the same reporting period, are reported as unrestricted support. -12-

15 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contributions (continued) Unconditional promises to give with payments due in future periods are reported as restricted support. Amounts due more than one year from the balance sheet date are recorded at the net realizable discounted cash flow. It is at least reasonably possible that the estimates of the net realizable value will be revised in the near term. The College implies a time restriction on gifts of long-lived assets and gifts of cash or other assets that must be used to acquire long-lived assets. The time restrictions on gifts of long-lived assets expire over their estimated useful lives. When received the contribution is reported as restricted support increasing temporarily restricted net assets. Depreciation is recorded over the asset's useful life, and net assets are reclassified from temporarily restricted to unrestricted as depreciation is recognized. Contributed services which meet the requirements defined for recognition as revenues are recorded at their fair value in the period received. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and temporary investments purchased with an initial maturity of three months or less, except for Treasury bills, commercial paper, and other short-term financial instruments included in the College s investment accounts. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these financial instruments. Accounts Receivable Accounts receivable arise in the normal course of business from charges for tuition, room and board, and other fees to students. The College utilizes the reserve method to account for bad debts based on a percentage of accounts receivable. Management reviews the status of outstanding accounts receivable for collectibility primarily on timing of payments. At least annually, accounts for which collectibility is deemed unlikely are written off against the allowance for doubtful accounts. Accounts receivable are recorded net of an allowance for uncollectible accounts of approximately $1,125,000 and $1,040,000 at May 31, 2010 and 2009, respectively. Contributions Receivable Contributions receivable arise in the normal course of business from donors that have pledged amounts for the benefit of the College. The College utilizes the reserve method to account for pledges that are not expected to be collected. Management reviews the status of outstanding contributions receivable for collectibility primarily on the timing of payments and past collection experience. At least annually, accounts for which collectibility is deemed unlikely are written off against the allowance for uncollectible pledges. -13-

16 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments Debt and equity securities, in general, are stated at fair market value. Fair market value of investments is based on quoted market prices or dealer quotes, where available. The alternative investments, which are not readily marketable, are carried at estimated fair values as provided by the investment managers. The College reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. Those estimated fair values may differ significantly from the values that would have been used had a ready market for these securities existed. Other investments, including real estate, are stated at cost at date of acquisition or appraised value at the date of donation in the case of gifts. The College invests in various types of investment securities and investment vehicles. Investments are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities and investment vehicles, it is at least reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the statement of financial position. The College s investments are managed to achieve the maximum long-term total return. The College has a spending policy authorizing a spending rate of 5% of the previous three years rolling average, with the understanding that this spending rate plus inflation will not normally exceed total return from investment. During the year ended May 31, 2010, the Board of Trustees authorized an additional withdrawal of approximately $6,130,000 for the College's unrestricted and quasi-restricted endowment funds to support operations and replace operating funds used to complete the construction of the Campus Center. The goal of the investment policy is to ensure that the future growth of the fund is sufficient to offset normal inflation plus reasonable spending, thereby preserving the constant dollar value and purchasing power of the fund. The objective of the investment program is to enhance long-term viability by maximizing the value of the investment with a prudent level of risk. The policy provides for diversification of assets in an effort to maximize the investment return and manage the risk of the investments consistent with market conditions. Property, Plant and Equipment Constructed and purchased property and equipment are carried at cost. Land, buildings, or equipment donated to the College are generally carried in the accounts at appraised value at the date of the gift. Long-lived fixed assets, with the exception of land and artwork, are depreciated using the straight-line method over their estimated useful lives. The College uses the direct expensing method to account for planned major maintenance activities. -14-

17 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property, Plant and Equipment (continued) Construction in progress consists of development costs, direct and indirect construction costs, capitalized interest, and amortization of debt issuance costs. The costs are accounted for as construction in progress until construction is complete and the assets are placed into service. Capitalized interest is recorded by the College based upon interest expense incurred on the College's borrowings, offset by the investment income earned on the related bonds proceeds. Long-Lived Assets The College recognizes impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying values. There were no such losses recognized during 2010 and Deposits and Advances Received Deposits and advances received consist of student tuition and fees related to future fiscal years, and an advance rent payment received from a lessee. Refundable Advances - U.S. Government Grants Refundable advances U.S. Government grants represent federally-sponsored student loans which are administered by the College. Receipts and disbursements related to the administration of these loans increase or decrease the balance due. The balance due is primarily offset by loans receivable from students included in accounts receivable, net. Tuition and Fees Tuition and fees revenue is presented net of scholarships funded by the College. Scholarships for the years ended May 31, 2010 and 2009 were $18,488,148 and $16,639,541, respectively. Contracts and Exchange Transactions Contracts and exchange transactions are comprised of federal and state grants and contracts. Advertising Advertising costs are charged to expense when incurred. The College's advertising costs totaled $44,186 and $94,830 for the years ended May 31, 2010 and 2009, respectively. -15-

18 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The College is recognized by the Internal Revenue Service as an organization exempt from income taxes on related income under Section 501(c)(3) of the Internal Revenue Code (the Code). In addition, the College has been determined by the Internal Revenue Service not to be a private foundation within the meaning of Section 509(a) of the Code. The College receives some unrelated business income, however, taxes on such income, if any, are not material to the financial statements. For federal income tax purposes the Company has a net operating loss carryforward of approximately $1,541,021 available to offset future taxable income as of May 31, The net operating loss carryforwards expire as follows: Year ending May $ 153, , , , , , , ,401 $ 1,541,021 No tax benefit related to this carryforward is recorded in the financial statements as management has determined the time frame for utilization is uncertain and has fully reserved an allowance against a possible tax benefit. The College had no unrecognized tax benefits at May 31, The tax years 2006 through 2009 federal exempt organization business income tax returns remain open to examination. Allocation of Certain Expenses The financial statements present expenses by functional classification in accordance with the overall mission of the College. Certain natural expenses associated with the operation and maintenance of College plant assets are allocated to the respective functional classifications based on square footage occupancy. The expenses allocated are as follows for the years ended May 31: Depreciation $ 4,354,371 $ 3,949,614 Plant operations and maintenance 4,400,475 4,879,083 Interest on indebtedness 3,989,104 3,228,

19 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The College uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported revenues and expenses. Significant estimates include management's estimates of the allowance for doubtful accounts for accounts and contributions receivable, the fair value of investments and other financial instruments, and the useful lives of the College's fixed assets. Actual results could vary from the estimates that were used. Reclassification Certain reclassifications have been made to the 2009 financial statement presentation to correspond to the current year s format. Subsequent Events Management has evaluated subsequent events through September 22, 2010, which is the date the financial statements were available to be issued. NOTE 2 - CONTRIBUTIONS RECEIVABLE Contributions receivable consists of the following at May 31, 2010 and 2009: Unconditional promises expected to be collected in the following periods: Less than one year $ 1,529,685 $ 1,546,835 One year to five years 3,933,834 5,539,125 Over five years 2,377,297 2,523,203 Less allowance for uncollectible contributions (977,218) (597,596) Less discount to present value (668,895) (2,217,461) $ 6,194,703 $ 6,794,106 Contributions receivable with due dates extending beyond one year are discounted using the rates of return from the U.S. Treasury yield curve for the year ended May 31, 2010, and were discounted using the rates of return provided by the Common Fund for similar term investments for the year ended May 31, This change was necessary due to the Common Fund no longer providing shortterm investment accounts. The applicable rates at May 31, 2010 and 2009 were 0.34% % and 4.29% %, respectively. -17-

20 NOTE 2 - CONTRIBUTIONS RECEIVABLE (CONTINUED) The College is a beneficiary of various charitable remainder trusts held by others. At the dates these trusts are established or the College becomes aware of their existence, the College recognizes contribution revenue and contributions receivable at the present value of the estimated future benefits to be received when the trust assets are distributed. On an annual basis, the College revalues the receivable to reflect changes in the fair value of the assets and the present value of the estimated future benefits using applicable discount rates and mortality tables. These annual changes are recorded as the change in value of split-interest agreements. NOTE 3 - DEPOSITS WITH BOND TRUSTEE Under the terms of the Trust Indenture of the Series 2007 bonds, various funds were established. These funds may be invested or reinvested in accordance with the instructions of the College to the extent that such investment is, in the opinion of the trustee, feasible and consistent with the purposes for which the funds were created. However, money in certain funds shall be invested only in federal securities. These deposits are not insured or collateralized; however, they are invested according to bond documents which work to mitigate the credit risk of those investments. These short-term investments are stated at cost, which approximates market. Deposits with the bond trustee included treasury money market funds at May 31, NOTE 4 - INVESTMENTS Investments consist of the following at May 31, 2010 and 2009: Common fund: Equity $ 13,164,005 $ 15,441,353 Bond 4,687,659 5,281,401 Commodities 995, ,664 Government securities fund 91, ,999 Short term - 17,113 Community Foundation 1,255,704 1,136,176 Real estate investment trust 29, ,245 Corporate debentures 82,066 82,066 Other 455, ,740 $ 20,761,561 $ 24,240,757 The balance in the account held by The Community Foundation of South Alabama, Inc. (the Community Foundation) is recorded as an interest in the net assets of the Community Foundation. The funds have been transferred to the Community Foundation and are invested according to policies of the Community Foundation. Distributions of the funds are subject to the spending policy of the Community Foundation, but are available to the College in case of emergency upon certain conditions. -18-

21 NOTE 4 - INVESTMENTS (CONTINUED) As stated in Note 1, The Board of Trustees appropriates a certain amount of net cumulative appreciation in the investment portfolio for use in operations each year. This amount is combined with income realized from the trusts held by third parties to determine the total income from endowed investments (see Note 6). The State of Alabama enacted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) effective January 1, 2009, the provisions of which apply to endowment funds existing on or established after that date. The College's endowment consists of approximately 150 individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the board to function as endowments. Net assets associated with endowment funds, including board-designated funds, are classified and reported based on the existence or absence of donor-imposed restrictions. Management has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the College classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the College in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the College considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) the duration and preservation of the various funds, (2) the purposes of the College and the donorrestricted endowment funds, (3) general economic conditions, (4) the possible effect of inflation and deflation, (5) the expected total return from income and the appreciation of investments, (6) other resources of the College, and (7) the College s investment policies. The following schedule summarizes the investment return on the endowment and its classification in the Statement of Activities for the years ended May 31, 2010 and 2009: Dividends and interest $ 805,372 $ 661,067 Net realized and unrealized gains (losses) 3,506,570 (8,409,434) Total income (loss) from endowed investments 4,311,942 (7,748,367) Less cumulative investment returns distributed for current operations (7,777,570) (2,378,142) Investment return reinvested (reduction in cumulative gains in investment portfolio) - non-operating $ (3,465,628) $ (10,126,509) -19-

22 NOTE 4 - INVESTMENTS (CONTINUED) Endowment net asset composition by type of fund as of May 31, 2010 is as follows: Unrestricted Temporarily Restricted Permanently Restricted Total Net Endowment Assets Donor-restricted $ (4,347,712) $ - $ 31,105,035 $ 26,757,323 Board-designated 12,669, ,669,411 $ 8,321,699 $ - $ 31,105,035 $ 39,426,734 Changes in endowment net assets for the year ended May 31, 2010 are as follows: Temporarily Restricted Permanently Restricted Total Net Endowment Assets Unrestricted Endowment net assets, beginning of year $ 12,370,527 $ - $ 29,476,517 $ 41,847,044 Contributions 12, , ,917 Investment income 151, , ,783 Net appreciation (depreciation) 3,264,123 (88,164) - 3,175,959 Net gain on perpetual trusts - - 1,161,601 1,161,601 Amounts appropriated for expenditure (7,476,540) (301,030) - (7,777,570) Endowment net assets, end of year $ 8,321,699 $ - $ 31,105,035 $ 39,426,734 Endowment net asset composition by type of fund as of May 31, 2009 is as follows: Unrestricted Temporarily Restricted Permanently Restricted Total Net Endowment Assets Donor-restricted $ (7,611,835) $ - $ 29,476,517 $ 21,864,682 Board-designated 19,982, ,982,362 $ 12,370,527 $ - $ 29,476,517 $ 41,847,

23 NOTE 4 - INVESTMENTS (CONTINUED) Changes in endowment net assets for the year ended May 31, 2009 are as follows: Temporarily Restricted Permanently Restricted Total Net Endowment Assets Unrestricted Endowment net assets, beginning of year $ 21,400,657 $ 2,113,524 $ 30,349,946 $ 53,864,127 Contributions 6, , ,194 Investment income 206, , ,070 Net depreciation (7,611,835) (1,949,747) - (9,561,582) Net loss on perpetual trusts - - (1,853,623) (1,853,623) Amounts appropriated for expenditure (1,631,013) (747,129) - (2,378,142) Endowment net assets, end of year $ 12,370,527 $ - $ 29,476,517 $ 41,847,044 There was a deficiency of $1,661,575 and $3,251,613 between the fair value of the investments of the endowment fund and the level required by donor stipulations as of May 31, 2010 and 2009, respectively. NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at May 31, 2010 and 2009: Estimated Lives Land $ 2,779,805 $ 2,779,805 Plant and equipment: Buildings yrs. 118,771, ,428,035 Less accumulated depreciation (23,304,190) (20,188,598) Equipment and furnishings 5-15 yrs. 20,847,175 20,216,554 Less accumulated depreciation (15,072,947) (14,276,719) Construction in progress 13,678,321 4,534,174 $ 117,699,627 $ 111,493,251 Depreciation expense charged to operations was $4,354,371 and $3,949,614 for the years ended May 31, 2010 and 2009, respectively. During the years ended May 31, 2010 and 2009, interest expense, net of interest income on unexpended proceeds of related debt, was capitalized in the amounts of $370,368 and $394,514, respectively. As of May 31, 2010, the estimated costs to complete the construction in progress is approximately $155,

24 NOTE 6 - TRUSTS HELD BY THIRD PARTIES The College is the beneficiary of several irrevocable perpetual trusts held by Regions Bank. Under the terms of the agreements, the College has the irrevocable right to receive the income earned on the trust assets in perpetuity, but never receives the assets held in trust. Changes in the fair value of the trust assets are recognized as permanently restricted non-operating gains or losses. The fair value of the trusts totaled $19,081,268 and $17,666,893 at May 31, 2010 and 2009, respectively. Income from the trusts totaled $672,144 and $626,526 for the years ended May 31, 2010 and 2009, respectively. Income realized from the trusts including interest, dividends, distributions, and realized gains and losses are included as investment return on the endowment in the Statement of Activities (see Note 4). NOTE 7 - LINE OF CREDIT Line of credit consists of the following at May 31, 2010 and 2009: Revolving uncollateralized line of credit, payable on demand, providing for maximum borrowings of $7,000,000; interest due quarterly at rates negotiated periodically by the bank; at May 31, 2010 and 2009, the interest rate was 4.75% and 2.30%, respectively $ 6,197,023 $ 6,547,811 NOTE 8 - CAPITAL LEASES The College leases equipment under capital leases expiring in various years through The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over their estimated productive lives. Amortization of assets under capital leases in included in depreciation expense. Properly held under capital leases is summarized as follows at May 31, 2010 and 2009: Equipment $ 538,256 $ 131,570 Accumulated amortization (111,395) (57,140) $ 426,861 $ 74,

25 NOTE 8 - CAPITAL LEASES (CONTINUED) Minimum future lease payment under capital leases at May 31, 2010, are as follows: Year ending May $ 147, , , , ,441 Less amounts representing interest (44,495) $ 419,946 NOTE 9 - NOTES AND BONDS PAYABLE Notes payable consist of the following at May 31, 2010 and 2009: Note payable in 60 semi-annual installments of $55,265, including interest at 5.5% per annum; matures September 1, 2023; collateralized by a first mortgage on Yenni Hall and building site and the improvements thereon, including the furniture, furnishings and equipment thereon owned by the College, and all net fees, rents, and charges from the operation of Yenni Hall $ 1,043,578 $ 1,094,594 Note payable in 142 monthly installments of $8,915, including interest at 6.33% per annum; matures December 1, 2014; collateralized by a first mortgage on golf course property owned by the College 424, ,072 Note payable in 360 monthly installments of $5,031, including interest at 4.00% per annum; matures March 17, 2036; collateralized by a subordinate mortgage on the real estate owned by the College 929, ,158 Note payable in 120 monthly installments of $5,263 with the remaining balance due upon maturity (approximately $366,000), including interest at the prime rate less 1% per annum (2.25% as of May 31, 2010 and 2009); matures May 30, 2018; collateralized by a subordinate mortgage on the real estate owned by the College 771, ,

26 NOTE 9 - NOTES AND BONDS PAYABLE (CONTINUED) Note payable in 60 monthly installments of $11,146 with the remaining balance due upon maturity (approximately $1,324,000), including interest at the prime rate less 1% per annum (2.25% as of May 31, 2010 and 2009); matures May 30, 2013; collateralized by a subordinate mortgage on the real estate owned by the College 1,633,791 1,729,086 $ 4,802,785 $ 5,094,423 Principal maturities of notes payable at May 31, 2010, are as follows: Year ending May $ 278, , , ,607, , and thereafter 2,121,680 $ 4,802,785 Bonds payable consist of the following at May 31, 2010 and 2009: Twenty year Spring Hill College Educational Building Authority of Mobile Revenue Bonds Series 1995; maturities through 2015 with interest from 4.0% to 5.5% $ 2,130,000 $ 2,420,000 Fourteen year Spring Hill College Educational Building Authority of Mobile Refunding Revenue Bonds - Series 1999A; maturities through 2012 with interest at 4.72% 1,700,517 2,411,933 Eighteen year Spring Hill College Educational Building Authority of Mobile Refunding Revenue Bonds - Series 1999B; maturities through 2016 with interest at 4.85% 1,399,278 1,583,342 Ten year Spring Hill College Educational Building Authority of Mobile Refunding Revenue Bonds Series 1999C; maturities through 2010 with interest at 5.81% - 112,661 Twenty-two year Spring Hill College Educational Building Authority of Mobile Series 2001; maturities through 2023 with interest from 3.35% to 5.20% 5,270,000 5,535,

27 NOTE 9 - NOTES AND BONDS PAYABLE (CONTINUED) Thirty year Spring Hill College Educational Building Authority of Mobile Revenue Bonds Series 2004A; maturities through 2034 with interest from 2.85% to 5.25% 20,350,000 20,900,000 Twenty year Spring Hill College Educational Building Authority of Mobile Variable Rate Demand Revenue Bonds Series 2004B; interest payments through 2024, at 1.03% and 0.65% as of May 31, 2010 and 2009, respectively; principal due in full September 1, ,000,000 13,000,000 Thirty year Spring Hill College Educational Building Authority of Mobile Variable Rate Demand Revenue Bonds-Series 2007; interest payments through 2034, at 1.03% and 0.65% as of May 31, 2010 and 2009, respectively; principal due in full September 1, ,000,000 35,000,000 $ 78,849,795 $ 80,962,936 Principal maturities of bonds payable at May 31, 2010, are as follows: Year ending May $ 2,046, ,088, ,659, ,548, ,594, and thereafter 69,912,634 $ 78,849,795 The Series 1995 bonds were issued in December 1995 by the Spring Hill College Educational Building Authority of Mobile (the Authority). In conjunction with the issuance of the bonds, the College entered into a ground lease with the Authority for a period of 20 years. The Series 1995 bonds are collateralized by the assignment of the Authority s interest in the recreational facility project lease, a pledge by the Authority of the revenues received under the lease and a first mortgage on the real estate and building thereon. The bonds mature serially through September 1, 2015 in annual installments with interest payable semiannually September 1 and March 1 of each year. The bonds maturing on or after September 1, 2006 are callable at the option of the Authority. Redemption price includes principal, interest, and a premium of 1% for bonds redeemed September 1, 2006 to August 31, The College will gain title to the recreational facility from the Authority when the project lease expires in September

28 NOTE 9 - NOTES AND BONDS PAYABLE (CONTINUED) The purpose of the 1995 issue was to finance the construction and furnishing of a recreational center facility on campus. Regions Bank, Trustee, issued an irrevocable $2,491,616 letter of credit to the College on December 28, 1995 to provide funds from which the Trustee is authorized and directed to draw up to an amount sufficient to pay principal and interest on the bonds as they mature. The letter of credit expires September 16, The Series 1999 (A & B) bonds were issued in February 1999 by the Authority. In conjunction with the issuance of the bonds, the College entered into a ground lease with the Authority for a period of 17 years. The Series 1999 (A & B) bonds are collateralized by the assignment of the Authority s interest in the Fairway Apartment project lease and a first mortgage on certain College property. The bonds mature serially through September 2016 payable for principal and interest monthly and are callable at a 2.0% premium. The College will gain title to the Fairway Apartments from the Authority when the project lease expires in September The proceeds of the Series 1999 (A & B) bonds were used to defease the Series 1992 bonds and to redeem at a premium the Series 1996 bonds. The Series 1999 (C) bonds were issued in December 1999 by the Authority. In conjunction with the issuance of the bonds, the College entered into a ground lease with the Authority for a period of 10 years. The Series 1999 (C) bonds are collateralized by the assignment of the Authority s interest in the O Leary Hall Renovation project, a security interest in certain machinery and equipment, and a mortgage on certain of the golf course properties already mortgaged to secure previous bond issues. The bonds mature serially through January 2010, payable for principal and interest monthly and are callable at a 2.0% premium. The College will gain title to O Leary Hall from the Authority when the project lease expires in September The proceeds of the Series 1999 (C) bonds were used to defray the cost of the O Leary Hall improvements and certain additional capital improvements on the campus, including the purchase of two HVAC units and underground storage tanks. The Series 2001 bonds were issued in July 2001 by the Authority. In conjunction with the issuance of the bonds, the College entered into a ground lease with the Authority for a period of 20 years on certain properties of the College constituting a new residence hall and will in turn lease the properties back to the College. The rent due on the ground leases shall be sufficient to pay the principal and interest on the bonds as the same become due. The Series 2001 bonds are collateralized by a letter of credit issued by a bank. The bonds mature serially through September 2023 in annual installments with interest payable semiannually September 1 and March 1 of each year. The bonds are subject to mandatory redemption on any date for a redemption price of 102% prior to September 1, 2011 and after September 1, 2011 through August 31, 2012 at 101%. Any mandatory redemption occurring after August 31, 2012 will be at 100% of the principal amount. The College will gain title to the residence hall from the Authority when the project lease expires in September