Finance UpdateCA Meeting

July 31, 2012

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Finance UpdateAgenda

1. Financial Position and Treasury Update2. Endowment and Debt3. FY 2012 Projection4. FY 2013 Budget5. Five Year Financial Plan6. Other

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Financial PositionAs of May 31, 2012 Investments: $0.93 billion* Land, Building, and Equipment: $0.37 billion Other: $0.12 billion Total Assets: $1.42 billion * Includes (1) commingled endowment investments managed by Investure, (2) separately managed trust and annuity investments managed by Kaspick and Co., and (3) other separately managed investments (Davis, etc.).

Long-term Debt: $287.0 million** Other: $100.4 million* Total Liabilities: $387.4 million *Includes $12 million in deferred revenue – mainly from unearned student revenue to be recognized over the Spring semester (June). **Includes premium/discount per Generally Accepted Accounting Principles (GAAP).

Total Net Assets (Total Assets less Total Liabilities): $1.03 billion

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Treasury Update

College cash flows– Enough cash flows and liquidity to meet our

obligations– Student payments are on target with prior year– Total of $50 million line of credit in place: 3-year

commitment with TD Bank

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Treasury Update Operating Cash Balances at Month-End

$-

$10

$20

$30

$40

$50

$60

$70

$80

July August Sept October November December January February March April May June

2010 Actual 2011 Actual Min 2012 Act/Proj 2013 Proj

In Millions

Endowment

~$882

College

Operations

Comprehensive Fee ($136)

Monterey Institute Tuition ($28)

Summer Program Fees ($17)

Schools Abroad ($9)

Annual Fund Gifts/Accumulated Reserves ($23)

Sponsored Activities ($9)

Other Sources ($12)

Endowment Gifts ($9)

Capital Calls for Private Partnerships (~$40)

(Total unfunded = $137)

Other Investments

Spending ($52)

Distributions from Private Partnerships (~$40)

Redemptions (~$39)

Instruction and Academic Support ($84)

Financial Aid ($49)

Student Services ($32)

Institutional Support ($30)

Maintenance and Operations ($25)

Debt Service ($16)

Library & Information Services ($16)

Capital Expenditures ($14)

Sponsored Activities ($9)

*Other ($11)

Inflows ($234) Outflows ($286)Middlebury Cash Flows FY 2013 (in millions)

Unused Line of Credit ($50)

*Other: auxiliary enterprises, initiative, and contingency.

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Endowment • Endowment value was $882 million as of June 30, 2012• Twelve months ended June 30, 2012 performance was 2.7%• As of June 30, 2012: 1 Yr = 2.7%, 3 Yrs = 12.6%, 5 Yrs = 3.5%, 10 Yrs = 8.9%• The college assumes a 5% return in its financial plan

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12$640

$690

$740

$790

$840

$890

$940

$990 $962

$649

$882

Millions

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Endowment

$300

$201

$320

$42 $19

Global Equity Alternative EquityPrivate Partner-shipsFixed Income

Millions Total Endowment as of June 30, 2012 = $882 million

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Endowment Summary

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -

100

200

300

400

500

Return Return Adj for HEPI Return Adj for HEPI/Spending3rd Qtr

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EndowmentEndowment Spend Rate … return to 5%by 2015

TOTAL SPEND RATE: 1964 - 2017

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Total Spend Rate (Combined) 5% Spend Rate

5.00% by 2015

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Challenges

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Long-term Debt The College’s debt portfolio is as follows:Total debt (par value) = $270MAvg. cost of capital = 4.24% Avg. maturity = 24.5 years

Prior to the April refinancing:

The College’s debt portfolio is as follows:Total debt (par value) = $277MAvg. cost of capital = 4.58% Avg. maturity = 25.0 years

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April 2012 Debt Refinancing Refinanced $64 million of long-term debt

Outcome:• Cash flow debt service savings of $22 million• Achieved present value savings of $11 million, which

represented 17.3% of refunded par • Provided debt service relief of nearly $4.6 million over

the next five years• Converted a $50 million bullet to an amortizing structure,

to help create level debt and effectively eliminating the 2033 bullet

• Locked-in an all-in cost on the Series 2012 Bonds of 3.60%

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FY 2012 Projection Projecting a $3.3mm surplus or unused contingency …

which is in line with budget Student fees below plan Other sources above plan Financial aid below plan Oil costs above plan Managing costs – esp. labor costs

Some labor cost increases due to job re-pricing projects, esp. in College Advancement and Technology areas.

Utility cost increase All units positive, except for auxiliary units

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FY 2013 BudgetREVENUE (+5%) Student fee revenue increase of 3.5%

Second year of CPI +1 Midd comprehensive fee at 4% and MIIS tuition increase at

3.5% Enrollment steady at 2,450 at Midd and MIIS at 750 GRASP revenue decreases of 3%

Endowment and gift support increase of 9% Unrestricted gifts increase of 2% Increase in the use of accumulated reserves Other increase of 8%

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FY 2013 BudgetEXPENSE (+5%) Instruction and Academic Support (plus LIS) increase of

5% Student Services increase of 6% Financial aid increase of 1% Institutional support and Maintenance and Operations of

Plant increase of 9% Capital support reduced by 5%

CAPEX no increase Debt service increase of 9%

Other increase of 10%

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FY 2013 Budget

RESULTS All units provide a positive financial

contribution … except Auxiliary Enterprises ($550K deficit)

Overall contingency of $3.1 million

Middlebury College Financial Plan (ex-MIIS) Major Assumptions FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Endowment Performance 5% 5% 5% 5% 5%Endowment Gifts 9,000$ 12,000$ 14,000$ 16,000$ 18,000$ Annual Fund Gifts/Accumulated Reserves 14,600$ 17,000$ 12,700$ 13,200$ 13,800$ Number of Students 2,450 2,450 2,450 2,450 2,450 Comprehensive Fee Increase 2.50% 4.00% 3.70% 3.70% 3.70%Summer and Abroad Fee Increase 3% - 4% 3% - 4% 3.5 - 4% 3.00% 3.00%Financial Aid Increase 0.54% 1.20% 3.00% 3.01% 3.01%Faculty Salary Increase 6.00% 4.50% 3.60% 3.70% 3.70%Staff Salary Increase 3.60% 3.50% 3.60% 3.70% 3.70%Benefits Increase 4.08% 3.50% 3.60% 3.70% 5.00%Non-salary increase (ex-utilities) -2.00% 3.00% 3.00% 3.00% 3.00%Utilities Increase 2.00% 3.00% 3.00% 3.00% 3.00%Contingency (000's)* 1,002$ 574$ -$ -$ -$ Financial Aid 41,500$ 42,000$ 43,260$ 44,560$ 45,900$ Debt Service 14,931$ 16,208$ 13,586$ 13,902$ 14,162$ Endowment Spending Reduction 2,640$ 2,300$ 2,500$ 3,650$ 3,550$ Endowment Spending Rate** 5.62% 5.40% 5.20% 5.00% 5.00%

* Contingency remaining after allocation for endowment spending reduction.** Includes supplemental endowment draw for debt service and endowment spending reduction.

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Other

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Financial Position The college’s financial position is strong … Aa2 (Moody’s) and AA (S & P)

Aaa Aa1 Aa2 Aa3Amherst ($1.4) Brown Bowdoin ($0.8) Boston CollegeBerea Cal Tech Bryn Mawr ($0.6) Claremont Mckenna ConsortiumColumbia Cornell Bucknell ClarksonGrinnell Dartmouth Carleton ($0.6) ColgateHarvard Duke Claremont Mckenna College of the Holy CrossMIT Smith ($1.2) Emory Colorado CollegeNorthwestern Univ of Chicago Hamilton ($0.6) DenisonNotre Dame Univ of Richmond Haverford ($0.4) EarlhamPomona ($1.5) USC John Hopkins Harvey MuddPrinceton Williams ($1.5) Julliard LafayetteRice Lehigh MacalesterStanford Middlebury ($0.8) Mount Holyoke ($0.5)Swathmore ($1.2) Oberlin ($0.6) NYUWashington (MO) Reed OccidentalWellesley ($1.3) Tufts PepperdineYale Univ Penn Santa Clara

Vanderbilt SMUVassar ($0.7) SyracuseWashington and Lee ($1.0) TCU

Univ of RochesterWake ForestWesleyan ($0.5)Wheaton

Peers in bold WhitmanJune 30, 2010 endowment value in $ billions in parentheses Yeshiva

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Credit Strengths

– Excellent student market position as a nationally prominent liberal arts college located in west-central Vermont, with reputational strength in languages, international studies, and literature. There is strong demand with 8,533 applications for FY 2011-12.

– Middlebury is highly selective, with a 18% freshmen selectivity ratio in fall 2011 and 38% matriculation ratio (accepted applicants who chose to enroll).

– Management is focused on program and revenue diversification, as highlighted by the recent full merger with the Monterey Institute of International Studies in California, summer programs, and the launch of Middlebury Interactive Languages LLC, a language learning company geared for pre-college students, featuring both an on-line language learning program and residential, language immersion summer academies located in various states.

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FY 2013 Budget: Middlebury College Units

$206 72%

4114%

166%

114%

52%

72%

Undergraduate Col-legeMonterey InstituteLanguage SchoolsSchools AbroadBreadloaf SchoolAuxiliary

Millions Total budget = $286 million

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Credit Strengths

– Management actions to reduce operating expenses in light of investment losses and forward budget planning likely to help mitigate impact of reduced availability of spending from endowment, including voluntary separation programs, salary freezes, and other budget reductions.

– Although fundraising has experienced some pressure recently in light of the economic climate, strong gift revenue remains a key credit strength of the College.

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Credit Challenges

– Higher leverage than most similar-sized Aa rated private colleges due to the College's significant investment in its facilities and its decision historically to use debt rather than gifts or reserves to finance several large capital programs.

– Further, the College has made extensive use of debt (approximately $279 million of pro-forma debt), some of which has been structured as bullet maturities with principal payments scheduled for later years. This concern is partly mitigated by the College's lack of near-term additional borrowing plans and healthy balance sheet.

– Although the College employs a 5% endowment spending policy, it also draws from the endowment to support debt service payments. Thus endowment draws are typically higher than the 5% draw that Moody's includes for all universities.

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What’s Ahead?• Stick to plan

– Staffing Resources Committee to manage staff FTE count and staff salary increase program

– Ensure linkage between student revenue and major expense drivers (compensation and financial aid)

– Continue to evaluate non-salary spending– Continue to manage auxiliary operations to at

least break-even

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OpportunitiesKeep perfecting the things we do well:

Language Schools

Schools Abroad

The Monterey Institute of International Studies

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OpportunitiesNew Ventures

Middlebury Interactive Languages

Commercial ventures

Mergers/Acquisitions

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OpportunitiesHybrid

Online learning

Study away at other locations

Leverage relationships/networks

CA MeetingMiddlebury Interactive Languages

July 31, 2012

Middlebury Interactive Languages

PurposeThe CompanyFinance

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PurposeMiddlebury College and K-12 will collaborate to provide world class, industry leading on-line foreign language instruction for elementary and secondary schools.

An additional and related line of business is to further develop the Middlebury-Monterey summer language academies featuring language immersion experiences for secondary and middle school students.

In addition, the venture may expand to international markets and include services and products for college level classes, adult self-paced language instruction, English as a second language, and K-5 students.

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The Company Limited Liability Corporation (LLC) Middlebury College is a 40% owner Operational May 1, 2010 Standalone company

– CEO Jane Swift– Technical employees located in Provo, Utah– Remaining employees based in Middlebury, Vermont– Enhancing the existing infrastructure which is separate

and apart from both K12 and Middlebury

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Finance

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Middlebury Interactive LanguagesProfit & Loss Statement by Functional Area

VariancesFY 2011 FY 2012 FY 2013 FY 2014 FY13 BudgetActual Forecast Budget Budget Budget vs. FY12 Fcst % inc/(dec)

Revenue:Software Revenue 5,093,998 6,764,875 8,827,620 11,375,128 17,062,693 4,610,254 68%MMLA Revenue 2,933,548 4,315,733 4,278,469 4,860,932 5,347,026 545,199 13%

8,027,546 11,080,608 13,106,089 16,236,061 22,409,718 5,155,453 47%

Cost of SalesCost of Sales Software 652,946 1,074,407 1,388,925 1,933,772 2,985,971 (859,365) -80%Commissions - K12 1,530,436 1,835,020 Amortization 874,048 1,624,631 1,460,449 1,743,240 1,743,240 (118,609) -7%Cost of service MMLA 2,879,113 3,909,993 3,721,109 3,239,423 3,598,548 670,570 17%

4,406,107 6,609,031 6,570,483 8,446,870 10,162,780 (307,404) -5%

Gross Profit 3,621,439 4,471,577 6,535,606 7,789,190 12,246,939 3,317,613 74%45% 40% 50% 48% 55%

OperatingSelling and Marketing 2,515,625 3,163,757 4,948,410 4,257,232 5,534,402 (1,093,475) -35%MMLA 993,194 983,116 983,116 833,203 999,844 149,913 15%Product development 647,939 860,166 775,183 1,142,829 1,314,254 (282,663) -33%General and administrative 1,452,478 1,661,270 2,286,153 2,097,224 2,390,835 (435,953) -26%Depreciation 793,812 859,669 886,600 859,861 859,861 (192) 0%Total Operating 6,403,048 7,527,979 9,879,462 9,190,349 11,099,195 (1,662,370) -22%

- Net Income /(Loss) (2,781,609) (3,056,401) (3,343,856) (1,401,158) 1,147,744 1,655,243 54%

Supplemental InformationD&A 1,667,860 2,484,300 2,347,049 2,603,101 2,603,101 118,801 5%

EBITDA (1,113,749) (572,102) (996,807) 1,201,942 3,750,845 1,774,044 310%