Financial Statements and Report of Independent Certified Public Accountants. The Franklin Institute. December 31, 2015 and 2014

Transcription

1 Financial Statements and Report of Independent Certified Public Accountants

2 Contents Page Report of Independent Certified Public Accountants 3 Financial statements Statements of financial position 5 Statements of activities and changes in net assets 6 Statements of cash flows 8 Notes to financial statements 9

3 Report of Independent Certified Public Accountants To the Board of Trustees of Philadelphia, Pennsylvania Grant Thornton LLP Two Commerce Square 2001 Market St., Suite 700 Philadelphia, PA T F GrantThornton.com linkd.in/grantthorntonus twitter.com/grantthorntonus Report on the financial statements We have audited the accompanying financial statements of, which comprise the statement of financial position as of December 31, 2015 and the related statements of activities and changes in net assets and cash flows for the year then ended, and the related notes to the financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these 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 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 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the organization s preparation and fair presentation of the 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 organization 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of as of December 31, 2015, and the changes in its 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 matter Report on summarized comparative information The financial statements of as of and for the year ended December 31, 2014 (not presented herein) were audited by other auditors. Those auditors expressed an unmodified opinion on those 2014 financial statements in their report dated April 23, Philadelphia, Pennsylvania May 12, 2016

5 STATEMENTS OF FINANCIAL POSITION December 31, ASSETS Cash and cash equivalents $ 5,570,037 $ 8,631,089 Accounts receivable, net 4,203,009 1,491,298 Pledges receivable, net 3,900,193 4,977,127 Inventory 14,667 15,571 Prepaid and other assets 913,904 1,425,700 Pooled investments 36,991,412 38,156,270 Other investment 307, ,579 Investments held by third parties 15,160,230 15,841,574 Property, buildings and equipment, net 87,762,230 88,865,561 Deferred loan costs, net 106, ,932 Total assets $ 154,930,241 $ 159,972,701 LIABILITIES AND NET ASSETS Accounts payable and accrued expenses $ 7,702,526 $ 8,435,191 Deferred revenue and other liabilities 3,278, ,174 Bridge financing loan 898,000 2,500,000 Long-term debt 12,380,000 13,255,000 Total liabilities 24,259,440 24,974,365 Net assets Unrestricted 84,374,811 84,401,990 Temporarily restricted 28,731,642 32,327,547 Permanently restricted 17,564,348 18,268,799 Total net assets 130,670, ,998,336 Total liabilities and net assets $ 154,930,241 $ 159,972,701 The accompanying notes are an integral part of these financial statements. 5

6 STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS Year ended December 31, 2015, with summarized information for Temporarily Permanently Unrestricted restricted restricted Total 2014 Revenue, support, and operating investment income Program revenue Admissions fees $ 11,053,401 $ - $ - $ 11,053,401 $ 7,393,319 Memberships 2,851, ,851,958 2,022,919 Ancillary activities 5,118, ,118,552 4,449,809 Grants 2,764, ,974-3,598,628 3,885,573 Educational programs and services 1,875, ,307-2,175,433 2,550,388 Other project revenue 2,056, ,056,908 1,783,599 Total program revenue 25,720,599 1,134,281-26,854,880 22,085,607 Support Contributions and pledges 4,025,485 1,612,536-5,638,021 6,004,371 Bequests and other contributions 104,966 5, , ,635 2,279,408 Government appropriations and grants 65, ,000 50,000 Contributions - capital campaigns - 32,892-32,892 9,626,189 Total support 4,195,451 1,651, ,684 6,151,548 17,959,968 Endowment income designated for current operations 1,579, ,579,880 1,514,148 Net assets released from restrictions - satisfaction of purpose restrictions 1,956,474 (1,956,474) Total revenue, support, operating investment income, and net assets released from restrictions 33,452, , ,684 34,586,308 41,559,723 Expenses Program services expenses Exhibit services 4,411, ,411,509 2,944,233 Educational programs, services and grants 6,456, ,456,013 6,444,455 Visitor and member services 1,846, ,846,707 1,378,783 Ancillary activities 2,245, ,245,769 1,829,919 Awards 934, , ,109 Other project expenses 389, , ,766 Total program services expense 16,284, ,284,391 13,820,265 6

7 STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS - CONTINUED Year ended December 31, 2015, with summarized information for Temporarily Permanently Unrestricted restricted restricted Total 2014 Supporting services expenses Museum operations $ 12,583,706 $ - $ - $ 12,583,706 $ 12,086,498 General development 2,577, ,577,199 2,790,913 Interest 584, , ,330 Total supporting services expense 15,745, ,745,857 15,468,741 Total expenses 32,030, ,030,248 29,289,006 Operating income before depreciation and amortization 1,422, , ,684 2,556,060 12,270,717 Depreciation and amortization 5,075, ,075,262 5,005,106 Operating (loss) income (3,653,106) 829, ,684 (2,519,202) 7,265,611 Non-operating income (loss), expenses and releases Net assets released from restrictions - satisfaction of purpose restrictions 3,466,928 (3,466,928) Endowment return net of amounts designated for current operations (352,117) (958,197) - (1,310,314) 51,470 Net actuarial gain (loss) on defined benefit retirement plan 304, ,034 (1,507,938) Unrealized gain (loss) on interest rate swap 207, ,037 (147,127) Change in value of investments held by third parties 45 - (1,009,135) (1,009,090) (158,079) Total non-operating income (loss), expenses and releases 3,625,927 (4,425,125) (1,009,135) (1,808,333) (1,761,674) (Decrease) increase in net assets (27,179) (3,595,905) (704,451) (4,327,535) 5,503,937 Net assets Beginning of year 84,401,990 32,327,547 18,268, ,998, ,494,399 End of year $ 84,374,811 $ 28,731,642 $ 17,564,348 $ 130,670,801 $ 134,998,336 The accompanying notes are an integral part of these financial statements. 7

8 STATEMENTS OF CASH FLOWS Years ended December 31, Cash flows from operating activities Change in net assets $ (4,327,535) $ 5,503,937 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Allowance and discount on pledges receivable 18,198 (82,243) Amortization of bond discount and deferred loan costs 10,242 11,764 Net actuarial (gain) loss on defined benefit retirement plan/ net periodic benefit (credit) cost (260,192) 1,430,081 Unrealized (gain) loss on interest rate swap (207,037) 147,127 Depreciation 5,045,020 4,973,342 Stock (net) and cash contributions received for capital campaign 1,607,108 (7,423,352) Net realized and unrealized loss (gain) on investments 357,568 (910,677) Net depreciation of investments held by third parties 1,009, ,079 Contribution of perpetual trust held by third parties (304,684) (2,280,646) Changes in operating assets and liabilities Accounts receivable (2,711,711) 1,949,292 Pledges receivable 1,058,736 4,224,859 Inventory 904 1,963 Prepaid and other current assets 511,796 (86,854) Accounts payable and accrued expenses (265,436) (4,517,980) Deferred revenue 2,494,740 (6,423,064) Net cash provided by (used in) operating activities 4,036,852 (3,324,372) Cash flows from investing activities Purchases of fixed assets (3,941,688) (6,389,154) Purchases of investments (73,919,453) (4,994,705) Proceeds from sale of investments 74,703,635 5,855,149 Return of capital from other investments 143,710 - Net cash used in investing activities (3,013,796) (5,528,710) Cash flows from financing activities Stock (net) and cash contributions received for capital campaign (1,607,108) 7,423,352 Proceeds from bridge financing loan - 2,229,504 Repayment of bridge financing loan (1,602,000) (1,991,358) Repayment of long-term debt (875,000) (840,000) Net cash (used in) provided by financing activities (4,084,108) 6,821,498 Decrease in cash and cash equivalents (3,061,052) (2,031,584) Cash and cash equivalents Beginning of year 8,631,089 10,662,673 End of year $ 5,570,037 $ 8,631,089 Supplemental disclosure Cash paid for interest on long-term debt $ 584,952 $ 591,330 The accompanying notes are an integral part of these financial statements. 8

9 NOTES TO FINANCIAL STATEMENTS NOTE A - ORGANIZATION In the spirit of inquiry and discovery embodied by Benjamin Franklin, the mission of (the Institute ) is to inspire a passion for learning about science and technology. The Institute maintains an exemplary, innovative museum of science and internet presence with engaging, educational exhibits and programs; supports a diverse set of partnerships with all levels of the formal educational system; interprets the social and historical impact of science and technology; recognizes outstanding achievement; and provides a forum for discussion of important scientific issues. The Institute also serves to perpetuate the legacy of Benjamin Franklin. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Presentation Net assets are classified as unrestricted, temporarily restricted or permanently restricted in accordance with donorimposed restrictions. Each of these three classes of net assets are displayed in the financial statements, and the amounts of changes in each of those classes of net assets are displayed in the statements of activities and changes in net assets. Temporarily restricted net assets include gifts which have either a time or use restriction but which may ultimately be expended. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities and changes in net assets as net assets released from restrictions. The Institute s temporarily restricted net assets are intended, by the donors, to be used for lecture series, library resources, medal and awards programs, capital campaigns and other purposes. Permanently restricted net assets include the historical dollar amounts of gifts, including pledges, trusts and remainder interests, which are required by donors to be permanently retained. Capital appreciation, if permanently restricted by the donor or a third party, is also included in permanently restricted net assets. All other net assets are recorded as unrestricted net assets. 2. Income Tax Status The Institute has been granted exemption from federal income tax under Section 501(c)(3) of the Internal Revenue Code (the Code ), and has been classified as an organization, which is not a private foundation under Section 509(a) of the Code. Certain unrelated business income is subject to federal income taxes. Management has reviewed the tax positions for each of the open tax years ( ) or those expected to be taken in the Institute s 2015 tax return and has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. 9

10 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 3. Use of Estimates The financial statements of the Institute are prepared in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) that require 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 revenue and expenses during the reported periods. Some of the more significant estimates include the allowance for doubtful accounts on receivables, allocation of functional expenses and assumptions used in the valuation of the retirement plan. Actual results could differ from these estimates. 4. Cash and Cash Equivalents The Institute considers highly liquid debt instruments purchased with maturity dates of three months or less to be cash equivalents. 5. Concentration of Credit Risk The Institute occasionally maintains deposits in excess of federally insured limits. Accounting Standards Codification ( ASC ) 825, Financial Instruments, identifies these items as a concentration of credit risk requiring disclosure, regardless of the degree of risk. The risk is managed by monitoring the financial institutions in which deposits are made. 6. Allowance for Doubtful Accounts on Accounts Receivable and Pledges Receivable The allowance for doubtful accounts is provided based upon management s judgment, including such factors as prior collection history and type of receivable. The Institute writes off receivables when they become uncollectible, and payments subsequently received on such receivables, if any, are credited to the allowance for doubtful accounts. The allowance for doubtful accounts on accounts receivable was $30,515 and $17,709 at December 31, 2015 and 2014, respectively. 7. Fair Value of Financial Instruments The Institute carries its financial instruments at estimated fair value. The estimated fair values that differ from the carrying amounts have been determined by the Institute using available market information. The fair values of investments in debt and equity securities are based upon quoted market prices and at appraised value for donated securities. The fair value of contributions receivable is determined by discounting the future cash flows to their present value using interest rates adjusted for market conditions. The fair value of long-term debt and the bridge financing loan (Notes J and I) approximates fair value because it bears interest at rates which approximate current market rates for debt with similar maturities and credit quality. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and other accrued expenses, and other current liabilities approximate fair value because of the short maturity of these items. 10

11 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 8. Inventory Inventory is stated at the lower of cost or market on a first-in, first-out ( FIFO ) basis and consists primarily of office supplies. 9. Investments The Institute s investments are measured at fair market value. Pooled investments include equity securities, fixed income securities, mutual funds and alternative investments. Investment income (interest and dividends) earned on such investments is distributed to each participating net asset category on the basis of its respective interest in the total funds invested, and each has an equity in the gain or loss on investments on the same basis. Realized and unrealized gains and losses on investments are reported in the statements of activities and changes in net assets as increases or decreases in unrestricted, temporarily restricted net assets, or permanently restricted net assets. 10. Collection Assets Collection assets of the Institute have not been capitalized nor recognized. Collection items are held as historical treasures and are under the stewardship of the Institute acting through its President and Senior Curator. 11. Property, Buildings and Equipment Property, buildings and equipment are stated at cost. Donated property, buildings and equipment are capitalized based upon independent appraisals, and an equivalent amount is recognized as contribution revenue. The Institute receives various federal, local and private grants relating to science and education. The property and equipment is retained by the Institute or returned to the grantor based upon the grant contract. The cost of current additions to exhibits, books and scientific literature is charged to expense. A portion of such cost may be reimbursed by designated contributed funds and income of temporarily and permanently restricted net assets. Maintenance, repairs and minor renewals are charged to expense. Major renewals or improvements which prolong the life of the assets are capitalized. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Estimated useful lives used in determining depreciation rates are as follows: Buildings and building improvements Equipment, furniture and fixtures 5-42 years 3-20 years 12. Deferred Revenue Deferred revenue represents funds received in advance on conditional contributions and on exchange contracts, where revenue is recognized as costs are incurred. Additionally, deferred revenue is recorded on fees received on certain exhibits which are recognized over the exhibition period. 11

12 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 13. Operating Income The operations of the Institute depend primarily upon the level of program revenue (including admission fees, ancillary activities and grants from the government and private funding sources), support (including annual giving, governmental appropriations and endowments) and investment income. Accordingly, the operations of the Institute are subject to variability due to changes in the number of visitors, political environment, donors actions and the financial market environment. 14. Contributions The Institute reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities and changes in net assets as net assets released from restrictions. Unconditional promises to give are included in the financial statements as pledges receivable, and the related contribution revenue is recorded in the unrestricted or temporarily restricted net assets depending on donor stipulations. Pledges are recorded after discounting to the present value of the future cash flows. Pledges subject to certain conditions are recorded as contribution revenue when such conditions are met. In-kind contributions are recorded at their estimated fair value on the date of receipt. 15. Government Grants Revenue from contracts and reimbursement-based government grants is recognized as the work is performed and the costs are incurred; the related costs and expenses are charged to operations as incurred. Funds received in advance of expenses are reported as deferred revenue. 16. Advertising Advertising is expensed as incurred and amounted to approximately $2,024,000 and $1,773,000 in 2015 and 2014, respectively. 17. Prior Year Information The financial statements include certain prior year summarized comparative information in total, but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with U.S. GAAP. Accordingly, such information should be read in conjunction with the Institute s audited financial statements for the year ended December 31, 2014, from which the summarized information was derived. 12

13 NOTE C - PLEDGES RECEIVABLE The Institute had pledges receivable as follows at December 31: Pledges receivable: Due within a year $ 3,063,835 $ 3,562,747 Due between one and five years 1,012,680 1,572,504 Pledges receivable, gross 4,076,515 5,135,251 Less allowance for doubtful accounts (162,639) (135,830) Discount, at rates ranging from 0.56% to 1.66% (13,683) (22,294) Pledges receivable, net $ 3,900,193 $ 4,977,127 Pledges receivable, gross, relating to the capital campaigns consisted of $997,929 and $2,577,537 at December 31, 2015 and 2014, respectively. NOTE D - POOLED INVESTMENTS Investments are maintained in a common pool, at fair market value, which comprise the following at December 31: Cost Market Cost Market Money market $ - $ - $ 889,590 $ 889,590 Fixed income funds 11,248,052 11,131,943 6,794,871 6,518,348 Equity funds 26,770,223 25,799,672 8,050,823 9,608,753 Common stock - - 6,336,880 7,507,195 Structured notes , ,775 U.S. Treasury notes - - 2,142,527 2,146,191 Government agencies , ,514 Alternative investments Equity private placement funds (a) - - 3,995,000 7,018,815 Hedge funds (b) - 59,797 3,534,711 3,888,346 38,018,275 36,991,412 32,290,269 38,212,527 Written options - - (56,257) (56,257) Total $ 38,018,275 $ 36,991,412 $ 32,234,012 $ 38,156,270 13

14 NOTE D - POOLED INVESTMENTS - Continued (a) These funds are invested for long-term growth in U.S. equity and international equity securities that are judged to be under value or relative by the intrinsic value; one of the funds invests in small companies generally with a global stock market capitalization of less than $5 billion. Redemptions from these funds can be made on a monthly basis. During the year ended December 31, 2015, these funds were liquidated. (b) These hedge funds offer concentrated exposure in a multi-strategy approach with long-term risk-adjusted absolute returns. The multi-strategy approach consists of equity long/short in global equities, global event drivers (mergers, restructuring and other situations) and managed future strategies. Redemptions from these funds can be made on a quarterly basis. There were no purchase commitments, and the funds are locked up until final settlement with the fund. The Institute has pooled its endowment investments, including unrestricted net assets designated for investment, certain temporarily restricted net assets and permanently restricted net assets. The Institute uses a total return approach for its pooled investment assets. The Institute s spending rate, as authorized annually by the Institute s Board of Trustees, is determined based upon a percentage of the average market value of the endowment, over the prior 12 quarters. For 2015 and 2014, the Board approved a spending rate of 4.5%. If the spending rate amount exceeds the actual earnings of the pooled investments in any one year, then the amount needed to fund such excess will be taken from the accumulated excess earnings from prior years, and conversely, any undistributed income after the allocation of the spending rate amount is added back to the accumulated excess earnings in the appropriate net asset category. The Institute had $8,740,227 and $9,135,856 in accumulated excess earnings at, respectively, related to its permanently restricted endowment assets. The following schedule summarizes the investment return and its classification in the statements of activities and changes in net assets for the years ended December 31: Interest and dividends $ 625,028 $ 653,703 Net realized and unrealized (losses) gains (355,462) 911, ,566 1,565,618 Endowment income designated for current operations 1,579,880 1,514,148 Endowment (loss) income net of amounts designated for current operations $ (1,310,314) $ 51,470 The Institute utilized various methods to measure the year-end value of its investments. U.S. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of inputs are described below: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the Institute has the ability to access. 14

15 NOTE D - POOLED INVESTMENTS - Continued Level 2 Level 3 Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data. Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Institute s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available. The inputs methodology used for valuing securities is not necessarily an indication of the risk associated with investing in those securities. The summary of inputs used to value the Institute s investments as of is as follows: Total Quoted prices in active markets (Level 1) 2015 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Investments Fixed income funds $ 11,131,943 $ 11,131,943 $ - $ - Equity funds 25,799,672 25,799, Hedge funds 59,797-59,797 - Total investments $ 36,991,412 $ 36,931,615 $ 59,797 $ - Beneficial interest in perpetual trusts $ 15,124,877 $ - $ - $ 15,124,877 Interest rate swap obligation $ 1,787,307 $ - $ 1,787,307 $ - 15

16 NOTE D - POOLED INVESTMENTS - Continued Total Quoted prices in active markets (Level 1) 2014 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Investments Money market $ 889,590 $ 889,590 $ - $ - Fixed income funds 6,518,348 6,518, Equity funds 9,608,753 9,608, Common stock 7,507,195 7,507, U.S. treasury notes 2,146,191-2,146,191 - Government agencies 381, ,514 - Equity private placement funds 7,018,815-7,018,815 - Structured notes 253, ,775 - Hedge funds 3,888,346-3,888,346 - Total investments 38,212,527 24,523,886 13,688,641 - Written options (56,257) (56,257) - - $ 38,156,270 $ 24,467,629 $ 13,688,641 $ - Beneficial interest in perpetual trusts $ 15,829,328 $ - $ - $ 15,829,328 Interest rate swap obligation $ 1,994,344 $ - $ 1,994,344 $ - There were no transfers between Level 1 and Level 2 during the years ended December 31, 2015 or Transfers, when applicable, are recorded at the end of the period of change. The changes in the financial instruments measured at fair value for which the Institute used Level 3 inputs to determine fair value are as follows for the years ended December 31: Balance, beginning of year $ 15,829,328 $ 13,706,761 Additions 304,684 2,280,646 Unrealized losses - net change in valuation (1,009,135) (158,079) Balance, end of year $ 15,124,877 $ 15,829,328 The beneficial interest in perpetual trusts is measured at the estimated future cash flows which involve unobservable inputs. As a result, these present value techniques are Level 3 inputs. 16

17 NOTE E - OTHER INVESTMENT During 2011, the Institute invested $780,000 in a newly formed LLC organized to create a new traveling exhibit. The Institute has a 20% interest in this investment and, as such, carries its investment using the equity method. At the close of each year, the Institute is expected to receive distributions of capital and/or the applicable percentage interest of revenue earned by the LLC. Once capital contributions have been returned and a contracted payment to the LLC holding company has been made, the Institute will receive 20% of the remaining available cash derived from revenues from the first five venues, 15% from the sixth venue, and 10% from the seventh and any subsequent venues. In 2015, the Institute received distributions in the amount of $143,710. As of December 31, 2015 and 2014, the Institute s equity investment was $307,869 and $451,579, respectively. NOTE F - INVESTMENTS HELD BY THIRD PARTIES The Institute is a beneficiary of the income of certain residual trusts held in perpetuity by third parties. The fair value of the Institute s share of these trusts was $15,124,877 as of December 31, 2015 and $15,829,328 as of December 31, The Institute recognized unrestricted income included within other project revenue of $1,185,943 and $896,611 from income distributions of these trusts during 2015 and 2014, respectively. The Institute recorded contributions of principal of $304,684 and $2,280,646 on trusts in 2015 and 2014, respectively. The 2014 contribution of principal was due to an oversight by the Trustee bank. The Institute recognized permanently restricted capital depreciation of $1,009,135 and $158,079 during 2015 and 2014, respectively. NOTE G - PROPERTY, BUILDINGS AND EQUIPMENT A summary of property, buildings and equipment is as follows at December 31: Land $ 12,000,000 $ 12,000,000 Buildings and improvements 88,698,347 88,659,981 Equipment, furniture, fixtures and exhibits 67,247,535 63,798,743 Construction-in-progress 1,030, , ,976, ,034,749 Less accumulated depreciation (81,214,208) (76,169,188) Property, buildings and equipment, net $ 87,762,230 $ 88,865,561 During 2015 and 2014, the Institute expended $306,438 and $417,146 on capital maintenance, repair and information technology projects and $3,635,250 and $5,972,008 on new capital projects, exhibits and equipment, respectively. 17

18 NOTE H - NOTE PAYABLE - BANK The Institute maintains a $7,000,000 line of credit with a bank with a set expiration date of November 30, Interest is calculated at the London Inter Bank Offered Rate ( LIBOR ) plus 0.80% and is payable monthly. At, there was no balance outstanding. NOTE I - BRIDGE FINANCING LOAN On September 30, 2013, the Institute issued a Revenue Bond, Series 2013 ( Authority Bond ) through the Philadelphia Authority for Industrial Development not to exceed $11,000,000. The Authority Bond was issued as bridge financing until payments are received on outstanding pledges and from Pennsylvania s Redevelopment Assistance Capital Program ( RACP ) grants, to fund the construction and equipping of the Nicholas and Athena Karabots Pavilion (the Pavilion ) addition, to fund any required reserves, and to fund the Authority Bond s issuance costs. The Authority Bond bears interest at the Daily LIBOR rate plus 100 basis points multiplied by 65% plus 5 basis points. Monthly interest payments are due through December 31, The Authority Bond is secured by the outstanding pledges and RACP grants. Interest expense amounted to $14,049 for 2015 and $30,511 for The Authority Bond may be prepaid at any time. Principal outstanding must be reduced to no greater than $1,000,000 as of December 31, 2015, and the principal must be repaid in full as of December 31, Principal outstanding totaled $898,000 and $2,500,000 as of, respectively. The Authority Bond also contains certain covenants requiring the maintaining of certain funds flow coverage ratios and minimum liquid assets, which the Institute complied with as of December 31, NOTE J - LONG-TERM DEBT Long-term debt consists of the following at December 31: Revenue Bonds, Variable Rate, 2026 $ 12,380,000 $ 13,255, and 1998 Bonds On March 22, 2006, the Institute borrowed $14,095,000 through the issuance of Revenue Bonds, Series 2006 Variable Rate Refunding Bonds ( 2006 Bonds ) through the Philadelphia Authority for Industrial Development. The 2006 Bonds were issued to advance refund the remaining principal amount of the Institute s Revenue Bonds, Series 1998 ( 1998 Bonds ). In addition, proceeds of the 2006 Bonds were used to pay certain issuance costs of the 2006 Bonds. The 2006 Bonds bear interest at 70% of the 1-month LIBOR. Monthly interest payments are due through June 1, Note repayments in the amount of $875,000 and $840,000 were made for the years ended, respectively. Interest expense related to the 2006 Bonds for the years ended was $570,989 and $560,819, respectively. 18

19 NOTE J - LONG-TERM DEBT - Continued Annual principal payments began on June 1, 2014 and continue through June 1, Concurrent with the issuance of the 2006 Bonds, the Institute entered into an interest rate swap agreement as a hedge against interest rate fluctuations. The swap has the effect of fixing the Institute s borrowing rate on the 2006 Bonds at a rate of 3.82% per annum until the maturity date of the 2006 Bonds. The difference between the fixed and variable rates are either paid to the bank or refunded to the Institute. The 2006 Bonds are secured by a bank irrevocable directpay letter of credit which expires April 21, The fair value of the swap agreement was $1,787,307 and $1,994,344 in favor of the bank as of, respectively. The Institute incurred issuance costs of $206,552 related to the 2006 Bonds, which are being amortized on a straight-line basis over the life of the 2006 Bonds. Mandatory redemption payments under the terms of the long-term debt are as follows: Year ending December 31, Total 2016 $ 910, , , ,025, ,075, and thereafter 7,440,000 NOTE K - NET ASSETS Unrestricted net assets at comprise the following: $ 12,380,000 Operations $ 1,527,952 $ 2,917,268 Board-designated Endowment funds 10,043,246 10,251,573 Net investment in property, buildings and equipment 72,803,613 71,233,149 $ 84,374,811 $ 84,401,990 19

20 NOTE K - NET ASSETS - Continued Temporarily restricted net assets at are available for the following purposes: Bower award fund $ 13,490,536 $ 13,969,047 Other endowment funds 2,277,931 2,360,323 Capital campaigns 1,164,328 1,924,613 Accumulated unrealized gain on permanently restricted endowment investments 8,740,227 9,135,856 Grants and contributions 3,058,620 4,937,708 $ 28,731,642 $ 32,327,547 Temporarily restricted net assets at, with accumulated endowment income and unrealized gains allocated for information purposes only are: Bower award fund $ 13,490,536 $ 13,969,047 Endowment funds - special purpose 6,460,414 6,727,638 Endowment funds - unrestricted as to income 4,557,744 4,768,541 Capital campaigns 1,164,328 1,924,613 Grants and contributions 3,058,620 4,937,708 $ 28,731,642 $ 32,327,547 Permanently restricted net assets at are available for the following purposes: Medal funds $ 409,995 $ 409,995 Library funds 97,314 97,314 Lecture funds 62,205 62,205 Miscellaneous funds 470, ,875 Endowment funds - unrestricted as to income 1,399,082 1,399,082 Beneficial interest in perpetual trusts 15,124,877 15,829,328 $ 17,564,348 $ 18,268,799 20

21 NOTE K - NET ASSETS - Continued Net assets were released from donor restrictions for the years ended December 31 by satisfying the restricted purpose, as follows: Purpose and time restrictions accomplished: Operating releases Capital campaign development/administrative expenses $ 42,671 $ 2,689,948 Education and other programs 1,607,203 1,426,284 Time restrictions met 306, ,700 Total operating releases 1,956,474 4,910,932 Non-operating releases Capital campaign funds used for capitalized assets 3,466,928 8,220,113 Total non-operating releases 3,466,928 8,220,113 Total net assets released from restrictions $ 5,423,402 $ 13,131,045 Endowment net asset composition by type of fund, excluding beneficial interest in perpetual trusts, as of : Unrestricted Temporarily Restricted 2015 Permanently Restricted Total Donor-restricted endowment funds $ - $ 24,508,695 $ 2,439,471 $ 26,948,166 Board-designated endowment funds 10,043, ,043,246 Total funds $ 10,043,246 $ 24,508,695 $ 2,439,471 $ 36,991,412 Unrestricted Temporarily Restricted 2014 Permanently Restricted Total Donor-restricted endowment funds $ - $ 25,465,226 $ 2,439,471 $ 27,904,697 Board-designated endowment funds 10,251, ,251,573 Total funds $ 10,251,573 $ 25,465,226 $ 2,439,471 $ 38,156,270 21

22 NOTE K - NET ASSETS - Continued The Institute classifies the original value of gifts received with donor stipulations that require them to be held in perpetuity as permanently restricted net assets. Income earned on such gifts is classified as temporarily restricted until it is expended in accordance with state law and/or the donor restriction. The Institute s board may also designate certain unrestricted gifts to function as endowment funds; such gifts are classified within unrestricted net assets as board-designated endowment funds. Changes in endowment net assets for the years ended : Unrestricted Temporarily Restricted 2015 Permanently Restricted Total Endowment net assets, beginning of year $ 10,251,573 $ 25,465,226 $ 2,439,471 $ 38,156,270 Investment return 72, , ,566 Contributions 143,710 1, ,456 Endowment income designated for current operations (424,472) (1,155,408) - (1,579,880) Endowment net assets, end of year $ 10,043,246 $ 24,508,695 $ 2,439,471 $ 36,991,412 Unrestricted Temporarily Restricted 2014 Permanently Restricted Total Endowment net assets, beginning of year $ 10,237,758 $ 25,427,570 $ 2,439,471 $ 38,104,799 Investment return 420,641 1,144,978-1,565,619 Endowment income designated for current operations (406,826) (1,107,322) - (1,514,148) Endowment net assets, end of year $ 10,251,573 $ 25,465,226 $ 2,439,471 $ 38,156,270 At, there were no deficiencies of donor-restricted net assets for which the fair value of the assets is less than the level required by donor stipulations. The Institute s endowment policy is to preserve and grow the purchasing power of the fund and to provide a constant stream of steady income to meet annual operating needs in accordance with the Institute s spending policy (see Note D). The objective is achieved by monitoring the investment performance throughout the year. 22

23 NOTE L - SPECIAL EXHIBITIONS The Institute hosts rental exhibits and/or partner exhibits in any given year. The Institute records all revenues and all expenses relating to rental exhibits. All revenues relating to rental exhibits are included in the statement of activities and changes in net assets under revenue on a gross basis as admissions fees, while corresponding expenses are included under exhibit services. All revenues and expenses relating to partner exhibits are put into a shared pool, and any net profit is split between the Institute and the exhibit partner based on a contractual agreement. The Institute s portion of the net profit for a partner exhibit is included in the statement of activities and changes in net assets under revenue, on a net basis, as admissions fees. Special exhibition net contributions of $4,808,723 and $1,605,933 were recorded for the years ended, respectively. NOTE M - RETIREMENT PLAN The Institute maintains a defined benefit pension plan. Benefits under the plan are based on employees years of service and compensation. On October 10, 2006, the Board of Trustees voted to freeze participation in The Franklin Institute Retirement Income Plan (II) (the Plan ) as of October 11, 2006, and to cease all benefit accruals no later than April 1, The Institute has presented financial information related to the defined benefit plan in accordance with ASC 715, Compensation - Retirement Benefits. ASC 715 requires the funded status of the defined benefit pension plan be fully recognized in the statement of financial position and the measurement date of plan assets and benefit obligations coincide with the statement of financial position. The plan assets and pension obligation have been consistently presented as of the date of the statement of financial position and, as such, there is no effect on the financial statements related to the measurement date provision of the statement. The Plan s assets are held by a trustee, Vanguard Fiduciary Trust Company, and are not included within the assets presented in these financial statements. The following amounts relate to the Institute s defined benefit pension plan: Pension benefit obligation $ 10,237,867 $ 10,364,358 Fair value of plan assets 8,309,608 8,175,907 Plan assets in deficiency of the pension benefit obligation $ (1,928,259) $ (2,188,451) Accumulated benefit obligation $ 10,237,867 $ 10,364,358 23

24 NOTE M - RETIREMENT PLAN - Continued The principal assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: Weighted average discount rate 4.14% 3.80% Expected return on plan assets 7.50% 7.50% Rate of compensation increase N/A N/A Following are the defined benefit periodic pension expense (credit), Institute contributions, and benefits paid for the years ended December 31: Periodic pension expense (credit) $ 43,842 $ (77,857) Contributions - - Benefits paid 347, ,436 The following item has not been recognized as a component of net periodic pension cost: Other changes in plan assets and benefit obligations $ (304,034) $ 1,507,938 Components of net periodic benefit cost (credit) Interest cost on projected benefit obligation $ 386,073 $ 405,464 Actual return on plan assets (598,391) (579,602) Amortization of loss 256,160 96,281 Total net periodic benefit cost (credit) $ 43,842 $ (77,857) The principal assumptions used in determining the net periodic pension benefit cost (credit) were as follows: Discount rate 3.80% 4.75% Rate of increase in compensation N/A N/A Expected long-term rate of return on plan assets 7.50% 7.50% Corridor 10.00% 10.00% Average future working lifetime

25 NOTE M - RETIREMENT PLAN - Continued The expected long-term rate of return on the Plan assets is based on a weighted average rate of return based on historical investment returns for each respective investment category. For the year ended December 31, 2015, the Institute does not expect to recognize any of the unrecognized actuarial gain or loss as a component of the net periodic benefit cost, due to its election of the 10% corridor in calculating the Plan s projected benefit obligation in accordance with ASC 715. The 10% corridor requires the Plan to amortize the actuarial gain or loss in excess of the greater of 10% of the fair value of Plan assets or projected benefit obligation over the average working lifetime of participants expected to receive benefits. The Plan s actuary does not anticipate that the unrecognized gain or loss will meet the 10% requirement and, accordingly, no amortization will be recognized. The pension plan asset allocations by asset category are as follows: Asset Category 2015 Domestic equity securities 40.90% International equity securities Fixed income Cash and cash equivalents 0.30 Total % The fair value by major category of plan assets at is as follows: Cash and cash equivalents $ 23,843 $ 95,165 Fixed income 2,739,414 2,679,326 Equities 5,546,351 5,398,063 Receivables - 3,353 $ 8,309,608 $ 8,175,907 25

26 NOTE M - RETIREMENT PLAN - Continued The summary of inputs used to value the Institute s Plan assets carried at fair value as of December 31, 2015 and 2014 is as follows: Total Quoted prices in active markets (Level 1) 2015 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Cash and cash equivalents $ 23,843 $ 23,843 $ - $ - Fixed Income 2,739,414 2,739, Equities 5,546,351 5,546, $ 8,309,608 $ 8,309,608 $ - $ - Total Quoted prices in active markets (Level 1) 2014 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Cash and cash equivalents $ 95,165 $ 95,165 $ - $ - Fixed Income 2,679,326 2,679, Equities 5,398,063 5,398, $ 8,172,554 $ 8,172,554 $ - $ - The Institute attempts to mitigate the investment risk by rebalancing the portfolio at least quarterly to reestablish target allocation percentages as defined by the Plan s investment policy. The investment policy specifies diversification and liquidity guidelines for investment managers to maintain. The Institute s funding policy for the Plan has been to contribute the minimum required contribution. There is no estimated required contribution for the year ended December 31, The Institute s primary investment objective is to ensure that sufficient assets are available to provide the benefits at the time they are payable and, secondly, to achieve optimal return within specified risk tolerances. In order to achieve its investment objective, an investment strategy defines acceptable investment composition and ranges within each investment category which can be broadly defined as a 65%/35% allocation between equities and fixed income securities with an allowable range of 5% from target for the actual investment composition. 26

27 NOTE M - RETIREMENT PLAN - Continued Estimated future benefit payments for the fiscal years ended December 31 are as follows: Year ending Benefits 2016 $ 399, , , , , ,720,113 As a result of the freezing of the defined benefit plan, the Board of Trustees voted to adopt, effective April 1, 2007, a tax-favored defined contribution 401(k) retirement plan for the benefit of its eligible employees. The Institute makes a 2% nonelective contribution for all eligible compensation of the 401(k) plan participants, when certain service requirements are met. In addition, the Institute contributes a matching contribution up to 4% of the participants eligible compensation when the service requirements are met. The Institute contributed $550,994 and $520,705 to the 401(k) plan for the years ended, respectively. The Institute also maintains a voluntary deferred compensation plan. The Institute does not match employee contributions to this plan. NOTE N - CONTINGENCIES At December 31, 2015, the Institute is a party to certain lawsuits in the ordinary course of business. While any litigation has an element of uncertainty, after reviewing these actions with legal counsel, management is of the opinion that the liability, if any, resulting from these actions will not have a material effect on the financial condition of the Institute. NOTE O - SUBSEQUENT EVENTS Subsequent events after the statement of financial position date through the date that the financial statements were available for issuance, May 12, 2016, have been evaluated in the preparation of the financial statements. 27