REPORT OF INDEPENDENT AUDITORS AND CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTARY INFORMATION FOR PACIFIC NORTHWEST BALLET

Transcription

1 REPORT OF INDEPENDENT AUDITORS AND CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTARY INFORMATION FOR PACIFIC NORTHWEST BALLET June 30, 2017 and 2016

2 Table of Contents Report of Independent Auditors 1 2 PAGE Consolidated Financial Statements Consolidated balance sheets 3 Consolidated statements of activities 4 Consolidated statements of cash flows 5 Notes to consolidated financial statements 6 21 Supplementary Information Consolidated schedule of functional expenses 22

3 Report of Independent Auditors To the Audit Committee Pacific Northwest Ballet Report on the Financial Statements We have audited the accompanying consolidated financial statements of Pacific Northwest Ballet Association and Pacific Northwest Ballet Foundation (collectively, Pacific Northwest Ballet or the Organization), which comprise the consolidated balance sheet as of June 30, 2017, and the related consolidated statements of activities and cash flows for the year ended June 30, 2017, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Northwest Ballet as of June 30, 2017, and the consolidated changes in net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Report on Summarized Comparative Information We have previously audited the Organization s 2016 consolidated financial statements, and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated September 9, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2016, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Supplementary Information Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The accompanying consolidated schedule of functional expenses is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such information is the responsibility of the Organization s management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and certain other procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated basic financial statements as a whole. Seattle, Washington September 8,

5 Consolidated Balance Sheets ASSETS June 30, ASSETS PNB Association assets Current assets Cash and cash equivalents $ 3,629,093 $ 3,516,535 Accounts receivable 243, ,125 Contributions receivable, net 1,274,559 2,061,754 Inventory 302, ,363 Prepaid expenses 1,149, ,575 Total current assets 6,599,896 6,952,352 Long-term contributions receivable, net 755,700 38,981 Investments 218, ,790 Gift annuity reserves 155, ,603 Investment in gift shop 216, ,140 Personal property and leasehold improvements, net 10,494,360 5,816,734 Total PNB Association assets 18,440,193 13,727,600 PNB Foundation assets Investments 17,056,563 14,008,328 Contributions receivable, net 139, ,567 Charitable remainder unitrust receivable 1,567,873 1,482,026 Total PNB Foundation assets 18,763,662 15,772,921 Total assets $ 37,203,855 $ 29,500,521 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable and accrued expenses $ 2,191,234 $ 955,126 Deferred revenue 4,174,944 3,973,154 Dancer severance liability - current portion 105, ,000 Gift annuities payable - current portion 18,546 18,546 Total current liabilities 6,489,724 5,051,826 Accrued lease rent 367,198 48,750 Dancer severance liability 531, ,397 Gift annuities payable 109, ,135 Total liabilities 7,498,358 5,747,108 NET ASSETS Unrestricted 7,670,697 3,052,634 Temporarily restricted 5,466,241 5,211,217 Permanently restricted 16,568,559 15,489,562 Total net assets 29,705,497 23,753,413 Total liabilities and net assets $ 37,203,855 $ 29,500,521 See accompanying notes. 3

6 Consolidated Statements of Activities Unrestricted Unrestricted Board Temporarily Permanently Operating Plant Designated Restricted Restricted Total Total EARNED REVENUE Nutcracker ticket sales $ 6,637,081 $ - $ - $ - $ - $ 6,637,081 $ 7,732,499 Other ticket sales 5,261,287 5,261,287 5,453,798 Performance fees 135, , ,500 Ballet school and outreach 3,767, ,767,427 4,095,246 Gift shop (net) 132, , ,576 Other earned income 128, , ,971 Investment return - Association 19, , Investment return - Foundation - - 2,071, ,071,579 (404,197) 16,080,850-2,071, ,152,548 17,339,784 FUNCTIONAL EXPENSES Artistic and production 13,474, ,474,805 12,689,002 Ballet school and outreach 3,727, ,727,656 3,853,793 Marketing and box office 3,549, ,549,970 3,762,674 Administration 2,069, ,414 70, ,338,713 2,074,430 Development 1,266,814 25, ,291,816 1,249,809 Contributed services expenses 880, , ,979 Investment expense - Foundation ,968 24,969, ,416 70, ,263,766 24,567,655 Income (loss) before contributions and transfers (8,888,945) (223,416) 2,001, (7,111,218) (7,227,871) CONTRIBUTIONS Contributions to Association 4,201,564-95,000 2,482,605-6,779,169 5,950,523 Contributions to Foundation ,000-1,123,548 1,233,548 29,054 Special events (net expenses of $111,894 and $135,182) 286, , , ,339 Contributed services revenues 880, , ,979 Provision for uncollectible pledges (52,557) (44,551) (97,108) (21,361) 5,316, ,000 2,490,105 1,078,997 9,090,623 7,098,534 RELEASES, TRANSFERS, AND OTHER PNB Foundation support 821,000 - (821,000) Releases of restricted funds 1,785, (1,785,962) Release of funds designated by board 761,503 - (761,503) Gain on eminent domain settlement - 5,000, ,000,000-3,368,465 5,000,000 (1,582,503) (1,785,962) - 5,000,000 - Change in net assets before depreciation and amortization (203,959) 4,776, , ,262 1,078,997 6,979,405 (129,337) DEPRECIATION AND AMORTIZATION Depreciation and amortization expense (501,017) (526,304) (1,027,321) (671,440) Releases of funds for depreciation expense 501,015 - (51,777) (449,238) (2) (526,304) (51,777) (449,238) - (1,027,321) (671,440) CHANGE IN NET ASSETS (203,961) 4,250, , ,024 1,078,997 5,952,084 (800,777) NET ASSETS Beginning of year (2,956,997) 2,997,572 3,012,059 5,211,217 15,489,562 23,753,413 24,554,190 End of year $ (3,160,958) $ 7,247,852 $ 3,583,803 $ 5,466,241 $ 16,568,559 $ 29,705,497 $ 23,753,413 See accompanying notes. 4

7 Consolidated Statements of Cash Flows Years Ended June 30, CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 5,952,084 $ (800,777) Adjustments to reconcile change in net assets to cash from operating activities Depreciation and amortization 1,027, ,440 Net (gain) loss on investments (1,827,156) 620,351 Gain on eminent domain settlement (5,000,000) - Contributions restricted for purchase of long-term assets (1,695,541) - Contributions and earnings restricted for endowments (1,424,371) (239,419) Provision for uncollectible pledges 97,108 21,361 Cash from changes in operating assets and liabilities Accounts receivable 6,213 (85,711) Contributions receivable 678, ,454 Inventory and prepaid expenses (328,394) 171,173 Investment in gift shop 2,352 (97,576) Accounts payable and accrued expenses (521,182) 4,157 Deferred revenue 201,790 52,274 Accrued lease rent 318,448 48,750 Net cash from operating activities (2,512,511) 481,477 CASH FLOWS FROM INVESTING ACTIVITIES Payments for personal property and leasehold improvements (3,948,313) (1,548,413) Proceeds for eminent domain settlement 5,000,000 - Payments to life tenants of gift annuity (18,546) (18,546) Increase in gift annuity reserves (25,000) - Purchases of investments (3,906,022) (2,451,663) Proceeds from sale of investments 3,050,993 2,944,553 Net cash from investing activities 153,112 (1,074,069) CASH FLOWS FROM FINANCING ACTIVITIES Contributions received for purchase of long-term assets 1,034,643 - Contributions and earnings received for endowments 1,437, ,940 Net cash from financing activities 2,471, ,940 NET CHANGE IN CASH AND CASH EQUIVALENTS 112,558 (170,652) CASH AND CASH EQUIVALENTS, beginning of year 3,516,535 3,687,187 CASH AND CASH EQUIVALENTS, end of year $ 3,629,093 $ 3,516,535 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid during the year $ 3,082 $ 3,101 Noncash investing activity Construction in progress included in accounts payable $ 1,756,634 $ - 5 See accompanying notes.

8 Note 1 - Description of Organization and Summary of Significant Accounting Policies Organization - The Pacific Northwest Ballet Association (the Association or PNB Association) and the Pacific Northwest Ballet Foundation (the Foundation or PNB Foundation) (collectively, the Organization or PNB) are not-for-profit corporations organized in 1972 and 1996, respectively. The Association stages several major ballets each year, operates a ballet school, and promotes public interest in the art of ballet. The mission of the Association is to enrich lives in the Pacific Northwest by: Setting new standards for artistic excellence, innovation, and creativity; Attracting the most talented dancers, choreographers, musicians, staff, and volunteers; Educating and developing dance artists as well as enthusiasts; Captivating a devoted, supportive, continually growing, and diverse audience; and Strengthening the Organization s financial foundation. The Foundation was formed to conduct and support activities exclusively for the benefit of the Association. The Foundation receives and holds endowment funds for and makes distributions to the Association. Basis of presentation - The Organization reports information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. Net assets, revenues, expenses, and gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of the Organization and changes therein are classified and reported as follows: Unrestricted net assets - Net assets that are not subject to donor-imposed restrictions and consist of operating, plant, and board-designated assets. Plant activity includes gains and expenses related to the acquisition, disposition and amortization of leasehold improvements. Temporarily restricted contributions received and expended in the same accounting period are recorded as unrestricted net asset activity when satisfaction of the restriction is met within the same fiscal year. Temporarily restricted net assets - Net assets subject to donor-imposed restrictions that may or will be met either by actions of the Organization or the passage of time. Permanently restricted net assets - The Organization has interpreted Washington State s Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) as requiring the following to be classified as permanently restricted assets: The original value of gifts designated by donors for the endowment; The original value of matching gifts related to donor-designated endowment gifts; Accumulations to those donor-designated endowment funds, if required by the donor gift instrument. 6

9 Note 1 - Description of Organization and Summary of Significant Accounting Policies (continued) Changes in net assets - Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporary restrictions on net assets are reported as releases from restrictions. Basis of consolidation - The consolidated financial statements include the financial position and the results of activities, changes in net assets, and cash flows of the Association and the Foundation. All significant intercompany transactions have been eliminated in the consolidated financial statements. Use of estimates - The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates. Cash and cash equivalents - The Organization considers all temporary investments with an original maturity of three months or less to be cash equivalents. The Organization maintains its cash and cash equivalents in depository institution accounts that, at times, may exceed federally insured limits. The Organization has not experienced any losses in such accounts. Accounts receivable - Accounts receivable consist of amounts due for student tuition, credit card sales, and for costume and set rentals or co-productions. All account balances are due in less than one year. No allowance for uncollectible balances has been deemed necessary based upon historical experience. Contributions receivable - Contributions, which include unconditional promises to give (pledges), are recognized as revenues in the period received. The Organization records an allowance for doubtful accounts on pledges based on review of individual past due balances, historical write-off experience, and economic data. Unconditional promises to give that are expected to be collected over a period of more than one year are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed using the discount rate adjustment technique, in which the rate is based upon the risk-free interest rate applicable to those years when pledges were received (Note 3). The effective interest rate on discounted contributions receivable was 3.50% and 3.25% for the years ended June 30, 2017 and 2016, respectively. Inventory - Inventory consists of ballet shoes for use by PNB Association dancers in future performances. Such inventory items are recorded at the lower of cost or market. Investments - The Organization s investments are recorded at fair value in the consolidated balance sheets, and the realized and unrealized gains and losses on investments are reported in the consolidated statements of activities as part of investment return. A portion of the Organization s investments are held in private investment partnerships, which are considered alternative investments. The board engages investment consultants to investigate and monitor these investments. PNB Association s investments, consisting of money market funds, are held in separate accounts in accordance with donor restrictions or contractual requirements. 7

10 Note 1 - Description of Organization and Summary of Significant Accounting Policies (continued) Investment in gift shop - PNB Association has a 50% ownership interest in Song & Dance, LLC, d.b.a. amusements: Gifts of Artistic Expression (the LLC). The purpose of the LLC is to operate a retail gift shop in McCaw Hall. The investment in the LLC is accounted for using the equity method. Gift annuities - The Organization periodically enters into gift annuity agreements in connection with contributions for which it is obligated to make periodic payments to designated beneficiaries. Assets contributed are recorded at fair value when received, and a liability is recorded at the present value of future cash flows to annuitants. Funds equal to at least 110% of the present value of payments due to beneficiaries are maintained in a reserve account as required by statute. Investment earnings on the annuity reserves are recognized when earned, and actuarial adjustments are made to the liability annually. The annuity reserve consists of mutual funds that are invested in domestic and international equity securities, fixed income, and money market accounts. Charitable remainder unitrust receivable - The Foundation is the beneficiary of a trust administered by a donor. The trust invests in temporary cash investments, mutual funds, and contracts receivable. The Foundation s beneficiary interest receivable is recorded at its estimated fair value based on the use of present value techniques and the trust administrator s annual estimated fair value based on unobservable inputs (Note 6). Personal property and leasehold improvements - Personal property and leasehold improvements are stated at cost. Sets and costumes with a minimum original cost of $250,000, equipment with a minimum cost of $5,000, and leasehold improvements with an original cost of $50,000 are capitalized. Long-lived assets that are acquired with restricted gifts maintain a time restriction that expires over the useful life of the asset. Leasehold improvements represent capitalized costs of constructing the Association s rehearsal, school, and administrative facilities in its leased Seattle Center and Bellevue locations. Gains or losses on the disposition of capital assets are included in the statements of activities at the time of disposal (Note 7). Depreciation and amortization of personal property and leasehold improvements are provided as follows: Sets and costumes Straight-line basis 3 10 years Office, studio, and stage equipment Straight-line basis 3 5 years Leasehold improvements Straight-line basis Lesser of lease term or estimated useful life Deferred revenue - Deferred revenue consists primarily of ticket sales for the upcoming season and tuition for ballet school classes held in the summer, subsequent to the corresponding consolidated balance sheet date. Advertising expense - Advertising costs are recognized as expense in the period in which the performance occurs. Advertising expense was $1,618,153 and $1,717,070 for the years ended June 30, 2017 and 2016, respectively. 8

11 Note 1 - Description of Organization and Summary of Significant Accounting Policies (continued) Income tax - The Organization is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code except to the extent of unrelated business income from a partnership with Seattle Opera to operate the amusements gift shop in McCaw Hall. Contributed goods and services - Contributed goods are recorded at fair value when received by the Organization. Contributed professional and advertising services are reflected in the consolidated financial statements, inasmuch as an objective basis is available to measure the value of such services. However, a substantial number of volunteers have donated their time to the program services and fundraising campaigns of the Organization, which is not reflected in the consolidated financial statements because no objective basis is available to measure the value of such services. Reclassifications - Certain reclassifications have been made to the 2016 comparable information to conform to the 2017 presentation. Such reclassifications do not alter the change in net assets or net asset balances as previously reported. Subsequent events - Subsequent events are events that occur after the balance sheet date but before consolidated financial statements are issued. The Organization recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the consolidated balance sheets, including the estimates inherent in the process of preparing the consolidated financial statements. The Organization has evaluated subsequent events through September 8, 2017, which is the date that the consolidated financial statements were available to be issued. Note 2 - Contributions and Grants Contributions and grants consisted of the following for the years ended June 30: Temporarily Permanently Unrestricted Restricted Restricted Total 2017 Individual $ 3,156,582 $ 1,895,760 $ 123,548 $ 5,175,890 Corporate 339, , ,018 Foundation 632, ,845 1,000,000 1,839,373 Government 278, , ,436 $ 4,406,564 $ 2,482,605 $ 1,123,548 $ 8,012, Individual $ 3,084,690 $ 1,030,509 $ 26,227 $ 4,141,426 Corporate 291, , ,084 Foundation 254, , ,621 Government 288, , ,446 $ 3,919,236 $ 2,034,114 $ 26,227 $ 5,979,577 9

12 Note 3 - Contributions Receivable Contributions receivable consisted of the following at June 30: 2017 PNB PNB 2016 Association Foundation Total Total Current (less than one year) Individuals and affiliated groups $ 994,174 $ 101,665 $ 1,095,839 $ 1,785,080 Corporate 103, , ,840 Foundation ,000 Government 283, , ,696 Present value discount (2,801) (674) (3,475) (6,394) Allowance for doubtful accounts (104,000) (50,000) (154,000) (154,000) Current contributions receivable, net $ 1,274,559 $ 50,991 $ 1,325,550 $ 2,172,222 Long-term (one to eight years) Individuals and affiliated groups $ 761,250 $ 98,230 $ 859,480 $ 235,750 Corporate Foundation 60,000-60,000 - Government Present value discount (65,550) (9,995) (75,545) (24,670) Long-term contributions receivable, net $ 755,700 $ 88,235 $ 843,935 $ 211,080 Conditional pledges are not recorded until the conditions on which they depend are substantially met. At June 30, 2017, the Association had a $200,000 conditional pledge to the Stabilization Fund that depended on raising $200,000 in matching contributions. Contributions raised for the Stabilization Fund were $95,000 as of June 30,

13 Note 4 - Net Assets Unrestricted net assets consisted of the following at June 30: Unrestricted net assets PNB Association Operating funds $ (3,160,958) $ (2,956,997) Plant 7,247,852 2,997,572 4,086,894 40,575 Unrestricted - board-designated net assets PNB Association Designated for website improvements and office equipment 108, ,504 Designated to support next fiscal year operating activity - 250,000 Invested in sets, costumes and equipment 50, ,949 Stabilization Fund 1,846,181 2,221,181 2,004,354 2,722,634 PNB Foundation General Endowment Fund 2,157,406 2,047,406 Artistic Directors Fund 981, ,685 Scholarship and Outreach Fund 137, ,026 Accumulated net earnings on investments 9,963,581 7,962,557 Accumulated distributions to PNB Association (11,660,249) (10,839,249) 1,579, ,425 Total unrestricted $ 7,670,697 $ 3,052,634 The board-designated Stabilization Fund, established in 2000 for cash flow stability, preserves working capital to offset operating deficits. Designations to the Stabilization Fund are based on operating surpluses before non-cash expenses and donor-specified contributions. Temporarily restricted net assets consisted of the following at June 30: Temporarily restricted net assets PNB Association Dancer Transition Fund $ 167,779 $ 170,471 Donor-restricted to future fiscal years 876,400 1,826,175 Donor-restricted for sets and costumes 2,326,521 2,814,571 Donor-restricted to leasehold improvements 2,095, ,000 Total temporarily restricted $ 5,466,241 $ 5,211,217 11

14 Note 4 - Net Assets (continued) Permanently restricted net assets consisted of the following at June 30: Permanently restricted net assets PNB Foundation General Endowment Fund $ 4,075,380 $ 4,099,133 School and Outreach Funds 4,361,140 4,353,519 Artistic and Creative Funds 4,529,480 4,528,980 Artistic Directors Fund 2,095,355 1,095,355 General Endowment unitrust receivable 1,567,873 1,482,026 Present value discount and allowance for doubtful accounts (60,669) (69,451) Total permanently restricted net assets $ 16,568,559 $ 15,489,562 Note 5 - Investments Investments consisted of the following at June 30: PNB PNB Association Foundation 2017 Money market $ 218,235 $ 132,644 Equity securities and mutual funds - 15,375,037 Hedge funds - 1,548,882 $ 218,235 $ 17,056, Money market $ 557,790 $ 66,155 Equity securities and mutual funds - 12,186,267 Hedge funds - 1,755,906 Net investment return consisted of the following for the years ended June 30: $ 557,790 $ 14,008, Interest and dividend income $ 251,460 $ 216,545 Realized and unrealized gain (loss) on investments 1,839,545 (620,351) $ 2,091,005 $ (403,806) 12

15 Note 6 - Fair Value Measurements The Organization applies the provisions of Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The ASC describes three levels of inputs that may be used to measure fair value: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Assets that are measured at fair value on a recurring basis are categorized using the three levels of the fair value hierarchy as follows as of June 30: 2017 Total Level 1 Level 2 Level 3 Investments Money market $ 350,879 $ 350,879 $ - $ - Equity securities and mutual funds 15,375,037 15,375, Gift annuity reserves 155, , Charitable remainder unitrust 1,567, ,567,873 Total assets in the fair value hierarchy 17,449,003 $ 15,881,130 $ - $ 1,567,873 Hedge fund investments measured at NAV (practical expedient) 1,548,882 Assets at fair value $ 18,997, Total Level 1 Level 2 Level 3 Investments Money market $ 623,945 $ 623,945 $ - $ - Equity securities and mutual funds 12,186,267 12,186, Gift annuity reserves 142, , Charitable remainder unitrust 1,482, ,482,026 Total assets in the fair value hierarchy 14,434,841 $ 12,952,815 $ - $ 1,482,026 Hedge fund investments measured at NAV (practical expedient) 1,755,906 Assets at fair value $ 16,190,747 13

16 Note 6 - Fair Value Measurements (continued) Hedge fund investments are measured at fair value on a recurring basis using net asset value per share (or its equivalent, such as member units or an ownership in partner s capital to which a proportionate share of net assets is attributed). The hedge fund investments allow capital withdrawals at the end of each quarter with written notice 90 days prior to quarter-end. The funds seek appreciation by allocating their assets among a select group of private investment funds that use a variety of alternative investment strategies. There were no commitments or restrictions on these funds. Level 3 assets consist of a charitable remainder unitrust receivable, administered by an outside trustee, which is valued at the present value of the estimated expected future remainder interest to be received when the trust assets are distributed. Adjustments to the remainder interest reflect changes in the fair value, life expectancy, and discount rate and are included as contribution revenue in the consolidated statements of activities. Investment securities are exposed to various risks, such as interest rate, market volatility, and credit risks. Due to the level of risk associated with certain investment securities and investment contracts, and the level of uncertainty related to changes in the value of the investment securities, it is at least reasonably possible that changes in risks in the near term could materially affect account balances and the amounts reported in the consolidated balance sheets and the consolidated statements of activities. The Organization s management determines the fair value measurement policies and procedures, which are reassessed at least annually to determine whether the current valuation techniques are still appropriate. At that time, the unobservable inputs used in the fair value measurements are evaluated and adjusted, as necessary, based on current market conditions and other third-party information. The following table discloses the summary of changes in the fair value of Level 3 investment assets: Beginning balance $ 1,482,026 $ 1,485,334 Change in fair value of charitable remainder unitrust recognized as increase (decrease) in contribution revenue 85,847 (3,308) Ending balance $ 1,567,873 $ 1,482,026 Quantitative information about significant unobservable inputs used in Level 3 fair value measurements is as follows: Range of Input Values Fair Valuation Unobservable (Weighted Name Value Technique Inputs Average) Charitable Remainder Unitrust $ 1,567,873 Discounted cash flow Payout percentage 8% Discount rate % Discount rate % 14

17 Note 7 - Leasehold Improvements and Personal Property Leasehold improvements and personal property consisted of the following at June 30: Accumulated Depreciation/ Cost Amortization Net 2017 Construction in progress $ 5,483,399 $ - $ 5,483,399 Leasehold improvements 7,970,347 5,156,722 2,813,625 Sets and costumes 7,965,222 5,811,779 2,153,443 Office, studio, and stage equipment 627, ,931 43,893 $ 22,046,792 $ 11,552,432 $ 10,494, Construction in progress $ 256,961 $ - $ 256,961 Leasehold improvements 10,538,861 7,541,290 2,997,571 Sets and costumes 7,849,154 5,342,008 2,507,146 Office, studio, and stage equipment 680, ,350 55,056 $ 19,325,382 $ 13,508,648 $ 5,816,734 In August 2016, the regional transit authority (RTA) took possession by eminent domain the space that was leased by the Association for its school located in Bellevue, Washington. The Association was compensated $5 million for the loss of its leasehold improvements, which were fully depreciated. The Association is using the compensation to build its replacement school in Bellevue, which is reflected as construction in progress above. The Association has contracted architectural and construction services totaling an estimated $11.5 million for leasehold improvements. The settlement gain and legal expenses related to the eminent domain action, and expenses related to the fundraising campaign to pay for the construction costs of the replacement school are recorded in Unrestricted Plant activity. Contributions for the replacement school are recorded as temporarily restricted net assets. Note 8 - Benefit Plans The Association has a contract with dancers employed under an American Guild of Musical Artists contract. The contract provides that the Association shall contribute to the PNB Association Employee Benefit Plan, a 401(k) plan, an amount that is 5% of each dancer s gross compensation, plus an additional 7% of matching contributions. Contributions for dancers were approximately $327,000 and $296,000 for the years ended June 30, 2017 and 2016, respectively. The Association has a contract with musicians employed under an International Guild of Symphony, Opera and Ballet Musicians contract. The contract provides that the Association shall contribute to the PNB Association Employee Benefit Plan, a 401(k) plan, an amount that is 7% of each musician s wages, plus up to an additional 3% of matching contributions. Contributions for musicians were approximately $112,000 and $109,000 for the years ended June 30, 2017 and 2016, respectively. 15

18 Note 8 - Benefit Plans (continued) The Association has a contract with stagehands employed under an International Alliance of Theatrical Stage Employees (IATSE) contract. The contract provides for 401(k) benefits under a union retirement plan, and requires that the Association contribute 6% of gross pay to the IATSE plan. Retirement benefits expense for stagehands was approximately $48,000 and $61,000 for the years ended June 30, 2017 and 2016, respectively. Additionally, the contract provides for health and welfare benefits and requires that the Association contribute 10% of gross wages to the union plan. The health and welfare benefits expense for stagehands was approximately $69,000 and $102,000 for the years ended June 30, 2017 and 2016, respectively. The Association has a contract with dressers employed under a Theatrical Wardrobe Union contract. The contract provides for 401(k) benefits under a union retirement plan, and requires that the Association contribute 6% of gross wages. Retirement benefits expense for dressers was approximately $11,000 and $10,000 for the years ended June 30, 2017 and 2016, respectively. Additionally, the contract provides for health and welfare benefits and requires that the Association contribute 10% of gross wages to the union plan. The health and welfare benefits expense for dressers was approximately $18,000 and $16,000 for the years ended June 30, 2017 and 2016, respectively. Salaries of employees covered under collective bargaining agreements were approximately $5,751,000 and $5,691,000, representing 48% and 45% of salaries for the years ended June 30, 2017 and 2016, respectively. The Association has a defined contribution plan to provide retirement benefits for all employees not covered by a collective bargaining agreement. Under the terms of the plan, it is optional for the Association to provide a matching contribution, which is based on an eligible employee s annual gross wages. The Association made matching contributions of approximately $89,000 and $89,000 for the years ended June 30, 2017 and 2016, respectively. Note 9 - Line of Credit The Association has a $1,600,000 revolving credit facility, payable on demand, bearing interest at 1.50% plus the one-month LIBOR (2.72% at June 30, 2017) with a December 1, 2017, maturity. The facility is secured by the Association s contribution receivables, investments, costumes, and sets. No balances were outstanding as of June 30, 2017 and Interest expense under the line of credit was approximately $3,000 for each year ended June 30, 2017 and

19 Note 10 - Rent Commitments The Association rents office, studio, school, and warehouses under noncancelable operating leases expiring through The office, studio and school leases have renewal options for 10 to 15 years. The lease for the Seattle office, studio and school has annual lease payment escalations through February 2021, and requires the Association to make $300,000 of tenant improvements by February The Bellevue school lease, which commenced December 2016, does not require lease payments for the first nine months. Scheduled lease payments will begin September 2017 and increase by 3% annually thereafter for the initial 15-year lease term. Accounting principles require total lease payments to be expensed evenly over the related lease term. In years when the amortized rent expense is in excess of the schedule lease payments, the difference is recorded as accrued lease rent liability. Conversely, in years when the amortized rent expense is less than the actual lease payments, the difference reduces the accrued lease rent liability. The Association performs its ballets in McCaw Hall under an operating agreement with the City of Seattle and Seattle Opera. Under the agreement, the Association pays the City of Seattle an annual fee based on annual hall net operating expenses and its percentage use of the hall. The agreement also requires shared responsibility for capital renewal costs and for debt service on the outstanding balance of capital funding for McCaw Hall. The term of the agreement is through 2028 with two 15-year renewal options. The Association s share of the debt service is expected to be approximately $30,000 for each year through The Association s share of capital renewal costs was $136,500 and $132,500 for the years ended June 30, 2017 and 2016, respectively, and is expected to be $140,600 for the year ending June 30, 2018 and then increase annually by 3% thereafter. Rental expense consists of the following for the years ended June 30: Office, studios, schools, and warehouses Lease payments $ 728,662 $ 900,706 Rent expense in excess of lease payments 318,448 48,750 McCaw Hall 609, ,137 Aggregate minimum rental commitments consisted of the following as of June 30: 2018 $ 607, , , ,033, ,848 Thereafter 5,641,524 $ 1,656,296 $ 1,612,593 $ 9,206,709 17

20 Note 11 - Related Party Transactions Contributions, including both gifts and pledges to give, from members of the Association s board of trustees were approximately $2,182,000 and $1,102,000 for the years ended June 30, 2017 and 2016, respectively. Contributions receivable of approximately $1,181,000 and $616,000 as of June 30, 2017 and 2016, respectively, were due from members of the Association s board of trustees. Note 12 - Intellectual Property Agreement On July 2, 2002, the Association entered into an agreement to continue the Association s interest in certain intellectual property and restaging of ballets. The agreement also requires that certain consulting services be provided throughout the lifetimes of the parties. Amounts paid under this agreement were approximately $130,000 and $128,000 during 2017 and Future amounts due under this agreement approximate the following as of June 30: 2018 $ 131, , , , ,000 Thereafter 686,000 $ 1,351,000 Note 13 - Endowment Policies Investment earnings on permanently restricted net assets, including realized and unrealized capital gains, are classified as temporarily restricted net assets until they are appropriated for distribution to the Association in a manner consistent with the standard of prudence prescribed by UPMIFA. Endowment net assets consist of the following as of June 30: Unrestricted net assets - board-designated $ 1,579,449 $ 289,425 Permanently restricted net assets 16,568,559 15,489,562 Total endowment net assets $ 18,148,008 $ 15,778,987 18

21 Note 13 - Endowment Policies (continued) Change in endowment net assets for the year ended June 30, 2017, is as follows: Foundation Temporarily Permanently Unrestricted Restricted Restricted Total Net assets, July 1, 2016 $ 289,425 $ - $ 15,489,562 $ 15,778,987 Investment return 2,071, ,071,579 Board appropriations (821,000) - - (821,000) Other expenses (70,555) - - (70,555) Board-designated additions 110, ,000 Contributions - - 1,078,997 1,078,997 Total net assets, June 30, 2017 $ 1,579,449 $ - $ 16,568,559 $ 18,148,008 Change in endowment net assets for the year ended June 30, 2016, is as follows: Foundation Temporarily Permanently Unrestricted Restricted Restricted Total Net assets, July 1, 2015 $ 1,562,763 $ - $ 15,463,335 $ 17,026,098 Investment return (404,197) - - (404,197) Board appropriations (802,000) - - (802,000) Other expenses (69,968) - - (69,968) Board-designated additions 2, ,827 Contributions ,227 26,227 Total net assets, June 30, 2016 $ 289,425 $ - $ 15,489,562 $ 15,778,987 Investment policy The investment policy of the Foundation is to increase the value of the endowment portfolio and at the same time provide a dependable, growing source of income that will be used to support various programs of the Association. Endowment assets will be managed on a total return basis while taking into account the level of investment income required. Although the board of the Foundation recognizes the importance of the preservation of capital, they also adhere to the principle that varying degrees of investment risk are generally rewarded with associated returns over the long term. Endowment assets will be diversified among asset classes, as well as within each asset class including diversification among sectors and industries, quality, market capitalization, and investment style on the premise that portfolio diversification and equity style diversification provide protection against a single security or class of securities having a disproportionate impact on aggregate performance. 19

22 Note 13 - Endowment Policies (continued) Investment objectives Risk - The endowment s risk capacity enables it to serve its mission in perpetuity and to focus its investment horizon primarily over the long term. Consequently, it has the ability to take on a moderately higher degree of volatility and illiquidity than most operating entities. To that consideration, the board of the Foundation believes that a reasonable risk target for the investment portfolio is in the range of 8% to 14%, as measured by the per annum standard deviation of returns over the last five years. The board of the Foundation believes that achieving that risk target can best be accomplished through a diversified set of investment assets. With the Foundation s payout needs in mind, the following liquidity constraints will apply: Lock-ups - The Foundation may hold no more than 25% of the portfolio in assets with liquidity of one-quarter of a year or more, and no more than 10% of its portfolio in assets with liquidity of one year or more. Concentrations - The Foundation may not hold more than 5% of its portfolio in any single security that is not supported by the full faith of the U.S. Government. Return - Results will be measured through a total return approach, which is the sum of both market value changes (realized and unrealized) and the current yield (interest and dividends). The Foundation should seek to achieve the largest return that is possible, while still being consistent with its risk and liquidity targets. It recognizes that the magnitude of the potential return will vary substantially from one environment to the next. Accordingly, from time to time, it may be appropriate for the Foundation to adjust its return expectation to reflect the lack or plethora of opportunities in the market. Distribution policy The overall objective of the distribution policy is to produce distributions to the Association, as well as to preserve the real value of the endowment funds through time by growth of principal. In accordance with UPMIFA, the board of trustees of the Foundation considers the following factors when determining (1) the amounts to be distributed to the Association in accordance with donor intent and (2) the amounts to be accumulated in the endowment funds in accordance with donor intent: the duration and preservation of the endowment fund; the purposes of the organization and the endowment fund; general economic conditions; the possible effect of inflation or deflation; the expected total return from income and the appreciation of investments; other resources of the organization; and the investment policies of the organization. 20

23 Note 13 - Endowment Policies (continued) The distribution formula is based on a percentage of the average invested assets over the previous 12 quarters ending March 31. The spending policy, as calculated above, is determined on a year-to-year basis by the board. The board has set the following guidelines with respect to any distribution: Retain discretion to not make a distribution if the board believes that the distribution would affect the viability of future distributions. Retain discretion to make a distribution that would cause the fair value of assets to fall below the original value of gifts donated, if the board believes that to do so would be consistent with UPMIFA and would be a prudent balance between the donors intent to maintain funds in perpetuity and the donors intent that the endowment provide support to the Association. Reserve the right to not pay out in any given year. Note 14 - Contingencies At times, the Organization may be involved in litigation and contingencies arising in the normal course of business. After consultation with legal counsel, management estimates that any current matters will be resolved without significant impact to the Organization s financial position. 21

24 Supplementary Information

25 Consolidated Schedule of Functional Expenses Salaries, benefits, and taxes Salaries Dancers 3,306,807 Program Expenses Support Expenses Total Expenses Artistic Ballet School General and Production and Outreach Marketing Total Administration Development Total $ $ - $ - $ 3,306,807 $ - $ - $ - $ 3,306,807 $ 3,004,096 Musicians 1,887, ,388-2,282, ,282,312 2,283,086 Other artists 816, , , ,915 Technical 1,551,212 56,140-1,607, ,607,352 1,452,229 Administrative - 687, ,413 1,475, , ,773 1,506,331 2,981,445 2,904,151 Teachers - 897, , , ,974 Total payroll 7,562,043 2,036, ,413 10,385, , ,773 1,506,331 11,891,974 11,384,451 Payroll taxes 995, , ,423 1,360,757 88,035 84, ,838 1,533,595 1,489,887 Employee benefits 1,499, ,636 86,186 1,772,838 78,424 83, ,288 1,935,126 1,873,078 Total salaries, benefits, and taxes 10,056,329 2,486, ,022 13,519,238 1,034, ,440 1,841,457 15,360,695 14,747,416 Choreography and dance 721,074-20, , , ,479 Scenery and stage 377,929 10,540 1, , , ,302 Costume and toe shoes 339, , , , ,820 Music and instruments 125, , , ,069 Performance hall 1,122,021 33,214-1,155, ,155,235 1,191,529 Total production expenses 2,685,922 44,264 23,591 2,753, ,753,777 2,471,199 Advertising and public relations 334 5,345 1,584,196 1,589,875-28,278 28,278 1,618,153 1,717,070 Building occupancy 263, , ,030, , ,042 1,507,226 1,396,241 Professional services 121,400 34, , , , , , , ,210 Travel 290, ,425 14, ,798 7,288 1,251 8, , ,738 Bank fees - 63, , ,153 92,239 42, , , ,777 Hospitality 18,511 9,333 5,186 33,030 13, , , , ,965 Printing and copying 322 6, , ,073 1,613 27,935 29, , ,723 Software, supplies and equipment 17,956 26,128 3,488 47, ,525 5, , , ,980 Postage and delivery 9,041 2, , ,900 9,736 7,334 17, , ,647 Other 4,055 17,746 4,746 26,547 88,167 3,315 91, , ,355 Insurance 7,000 8,353-15,353 74,929-74,929 90,282 98,030 Student expenses - 89,281-89, ,281 93,325 Total other expenses 732,554 1,196,505 2,550,357 4,479,416 1,304, ,376 1,789,072 6,268,488 6,481,061 $ 13,474,805 $ 3,727,656 $ 3,549,970 $ 20,752,431 $ 2,338,713 $ 1,291,816 $ 3,630,529 24,382,960 23,699,676 Contributed services 880, ,979 Total functional expenses $ 25,263,766 $ 24,567,655 22