Consolidated Financial Statements Johnson & Wales University

Consolidated Financial Statements Johnson & Wales University June 30, 2012 and 2011

Consolidated Financial Statements Table of Contents Consolidated Financial Statements: Independent Auditors Report 1 Consolidated Statements of Financial Position 2 Consolidated Statements of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets 3 Consolidated Statements of Changes in Net Assets 4 Consolidated Statements of Cash Flows 5 6 36

Independent Auditors Report The Board of Trustees Johnson & Wales University Providence, Rhode Island We have audited the accompanying consolidated statements of financial position of Johnson & Wales University (the University ) as of June 30, 2012 and 2011, and the related consolidated statements of unrestricted revenues, expenses, and other changes in unrestricted net assets, changes in net assets and cash flows for the years then ended. These consolidated financial statements are the responsibility of the University s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Johnson & Wales University as of June 30, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. November 13, 2012 Providence, Rhode Island

Consolidated Statements of Financial Position June 30, 2012 2011 Assets Cash $ 8,791 $ 29,511 Cash equivalents 6,884 6,190 Total cash and cash equivalents 15,675 35,701 Student accounts receivable, net 8,360 8,353 Inventories, deferred charges, prepaid expenses and other assets 11,919 13,222 Contributions receivable, net 1,954 3,024 Student loans, notes and other receivables, net 40,536 43,743 Investments 246,980 256,396 Property and equipment, net 529,040 506,244 Total assets $ 854,464 $ 866,683 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses $ 37,378 $ 39,684 Deferred revenue and student deposits 12,839 16,229 Annuity obligations 875 936 Bonds and notes payable 156,053 166,683 Refundable U.S. Government grants 4,108 4,106 Total liabilities 211,253 227,638 Net assets: Unrestricted: Available for operations and designated for long-term investment 212,452 239,034 Net investment in property and equipment 376,775 343,623 Loan program 25,612 27,180 Total unrestricted 614,839 609,837 Temporarily restricted 8,755 10,411 Permanently restricted 19,617 18,797 Total net assets 643,211 639,045 Total liabilities and net assets $ 854,464 $ 866,683 See accompanying notes to the consolidated financial statements. 2

Consolidated Statements of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets Years Ended June 30, 2012 2011 Changes in unrestricted operating net assets: Revenues and gains: Tuition and fees $ 380,362 $ 359,184 Residence and dining 67,295 61,545 Scholarships (130,671) (115,829) Net student fees 316,986 304,900 Practicum properties 12,025 12,141 Private gifts, grants and federal aid to students 4,336 4,555 Unrestricted interest and dividend income 791 991 Investment return appropriated for operations 5,713 5,279 Other sources 9,612 10,996 Total revenues and gains 349,463 338,862 Net assets released from restrictions 3,971 3,755 Total revenues, gains and other support 353,434 342,617 Operating expenses: Instructional 136,868 130,152 Practicum 20,354 20,328 General administrative 39,749 37,870 Admissions and recruiting 21,740 22,061 General services 30,198 25,445 Student services 71,510 64,280 Loss on sale of property and equipment 2,192 270 Total operating expenses 322,611 300,406 Increase in unrestricted net assets from operations 30,823 42,211 Non-operating activities: Decrease resulting from actuarial changes in defined benefit liability and settlement (11,381) (4,000) Unrestricted return on investments (8,621) 37,422 Investment return appropriated for operations (5,713) (5,279) Reclassifications from (to) temporarily-restricted net assets (106) 21 Increase (decrease) in unrestricted net assets from non-operating activities (25,821) 28,164 Increase in unrestricted net assets $ 5,002 $ 70,375 See accompanying notes to the consolidated financial statements. 3

Consolidated Statements of Changes in Net Assets Years Ended June 30, 2012 2011 Summary of changes in unrestricted net assets: Total operating unrestricted revenues and gains $ 349,463 $ 338,862 Net operating assets released from restrictions 3,971 3,755 Total unrestricted operating expenses and losses (322,611) (300,406) Total non-operating change in unresrestricted net assets (25,821) 28,164 Increase in unrestricted net assets 5,002 70,375 Changes in temporarily restricted net assets: Contributions 2,815 1,645 Appropriated gains (losses) on long-term investments (606) 3,726 Net assets released from restrictions (3,971) (3,755) Reclassifications from (to) unrestricted net assets 106 (21) Increase (decrease) in temporarily restricted net assets (1,656) 1,595 Changes in permanently restricted net assets: Contributions 828 3,381 Appropriated gains (losses) on long-term investments (8) 50 Increase in permanently restricted net assets 820 3,431 Increase in net assets 4,166 75,401 Net assets, beginning 639,045 563,644 Net assets, ending $ 643,211 $ 639,045 See accompanying notes to the consolidated financial statements. 4

Consolidated Statements of Cash Flows Years Ended June 30, 2012 2011 Cash flows from operating activities: Increase in net assets $ 4,166 $ 75,401 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization expense 28,236 26,162 Net realized and unrealized (gains) losses on investments 13,332 (37,472) Increase in allowance for uncollectible accounts 1,911 1,205 Contributions restricted for long-term investment (1,569) (1,456) Loss on sale of property and equipment 2,192 270 Change in accounts receivable and other assets 1,219 397 Change in accounts payable and accrued expenses, deferred revenue and student deposits and annuity obligations (5,757) (14,910) Net cash provided by operating activities 43,730 49,597 Cash flows from investing activities: Purchase of property and equipment (53,643) (41,639) Proceeds from sale or disposal of property and equipment 408 135 Purchase of investments (25,663) (64,564) Proceeds from maturity and sale of investments 21,747 60,378 Student loans, notes and other receivables advanced (9,195) (9,077) Student loans, notes and other receivables collected 11,367 8,402 Net cash used in investing activities (54,979) (46,365) Cash flows from financing activities: Principal repayments on notes and bonds payable (10,346) (9,085) Contributions restricted for long-term investments 1,569 1,456 Net cash used in financing activities (8,777) (7,629) Net decrease in cash and cash equivalents (20,026) (4,397) Cash and cash equivalents, beginning 35,701 40,098 Cash and cash equivalents, ending $ 15,675 $ 35,701 Supplemental disclosure of cash flows information: Cash paid during the year for interest on long-term debt $ 7,986 $ 8,472 See accompanying notes to the consolidated financial statements. 5

Note 1 - Nature of the University and Summary of Significant Accounting Policies Johnson & Wales University (the University ) is a not-for-profit institution offering undergraduate and graduate degree programs in business, culinary, hospitality and technology. Founded in Providence, Rhode Island in 1914, the University also operates campuses in North Miami, Florida; Denver, Colorado; and Charlotte, North Carolina. The University consists of the following entities, which have been consolidated in the accompanying financial statements: Johnson & Wales University; Johnson & Wales University Club; J.W.C. Corporation; J&W Corporation; Griffin Realty Enterprises, Inc.; Harborside Enterprises, Inc.; Johnson & Wales Alumni Services Corporation; Griffin Realty of Rhode Island-Florida, Inc., and CAFE, LLC. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. Johnson & Wales University is recognized by the Internal Revenue Service as a University described in Section 501(c)(3) of the Internal Revenue Code and is generally exempt from Federal and state income taxes on related income. Any tax on the subsidiaries is not significant to the consolidated financial statements. The University has identified its tax status as a tax exempt entity and its decision to include or exclude items of income unrelated to its operations as tax positions; however, the University has determined that such tax positions do not result in an uncertainty requiring recognition. Given the limited taxable activities of the University, management has concluded that disclosure relative to tax provisions are not necessary The University is not currently under examination by any taxing jurisdiction. Its Federal and state income tax returns are generally open for examination for three years following the date of the return being filed. Basis of Statement Presentation The consolidated financial statements of the University have been prepared on the accrual basis of accounting. The University reports three classes of net assets and the changes in those net assets in the statements of financial position and statements of changes in net assets, respectively. The three classes of net assets unrestricted, temporarily restricted and permanently restricted are based on the existence or absence of donor-imposed restrictions, either explicit or implicit. The three classifications are defined as follows: Unrestricted net assets - Net assets and contributions that are not restricted by the donor or for which donor restrictions have expired. Temporarily restricted net assets - Net assets subject to donor-imposed restrictions that permit the University to use or expend the donated assets as specified and is satisfied by either the passage of time or by actions of the University. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that they be maintained permanently by the University. Unexpended appreciation on permanently restricted net assets is included in temporarily restricted net assets. 6

Note 1 - Nature of the University and Summary of Significant Accounting Policies (Continued) Basis of Statement Presentation (Continued) The University reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Contributions of cash or other assets that must be used to acquire long-lived assets are reported as temporarily restricted support until the assets are acquired and placed in service. The consolidated statements of unrestricted revenues, expenses, and other changes in unrestricted net assets and the consolidated statements of changes in net assets report the changes in unrestricted, temporarily restricted and permanently restricted assets from operating and nonoperating activities. Unrestricted operating revenues consist of those items attributable to the University s primary mission of providing education. Investment return included in operations reflects the amount computed using the spending policy for the period as approved by the Board of Trustees. All other investment income or losses are reported as nonoperating revenue commensurate with any restrictions. The University also considers gains and losses resulting from actuarial changes in the defined pension liability as nonoperating. Cash and Cash Equivalents The University considers highly-liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents held by investment managers are considered part of investments given the expectation of near term reinvestment. The University maintains its cash balances at several financial institutions, which at times may exceed federally insured limits. The University monitors its exposure associated with cash and cash equivalents and has not experienced any losses in such accounts. Inventory Inventory is carried at the lower of cost (average cost) or market. Contributions Receivable Unconditional promises to give are recorded at fair value when initially pledged. Initial recording for pledges expected to be collected in one year or more is arrived at by using the present value of a risk adjusted rate to account for the inherent risk associated with the expected future cash flows. The initially recorded fair value is considered to be a Level 2 input. Unconditional promises to give are periodically reviewed to estimate an allowance for doubtful collections. Management estimates the allowance by a review of historical experience and a specific review of collection trends that differ from plan on individual accounts. Conditional promises to give are not included as support until the conditions are substantially met. 7

Note 1 - Nature of the University and Summary of Significant Accounting Policies (Continued) Accounts Receivable Receivables are carried at the original invoice amount less an estimate made for doubtful receivables based on a periodic review. Management determines the allowance for doubtful accounts by using historical experience applied to an aging of accounts. The allowance for doubtful accounts was $1,927 and $1,826 at June 30, 2012 and 2011, respectively. Receivables are written off when deemed uncollectible. Accounts receivable are considered past due if any portion of the receivable balance is outstanding for more than 90 days or the student no longer attends the University. Interest is not charged on receivables. Financing Receivables Included in loans receivable are University funds loaned to students and funds advanced by the University via the Federal Perkins Loan Program ( Perkins ). Perkins funds may be reloaned by the University after collection, but in the event that the University no longer participates in the program, a portion of the amounts are generally refundable to the Federal government. Perkins loans receivable are carried at their estimated net realizable value. Perkins loans receivable are considered past due if any portion of the receivable balance is outstanding for more than 120 days. Interest and late fees are recorded when received. Perkins loans that are in default and meet certain requirements can be assigned to the Department of Education, which reduces the Perkins refundable U.S. Government grants. Included in loans receivable are University funded Achievement Loans, which are carried at their net realizable value. These amounts represent loans to students that are forgiven if students achieve certain grade point averages during their course of study. If the criteria for forgiveness are not met, then the students are required to repay the Achievement Loans in accordance with established terms. Achievement Loans receivable are considered past due if any portion of the receivable balance is outstanding for more than 90 days. Interest and late fees are recorded when received. The Achievement Loans program ended during fiscal year ending June 30, 2006. As such, no new loans are being awarded under this program. For all loans, management estimates the allowance for credit losses based on historical experience applied to an aging of accounts, current economic conditions and the credit quality of the loans. Achievement Loan credit losses are also evaluated based on forgiveness trends. Investments Investments are carried at fair value. Fair value is determined as per the fair value policies described later in this section. Interest, dividends and net gains or losses on investments are reported as increases or decreases in permanently restricted net assets if the terms of the original gift require that they be applied to the principal of a permanent endowment fund; as increases or decreases in temporarily restricted net assets if the terms of the gift and/or relevant state law impose restrictions on the current use of the income or net gains and losses; and as increases or decreases in unrestricted net assets in all other cases. 8

Note 1 - Nature of the University and Summary of Significant Accounting Policies (Continued) Property and Equipment Constructed and purchased property and equipment are carried at cost. Land, buildings or equipment donated to the University are carried at estimated fair value at the date of the gift per the fair value policies described later in this section. Fair value of donated property is effectively recorded using a Level 3 market input. If donors stipulate how long the assets must be used, the contributions are recorded as restricted support. In the absence of such stipulations, contributions of land, buildings and equipment are recorded as unrestricted support at fair value. Long-lived fixed assets, with the exception of land, library holdings and artwork, are depreciated using the straight-line method over the estimated useful lives of the respective assets. The University reviews the carrying value of its long-lived assets to assess the recoverability of these assets; any impairment is recognized in operating results if a permanent reduction in value is deemed to have occurred. Bond Issuance Costs Bond issuance costs are amortized using the straight-line method over the life of the associated bond issue. The bond issuance costs of $3,789 and $4,062 at June 30, 2012 and 2011, respectively, are included in other assets. Amortization expense was $273 in 2012 and 2011. Deferred Revenue and Student Deposits Student deposits, along with advance payments for tuition, room and board and other fees related to all subsequent terms have been deferred and will be reported as unrestricted revenue in the year in which the related educational services are provided. Annuity Obligations The University s split-interest agreements consist principally of irrevocable charitable remainder trusts for which the University serves as trustee. Assets held in these trusts are included in investments and reported at fair value per the policies described later in this section. Contribution revenues are initially recognized at fair value at the date the trusts are established after recording liabilities for the present value of the estimated future payments to be made to beneficiaries. The liabilities are adjusted during the term of the trusts for changes in the actuarial value, accretion of the discount and other changes affecting the estimates of future obligations. The initially recorded fair value of the donated investments is determined based on the underlying nature of the investments received which generally represent Level 1 inputs while the initial measurement of the related obligations are Level 2 inputs. 9

Note 1 - Nature of the University and Summary of Significant Accounting Policies (Continued) Fair Value Measurements The University reports required types of financial instruments at fair value on a recurring and nonrecurring basis depending on the underlying accounting policy for the particular instrument. Recurring fair value measurements include the University s investment accounts and the interest rate swap contract. Nonrecurring measurements include contributions receivable and annuity obligations. Fair value standards require an entity to maximize the use of observable inputs (such as quoted prices in active markets) and minimize the use of unobservable inputs (such as appraisals or valuation techniques) to determine fair value. In addition, the University reports certain investments using net asset value per share as determined by investment managers under the so called practical expedient. The practical expedient allows net asset value per share to represent fair value for reporting purposes when the criteria for using this method are met. Fair value standards also require the University to classify recurring fair values of financial instruments into a three-level hierarchy, based on the priority of inputs to the valuation technique or in accordance with net asset value practical expedient rules, which allow for either Level 2 or Level 3 depending on lock-up and notice periods associated with the underlying funds. Instruments measured and reported on a recurring basis at fair value are classified and disclosed in one of the following categories: Level 1 Quoted prices are available in active markets for identical instruments as of the reporting date. Instruments which are generally included in this category include listed equity and debt securities publicly traded on a stock exchange. Level 2 Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Level 2 also includes investments reported at net asset value per share with lock-up periods of 90 days or less. Level 3 Pricing inputs are unobservable for the instrument and include situations where there is little, if any, market activity for the instrument. The inputs into the determination of fair value require significant management judgment or estimation. Level 3 methods include investments reported at net asset value per share with lock-up periods in excess of 90 days. In some instances the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such instances, the inputs are based on the lowest level of input that is significant to the fair value measurement. Market price is affected by a number of factors, including the type of instrument and the characteristics specific to the instrument. Instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. It is reasonably possible that changes in values of these instruments will occur in the near term and that such changes could materially affect amounts reported in these financial statements. For more information on the fair value of the University s financial instruments, see Note 5 Fair Values of Financial Instruments. 10

Note 1 - Nature of the University and Summary of Significant Accounting Policies (Continued) Practicum Properties The practicum properties are primarily hotels and banquet operations. Revenue is recognized when earned, when the stay or event is completed. Fundraising Expenses Fundraising costs of $3,210 and $3,739 in fiscal years 2012 and 2011, respectively, are charged to expense and are included in general administrative expenses in the consolidated statements of unrestricted revenues, expenses, and other changes in unrestricted net assets. Functional Expense Allocation The costs of providing the various programs and other activities have been summarized on a functional basis in the consolidated statement of unrestricted revenues, expenses and other changes in net assets. Physical plant costs, including depreciation and interest expense, have been allocated based on square footage utilization. All other program expenses represent actual costs incurred. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant management estimates included in the financial statements relate to the allowance for doubtful loans, contributions and accounts receivable, fair value of certain investments, the estimate of annuity obligations, and the allocation of common expenses over program functions. Reclassifications Certain reclassifications have been made to the 2011 consolidated financial statements to conform with the 2012 presentation. Subsequent Events The University has evaluated subsequent events through November 13, 2012, the date the financial statements were issued. 11

Note 2 - Student Accounts and Loans Receivable Student accounts receivable, loans, notes and other receivables consist of the following at June 30: 2012 2011 Student accounts receivables: Student receivables $ 10,287 $ 10,179 Allowance for doubtful accounts (1,927) (1,826) Student accounts receivable, net $ 8,360 $ 8,353 Financing loan receivables consist of the following at June 30: 2012 2011 Achievement loans $ 13,143 $ 16,166 Perkins loans 45,537 44,685 58,680 60,851 Less allowance for doubtful accounts: Beginning of year: 21,629 59,393 Provisions 2,475 3,395 Write-off of fully reserved balances - (39,000) Achievement loan cancellations (446) (2,159) End of year 23,658 21,629 Student loans and notes receivable, net 35,022 39,222 Other receivables 5,514 4,521 Student loans, notes and other receivables, net $ 40,536 $ 43,743 12

Note 2 - Student Accounts and Loans Receivable (Continued) At June 30, 2012 and 2011, the following is an aging analysis of amounts due under the student loan programs: 31-120 Days Past Due 121-360 Days Past Due Greater than 360 Days Past Due Total Past Due Current Total Financing Receivable 2012 Achievement loans $ 1,501 1,410 $ 4,863 $ 7,774 $ 5,369 $ 13,143 Perkins loans 5,273 2,555 4,091 11,919 33,618 45,537 2011 Student loans and notes receivable $ 6,774 $ 3,965 $ 8,954 $ 19,693 $ 38,987 $ 58,680 Achievement loans $ 2,137 $ 1,913 $ 3,269 $ 7,319 $ 8,847 $ 16,166 Perkins loans 4,790 3,659 1,770 10,219 34,466 44,685 Student loans and notes receivable $ 6,927 $ 5,572 $ 5,039 $ 17,538 $ 43,313 $ 60,851 Note 3 - Contributions Receivable Contributions receivable consist of the following at June 30: 2012 2011 Unconditional promises expected to be collected in: Less than one year $ 1,597 $ 1,584 One to five years 611 1,897 Greater than five years 10 10 2,218 3,491 Less: Allowance for uncollectible contributions (222) (349) Discount to present value (42) (118) Contributions receivable, net $ 1,954 $ 3,024 The discount rates ranged from 1.61% to 5.11% for June 30, 2012 and 2011. Conditional promises to give were $25 and $85 at June 30, 2012 and 2011, respectively. Certain conditions must be met in order for the University to receive the proceeds from these promises. Therefore, these amounts are not recorded in the accompanying consolidated financial statements. 13

Note 4 - Investments Long-term investment activities consist of the following for the years ended June 30: 2012 2011 Investments, beginning of year $ 256,396 $ 214,739 Gifts 1,591 1,519 Investment return, net of investment fees: Interest and dividends 4,673 4,219 Net unrealized gains (losses) (15,065) 28,759 Net realized gains 1,733 8,713 Investment fees (576) (493) Total return on investments, net of investment fees (9,235) 41,198 Net assets released, transfers and adjustments: Accumulated gains released from restriction (1,179) (1,083) Other transfers, withdrawals and adjustments (522) 157 Net due to (from) operating cash (71) (134) Total net assets released, transfers and adjustments (1,772) (1,060) Investments, end of year $ 246,980 $ 256,396 Investment return, net of investment fees, at June 30, 2012 is summarized as follows: Investments Short-Term Investments Total Interest and dividends, net of investment fees $ 4,097 $ 715 $ 4,812 Unrealized and realized gains (losses) (13,332) 76 (13,256) Total investment return $ (9,235) $ 791 $ (8,444) 14

Note 4 - Investments (Continued) Investment income, net of investment fees, at June 30, 2011 is summarized as follows: Investments Short-Term Investments Total Interest and dividends, net of investment fees $ 3,726 $ 904 $ 4,630 Unrealized and realized gains 37,472 87 37,559 Total investment income $ 41,198 $ 991 $ 42,189 Note 5 - Fair Values of Financial Instruments The following table presents financial assets at June 30, 2012 that the University measures fair value on a recurring basis, by level, within the fair value hierarchy: Level 1 Level 2 Level 3 Total Assets: U.S. equities $ 21,463 $ 26,700 $ - $ 48,163 Global equities 22,722 22,556-45,278 U.S. fixed income 26,369 - - 26,369 Global fixed income - 6,251-6,251 Marketable alternative assets: Restructuring funds - 4,094 16,200 20,294 Private equity funds - 27,412 12,408 39,820 Non-marketable alternative assets: Restructuring funds - - 11,591 11,591 Private equity funds - - 13,202 13,202 Non-marketable inflation hedging - - 4,602 4,602 Marketable inflation hedging 6,673 14,331-21,004 Cash and cash equivalents 856 - - 856 Money markets and other 6,400 3,150-9,550 Total assets at fair value $ 84,483 $ 104,494 $ 58,003 $ 246,980 15

Note 5 - Fair Values of Financial Instruments (Continued) The following table presents financial assets at June 30, 2011 that the University measures fair value on a recurring basis, by level, within the fair value hierarchy: Level 1 Level 2 Level 3 Total Assets: U.S. equities $ 23,561 $ 24,565 $ - $ 48,126 Global equities 25,104 26,228-51,332 U.S fixed income 6,057 - - 6,057 Global fixed income 18,885 6,240-25,125 Marketable alternative assets: Restructuring funds - 16,857 8,962 25,819 Private equity funds - 14,192 21,597 35,789 Non-marketable alternative assets: Restructuring funds - - 5,264 5,264 Private equity funds - - 16,389 16,389 Non-marketable inflation hedging - - 4,378 4,378 Inflation hedging 13,121 13,746-26,867 Cash and cash equivalents 1,177 - - 1,177 Money markets and other 6,705 3,368-10,073 Total assets at fair value $ 94,610 $ 105,196 $ 56,590 $ 256,396 16

Note 5 - Fair Values of Financial Instruments (Continued) The changes in investments measured at fair value for which the University has used Level 3 inputs to determine fair value are as follows: Marketable Non-Marketable Non-Marketable Alternative Alternative Inflation Funds Funds Hedging Total Fair value, July 1, 2010 $ 22,874 $ 16,524 $ 3,420 $ 42,818 Transfers to Level 2 (9,684) - - (9,684) Unrealized gains 2,046 1,340 213 3,599 Purchases 15,323 3,789 745 19,857 Fair value, June 30, 2011 30,559 21,653 4,378 56,590 Unrealized losses (175) (782) (591) (1,548) Purchases - 3,922 815 4,737 Sales (1,776) - - (1,776) Fair value, June 30, 2012 $ 28,608 $ 24,793 $ 4,602 $ 58,003 Current year unrealized losses for assets still held at the balance sheet date $ (175) $ (782) $ (591) $ (1,548) During 2011, the lock-up provisions of $9,684 of non-marketable alternatives expired and were transferred to Level 2 marketable alternatives. No transfers were made in 2012. 17

Note 5 - Fair Values of Financial Instruments (Continued) The University invests in certain entities that calculate net asset value per share in accordance with Financial Accounting Standards Board ( FASB ) guidance relative to investment companies and these investments are reported at fair value based on the net asset value per share as reported by the investee. These investments are measured at fair value using Level 2 or Level 3 inputs. Investments are categorized as Level 2 instruments when the University has the ability to redeem its investment in the entity at net asset value per share at year-end or within 90 days of year-end. Investments are categorized as Level 3 instruments when the University cannot redeem its investment within 90 days of year-end. A summary of the significant categories of such investments and their attributes is as follows: Redemption Frequency (If Redemption Unfunded Currently Notice Fair Value Commitments Eligible) Period U.S. equities $ 26,700 $ - Daily/Monthly 1-15 days Global equities 22,556 - Daily/Monthly 15-90 days Global fixed income 6,251 - Monthly 15 days Marketable alternative assets 60,114 - Quarterly/Annually 45-90 days Non-marketable alternative assets 24,793 10,189 N/A N/A Non-marketable inflation hedging 4,602 4,010 N/A N/A Marketable inflation hedging funds 14,331 - Daily/Quarterly 1-60 days $ 159,347 $ 14,199 U.S. equities includes investments in funds of funds that invest primarily in U.S. common stocks and the funds are designed to give the managers the flexibility to invest both long and short within their area of expertise. The funds are redeemable on a daily basis. 18

Note 5 - Fair Values of Financial Instruments (Continued) Global equities includes investments in funds of funds that invest primarily in foreign countries common stocks and the funds are designed to give the managers the flexibility to invest both long and short within their area of expertise. The funds are redeemable on a daily basis. Global fixed income includes investments in funds of funds that invest in U.S. and international debt securities and the funds are designed to give the managers the flexibility to invest both long and short within their area of expertise. The redemption restriction period for these investments is monthly within 90 days at June 30, 2012. Marketable alternative assets includes various investments in different markets designed to give the managers flexibility to invest both long and short within their areas of expertise. The redemption restriction period for these investments are quarterly or annually within 45 to 90 days at June 30, 2012. Non-marketable alternative assets includes investments in pooled investment vehicles and private equity funds. These investments can never be redeemed. Instead, the nature of the investments in this category is that distributions will be received as the underlying investments of the fund are liquidated. It is estimated that the underlying assets of the fund will be liquidated over the next five to seven years. Non-marketable inflation hedging includes three funds that invest in natural resources. These investments can never be redeemed. Instead, the nature of the investments in this category is that distributions will be received as the underlying investments of the fund are liquidated. Marketable inflation hedging funds includes three funds that invest in areas that are sources of inflationary pressure such as global and domestic equity and equity related securities, commodities, natural resources, and financial instruments. The redemption restriction period for these investments ranges from daily to quarterly within 60 days at June 30, 2012. Management has determined that fair value approximates carrying value for cash, cash equivalents, student accounts receivable and accounts payable and annuities payable, given the short-term nature of these instruments. Management has no practical or cost effective way of assessing fair value for contributions receivable and loans receivable. A reasonable estimate of the fair value of the notes receivable from students under government loan programs and advances from the Federal government for student loans could not be made because the notes receivable are not salable and can only be assigned to the U.S. government or its designees. The estimated fair value of the University s debt was $151,882 at June 30, 2012 based on quoted market prices for the same or similar issues. The market prices utilized reflect the rate that the University would have to pay to a creditworthy third party to assume its obligation and do not reflect an additional liability to the University. 19

Note 6 - Property and Equipment The following is a summary of the University s property and equipment as of June 30: Estimated Lives 2012 2011 Land - $ 58,587 $ 53,919 Building and land improvements 25 40 585,735 565,519 Equipment and furniture 3 12 134,412 121,390 Leasehold improvements 5 15 7,526 6,985 Library and museum holdings - 5,380 5,705 Construction in progress 4,825 5,245 796,465 758,763 Less accumulated depreciation (267,425) (252,519) Property and equipment, net $ 529,040 $ 506,244 Depreciation expense charged to operations was $28,247 and $26,173 in 2012 and 2011, respectively. Note 7 - Retirement Plans Defined Benefit Pension Plans The University had a defined benefit pension plan covering substantially all of its employees. The benefits were based on years of service and the employees compensation. The University s funding policy was to contribute annually an amount equal to or greater than the amount necessary to satisfy the minimum funding standards under ERISA 302 and Internal Revenue Code 412. As of June 30, 2006, the accrual of benefits in the defined benefit pension plan ceased and employee benefits accrued as of that date were frozen. In February 2010, the Board of Trustees voted to terminate the plan by settling the benefit obligation. During fiscal year ending June 30, 2012, the obligation for the defined benefit pension plan was settled by making lump-sum payments to the participants and/or providing third-party annuity contracts to cover the benefits, depending on the election of the plan participants. The University has an executive retirement plan that is designed in accordance with Section 457(b) of the Internal Revenue Code. Participants are designated by the Board of Trustees. The University generally makes non-elective annual contributions to the plan on behalf of each participant. The participants are responsible for making investment selections within their designated accounts. However, the funds remain assets of the University until such time as the participant withdraws the funds in accordance with plan provisions. Assets held for this plan were $941 and $870 in 2012 and 2011, respectively, and are reported in investments. A corresponding liability to plan participants is reported in accounts payable and accrued expenses. 20

Note 7 - Retirement Plans (Continued) Defined Benefit Pension Plans (Continued) The University also has a supplemental executive retirement plan ( SERP ) designed in accordance with Section 457(f) of the Internal Revenue Code. Participants are designated by the Board of Trustees. Although the plan is unfunded, the University has on deposit $796 in a rabbi trust, which is set aside for the purpose of paying these benefits. The plan is a defined benefit plan intended to provide a lump-sum payment at age 65, representing the actuarial value of a lifetime annuity equal to 75% of final salary, offset by the actuarial equivalent of benefits that had been accrued under the University s now terminated defined benefit pension plan and the assumed value of the participant s account in the previously described 457(b) plan, using a 7% assumed rate of return. The University uses a June 30 measurement date to determine the pension obligations. The following table sets forth the two plans funded status as recorded in accounts payable and accrued expenses in the consolidated statements of financial position as follows: 2012 2011 Pension SERP Total Total Change in benefit obligation: Benefit obligation at beginning of year $ 113,471 $ 2,709 $ 116,180 $ 113,402 Service cost - 82 82 78 Interest cost 4,619 143 4,762 5,738 Effect of settlement (122,183) - (122,183) - Actuarial loss 6,705 178 6,883 87 Benefits paid (2,612) - (2,612) (3,125) Benefit obligation at end of year - 3,112 3,112 116,180 Change in plan assets: Fair value of plan assets at beginning of year 109,961-109,961 90,683 Actual return on plan assets (5) - (5) 2,403 Employer contributions 14,839-14,830 20,000 Benefits paid (124,795) - (124,795) (3,125) Fair value of plan assets at end of year - - - 109,961 Funded status at end of year $ - $ (3,112) $ (3,112) $ (6,219) 21

Note 7 - Retirement Plans (Continued) Defined Benefit Pension Plans (Continued) Components of net periodic benefit cost are as follows: 2012 2011 Service cost $ 82 $ 78 Interest cost 4,762 5,738 Expected return on plan assets - (2,392) Amortization of transition amount 57 57 Amortization of prior service cost 43 43 Amortization of net loss 2,289 2,272 Net periodic benefit cost $ 7,233 $ 5,796 Weighted average assumptions as of June 30: Discount rate 4.13% 5.23% Expected return on plan assets N/A 2.50% The Plan s assets are allocated as follows at June 30: 2012 2011 Fixed income N/A 0% Cash and cash equivalents N/A 100% Total N/A 100% The University does not expect to make contributions to the plans in fiscal year 2013. The estimated net loss, prior service cost and transition obligation for the plan that will be amortized into net periodic benefit cost over the next fiscal year are $103, $43, and $57, respectively. As a result of the settlement, the University recorded a charge of $4,499 in the consolidated statements of unrestricted revenues, expenses and other changes in unrestricted net assets for the year ended June 30, 2012. 22

Note 7 - Retirement Plans (Continued) Defined Benefit Pension Plans (Continued) There were no assets in the University pension plan or SERP at June 30, 2012. The pension plan was settled during 2012 and the SERP remains unfunded. The fair values of the University s pension plan assets at June 30, 2011, by asset category are as follows: Asset Category Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 109,961 $ - $ - $ 109,961 Total $ 109,961 $ - $ - $ 109,961 Defined Contribution Retirement Savings Plan The University also has a qualified 401(k) retirement savings plan for its employees. The University contributes 6% of eligible compensation of each eligible employee, as well as matching 100% of employee contributions up to 4% of eligible compensation on a tax deferred basis, subject to limits. The University s contributions to the plan for the year ended June 30, 2012 and 2011 amounted to $11,484 and $11,018, respectively. 23

Note 8 - Bonds and Notes Payable Bonds payable, net of discounts and premiums, consist of the following at June 30 and are at fixed rates: 2012 2011 Rhode Island Health and Educational Building Corporation Revenue Bonds: 5.05% to 6.1% Series 1996, maturing serially through 2026 $ 6,283 $ 6,564 4.0% to 5.5% Series 1999, maturing serially through 2029 37,318 38,222 North Carolina Capital Facilities Agency: Educational Facilities Revenue Bonds, Series 2003A, 3.875% to 5.25%, maturing serially through 2033 44,141 45,194 Colorado Educational Facilities Revenue Bonds Series 2003A, 2.0% to 5.0%, maturing serially through 2033 24,364 25,064 Rhode Island Higher Education Facility Revenue Refunding Bonds, Series 2003, 3.0% to 5.375%, maturing 2020 24,717 28,105 North Miami Educational Facilities Revenue Refunding Bonds, Series 2003A, 3.0% to 5.0%, maturing 2020 15,050 16,600 Notes payable consist of the following at June 30: U.S. Department of Education: 5.5% fixed, maturing November 1, 2021 962 1,049 Harborside Park, LLC: 2.75%, prime rate minus 0.5%, maturing March 1, 2028-1,559 Bank of America: 5.92% fixed, maturing November 5, 2012 164 541 Bank of America: 1.73% variable rate, fixed swap rate of 6%, maturing February 1, 2016 3,054 3,785 Bonds and notes payable $ 156,053 $ 166,683 24

Note 8 - Bonds and Notes Payable (Continued) Maturities of notes and bonds payable, net of discounts and premiums, for the fiscal years after June 30, 2012, are as follows: 2013 $ 9,427 2014 9,683 2015 10,089 2016 10,394 2017 10,243 Thereafter 106,217 Total $ 156,053 Discounts on bonds payable at June 30, 2012 and 2011 are $309 and $327, respectively. Premiums on bonds payable at June 30, 2012 and 2011 are $3,328 and $3,630, respectively. Rhode Island Health and Educational Building Corporation Revenue Bonds, Rhode Island Higher Education Facility Revenue Refunding Bonds, Colorado Education Facilities Bonds, North Carolina Educational Facilities Revenue Bonds and the North Miami Educational Facilities Revenue Refunding Bonds are secured by tuition and other revenues. Notes payable to the U.S. Department of Education are secured by real estate. The University has available lines of credit totaling $26.0 million with various banks. The lines of credit expire on December 31, 2012, January 31, 2013, and June 22, 2013, respectively. All of the lines of credit are uncollateralized. The University had no amounts outstanding on these lines at June 30, 2012 or 2011. Management expects to renew its lines in the ordinary course of business. The bond agreements and line of credit agreements contain covenants regarding certain operating activities and financial statement amounts and ratios of the University. As of June 30, 2012 and 2011, the University was in compliance with all such covenants. Interest costs for the years ended June 30, 2012 and 2011 were $7,617 and $8,113, respectively. 25

Note 9 - Derivative Instruments In January 2004, the University entered into an interest rate swap to manage its exposure to interest rate risk associated with the University s variable rate debt primarily through converting a portion of variable rate date to a fixed rate. The fair value of the swap is recorded on the consolidated statements of financial position as an accrued expense using Level 2 fair value inputs. The University does not enter into derivative instruments for trading or speculative purposes. As a result of the use of derivative instruments, the University is exposed to risk that the counterparties will fail to meet their contractual obligation. To mitigate the counterparty risk, the University only enters into contracts with selected major financial institutions based upon their credit ratings and other factors, and continually assesses the creditworthiness of counterparties. At June 30, 2012 and 2011, all of the counterparties to the University s interest rate swaps had investment grade ratings. To date, all counterparties have performed in accordance with their contractual obligation. The University had the following swap outstanding: Notional Termination Interest Rate Interest Change in Year End Amount Date Received Rate Paid Fair Value Fair Value June 30, 2012 $ 3,054 February 2016 One month LIBOR plus 1.5% (1.74%) 6.00% $ 243 $ (76) June 30, 2011 $ 3,785 February 2016 One month LIBOR plus 1.5% (1.69%) 6.00% $ 319 $ (87) Note 10 - Net Assets and Endowment Matters Unrestricted Net Assets Unrestricted net assets are comprised of the following: Available for operations and designated for long-term investment - Board-designated funds functioning as an endowment and managed by the Board s Investment Committee and other various long-term investments, and discretionary funds available for carrying on the operating activities of the University. The Board-designated funds have been set aside for strategic purposes and to provide investment income to support operations, which may only be used with the approval of the Board of Trustees. Net investment in property and equipment - The value of property and equipment, net of depreciation, used in the University s operations, and funds on deposit with bond trustees and bond issuance. This amount is offset by outstanding liabilities related to the assets, such as bonds and notes payable. 26

Note 10 - Net Assets and Endowment Matters (Continued) Unrestricted Net Assets (Continued) Loan Program - Notes receivable from students under government loan programs less the amount refundable to the government. Temporarily Restricted Net Assets Temporarily restricted net assets are comprised of the following: Student aid - Amounts received with donor restrictions for financial aid purposes, which have not yet been expended for their designated purposes. Instructional - Amounts received with donor restrictions for instructional purposes, which have not yet been expended for their designated purposes. Other - Amounts received with donor restrictions for various purposes, which have not yet been expended for their designated purposes. Temporarily restricted net assets consist of the following at June 30, 2012: Accumulated Annuities Contributions Fully Unspent Gains and Other Receivable Expendable Total Student aid $ 3,763 $ - $ 212 $ 2,138 $ 6,113 Instructional - - 56 100 156 Other - 1,878 421 187 2,486 Total $ 3,763 $ 1,878 $ 689 $ 2,425 $ 8,755 27

Note 10 - Net Assets and Endowment Matters (Continued) Temporarily Restricted Net Assets (Continued) Temporarily restricted net assets consist of the following at June 30, 2011: Accumulated Annuities Contributions Fully Unspent Gains and Other Receivable Expendable Total Student aid $ 5,479 $ - $ 234 $ 1,329 $ 7,042 Instructional - - 102 324 426 Other - 1,983 686 274 2,943 Total $ 5,479 $ 1,983 $ 1,022 $ 1,927 $ 10,411 Permanently Restricted Net Assets Permanently restricted net assets are comprised of the following: Student aid - Amounts restricted by donors against any expenditure of principal. Substantially all the income earned on principal is to be used for student aid purposes and is recorded in temporarily restricted net assets until appropriated for expenditure. Instructional - Amounts restricted by donors against any expenditure of principal. Substantially all the income earned on principal is to be used for instructional purposes and is recorded in temporarily restricted net assets until appropriated for expenditure. Other - Amounts restricted by donors against any expenditure of principal. Substantially all the income earned on principal is to be used for instructional purposes and is recorded in temporarily restricted net assets until appropriated for expenditure. 2012 2011 Endowment funds for which the income is restricted: Student aid $ 16,742 $ 15,177 Instructional 939 939 Other 671 679 Contributions receivable 1,265 2,002 Total $ 19,617 $ 18,797 28

Note 10 - Net Assets and Endowment Matters (Continued) Net Assets Released from Restrictions Net assets released from temporary donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of events specified by the donors were as follows: 2012 2011 Student aid $ 2,658 $ 2,148 Instructional 332 185 Building/facility projects 818 605 Program support 163 817 Total $ 3,971 $ 3,755 Composition of Endowment by Net Asset Class The following is the composition of endowment assets and those functioning as endowment assets by net asset class as of June 30, 2012: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 6,448 $ 18,420 $ 24,868 Board-designated endowment funds 215,449 - - 215,449 Total funds $ 215,449 $ 6,448 $ 18,420 $ 240,317 The following is the composition of endowment assets and those functioning as endowment assets by net asset class as of June 30, 2011: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 8,323 $ 16,871 $ 25,194 Board-designated endowment funds 224,236 - - 224,236 Total funds $ 224,236 $ 8,323 $ 16,871 $ 249,430 29

Note 10 - Net Assets and Endowment Matters (Continued) Endowment Activity by Net Asset Class The following summarizes the activities within the donor and Board-designated endowment assets and other investments for 2012 and 2011: 2012 Total Endowment Other and Other Endowment Investments Investments Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Endowment and those functioning as endowment assets and other investments, beginning of year Beginning of year $ 224,236 $ 8,323 $ 16,871 $ 249,430 $ 6,996 $ 256,396 Gifts and additions - 22 1,569 1,591-1,591 Investment returns: Interest and dividends, net of investment expenses 3,808 266 3 4,077 20 4,097 Net realized and unrealized gains (losses) (12,454) (872) (11) (13,337) 5 (13,332) Total investment returns (8,646) (606) (8) (9,260) 25 (9,235) Net assets released, transfers and adjustments: Accumulated gains released from restriction - (1,179) - (1,179) - (1,179) Other transfers, withdrawals and adjustments (70) (112) (12) (194) (328) (522) Net due to (from) operating cash (71) - - (71) - (71) Total net assets released, transfers and adjustments (141) (1,291) (12) (1,444) (328) (1,772) Total change (8,787) (1,875) 1,549 (9,113) (303) (9,416) Endowment and those functioning as endowment assets and other investments, end of year $ 215,449 $ 6,448 $ 18,420 $ 240,317 $ 6,663 $ 246,980 30

Note 10 - Net Assets and Endowment Matters (Continued) Endowment Activity by Net Asset Class (Continued) 2011 Total Endowment Other and Other Endowment Investments Investments Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Endowment and those functioning as endowment assets and other investments, beginning of year Beginning of year $ 186,967 $ 5,811 $ 15,326 $ 208,104 $ 6,635 $ 214,739 Gifts and additions 13-1,506 1,519-1,519 Investment returns: Interest and dividends, net of investment expenses 3,376 329 3 3,708 18 3,726 Net realized and unrealized gains 34,037 3,330 47 37,414 58 37,472 Total investment returns 37,413 3,659 50 41,122 76 41,198 Net assets released, transfers and adjustments: Accumulated gains released from restriction - (1,083) - (1,083) - (1,083) Other transfers, withdrawals and adjustments (23) (64) (11) (98) 255 157 Net due to (from) operating cash (134) - - (134) - (134) Total net assets released, transfers and adjustments (157) (1,147) (11) (1,315) 255 (1,060) Total change 37,269 2,512 1,545 41,326 331 41,657 Endowment and those functioning as endowment assets and other investments, end of year $ 224,236 $ 8,323 $ 16,871 $ 249,430 $ 6,966 $ 256,396 31

Note 10 - Net Assets and Endowment Matters (Continued) Reconciliation of endowment assets to total net assets at June 30, 2012: Temporarily Permanently Unrestricted Restricted Restricted Net Assets Net Assets Net Assets Total Endowment assets and those functioning as endowment assets $ 215,449 $ 6,448 $ 18,420 $ 240,317 Other investments 6,663 - - 6,663 Net receivables - 689 1,265 1,954 Gift annuity obligations - (807) (68) (875) Temporarily-restricted funds included in operating cash - 2,425-2,425 Other net assets 392,727 - - 392,727 Total net assets $ 614,839 $ 8,755 $ 19,617 $ 643,211 Reconciliation of endowment assets to total net assets at June 30, 2011: Temporarily Permanently Unrestricted Restricted Restricted Net Assets Net Assets Net Assets Total Endowment assets and those functioning as endowment assets $ 224,236 $ 8,323 $ 16,871 $ 249,430 Other investments 6,966 - - 6,966 Net receivables - 1,022 2,002 3,024 Gift annuity obligations - (861) (76) (937) Temporarily-restricted funds included in operating cash - 1,927-1,927 Other net assets 378,635 - - 378,635 Total net assets $ 609,837 $ 10,411 $ 18,797 $ 639,045 32

Note 10 - Net Assets and Endowment Matters (Continued) Total investments are comprised of: 2012 2011 Donor and Board-designated funds overseen by the Board's Investment Committee $ 237,548 $ 246,497 Donor-designated funds invested per donors' instructions 2,769 2,933 Endowment assets and those functioning as endowment assets 240,317 249,430 Other investments 6,663 6,966 Total investments $ 246,980 $ 256,396 Endowment The University s endowment consists of approximately 70 individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law and Spending Policy The University has interpreted the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ) signed into law in the state, requiring the preservation of the original 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 University classifies as permanently restricted net assets: (a) the original value of gifts donated to the permanently restricted net assets, (b) the original gift value of subsequent gifts to the permanently restricted net assets, and (c) accumulations to the permanently restricted net assets 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 University in a manner consistent with the standard of prudence prescribed by UPMIFA. 33

Note 10 - Net Assets and Endowment Matters (Continued) Interpretation of Relevant Law and Spending Policy (Continued) In accordance with UPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the University and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the University (7) The investment policies of the University The Board of Trustees has approved a spending policy to annually make available 3% of a trailing three-year average of the Endowment s total asset value to the University s operating fund account. The spending policy is intended for the general benefit of the University s current and future students, and for the furtherance of the educational mission of the University or to satisfy donor restrictions. In establishing this policy, the University considered the long-term expected return on its endowment. In the event that the University does not distribute the entire 3% to the operating fund account in any year, it may add the undistributed portion to the amount to be distributed in future years. For the years ending June 30, 2012 and 2011, $1,179 and $1,083, respectively, were distributed to the operating fund from the total appropriated to operating income. Funds with Deficiencies From time-to-time, the fair value of assets associated with donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the University to retain as a fund of perpetual duration. Deficiencies of this nature that are reported in unrestricted net assets were $63 and $0 as of June 30, 2012 and 2011, respectively. These deficiencies resulted from unfavorable market fluctuations. Return Objectives and Risk Parameters The purpose of the Endowment is to support the mission of the University over the long term. Accordingly, the primary investment objectives of the Endowment are to: (1) Preserve and enhance the real purchasing power of the principal, and (2) Provide a stable source of perpetual financial support to Endowment beneficiaries in accordance with the University s spending policy. In order to preserve the purchasing power of both principal and of withdrawals made available for spending, the long-term annualized total rate of return objective for the Endowment is inflation plus 3%. A minimum rate of return equal to the rate of inflation is required to preserve the real purchasing power of the Endowment, and the additional 3% is required to provide for spending. 34

Note 10 - Net Assets and Endowment Matters (Continued) Strategies Employed for Achieving Objectives To satisfy its long-term rate of return objective, the Endowment relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and from current yield (interest and dividends). Asset allocation guidelines and the investment manager structure should ensure adequate diversification in order to reduce the volatility of investment returns. To achieve its investment objectives, the Endowment is allocated among a number of diverse asset classes. These asset classes may include, but are not limited to: domestic equity, domestic fixed income, international equity, international fixed income, hedge funds, absolute return funds, real estate, inflation hedging assets and private capital. The purpose of allocating among asset classes is to ensure the proper level of diversification within the Endowment. The general policy is to diversify investments among equity, fixed income and alternative strategies so as to provide a balance that will enhance total return while avoiding undue risk concentration in any single asset class or investment category. Note 11 - Operating Leases The University leases office, classroom, dormitory facilities and equipment under non-cancellable leases expiring at various dates through 2055. Leases for classroom and dormitory facilities contain provisions for rent adjustments due to increased operating expenses. Rent expense for the years ended June 30, 2012 and 2011 was $8,295 and $7,395, respectively. The following is a schedule of future minimum lease payments required under the non-cancellable operating leases: Year ended 2013 $ 7,209 2014 6,815 2015 6,694 2016 4,000 2017 3,496 Thereafter 17,602 Note 12 - Commitments and Contingencies The University participates in a number of federal programs that are subject to financial and compliance audits. Management believes its programs have been conducted in accordance with the terms of the agreements and, thus, does not expect any significant impact if such programs are further audited by funders. 35

Note 12 - Commitments and Contingencies (Continued) The University is involved in other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the University s financial condition. Note 13 - Related Party Transactions In the ordinary course of business, the University expended $2,262 and $5,363 for the years ended June 30, 2012 and 2011, respectively, for major building renovations, equipment and supplies, and professional services with businesses, some of whose officers, partners, and/or stockholders are officers, employees or trustees of the University. Note 14 - Natural Classification of Operating Expenses Operating expenses by their natural classification were as follows for the years ended June 30: 2012 2011 Salaries and wages $ 131,335 $ 121,694 Benefits other than pension 28,176 27,673 Pension 11,031 10,082 Classroom 6,322 5,074 Student services 17,385 12,466 Food, beverage and kitchen supplies 12,678 11,778 Professional fees 7,324 6,739 Occupancy 26,858 26,104 Depreciation 28,248 26,173 Advertising, promotions and publications 7,901 8,287 Recruiting, travel and training 7,205 7,649 Supplies and postage 9,257 7,996 Insurance, taxes, fees and dues 5,062 4,440 Telephone 3,059 2,521 Bad debts 4,385 5,361 Interest and amortization 7,978 8,470 Loss on sale of property and equipment 2,192 270 Other 6,215 7,629 $ 322,611 $ 300,406 36