MEMPHIS MUSEUMS, INC. FINANCIAL STATEMENTS June 30, 2012

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1 FINANCIAL STATEMENTS June 30, 2012

2 CONTENTS REPORT OF INDEPENDENT ACCOUNTANTS 1 STATEMENTS OF FINANCIAL POSITION 2 STATEMENTS OF ACTIVITIES 3/4 STATEMENTS OF FUNCTIONAL EXPENSES 5/6 STATEMENTS OF CASH FLOWS 7 8/17

3 DECOSIMO CERTIFIED PUBLIC ACCOUNTANTS Joseph Decosimo and Company, PLLC 6750 Poplar Avenue - Suite 600 Memphis, Tennessee REPORT OF INDEPENDENT ACCOUNTANTS Board of Trustees Memphis Museums, Inc. Memphis, Tennessee We have audited the accompanying statements of financial position of Memphis Museums, Inc. (the Organization) as of June 30, 2012 and 2011, and the related statements of activities, functional expenses and cash flows for the years then ended. These financial statements are the responsibility of the Organization'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 consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Memphis Museums, Inc. as of June 30, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Memphis, Tennessee January 24,

4 STATEMENTS OF FINANCIAL POSITION June 30, 2012 and (as restated) ASSETS Cash and cash equivalents $ 877,327 $ 787,050 Certificates of deposit 218, ,237 Investments, at fair value 2,800,856 2,901,683 Grant receivable 6,250 - Accounts receivable 23,660 22,176 Promises to give 245, ,264 Prepaid expenses 161,272 73,026 Inventories 150, ,762 Land, buildings and equipment, net 183, ,477 TOTAL ASSETS $ 4,667,301 $ 4,753,675 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable and accrued expenses $ 287,893 $ 251,405 Deferred revenue 291, ,723 Total liabilities 579, ,128 NET ASSETS Unrestricted 1,114, ,431 Unrestricted - Board designated 100, ,000 Temporarily restricted 572, ,011 Permanently restricted 2,301,330 2,413,105 Total net assets 4,087,768 4,217,547 TOTAL LIABILITIES AND NET ASSETS $ 4,667,301 $ 4,753,675 The accompanying notes are an integral part of the financial statements. 2

5 STATEMENT OF ACTIVITIES Year Ended June 30, 2012 Unrestricted Temporarily Permanently Total SUPPORT AND REVENUE Gift shop sales $ 347,130 $ - $ - $ 347,130 IMAX concessions 33, ,539 Crafts fair 267, ,294 Program activities 130, ,409 Contributions 652,833 4, ,406 Memberships 192, ,828 Facility rental 351, ,854 Admissions 611, ,800 In-kind contributions 241, ,402 Miscellaneous income 23, ,055 Net investment return 26,762 21,516 (107,840) (59,562) Net assets released from restrictions 257,968 (254,033) (3,935) - Total support and revenue 3,136,874 (227,944) (111,775) 2,797,155 EXPENSES Program services - Curatorial 4, ,294 Exhibits 582, ,108 Education 1,371, ,371,917 1,958, ,958,319 Supporting services - Management and general 435, ,050 Fundraising 106, , , ,015 Operating costs - Gift shop 256, ,857 Crafts fair 169, , , ,600 Total expenses 2,926, ,926,934 CHANGE IN NET ASSETS 209,940 (227,944) (111,775) (129,779) NET ASSETS - beginning of year 1,004, ,011 2,413,105 4,217,547 NET ASSETS - end of year $ 1,214,371 $ 572,067 $ 2,301,330 $ 4,087,768 The accompanying notes are an integral part of the financial statements. 3

6 STATEMENT OF ACTIVITIES Year Ended June 30, 2011 Unrestricted (as restated) Temporarily (as restated) Permanently Total SUPPORT AND REVENUE Gift shop $ 325,241 $ - $ - $ 325,241 Crafts fair 263, ,629 Program activities 124, ,871 Contributions 318, , ,474 Memberships 217, ,316 Facility rental 302, ,982 Admissions 571, ,405 In-kind contributions 168, ,224 Miscellaneous income 44, ,047 Net investment return 30,985 22, , ,059 Net assets released from restrictions 214,995 (214,995) - - Total support and revenue 2,582,466 (42,057) 426,839 2,967,248 EXPENSES Program services - Curatorial 58, ,303 Exhibits 537, ,379 Education 1,370, ,370,660 1,966, ,966,342 Supporting services - Management and general 439, ,723 Fundraising 111, , , ,384 Other expenses - Gift shop 255, ,949 Crafts fair 172, , , ,496 Total expenses 2,946, ,946,222 CHANGE IN NET ASSETS (363,756) (42,057) 426,839 21,026 NET ASSETS - beginning of year 1,614, ,905 1,986,266 4,196,521 Prior period adjustment (246,163) 246, NET ASSETS - beginning of year, as restated 1,368, ,068 1,986,266 4,196,521 NET ASSETS - end of year $ 1,004,431 $ 800,011 $ 2,413,105 $ 4,217,547 The accompanying notes are an integral part of the financial statements. 4

7 STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2012 Program Services Supporting Services Operating Costs Management Curatorial Exhibits Education and General Fundraising Gift Shop Crafts Fair Total Advertising and publicity $ - $ 192,967 $ 237,611 $ - $ - $ 74 $ - $ 430,652 Cost of goods sold - gift shop , ,541 Cost of sales and expenses of crafts fair , ,743 Depreciation , ,843 Employee benefits - 13,794 30,384 10,597 7,084 2,530-64,389 Equipment and maintenance , , ,864 Insurance - 3,953 23,095 4, ,335 Other expenses - 2,975 8,346 61, ,163-79,882 Payroll taxes - 21,769 35,091 8,848 5,380 6,112-77,200 Postage and shipping 42 29,445 13, , ,096 Printing and publications - 29,581 24,127 2,813 1, ,104 Professional services - 51,208 24,815 85,499 11, ,207 Program expenses 4,252 66, , ,499 Salaries - 160, , ,928 73,869 83,759-1,026,025 Security services , ,664 Supplies - 5,817 62,779 4, ,830-78,735 Telephone ,117 Travel and training - 3,045 8,193 2, ,997 Utilities - - 2, ,041 $ 4,294 $ 582,108 $ 1,371,917 $ 435,050 $ 106,965 $ 256,857 $ 169,743 $ 2,926,934 The accompanying notes are an integral part of the financial statements. 5

8 STATEMENT OF FUNCTIONAL EXPENSES Year Ended June 30, 2011 Program Services Supporting Services Operating Costs Management Curatorial Exhibits Education and General Fundraising Gift Shop Crafts Fair Total Advertising and publicity $ - $ 101,762 $ 247,977 $ - $ - $ 250 $ - $ 349,989 Cost of goods sold - gift shop , ,171 Cost of sales and expenses of crafts fair , ,547 Depreciation 80-1,562 8, ,964 Employee benefits - 13,613 26,089 10,953 6,367 2,640-59,662 Equipment and maintenance , , ,275 Insurance - 4,579 22,797 4, ,702 Interest expense Other expenses ,400 64, ,639-82,230 Payroll taxes - 21,734 33,446 8,792 5,517 6,112-75,601 Postage and shipping 46 27,692 15,084 1,291 1, ,334 Printing and publications - 21,307 25, ,372 Professional services 7,090 15,691 23,082 92,334 19, ,296 Program expenses 50, , , ,010 Salaries - 155, , ,307 74,846 78, ,002 Security services , ,499 Supplies - 2,188 61,689 1,298 3,095 3,041-71,311 Telephone ,113 Travel and training 162 1,433 4, ,247 Utilities - - 2, ,824 $ 58,303 $ 537,379 $ 1,370,660 $ 439,723 $ 111,661 $ 255,949 $ 172,547 $ 2,946,222 The accompanying notes are an integral part of the financial statements. 6

9 STATEMENTS OF CASH FLOWS Years Ended June 30, 2012 and OPERATING ACTIVITIES Change in net assets $ (129,779) $ 21,026 Adjustments to reconcile change in net assets to net cash flows from operating activities - Depreciation 8,843 9,964 Unrealized loss (gain) on investments 129,936 (365,734) Realized gain on sale of investments (22,096) (61,105) Reinvestment of income (19,895) (9,592) Change in cash surrender value of life insurance policy 3,936 (11,050) Changes in operating assets and liabilities - Accounts receivable (1,484) 22,468 Promises to give 214, ,228 Grant receivable (6,250) - Prepaid expenses (88,246) 118,903 Inventories (31,960) (6,603) Accounts payable and accrued expenses 36,488 (111,203) Deferred revenue 6, Net cash flows from operating activities 101,226 (277,849) INVESTING ACTIVITIES Purchases of investments (235,356) (479,605) Proceeds from sales of investments 141, ,282 Proceeds from surrender of life insurance policy 82,766 - Net cash flows from investing activities (10,949) (19,323) NET CHANGE IN CASH AND CASH EQUIVALENTS 90,277 (297,172) CASH AND CASH EQUIVALENTS - beginning of year 787,050 1,084,222 CASH AND CASH EQUIVALENTS - end of year $ 877,327 $ 787,050 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ - $ 474 The accompanying notes are an integral part of the financial statements. 7

10 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF ORGANIZATION - Memphis Museums, Inc. is a Tennessee not-for-profit corporation whose function is to operate and support the Memphis Pink Palace Museum, Lichterman Nature Center, Mallory Neely House, Magevney House, and Coon Creek Science Center (commonly referred to as the Memphis Museum System), under a joint-venture arrangement with the City of Memphis, Tennessee (the City). The City owns all of the above facilities with the exception of Coon Creek Science Center which is owned by the Organization. The Organization is responsible for the day-to-day programming, fundraising and operation of the facilities, while the City is responsible for upkeep, maintenance, landscape, etc. When the Organization makes capital improvements to the facilities owned by the City, they are expensed in the year made. In addition, the Organization and the City share admissions revenue to certain attractions located in these facilities along with certain payroll and administrative costs. BASIS OF ACCOUNTING - The Organization's financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. FINANCIAL STATEMENT PRESENTATION - The accompanying financial statements reflect the results of all programs operated by the Organization. The Organization is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets, based on the absence or existence and type of donor-imposed restrictions. Accordingly, 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 stipulations or the donor-imposed restrictions have expired. All gifts, contributions, grants and bequests are considered unrestricted unless specifically restricted by the donor. Temporarily restricted net assets - Net assets that are subject to donor-imposed restrictions either for use during a specified time period or for a particular purpose. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported on the statements of activities as net assets released from restrictions. Temporarily restricted net assets are restricted by the donors as to the specific year when funds can be utilized or received. Permanently restricted net assets - Net assets that are subject to donor-imposed restrictions that they be maintained permanently by the Organization. The donors of the assets allow the Organization to use all or part of the contributions for unrestricted or restricted purpose. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and investments with maturities of three month or less and include cash and cash equivalents held as part of the investment portfolio. The Organization considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. The Organization maintains cash accounts which may exceed federally insured amounts at times and which may at times significantly exceed statement of financial position amounts due to outstanding checks. As of June 30, 2012 and 2011, the Organization had deposits which exceeded federally insured limits by approximately $265,000 and $173,000, respectively. 8

11 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued CERTIFICATES OF DEPOSIT - The certificates of deposit are stated at cost plus accrued interest, which approximates fair value. The certificates have stated interest rates of.35% and.9% and mature at various dates through February INVESTMENTS - The Organization's investments consist of land that was donated to the Organization and mutual funds that are considered available-for-sale securities and each is carried at fair value. The life insurance policy is valued by the insurance company based on the fair value of investments held within the policy. The land is reported at an amount independently valued by an appraiser. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Generally accepted accounting principles establish a fair value hierarchy which gives the highest priority to observable inputs such as quoted prices in active markets for identical assets or liabilities (Level 1), the next highest priority to inputs from observable data other than quoted prices (Level 2) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. Realized gains or losses upon disposition of investments are computed based upon the difference between the proceeds and the carrying value determined using the specific identification method. All other changes in the valuation of investments are reported in net investment return on the statements of activities. Unrealized gains or losses on investments are computed based upon the difference between fair value and the carrying value of investments held during the year and are classified as a component of net investment return. The Organization's financial statements include investment securities traded on a national securities exchange, or reported on the NASDAQ national market, which are valued based on quoted market prices. These financial instruments are classified as Level 1 in the fair value hierarchy. ACCOUNTS RECEIVABLE - The Organization reports accounts receivable at their estimated net realizable value. An allowance for doubtful accounts is provided based upon management's estimate of uncollectible accounts determined by the analysis of specific balances and a general reserve based upon aging of outstanding balances. Past due balances and delinquent receivables are charged against the allowance when they are determined to be uncollectible by management. Management did not consider an allowance for uncollectible accounts necessary as of June 30, 2012 or 2011, respectively. PROMISES TO GIVE - Promises to give are recognized as support when they are received or unconditionally pledged and reported as unrestricted, temporarily restricted or permanently restricted support depending on the designation, existence or nature of any donor restrictions. No provision for an allowance for doubtful accounts has been made since it is management's opinion that promises to give are collectible. PREPAID EXPENSES - Prepaid expenses consist of payments made for future exhibits, insurance and other expenses and are recognized in the year that the Organization is benefited. INVENTORIES - Inventories consist of gift shop items which are stated at the lower of cost, determined by the average cost method, or market. Management has reserved $4,214 and $34,447 for inventory obsolescence as of June 30, 2012 and 2011, respectively. 9

12 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued LAND, BUILDINGS AND EQUIPMENT - Land, buildings and equipment are carried at cost if purchased, or if contributed at fair value at the date of donation, less accumulated depreciation. Expenditures for additions, major renewals or betterments in excess of $1,000 are capitalized and those for maintenance and repairs are charged to expense as incurred. Upon the sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of activities. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. EXHIBIT COLLECTION - Items purchased or donated for use in the permanent or teaching collections of the Organization are not included in the statements of financial position. The fair value of the collections that were deaccessioned during the years totaled $979 and $0 for the years ended June 30, 2012 and 2011, respectively. NET ASSETS RELEASED FROM RESTRICTIONS - The expiration of a donor-imposed restriction on a promise to give is recognized in the period in which the restriction expires. At that time, the related resources are reclassified to unrestricted net assets. A restriction expires when the stipulated time has elapsed or the stipulated purpose for which the resource was restricted has been fulfilled. REVENUE RECOGNITION AND CONTRIBUTED SUPPORT - Contributions received are recognized as unrestricted, temporarily restricted or permanently restricted support depending on the existence and/or nature of any donor restrictions. The Organization has elected to show restricted contributions whose restrictions are met in the same reporting period as unrestricted support. Contributions that are subject to time or use restrictions are required to be reported as temporarily restricted support and are then reclassified to unrestricted net assets upon expiration of the time or use restrictions. Gift shop sales, program activities, crafts fair revenue, memberships, facility rentals and admissions are recognized as revenue when earned. DEFERRED REVENUE - Amounts collected in advance of the crafts fair, facility rental and membership are reported as deferred revenue and recognized as revenue in the year earned. IN-KIND CONTRIBUTIONS - Contributions of donated noncash assets are capitalized at their fair values in the period received. Contributions of donated services that create or enhance nonfinancial assets, or that require specialized skills and are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, are recognized at their fair values in the period received as support and functional expense. Additionally, the Organization receives a significant amount of contributed time from general volunteers which does not meet the two recognition criteria described above. Accordingly, the value of this contributed time has not been determined and is not reflected in the accompanying financial statements. INCOME TAXES - The Organization is classified by the Internal Revenue Service as a public charity exempt from federal income taxes on related business income under the provision of Section 501(c)(3) of the Internal Revenue Code. The Organization is similarly exempt from Tennessee taxes under provisions of the Tennessee Tax Code. Consequently, no federal or state income taxes have been provided in these financial statements. The Organization does not have any unrelated business income for the years ended June 30, 2012 or The Organization's federal and state exempt organization returns for the years ended June 30, 2009, 2010 and 2011, are subject to examination by the Internal Revenue Service, generally for three years after they are filed. 10

13 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued ADVERTISING AND PUBLICITY - Advertising and publicity costs are expensed as incurred and totaled $430,652 and $349,989 for the years ended June 30, 2012 and 2011, respectively. FUNCTIONAL ALLOCATION OF EXPENSES - Expenses that are directly identifiable are charged to program services, supporting services or operating costs as incurred. Expenses related to more than one function are charged to program services, supporting services or operating costs on the basis of management's estimates. Management and general expenses include those expenses that are not directly identifiable with any other specific function but provide for the overall support and direction of the Organization. ESTIMATES AND UNCERTAINTIES - The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS - Certain amounts in the prior year financial statements have been reclassified in order to conform with the current year classifications. SUBSEQUENT EVENTS - The Organization has evaluated subsequent events for potential recognition and disclosure through January 24, 2013, the date the financial statements were available to be issued. NOTE 2 - PROMISES TO GIVE Promises to give are expected to be collected as follows: Due in less than one year $ 121,363 $ 204,406 Due in one to five years 124, , , ,206 Discount to net present value (515) (1,942) $ 245,448 $ 460,264 Promises to give are discounted at rates ranging from.21% to.33% based on the year the pledge was made. 11

14 NOTE 3 - LAND, BUILDINGS AND EQUIPMENT Land, buildings and equipment consist of the following major classifications: Land $ 111,000 $ 111,000 Buildings and improvements 460, ,055 Furniture and equipment 891, ,010 IMAX equipment 1,230,690 1,230,690 2,692,755 2,692,755 Accumulated depreciation (2,509,121) (2,500,278) $ 183,634 $ 192,477 NOTE 4 - INVESTMENTS Investments reported at fair value consist of the following: 2012 Fair Value Cost Level 1 Level 2 Level 3 Total Mutual funds $ 2,240,932 $ 2,570,856 $ - $ - $ 2,570,856 Land held for investment , ,000 $ 2,240,932 $ 2,570,856 $ - $ 230,000 $ 2,800, Fair Value Cost Level 1 Level 2 Level 3 Total Mutual funds $ 2,125,121 $ 2,584,981 $ - $ - $ 2,584,981 Cash surrender value of life insurance policy, net 86,702-86,702-86,702 Land held for investment , ,000 $ 2,211,823 $ 2,584,981 $ 86,702 $ 230,000 $ 2,901,683 Significant unobservable inputs (Level 3) were used in determining the fair value of the land held for investment. The fair value of the land held for investment did not change during the year and is reported at the appraisal value independently determined in January

15 NOTE 4 - INVESTMENTS - continued The Organization was the sole beneficiary of a life insurance policy it received as a contribution. The policy was cashed in during the year ended June 30, 2012, and the Organization, as beneficiary, received the cash surrender value of $82,766 from the policy upon termination, net of policy debt. The policy was reported at the cash surrender value, net of policy debt, as of June 30, A summary of the net cash surrender value of life insurance as of June 30, 2012 and 2011, is as follows: Cash surrender value of life insurance $ - $ 95,796 Policy debt outstanding - (9,094) Net cash surrender value of life insurance $ - $ 86,702 The Organization received land held for investment as an unrestricted contribution. The land was independently valued by an appraiser in January In management's opinion, there was no change in the value of the land held for investment during the prior three years. Net investment return consists of the following: Unrestricted Temporarily 2012 Permanently Total Interest and dividends $ 26,762 $ 21,516 $ - $ 48,278 Unrealized loss on investments - - (129,936) (129,936) Realized gain on sale of investments ,096 22,096 $ 26,762 $ 21,516 $ (107,840) $ (59,562) Unrestricted Temporarily 2011 Permanently Total Interest and dividends (as restated) $ 30,985 $ 22,235 $ - $ 53,220 Unrealized gain on investments , ,734 Realized gain on sale of investments ,105 61,105 $ 30,985 $ 22,235 $ 426,839 $ 480,059 NOTE 5 - LINE OF CREDIT The Organization has a $100,000 line of credit with a bank. As of June 30, 2012 and 2011, the Organization had no outstanding borrowings under this line of credit. The line bears interest at 5.25% and expires May The line is collateralized by all promises to give. 13

16 NOTE 6 - DEFERRED REVENUE Deferred revenue consists of the following: Crafts fair $ 110,732 $ 91,398 Memberships 83,515 80,862 Facility rental 65,575 63,503 Program activities 31,818 31,991 Capital projects - 16,969 $ 291,640 $ 284,723 NOTE 7 - NET ASSETS The Board of Directors has designated $100,000 to be used to support the Organization's strategic plan. As of June 30, 2012 and 2011, temporarily restricted net assets are available for the following purposes: Programs $ 572,067 $ 800,011 Permanently restricted net assets consist of donor-designated endowment contributions. The Organization's net assets associated with endowment funds are classified and reported based on the existence or absence of donorimposed restrictions. Net assets released from restrictions for the years ended June 30, 2012 and 2011, respectively, are related to the following: Donor restrictions $ 5,362 $ 10,618 Time restrictions 252, ,377 $ 257,968 $ 214,995 14

17 NOTE 8 - ENDOWMENT FUNDS Interpretation of Relevant Law The Board of Directors of the Organization has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Organization classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the Organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Organization (7) The investment policies of the Organization Endowment net asset composition by type of fund as of June 30, 2012, is classified as follows: Unrestricted Temporarily Permanently Total Donor-restricted endowment funds $ - $ 289,914 $ 2,301,330 $ 2,591,244 Endowment net asset composition by type of fund as of June 30, 2011, is classified as follows (see Note 10): Unrestricted Temporarily Permanently Total Donor-restricted endowment funds $ - $ 268,398 $ 2,413,105 $ 2,681,503 15

18 NOTE 8 - ENDOWMENT FUNDS - continued Changes in endowment assets for the year ended June 30, 2012, are as follows: Unrestricted Temporarily Permanently Total Endowment assets - beginning of year $ - $ 268,398 $ 2,413,105 $ 2,681,503 Investment return - Interest and dividends - 21,516-21,516 Realized and unrealized loss - - (111,775) (111,775) Total investment return - 21,516 (111,775) (90,259) Endowment assets - end of year $ - $ 289,914 $ 2,301,330 $ 2,591,244 Funds with Deficiencies From time to time, the fair value of assets associated with donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Organization to retain as a fund of perpetual duration. There were no such deficiencies as of June 30, 2012 or Return Objectives and Risk Parameters The Organization has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. To satisfy its long-term rate of return objectives, the Organization relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Organization targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy The Organization's appropriation for distribution is the total interest and dividends income. The spending policy is re-evaluated annually to reflect the Organization's current objectives and the long-term expected return on its endowment. As of June 30, 2012 and 2011, the Organization had $2,301,330 and $2,413,105, respectively, in permanently restricted net assets subject to restrictions requiring the principal and realized gains and losses to be invested in perpetuity. Interest and dividend income from these investments is restricted to programs and education initiatives. 16

19 NOTE 9 - COMMITMENTS AND CONTINGENCIES In 2005, the Organization renewed its lease with IMAX, committing to a ten-year operating lease, expiring in January 2015, related to the continued use of the IMAX equipment. In addition to the required payments under the lease obligation, the Organization is required to make additional payments to IMAX if certain attendance limits are reached and in the amount of the yearly percentage increase, if any, in the Consumer Price Index applicable to the Metropolitan Memphis, Tennessee area. Amounts of contingent rents are not included in future minimum lease payments. The future minimum lease payments are as follows: Year ending June 30, 2013 $ 93,516 June 30, ,516 June 30, ,793 $ 194,825 Lease expense for the years ended June 30, 2012 and 2011, totaled $109,303 and $106,914, respectively, including contingent rental expenses of $15,787 and $13,398, respectively. The lease expense is recognized as an educational program expense in the schedules of functional expenses. The Organization contracts with various organizations to display exhibits. Generally, the organizations require the Organization to make payments in advance of the exhibits showing. As of June 30, 2012, the Organization reported $106,126 as prepaid expenses and is committed to an additional $167,592 on completion of the exhibits. The future minimum commitments are as follows: Year ending June 30, 2013 $ 93,792 June 30, ,800 $ 167,592 NOTE 10 - RESTATEMENT AND PRIOR PERIOD ADJUSTMENT OF PRIOR FINANCIAL STATEMENTS The Organization has made a prior period adjustment to the June 30, 2010, unrestricted and temporarily restricted net assets to correct an error in the account balances. The effect of the adjustment decreased June 30, 2010, unrestricted net assets by $246,163 and increased temporarily restricted net assets by $246,163. Total net assets did not change. The Organization has restated its 2011 statements of financial position and activities to reflect the correct ending balances for unrestricted and temporarily restricted net assets. As a result of this restatement, temporarily restricted net assets increased by $268,398 and unrestricted net assets decreased by $268,398. As described in Note 8, the donor-restricted endowment funds include an increase in permanently restricted net assets totaling $268,309 to present the correct ending balances. In addition, certain investments in Note 4 have been restated to reflect corrected net investment return by net asset classification. 17