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NORTH CAROLINA STATE UNIVERSITY FOUNDATION, INC.

CONSOLIDATED FINANCIAL REPORT

JUNE 30, 2011 and 2010

North Carolina State University Foundation, Inc. Consolidated Financial Statements For the years ended June 30, 2011 and 2010

Contents

Independent Auditors’ Report 1

Financial Statements

Consolidated statements of financial position 2

Consolidated statements of activities 3 – 4

Consolidated statements of cash flows 5

Notes to consolidated financial statements 6 – 19

Supplementary Information

Fund for Excellence budget vs. actual - unaudited 20

Ten year summary of asset growth - unaudited 21

Ten year summary of revenues and support - unaudited 22

Other Information

Independent Auditors’ Communication with Board of Directors 23 - 24

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors North Carolina State University Foundation, Inc. Raleigh, North Carolina

We have audited the accompanying consolidated statements of financial position of North Carolina State University Foundation, Inc. (the “Foundation”), a nonprofit organization, as of June 30, 2011 and 2010, and the related consolidated statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the Foundation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Carolina State University Foundation, Inc. as of June 30, 2011 and 2010, 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.

Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information on pages 20 through 22 is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentations of the supplementary information. However, we did not audit the information and express no opinion on it.

Raleigh, North Carolina October 7, 2011

1

North Carolina State University Foundation, Inc.

Consolidated Statements of Financial Position

June 30, 2011 and 2010

2011 2010

ASSETS

Cash and cash equivalents (Note 1) 7,985,783 $ 5,648,292 $

Cash and cash equivalents - Executive Education, LLC (Notes 1 and 15) 16,362 276,407

Intermediate investments (Note 1) 1,657,959 1,632,757

Marketable securities (Notes 1 and 3) 81,682,702 61,857,745

Pledges receivable (Notes 1 and 6) 20,027,613 12,482,756

Externally managed irrevocable trust (Note 5) 20,155,285 -

Executive Education, LLC accounts receivable, net (Note 15) 106,800 131,609

Receivable from University-associated entities (Note 1) 266,305 -

Donated property and land (Note 1) 1,914,963 1,993,963

Land and property held for others (Note 1) 1,159,023 1,000,000

University Club - at cost, net of accumulated depreciation of

$1,261,729 and $1,175,338 for 2011 and 2010, respectively (Notes 1 and 14) 4,696,678 3,690,927

Other assets 252,596 237,818

Total assets 139,922,069 $ 88,952,274 $

LIABILITIES AND NET ASSETS

Accounts payable - North Carolina State University (Note 1) 95,984 $ 37,224 $

Accounts payable (Note 1) 8,500 -

Due to others (Note 1) 1,373,989 1,379,338

Life income funds payable (Note 5) 3,922,971 3,795,482

Life income funds payable - externally managed irrevocable trust (Note 5) 13,254,063 -

Agency funds held in custody for others (Note 8) 614,485 73,772

Executive Education, LLC payables (Note 15) 201,605 253,291

Executive Education, LLC deferred revenue (Note 15) 90,708 12,429

Total liabilities 19,562,305 5,551,536

Net Assets:

Unrestricted:

Undesignated 1,608,584 1,004,884

Undesignated nonexpendable - University Club 4,696,678 3,690,927

Undesignated - underwater endowments (Note 2) (180,239) (2,416,896)

Board-designated - endowments 2,582,168 2,116,298

Board-designated - underwater endowments - (942,219)

Designated - Executive Education, LLC (Note 15) (169,151) 142,296

Temporarily restricted (Note 9) 46,995,411 37,767,051

Permanently restricted (Note 10) 64,826,313 42,038,397

Total net assets 120,359,764 83,400,738

Total liabilities and net assets 139,922,069 $ 88,952,274 $

See notes to consolidated financial statements. 2


Consolidated Statement of Activities

Year Ended June 30, 2011

Temporarily Permanently

Unrestricted Restricted Restricted Total

Revenues, gains, and other income:

Contributions 12,268 $ 8,003,695 $ 15,138,585 $ 23,154,548 $

Change in pledges receivable (251,261) 833,952 6,962,166 7,544,857

Donated services and salaries (Note 7) 577,000 - - 577,000

Leasehold improvements (Note 1) 1,067,376 - - 1,067,376

Net asset reclassification - underwater endowments (Note 2) 3,178,876 (3,178,876) - -

Net investment income 1,532,643 11,365,801 260,684 13,159,128

Change in value of split interest agreements - - (386,736) (386,736)

Interest and dividends 86,848 36,315 112,127 235,290

Executive Education, LLC income (Note 15) 462,695 - - 462,695

Other income 1,955,056 - 12,406 1,967,462

Net assets released from restrictions (Note 11) 7,024,027 (7,024,027) - -

Total revenues, gains, and other income 15,645,528 10,036,860 22,099,232 47,781,620

Grants to support the University:

Program:

Scholarships and fellowships 1,571,496 - - 1,571,496

Faculty support 1,388,094 - - 1,388,094

University support 24,000 - - 24,000

Departmental support 1,450,847 - - 1,450,847

Facility support 2,509,062 - - 2,509,062

Other contracted services 908,546 - - 908,546

Other current services 424,561 - - 424,561

Executive Education, LLC expenses (Note 15) 774,142 - - 774,142

Total program support 9,050,748 - - 9,050,748

Administrative 293,474 - - 293,474

Fund-raising 1,246,679 - - 1,246,679

Total other support 1,540,153 - - 1,540,153

Total support 10,590,901 - - 10,590,901

Excess of revenues, gains,

and other income over total support 5,054,627 10,036,860 22,099,232 37,190,719

Net transfers:

To other University-associated entities 27,650 (529,588) 270,245 (231,693)

Among funds (Note 13) (139,527) (278,912) 418,439 -

Total net transfers (111,877) (808,500) 688,684 (231,693)

Change in net assets 4,942,750 9,228,360 22,787,916 36,959,026

Net assets:

Beginning 3,595,290 37,767,051 42,038,397 83,400,738

Ending 8,538,040 $ 46,995,411 $ 64,826,313 $ 120,359,764 $



Consolidated Statement of Activities


Temporarily Permanently

Unrestricted Restricted Restricted TotalRevenues, gains, and other income:

Contributions 3,245 $ 7,030,423 $ 2,085,221 $ 9,118,889 $

Change in pledges receivable 249,330 (942,172) (3,768,430) (4,461,272)

Donated services and salaries (Note 7) 389,200 - - 389,200

Donated property - 189,977 - 189,977

Leasehold improvements (Note 1) 3,067,916 - - 3,067,916

Net asset reclassification -

underwater endowments (Note 2) 2,364,701 (2,364,701) - -

Net investment income 2,855,003 2,831,932 460,319 6,147,254


Interest and dividends 69,176 11,386 170,813 251,375

Executive Education, LLC income (Note 15) 837,525 - - 837,525

Other income 1,606,622 7,422 - 1,614,044

Net assets released from restrictions (Note 11) 5,133,654 (5,133,654) - -

Total revenues, gains, and other income 16,576,372 1,630,613 (1,915,443) 16,291,542

Grants to support the University:

Program:

Scholarships and fellowships 1,353,084 - - 1,353,084

Faculty support 1,317,066 - - 1,317,066

University support 39,550 - - 39,550

Departmental support 982,853 - - 982,853

Facility support 1,933,723 - - 1,933,723

Other contracted services 1,007,281 - - 1,007,281

Other current services 484,565 - - 484,565

Executive Education, LLC expenses (Note 15) 797,247 - - 797,247

Total program support 7,915,369 - - 7,915,369

Administrative 309,180 - - 309,180

Fund-raising 537,067 - - 537,067

Total other support 846,247 - - 846,247

Total support 8,761,616 - - 8,761,616

Excess (deficit) of revenues, gains,

and other income over total support 7,814,756 1,630,613 (1,915,443) 7,529,926

Net transfers:

To other University-associated entities (24,150) (251,807) - (275,957)

Among funds (Note 13) (1,585,520) 1,134,907 450,613 -

Total net transfers (1,609,670) 883,100 450,613 (275,957)

Change in net assets 6,205,086 2,513,713 (1,464,830) 7,253,969

Net assets:

Beginning (2,609,796) 35,253,338 43,503,227 76,146,769

Ending 3,595,290 $ 37,767,051 $ 42,038,397 $ 83,400,738 $



Consolidated Statements of Cash Flows

Years Ended June 30, 2011 and 2010

2011 2010

Cash Flows From Operating Activities:

Change in net assets: 36,959,026$ 7,253,969$

Adjustments to reconcile change in net assets

to net cash provided by (used in) operating activities:

Depreciation 64,452 28,045

Net investment gains (13,159,128) (6,147,254)

Investment income restricted for split interest agreements (112,127) (170,813)

Actuarial change in value of split interest agreements 386,736 863,366

Externally managed irrevocable trust, net of liability (6,901,222) -

Contributions restricted for permanent endowment (15,138,585) (2,085,221)

(Increase) decrease in:

Receivable from other University-associated entities (266,305) 602,654

Executive Education, LLC accounts receivable, net 24,809 3,791

Pledges receivable (7,544,857) 4,461,272

Donated property and land 79,000 (189,977)

Land and property held for others (159,023) -

University Club and other assets, net (1,084,981) (3,105,459)

Increase (decrease) in:

Accounts payable - North Carolina State University 58,760 (14,537)

Accounts payable 8,500 (17,198)

Due to others 23,911 56,381

Agency funds held in custody for others 540,713 15,172

Executive Education, LLC payables (51,686) 117,526

Executive Education, LLC deferred revenue 78,279 12,429

Net cash provided by (used in) operating activities (6,193,728) 1,684,146

Cash Flows From Investing Activities:

Proceeds from sales of investments 54,191,949 3,185,454

Purchases of investments (60,882,980) (4,411,440)

Net cash used in investing activities (6,691,031) (1,225,986)

Cash Flows From Financing Activities:

Contributions restricted for permanent endowment 15,138,585 2,085,221

Investment income restricted for split interest agreements 112,127 170,813

Payments on life income fund obligations (501,773) (468,234)

Proceeds from life income fund obligations 213,266 72,881

Net cash provided by financing activities 14,962,205 1,860,681

Net increase in cash and cash equivalents 2,077,446 2,318,841

Cash and cash equivalents:

Beginning 5,924,699 3,605,858

Ending 8,002,145$ 5,924,699$

Supplemental Disclosure of Noncash Activities:

Leasehold improvements 1,067,376$ 3,067,916$

Donated property -$ 189,977$

Donated services and salaries 577,000$ 389,200$

T ransfers among funds 418,439$ 1,585,520$

Externally managed irrevocable trust, net of liability 6,901,222$ -$


North Carolina State University Foundation, Inc. Notes To Consolidated Financial Statements For the years ended June 30, 2011 and 2010 ____________________________________________________________________________________________

Note 1. Nature of Activities and Significant Accounting Policies Nature of activities: North Carolina State University Foundation, Inc., ("Foundation") is one of a group of foundations which provides financial support exclusively to one or more of the colleges at North Carolina State University ("University"). The Foundation, founded in 1942, supports, by financial assistance and otherwise, the various colleges within the University, the libraries, and other University-connected functions. Effective July 1, 2003, North Carolina State University considers the Foundation to be a component unit. A summary of the Foundation’s significant accounting policies follows: Basis of accounting and presentation: The financial statements of the Foundation are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. In preparing its financial statements, net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Foundation and changes therein are classified and reported as follows:

Unrestricted net assets – Net assets that are not subject to donor-imposed stipulations. Temporarily restricted net assets – Net assets subject to donor-imposed stipulations that may or will be met either by actions of the Foundation and/or by the passage of time. Permanently restricted net assets – Net assets subject to donor-imposed stipulations that they be maintained permanently by the Foundation. Generally, the donors of these assets permit the Foundation to use all or part of the earnings on related investments for the donor-restricted purpose.

Principles of consolidation: The consolidated financial statements include the accounts of the Foundation and NC State Executive Education, LLC, which was organized to further the purposes of its sole member, the Foundation. All significant intercompany balances and transactions have been eliminated in the consolidation. Additional details regarding the financial position and activities of NC State Executive Education, LLC are contained in Note 15. Cash and cash equivalents: For purposes of reporting cash flows, the Foundation considers all highly liquid debt instruments to be cash equivalents. Cash designated or restricted for long-term purposes is included with marketable securities. At times the Foundation places deposits with a high-quality financial institution that may be in excess of federal insurance limits. Cash and cash equivalents consist of accounts with BNY Mellon’s Liquidity DIRECT, the State Treasurer’s Short Term Investment Fund (STIF), and an operating checking account with Wachovia Bank, N.A. The STIF account maintained by the State Treasurer has the general characteristics of a demand deposit account in that participants may deposit and withdraw cash at any time without prior notice or penalty. During fiscal year 2010, the commonfund Short Term fund was liquidated. Intermediate investments: Intermediate investments consist of an account with the commonfund Intermediate Term Fund for funds that can be invested for longer periods, but which are available in the event of short-term needs. These investments are reported at readily determinable fair values of $1,657,959 and $1,632,757 at June 30, 2011 and 2010, respectively. The cost of these investments was $1,884,335 as of June 30, 2011 and 2010.

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Note 1. Nature of Activities and Significant Accounting Policies (continued) Marketable securities: Long-term investments and marketable securities are stated at fair value based on readily determinable fair values, when available. Investments for which readily determinable fair values are not available are carried at estimated fair values as provided by the respective fund managers of the investments. The Foundation, in accordance with investment policies promulgated by its Board of Directors (the “Board”), invests with the NC State Investment Fund, Inc. (“NCSIF”). In addition, the Foundation has planned giving instruments invested with BNY Mellon and Citigroup Trust Bank. Pledges receivable: Unconditional pledges receivable are recognized as support and assets in the period received. Conditional pledges are recognized when the conditions on which they depend are substantially met. Receivables from University-associated entities: Receivables from associated organizations consisted of amounts due the Foundation from other University-associated foundations. Donated property and land: Donated property and land are stated at cost. Cost for property acquired by gift is defined as market value on the date of the gift. Property held for others: Property held for others is for a land gift held for sale for which the sale proceeds will be due to others. University Club: The value of the North Carolina State University Club (the “Club”) is stated at cost and leasehold improvements are recorded at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets. The Club was renovated over the past three years, and the increase in value is attributable to these renovations. The Foundation and the Club entered into an operating agreement in 1979 based on a lease originally established between the State of North Carolina and the Foundation in 1960. For the leasehold improvements completed during fiscal year 2011, the Club is responsible for financing and payment. Leasehold improvements capitalized were $1,067,376 and $3,067,916 during the years June 30, 2011 and 2010, respectively. Refer to Note 14 for additional information regarding the Foundation's role in the Club's financing of the renovations. Other assets: Other assets include beneficiary interests in life insurance policies contributed to the Foundation and the Foundation is the owner of these policies. These gifts are recorded at current cash values less any loans outstanding on the policies. Cash surrender values of these policies were $225,079 and $202,473 at June 30, 2011 and 2010, respectively. Contributions: Restricted contributions are segregated for income and expense reporting purposes; however, the assets are commingled. When a donor or grantor restriction expires because the stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions in the statement of activities. In fiscal year 2011, the University instituted a gift assessment program in support of Central Development and college-level fund-raising efforts. Beginning October 1, 2010, a one-time fee of 5% is assessed on gifts that support current operations and facilities, with 3% designated for Central Development and 2% designated to the fund-raising entity receiving the gift.

7


Note 1. Nature of Activities and Significant Accounting Policies (continued) Investment income: Investment income is allocated on the basis of average fund balances for unrestricted and temporarily restricted net assets. For endowments, investment income is allocated on the “unit value” method of valuing interest in an investment portfolio and the investment earnings are recorded as unrestricted, temporarily restricted, or permanently restricted, as appropriate. Earnings from investments are net of investment fees of $261,047 and $292,809 for the years ended June 30, 2011 and 2010, respectively. Gains and losses on sales of investments are allocated on the unit value method. Investment income on investments owned individually by one fund is directly allocated to the owning fund. As part of the University’s gift assessment program, beginning October 1, 2010, an annual fee of 0.50% is assessed on the average twenty-quarter market value of endowments held in the investment portfolio, with 0.25% designated for Central Development and 0.25% designated to college-level fund-raising efforts. In addition, an assessment of 0.55% is charged by the Foundation on the average twenty-quarter market value of the endowments held in the investment portfolio, for the support of Foundation fund-raising activities. Accounts payable - North Carolina State University: Accounts payable to the University include amounts disbursed by the University on behalf of the Foundation for payment of various normal operating expenses. Accounts payable: Accounts payable represents trade payables due to vendors at June 30, 2011. Due to others: Due to others at June 30, 2011 and 2010 consists of $373,989 and $379,338, respectively, due to remainder beneficiaries of life income funds, and $1,000,000 received by the Foundation on behalf of other organizations. Estimates: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income taxes and uncertain tax positions: The Foundation is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code and is classified as other than a private foundation. The Foundation had no significant unrelated trade or business income for 2011 and 2010. Therefore, no provision for income taxes has been reflected in the accompanying financial statements. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the organization and recognize a tax liability (or asset) if the organization has taken an uncertain position that more likely than not would be sustained upon examination by the IRS. Management has analyzed the tax positions taken by the Foundation, and has concluded that as of June 30, 2011, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Foundation is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes it is no longer subject to income tax examinations for years prior to 2007.

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Note 2. Endowment The Foundation’s endowment consists of approximately 490 individual funds established for a variety of purposes related to the mission of the University. The endowment includes both donor-restricted endowments and funds designated by the Foundation Board to function as endowments. Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. The majority of the Foundation’s signed endowment gift agreements with donors have donor-imposed restrictions which stipulate that principal shall not be used to fund spending. Interpretation of relevant law: The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was adopted in North Carolina as NC General Statute 36E effective March 17, 2009. UPMIFA defines a prudence standard for management and investment of institutional funds. As a result of the Foundation’s interpretation of UPMIFA, the Foundation 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 that are required by the applicable donor gift instrument. 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 Foundation’s endowment spending policy. Funds with deficiencies: From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original gift value. These deficiencies generally result from unfavorable market fluctuations which produce unrealized losses to the fund. Deficiencies of this nature are reported in unrestricted net assets, and were $(180,239) and $(2,416,896) as of June 30, 2011 and 2010, respectively. Investment return objectives and risk parameters: The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a stable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for donor-specified periods as well as board-designated funds. The endowment assets are invested through the NCSIF in a manner that is intended to produce results that exceed a 70% S&P 500 Index/30% Barclays Aggregate Bond Index benchmark over rolling five and ten year periods while assuming a moderate level of investment risk. Spending policy: The Foundation has a policy of appropriating for programmatic spending each year 4.0% of its endowment fund's average market value over the prior twenty quarters through the fiscal year-end preceding the fiscal year in which the spending is planned. This is consistent with the Foundation’s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. However, in declining market conditions many endowments are not able to fund spending at the 4% level. Unless the gift instrument specifies otherwise, up to 15% of the corpus of an endowment may be expended if reserves are not sufficient to fund the programmatic spending amount, subject to the guidelines provided by UPMIFA. However, if the gift instrument does not allow spending of corpus, the Foundation does not initiate or renew spending for the individual endowments affected by declining market conditions until their market value has been recovered and exceeds their original gift value. In establishing the spending policy, the Foundation considered the long-term expected return on its endowment. Spending budgets were calculated at $746,605 and $878,955 for fiscal years 2011 and 2012, respectively.

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Note 2. Endowment (continued) Strategies employed for achieving investment objectives: For the long term, the primary investment objective for the NCSIF is to earn a total return (net of investment and custodial fees), within prudent levels of risk, which is sufficient to maintain in real terms the purchasing power of the NCSIF and to meet the spending needs of the University. To meet this investment objective, the NCSIF invests in various asset classes to offer diversification. The purpose of diversification is to provide reasonable assurance that no single security or class of securities or manager will have a disproportionate impact on the performance of the total fund. NCSIF’s investments are diversified both by asset class (e.g. common stocks and fixed income securities) and within asset classes (e.g., within common stocks by economic sector, geographic area, industry, quality, and size). In addition, the NCSIF seeks to diversify exposure to all asset classes through the use of multiple managers that use a variety of investment approaches. The following represents changes in endowment net assets for the fiscal year ended June 30, 2011:

The following represents endowment net asset composition by type of fund, as of June 30, 2011:

Unrestricted

Temporarily

Restricted

Permanently

Restricted Total

Endowment net assets, beginning of year (1,242,817)$ 22,155,777$ 42,038,397$ 62,951,357$

Net asset reclassification - underwater endowments 3,178,876 (3,178,876) - -

Endowment net assets after reclassification 1,936,059 18,976,901 42,038,397 62,951,357

Total investment return 571,050 11,269,012 372,811 12,212,873

Contributions, including change in accrued pledges - - 22,113,157 22,113,157

Appropriations of endowment assets for expenditure (105,180) (900,480) - (1,005,660)


Other changes:

Transfers - - 688,684 688,684

Endowment net assets, end of year $ 2,401,929 $ 29,345,433 $ 64,826,313 $ 96,573,675

Unrestricted

Temporarily

Restricted

Permanently

Restricted Total

Undesignated - underwater endowments $ (180,239) $ - $ - $ (180,239)

Donor restricted endowment funds 2,582,168 29,345,433 64,826,313 96,753,914

Total Funds $ 2,401,929 $ 29,345,433 $ 64,826,313 $ 96,573,675

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Note 2. Endowment (continued) The following represents changes in endowment net assets for the fiscal year ended June 30, 2010:

The following represents endowment net asset composition by type of fund, as of June 30, 2010:

Note 3. Long-Term Investments The Foundation invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of financial position. Investments at June 30, 2011 and 2010 consisted of:

Unrestricted

Temporarily

Restricted

Permanently

Restricted Total

Endowment net assets, beginning of year (4,542,222)$ 16,838,083$ 43,503,227$ 55,799,088$

Net asset reclassification - underwater endowments 2,364,701 (2,364,701) - -

Endowment net assets after reclassification (2,177,521) 14,473,382 43,503,227 55,799,088

Total investment return 1,065,470 8,604,216 631,132 10,300,818

Contributions, including change in accrued pledges - - (1,683,209) (1,683,209)

Appropriations of endowment assets for expenditure (130,766) (921,821) - (1,052,587)


Other changes:

Transfers - - 450,613 450,613

Endowment net assets, end of year $ (1,242,817) $ 22,155,777 $ 42,038,397 $ 62,951,357

Unrestricted

Temporarily

Restricted

Permanently

Restricted Total

Undesignated - underwater endowments (2,416,896)$ -$ -$ (2,416,896)$

Donor restricted endowment funds 2,116,298 22,155,777 42,038,397 66,310,472$

Board-designated underwater endowment funds (942,219) - - (942,219)

Total Funds (1,242,817)$ 22,155,777$ 42,038,397$ 62,951,357$

Fair Fair

Cost Value Cost Value

STIF 434,920$ 434,920$ -$ -$

NC State Investment Fund, Inc. (NCSIF) 72,043,812 74,231,298 61,824,607 55,652,218

BNY Mellon - Life Income Funds 5,360,673 6,544,094 5,358,892 5,801,074

Citicorp Trust Bank 394,605 472,390 425,299 404,453

78,234,010$ 81,682,702$ 67,608,798$ 61,857,745$

2011 2010

11


Note 3. Long-Term Investments (continued) Investments held by the NCSIF at June 30, 2011 were made up of limited partnerships. As of June 30, 2011, approximately 91% of these limited partnerships were with the UNC Management Company (UNCMC) while the remaining 9% were committed to or in other private equity investments with JP Morgan, Blackrock, and SEI. NCSIF’s net assets were valued at approximately $378,260,000 and $313,828,000 at June 30, 2011 and 2010, respectively. The Foundation’s investment in the NCSIF represents approximately 19.6% and 17.7% of the member equity of NCSIF at June 30, 2011 and 2010, respectively. The Foundation's investments held by BNY Mellon - Life Income Funds primarily consist of bond mutual funds and equity mutual funds. The Foundation’s investments held by Citicorp Trust Bank primarily consist of common equity securities. Note 4. Fair Value Measurement The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 provides a framework for measuring fair value under generally accepted accounting principles. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels. The fair value hierarchy of inputs is summarized in the three broad levels listed below:

Level 1 - quoted prices in active markets for identical investments

Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, credit risks, etc.)

Level 3 - significant unobservable inputs (including the fund’s own assumptions in determining the fair value of investments)

To measure fair value, there are three general valuation techniques that may be used, as described below:

A) Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources;

B) Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and

C) Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

12


Note 4. Fair Value Measurement (continued) Assets itemized below are measured at fair value on a recurring basis using both market and income approaches. The market approach was used for level 2 and the income approach was used for level 3.

The following is a reconciliation of the assets measured at fair value on a recurring basis in which significant unobservable inputs (Level 3) were used in determining value:

Level 1 Level 2 Level 3 Total Fair Value

Assets:

STIF 434,920$ -$ -$ 434,920$

commonf und Intermediate Term Fund - 1,657,959 - 1,657,959

NC State Investment Fund, Inc. - - 74,231,298 74,231,298

BNY Mellon - Life Income Funds - 6,544,094 - 6,544,094

Citicorp Trust Bank - 472,390 - 472,390

Externally Managed Irrevocable Trust - 20,155,285 - 20,155,285

Beneficial Interest in Life Insurance Policies - - 225,079 225,079

Total Assets 434,920$ 28,829,728$ 74,456,377$ 103,721,025$

Level 1 Level 2 Level 3 Total Fair Value

Assets:

commonf und Intermediate Term Fund -$ 1,632,757$ -$ 1,632,757$

NC State Investment Fund, Inc. - - 55,652,218 55,652,218

BNY Mellon - Life Income Funds - 5,801,074 - 5,801,074

Citicorp Trust Bank - 404,453 - 404,453

Beneficial Interest in Life Insurance Policies - - 202,473 202,473

Total Assets -$ 7,838,284$ 55,854,691$ 63,692,975$

2011

2010

NC State

Investment Fund,

Inc.

Beneficial

Interest in Life

Insurance

Policies

NC State

Investment Fund,

Inc.

Beneficial

Interest in Life

Insurance

Policies

Beginning balance 55,652,218$ 202,473$ 48,061,096$ 184,271$

Unrealized gain 8,359,862 22,606 5,098,965 18,202

Realized gain 68,073 - 569,799 -

Net investment 10,151,145 - 1,922,358 -

Ending balance 74,231,298$ 225,079$ 55,652,218$ 202,473$

2011 2010

13


Note 5. Life Income Funds

The financial statements include assets and liabilities of charitable gift annuities and unitrust agreements for which the Foundation is trustee. The grantors and/or beneficiaries retain future income interests in these assets until their death. These life income funds are recorded at fair value at the date of gift. Life income funds at June 30, 2011 and 2010 have asset balances of $7,016,484 and $6,205,527, respectively. The liabilities for distributions to grantors and/or beneficiaries are computed using Internal Revenue Code annuity valuation tables, the distribution terms of the agreements, and the life expectancy of the beneficiaries, and totaled $3,922,971 and $3,795,482 at June 30, 2011 and 2010, respectively. Payments from these funds were $501,773 and $468,234 during the years ended June 30, 2011 and 2010, respectively. In fiscal year 2010, an unrestricted reserve account was established in the Foundation’s Charitable Gift Annuity (CGA) pool to receive 5% from all new CGAs established in order to offset the liabilities for any annuities that reach exhaustion. The goal is to build the unrestricted reserve fund to equal 5% of the total value of the Foundation’s CGA pool. As of June 30, 2011 and 2010, the CGA reserve balance was $12,694 and $5,108, respectively. In addition to the above life income funds, the Foundation has been named the recipient of an externally managed trust in 2011 which represents irrevocable life income funds with a current market value totaling $20,155,285 and life income funds payable of $13,254,063 as of June 30, 2011. The Foundation is not serving as trustee for these funds. These life income funds have been reflected in the financial statements at their fair value and estimated future distributions to the beneficiaries have also been reflected in the financial statements and were computed using Internal Revenue Code annuity valuation tables, the distribution terms of the agreements, and the life expectancy of the beneficiaries. Note 6. Pledges Receivable Pledges receivable are stated at their present value, estimated by discounting the future cash flows using Federal Reserve rates of return, and are as follows:

On a periodic basis, the Foundation evaluates its receivables and establishes an allowance for doubtful accounts, based on history of past write-offs and current credit conditions. Active past due pledges receivable are reviewed twice yearly by the Advancement Services office in order to determine if it is appropriate to write off such pledges.

2011 2010

Receivable in less than one year 7,631,958 $ 4,922,665 $

Receivable in one to five years 10,228,705 8,692,033

Receivable in greater than five years 4,010,127 110,220

Total gross pledges receivable 21,870,790 13,724,918

Less allowance for uncollectible pledges (730,000) (937,572)

Less unamortized discount (1,113,177) (304,590)

Net pledges receivable 20,027,613 $ 12,482,756 $

14


Note 7. Donated Services and Salaries Donated services in the amount of $220,000 and $191,000 for the years ended June 30, 2011 and 2010, respectively, have been reflected in the financial statements for services provided by the University Treasurer’s Division. In addition, donated salaries paid by the University for college development personnel in the amount of $357,000 and $198,200 for the years ended June 30, 2011 and 2010, respectively, have been reflected in the financial statements. Note 8. Agency Funds The Foundation acts as funds custodian for the North Carolina State University Greek Court funds. The funds are for the sole benefit for the redevelopment of the Greek Court and totaled $121,623 and $73,772 at June 30, 2011 and 2010, respectively, and are for Kappa Sigma, Sigma Alpha Epsilon, Chi Psi, Delta Gamma, and Lambda Chi Alpha. During fiscal year 2011, the Foundation also began holding debt service and operating surplus funds for the University Club (see Note 14), which totaled $492,862 at June 30, 2011. Note 9. Temporarily Restricted Net Assets Temporarily restricted net assets at June 30, 2011 and 2010 are available for the following purposes:

Temporarily restricted net asset grouping “Other” includes amounts designated for general college support, research, general University support, facility support and funds with multiple purposes.

2011 2010

Scholarships 2,347,339$ 2,248,728

Fellowships 1,207,866 1,143,226

Professorships 391,778 272,080

Library support 1,105,613 1,070,809

Pledges receivable 12,883,882 12,049,930

Endowment cumulative earnings 27,302,553 19,970,537

Other 1,756,380 1,011,741

46,995,411$ 37,767,051

15


Note 10. Permanently Restricted Net Assets Permanently restricted net assets at June 30, 2011 and 2010 are restricted to:

Permanently restricted net asset grouping “Other” includes amounts designated for general college support, research, general University support, and funds with multiple purposes. Note 11. Net Assets Released From Donor Restrictions Net assets were released from donor restrictions as restrictions were met via the passage of time or by incurring expenses satisfying the restricted purposes specified by donors as follows:

The grouping "Other" includes amounts spent for general college support, research, and general University support.

2011 2010

Investment in perpetuity, the income from

which is expendable to support :

Scholarships 29,411,317 $ 28,059,215$

Fellowships 4,198,548 3,657,398


Library support 6,918,307 5,755,286

Pledges 7,143,731 181,564

Life income funds 13,917,705 6,205,527

NCSU Foundation enhancement endowment 9,242,486 8,057,781

Amounts reported as unrestricted or temporarily restricted net assets (31,747,362) (20,912,960)

Other 24,978,407 10,334,955

64,826,313 $ 42,038,397$

2011 2010

Scholarships 1,388,051 $ 1,015,663 $

Fellowships 52,806 125,307


Library support 315,104 277,025

Facility support 2,509,062 1,933,723

Other 2,696,207 1,690,974

7,024,027 $ 5,133,654 $

16


Note 12. Description of Leasing Arrangements The Foundation had operating leases with total payments for the years ended June 30, 2011 and 2010 of $21,000 and $21,152, respectively. Future minimum rental payments are shown in the following schedule:

Note 13. Transfers Among Funds To Permanently Restricted The Foundation's policy requires a minimum gift amount to establish an endowment. Contributions received toward setting up an endowment which are less than the minimum amount are initially recorded as temporarily restricted net assets, as it is understood by the donor that if the endowment minimum is not reached, the corpus can be used for the intended purpose. When the endowment reaches the minimum endowment level due to additional contributions, the endowment is transferred to permanently restricted net assets. For the years ended June 30, 2011 and 2010, net endowment transfers were $418,439 and $450,613, respectively. Note 14. University Club In June 2008, to assist with financing the construction, renovation, and expansion of the University Club, the Board of the Foundation approved a resolution to authorize the Foundation to serve as the guarantor for $3 million of a $4 million loan from First Citizens Bank & Trust Company to the North Carolina State University Club, Inc. (the "Club") to be obtained in conjunction with the renovation of the Club's facilities. The term of the loan and guarantee is ten years. The amount drawn on the loan, as of June 30, 2011 and 2010, was $4,000,000 and $3,212,061, respectively. A Memorandum of Understanding between the Foundation and the Club was established, which imposes certain requirements on the Club as a condition to the Foundation serving as guarantor for the loan. Note 15. NC State Executive Education, LLC NC State Executive Education, LLC (the “LLC”) was organized on June 6, 2008 to further the purposes of its sole member, the Foundation, and is consolidated for the purposes of these financial statements. The purposes of the LLC are exclusively charitable within the meaning of paragraph 501(c)(3) of the Internal Revenue Code of 1986, and more specifically are to support the educational mission of the University by operating an executive education program in conjunction with the University's Poole College of Management.

Total future minimum

2012 2013 2014 Thereafter payments required

Vehicles 21,258$ 20,634$ 9,285$ -$ 51,177$

17


Note 15. NC State Executive Education, LLC (continued) The Statements of Financial Position for NC State Executive Education, LLC for the years ended June 30, 2011 and 2010 are as follows:

The Statements of Activities for NC State Executive Education, LLC for the years ended June 30, 2011 and 2010 are as follows:

2011 2010

ASSETS

Cash and cash equivalents 16,362$ 276,407$

Accounts receivable, net 106,800 131,609

Total assets 123,162$ 408,016$

LIABILITIES AND NET ASSETS

Accounts payable - North Carolina State University 15,000$ 22,300$

Other payables 186,605 230,991

Deferred revenue 90,708 12,429

Total liabilities 292,313 265,720

Net Assets:

Unrestricted (169,151) 142,296

Total net assets (169,151) 142,296

Total liabilities and net assets 123,162$ 408,016$

2011 2010

Revenues, gains, and other income:

Custom Program Revenue 462,695$ 837,525$

Total revenues, gains, and other income 462,695 837,525

Expenses:

Program:

Labor costs 85,782 144,680

Rental costs 6,759 12,801

Contract fees 663,467 615,540

Other 18,134 24,226

Total expenses 774,142 797,247

Change in net assets (311,447) 40,278

Net assets:

Beginning 142,296 102,018

Ending (169,151)$ 142,296$

18


Note 16. Prior Year Restatement and Reclassifications Net assets have been restated among unrestricted, temporarily restricted, and permanently restricted for the 2010 financial statements in order to correct prior year errors in net asset classification as identified by management; however, there was no effect on previously reported total net assets. For the year ended June 30, 2010, the beginning net assets on the consolidated statement of activities have been

modified. Unrestricted beginning net assets have decreased $451,657, temporarily restricted beginning net assets

have decreased $3,317,338, and permanently restricted net assets have increased $3,768,995, with total net assets

remaining the same.

For the year ended June 30, 2010, the consolidated statement of financial position has been modified with total net

assets remaining the same, as follows: undesignated net assets decreased $6,627,569, undesignated

nonexpendable – University Club net assets increased $3,690,927, board-designated – endowments increased

$2,116,298, board-designated – underwater endowments increased $368,687, temporarily restricted net assets

decreased $3,317,338, and permanently restricted net assets increased $3,768,995.

Certain other amounts in the 2010 financial statements have been reclassified to conform to the 2011 presentation also with no effect on previously reported total net assets. Note 17. Subsequent Events In July 2011, the Foundation transferred its life income fund investments from BNY Mellon to Wells Fargo. The Foundation has evaluated subsequent events through October 7, 2011, the date which the financial statements were available to be issued, and there were no additional subsequent events to report.

19

SUPPLEMENTARY INFORMATION


Fund for Excellence Budget vs. Actual - Unaudited


Approved Over (Under)

Budget Actual Variance

Income:

Endowment spending budget 105,180$ 90,475$ (14,705)$

General Fund contributions 2,200 11,174 8,974

Interest and dividends 57,000 54,777 (2,223)

Endowment assessment 96,440 96,440 -

Alumni endowment assessment 35,785 35,785 -

Alumni marketing 250,000 250,000 -

Miscellaneous 400 635 235

Total income 547,005 539,286 (7,719)

Support:

Program support 422,375 417,195 (5,180)

Foundation administration 147,955 145,416 (2,539)

Total support 570,330 562,611 (7,719)

Income less support (23,325) (23,325) -

Fund balance:

Beginning 579,524 579,524 -

Ending 556,199$ 556,199$ -$

20


Ten Year Summary of Asset Growth - Unaudited

Years Ended June 30

(Dollars in Millions)

Total Assets

61.6 66.8

73.9 74.9 78.7

93.1 102.5

81.1 89.0

140.0

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11Years

21

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24.4

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19.6

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16.2

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47.7

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22

OTHER INFORMATION

October 7, 2011

To the Board of Directors North Carolina State University Foundation, Inc. Raleigh, North Carolina

We have audited the financial statements of North Carolina State University Foundation, Inc. (the “Foundation”), a nonprofit organization, for the year ended June 30, 2011, and have issued our report thereon dated October 7, 2011. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our engagement letter to you dated June 23, 2011. Professional standards also require that we communicate to you the following information related to our audit.

Significant Audit Findings

Qualitative Aspects of Accounting Practices

Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by North Carolina State University Foundation, Inc. are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2011. We noted no transactions entered into by the Foundation during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period.

Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected.

Difficulties Encountered in Performing the Audit

We encountered no significant difficulties in dealing with management in performing and completing our audit.

Corrected and Uncorrected Misstatements

Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. No material misstatements were identified as a result of audit procedures and, as such, no adjustments were necessary.

23

Disagreements with Management

For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditors’ report. We are pleased to report that no such disagreements arose during the course of our audit.

Management Representations

We have requested certain representations from management that are included in the management representation letter dated October 7, 2011.

Management Consultations with Other Independent Accountants

In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the Foundation’s financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants.

Other Audit Findings or Issues

We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Foundation’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention.

Other Information in Documents Containing Audited Financial Statements

With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles selected by the Foundation, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. However, we did not audit the supplementary information and, therefore, do not express an opinion on it.

Closing

We are happy to respond to any questions you may have concerning this communication. We appreciate the opportunity to continue to serve the North Carolina State University Foundation, Inc.

This information is intended solely for the use of the Board of Directors and management of North Carolina State University Foundation, Inc. and is not intended to be and should not be used by anyone other than these specified parties.

24