The Scripps Research Institute

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1 The Scripps Research Institute ANNUAL REPORT UNDER SECTION 4 AND 5 OF THE CONTINUING DISCLOSURE AGREEMENTS DATED JULY 19, 2000 AND FEBRUARY 23, 2005, AS OF SEPTEMBER 30, 2014

2 THE SCRIPPS RESEARCH INSTITUTE ANNUAL REPORT UNDER SECTION 4 AND 5 OF THE CONTINUING DISCLOSURE AGREEMENTS DATED JULY 19, 2000 AND FEBRUARY 23, 2005, AS OF SEPTEMBER 30, 2014 TABLE OF CONTENTS I. Audited Financial Statements for the Years Ended September 30, 2014 and 2013 II. Scientific Staffing III. Sources of Grants and Contracts Revenue IV. Capitalization V. Maximum Annual Debt Service Coverage Ratio VI. Investments at Market Value VII. Reporting of Significant Events 1

3 THE SCRIPPS RESEARCH INSTITUTE SECTION I FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013, AND INDEPENDENT AUDITORS REPORT; FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013, SUPPLEMENTAL INFORMATION FOR THE YEAR ENDED SEPTEMBER 30, 2014 AND INDEPENDENT AUDITORS REPORT; FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013, INDEPENDENT AUDITORS REPORT, SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, 2014, AND REPORTS IN COMPLIANCE WITH OFFICE OF MANAGEMENT AND BUDGET CIRCULAR A133; SCRIPPS FLORIDA (A DIVISION OF THE SCRIPPS RESEARCH INSTITUTE) FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013, AND INDEPENDENT AUDITORS REPORT. 2

4 The Scripps Research Institute Financial Statements as of and for the Years Ended September 30, 2014 and 2013, and Independent Auditors Report

5 THE SCRIPPS RESEARCH INSTITUTE TABLE OF CONTENTS MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING 1 INDEPENDENT AUDITORS REPORT 2 FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013: Balance Sheets 3 Statements of Activities 4 Statements of Cash Flows 5 Page Notes to Financial Statements 6 23

6 THE SCRIPPS RESEARCH INSTITUTE MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING Management has the primary responsibility for the preparation of the financial statements and for ascertaining that the financial statements and other information fairly reflect the financial position and results of operations of The Scripps Research Institute. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include amounts that are based on best estimates and judgments with appropriate consideration given to materiality. Management has made these estimates and judgments based on extensive experience and a substantive understanding of the underlying events and transactions. In fulfilling its responsibility for the reliability and integrity of financial information, management has established and maintains accounting procedures and related internal control systems. Management believes that these systems and controls provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management s authorizations and properly recorded to permit the preparation of reliable financial statements in conformity with accounting principles generally accepted in the United States of America, and that material errors or irregularities are either prevented or detected within a timely manner by employees in the normal course of performing their assigned duties. The Scripps Research Institute s independent auditors consider the established internal control systems to the extent necessary to express an opinion on the financial statements

7 INDEPENDENT AUDITORS REPORT To The Board of Trustees The Scripps Research Institute: Report on the Financial Statements We have audited the accompanying financial statements of The Scripps Research Institute (the Institute ), which comprise the balance sheets as of September 30, 2014 and 2013, and the related statements of activities and cash flows for the years 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 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 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 entity 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 Institute 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Institute as of September 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. December 18,

8 THE SCRIPPS RESEARCH INSTITUTE BALANCE SHEETS AS OF SEPTEMBER 30, 2014 AND 2013 (In thousands) ASSETS CASH AND CASH EQUIVALENTS $ 17,930 $ 17,619 GRANTS AND CONTRACTS 43,290 51,265 OTHER ASSETS AND RECEIVABLES Net 15,033 17,492 INVESTMENTS 421, ,391 PROPERTY Net 349, ,347 TOTAL $ 846,528 $ 883,114 LIABILITIES AND NET ASSETS ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 36,242 $ 39,941 DEFERRED REVENUE 29,012 30,605 DEBT 44,671 46,980 POSTRETIREMENT BENEFITS AND OTHER 39,949 38,114 Total liabilities 149, ,640 NET ASSETS: Unrestricted 448, ,609 Temporarily restricted 205, ,046 Permanently restricted 41,744 41,819 Total net assets 696, ,474 TOTAL $ 846,528 $ 883,114 See notes to the financial statements

9 THE SCRIPPS RESEARCH INSTITUTE STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands) CHANGES IN UNRESTRICTED NET ASSETS: Revenue: Grants and contracts $ 312,445 $ 320,212 Other revenue and support 15,182 16,055 Investment income 11,325 18,059 Net assets released from restrictions 38,610 35,884 Total revenue 377, ,210 Expenses: Research 343, ,117 Postgraduate and graduate education 22,214 22,554 Management and general 16,053 16,378 Other 4,337 3,850 Total expenses 386, ,899 DEFICIENCY OF REVENUES OVER EXPENSES (8,669) (9,689) PENSION-RELATED CHANGES OTHER THAN NET PERIODIC PENSION EXPENSE (4,985) 19,305 Changes in unrestricted net assets (13,654) 9,616 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS: Grants 300 4,700 Other support and contributions 3,977 6,335 Investment income 17,242 14,580 Net assets released from restrictions (38,610) (35,884) Changes in temporarily restricted net assets (17,091) (10,269) CHANGES IN PERMANENTLY RESTRICTED NET ASSETS Contributions and other support (75) 582 CHANGES IN NET ASSETS (30,820) (71) NET ASSETS Beginning of year 727, ,545 NET ASSETS End of year $ 696,654 $ 727,474 See notes to financial statements

10 THE SCRIPPS RESEARCH INSTITUTE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets $ (30,820) $ (71) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization 32,985 35,394 Loss on disposal of property 1,107 1,046 Realized and unrealized gain on investments (18,356) (23,551) Contributions restricted for endowment (285) (209) Pension-related changes other than net periodic pension costs 4,985 (19,305) Changes in assets and liabilities: Grants and contracts 7,974 1,074 Other assets and receivables net 2,459 (190) Accounts payable and accrued expenses (772) (3,295) Deferred revenue (1,593) (1,864) Postretirement benefits and other (3,150) (2,568) Net cash used in operating activities (5,466) (13,539) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (249,791) (38,183) Proceeds from sales of investments 284,307 83,771 Property additions (26,849) (24,609) Net cash provided by investing activities 7,667 20,979 CASH FLOWS FROM FINANCING ACTIVITIES: Payments on debt (2,175) (2,065) Contributions restricted for endowment Net cash used in financing activities (1,890) (1,863) NET INCREASE IN CASH AND CASH EQUIVALENTS 311 5,577 CASH AND CASH EQUIVALENTS Beginning of year 17,619 12,042 CASH AND CASH EQUIVALENTS End of year $ 17,930 $ 17,619 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Interest paid $ 2,331 $ 2,410 Property additions included in accounts payable $ 2,609 $ 5,537 See notes to financial statements

11 THE SCRIPPS RESEARCH INSTITUTE NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Scripps Research Institute (TSRI) conducts biomedical research in California and Florida funded primarily with grants from agencies of the United States government. TSRI is a California not-for-profit public benefit corporation, exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. A significant reduction in funding from U.S. government agencies could have a material impact on the operations and cash flows of TSRI. TSRI also operates a graduate school known as The Kellogg School of Science and Technology ( The Kellogg School ). Accredited by the Western Association of Schools and Colleges, The Kellogg School provides an interdisciplinary program in the chemical and biological sciences and confers the degrees of Doctor of Philosophy, Doctor of Philosophy Honorary, and Master of Science. Scripps Florida Scripps Florida was established in January 2004 as an operating division of TSRI. Using the latest technology, scientists at Scripps Florida focus on basic biomedical research and drug discovery. In addition to resources provided by the National Institutes of Health and other grantors, funding is also provided by a grant of $310 million, plus interest, from the State of Florida. At September 30, 2014, the entire grant was awarded and distributed. In February 2006, the County of Palm Beach (the County ) voted to provide Scripps Florida with permanent facilities on a campus that includes a 30-acre site on the Jupiter campus of Florida Atlantic University (FAU) and 70 acres on the parcel (the Briger parcel ) located across the street from FAU. The County grant agreement for the permanent facilities includes: (i) a 99-year sublease for the FAU land, (ii) $187 million in funding for construction of the permanent facilities on the FAU land, and (iii) an option to enter into a lease for the Briger parcel. Occupancy of the permanent facility, and depreciation, commenced on March 31, The lease for the Briger parcel was signed by TSRI and the County on January 24, 2012, and expires on February 6, 2021, after which the County is required to convey fee simple title to TSRI. The $23 million appraised value of the grant for the use of the Briger property as of the date of the lease, is reflected as land and temporarily restricted revenue and is being amortized into unrestricted revenue over the term of the lease. The $13 million grant for the use of the underlying FAU land is being amortized as unrestricted revenue ratably over the life of the lease. Basis of Presentation TSRI s net assets and its revenues, gains, and losses are classified based on the existence, or absence, of donor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Unrestricted Net Assets Unrestricted net assets are not subject to donor-imposed or other restrictions and include the carrying value of all land, buildings, investments and equipment. Items that affect this category consist of unrestricted gifts, plus revenue and expenses associated with the primary objectives of TSRI, and releases of temporarily restricted net assets as described below. Unspent grant funds from federal and other grantors received in advance of the related expenditure are reported as deferred revenue. Temporarily Restricted Net Assets Temporarily restricted net assets result from amounts designated by donors for use in future periods, generally for specific research projects. Expirations of temporary restrictions are reported as net assets released from restrictions upon appropriation or upon the expiration of the restriction period. Gifts of cash for the acquisition of property are reported as net assets released from restriction when the property is placed in service. Restricted amounts whose restrictions - 6 -

12 are met in the same reporting period are reported as increases to temporarily restricted net assets with a corresponding release from restriction. Permanently Restricted Net Assets Permanently restricted net assets include donor-restricted gifts and bequests for permanent projects. Unconditional pledges are recorded at their estimated present value reduced by an allowance for uncollectible amounts. Technology Licensing Agreements The transfer of research results into the commercial marketplace is a fundamental component of TSRI s research activities. Accordingly, TSRI is a party to various arrangements that generally provide for the licensing of technology developed at TSRI s California and Florida campuses in exchange for research funding, royalties, other compensation, or ownership participation. In arrangements that contain multiple elements, the revenue allocation is based on each element s relative fair value provided that (i) each element meets the criteria as a separate unit of accounting, (ii) the element has value to the customer on a stand-alone basis, and (iii) there is objective and verifiable evidence of the fair value of the separate elements. The total value of the arrangement is recognized either ratably over the period of the transaction or as amounts are expended if the fair value of each element cannot be objectively determined. The Patent and Trademark Law Amendments Act of 1980 as amended, more commonly known as the Bayh-Dole Act, requires that academic institutions share with the inventor(s) a portion of any revenue received from the licensing of an invention. The requirements of this act result in royalty-sharing arrangements between TSRI and its faculty, some of whom may be related parties. Cash and Cash Equivalents Liquid investments, which fund the daily operating activities of TSRI and have a maturity of three months or less at the time of purchase, are reported as cash and cash equivalents. Investments Investments are carried at fair value, which is generally determined by management based on quoted market prices provided by independent outside valuation services. Investments for which readily determinable market values do not exist are recorded at estimated fair value as determined by TSRI, with the assistance of fund managers, the general partners, or third-party service providers, using methods and assumptions TSRI considers appropriate based on its understanding of the underlying characteristics of the investments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of volatility associated with certain investment securities, it is probable that changes in the values of investment securities will occur from time to time and that such changes could materially affect the amounts reported in the accompanying balance sheets. Use of Estimates and Assumptions The preparation 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, the amounts of revenues and expenses, and the related financial statement disclosures. Actual results could differ from those estimates. Subsequent Events In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 855, Subsequent Events, TSRI evaluated subsequent events through December 18, 2014, the date of the release of these financial statements

13 2. INVESTMENTS General TSRI s investment portfolio includes cash, marketable securities, and nonmarketable securities managed by independent professional investment managers. Certain of these managers are authorized to invest a limited portion of TSRI s portfolio in derivative instruments to increase portfolio diversification and return and to reduce volatility. Investments at fair value as of September 30, 2014 and 2013, are summarized as follows (in thousands): Cash and short-term investment funds $ 147,685 $ 142,183 Growth assets: Global equity and convertible securities 123, ,833 Directional hedge funds 50,325 42,442 Private equity LPs 27,335 26,144 Inflation protection assets: Private real estate LPs 8,636 10,572 Private oil and gas LPs 6,881 9,143 Risk reduction assets: Government, mortgage, and corporate debt funds 32,151 48,282 Absolute return strategy funds 24,483 18,792 Total $ 421,232 $ 437,391 Investments with a fair value of $5.3 million and $5.2 million at September 30, 2014 and 2013, respectively, included above, have been received under annuity and unitrust agreements, which require annual payments from the trust to the beneficiaries during their lifetimes. Upon the death of the beneficiaries, substantially all of the remaining assets are available for general purposes, unless restricted. The liability to such beneficiaries of $1.1 million and $1.3 million at September 30, 2014 and 2013, is based on life expectancies and the annual payment required, discounted at the risk-free interest rate of 6% for 2014 and 2013, respectively. Unspent grant funds restricted to support the Florida division totaled $91.1 million and $108.7 million at September 30, 2014 and 2013, respectively. The majority of these unspent funds are invested through a mutual fund in short-term, fixed-income obligations with maturities of up to one year. The composition of investment income for the years ended September 30, 2014 and 2013, includes the following (in thousands): Interest and dividends: Unrestricted $ 3,893 $ 4,594 Temporarily restricted 5,902 4,774 Permanently restricted Net gains: Unrestricted 7,432 13,465 Temporarily restricted 11,340 9,806 Permanently restricted (416) 280 Investment income net $ 28,207 $ 33,

14 Fair Value Assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC 820, Fair Value Measurements and Disclosures. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting management s own assumptions and include situations where there is little or no market activity for the asset or liability. The following is a general description of the valuation methodologies used for financial assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy: Marketable Securities Utilizing Level 1 inputs include listed equity and bond market mutual funds, and exchange-traded equity securities held in professionally managed separate accounts, with valuation based upon quoted prices in active markets. Nonmarketable Securities Utilizing Level 2 inputs include shares in funds, such as unlisted mutual funds, limited exempted corporations, limited partnerships (LPs), and common trust funds (collectively, commingled funds ). Commingled funds have a net asset value (NAV) determined by market corroborated pricing or other models using observable inputs and are invested by professional asset management firms in the global equity, convertible, and fixed-income securities markets. In almost all cases, the individual securities held in commingled funds have readily determinable market values and provide daily or monthly liquidity. TSRI s investment in these vehicles may not be equal to the ratable portion of market values of those securities. A portion of TSRI s nonmarketable securities, including directional hedge funds, absolute return strategy funds, and private equity, real estate, and oil and gas LPs, (collectively, alternative investments ), has been classified as utilizing Level 3 inputs since valuation requires substantial judgment and estimation of factors not currently observable in the market. Alternative investments consist of fund holdings with varying redemption terms and conditions and are valued at TSRI s pro rata allocation of the fund s NAV or LP s equity balance, as determined by the fund s investment manager or general partner, respectively. Certain funds, structured as LPs, are illiquid, long-term commitments and are subject to future capital calls of $15.8 million and $21.0 million at September 30, 2014 and 2013, respectively. Nonmarketable securities that meet all of the following criteria are classified as Level 2 under the fair value hierarchy: The notice period for redemption is 90 days or less No lock up is in effect A full redemption is available at a determination date No gate or other redemption restriction is in effect No right to suspend redemptions exists Nonmarketable securities not meeting the above criteria are classified as Level 3. Gift Annuities and Unitrusts Obligations from donated assets are held by a bank custodian and subject to a payment schedule specified in the terms of the donor s agreement with TSRI. These assets have been classified as Level 1 as the fair value can be determined by quoted prices in active markets. TSRI s liabilities under the agreements with the donors calculated by utilizing interest rate and actuarial inputs have been classified as Level

15 The assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and 2013, including the fair value hierarchy of the valuation techniques utilized to determine such fair value, are as follows (in thousands): Quoted Prices in Active Markets for Significant Other Observable Significant Unobservable Balance 2014 Identical Assets Inputs Inputs September 30, Assets (Level 1) (Level 2) (Level 3) 2014 Marketable securities: Cash and short-term investment funds $ 124,012 $ 22,933 $ - $ 146,945 Global equity and convertible securities 122, ,677 Government, mortgage, and corporate debt funds 28,684 28,684 Total marketable securities 275,373 22, ,306 Nonmarketable securities: Directional hedge funds 50,325 50,325 Private real estate LPs 8,636 8,636 Private equity LPs 27,335 27,335 Private oil and gas LPs 6,881 6,881 Absolute return strategy funds 24,483 24,483 Total nonmarketable securities , ,660 Gift annuities and unitrusts: Cash and short-term investment funds Global equity and convertible securities 1,059 1,059 Government, mortgage, and corporate debt funds 3,468 3,468 Total gift annuities and unitrusts 5, ,266 Total $ 280,639 $ 22,933 $ 117,660 $ 421,232 Liabilities Gift annuities and unitrusts $ 1,121 $ 1,

16 Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Balance 2013 Identical Assets Inputs Inputs September 30, Assets (Level 1) (Level 2) (Level 3) 2013 Marketable securities: Cash and short-term investment funds $ 137,243 $ 4,300 $ - $ 141,543 Global equity and convertible securities 112, ,298 Government, mortgage, and corporate debt funds 30,759 14,143 44,902 Total marketable securities 280,300 18, ,743 Nonmarketable securities: Directional hedge funds 42,443 42,443 Private real estate LPs 10,572 10,572 Private equity LPs 26,144 26,144 Private oil and gas LPs 9,143 9,143 Absolute return strategy funds 18,792 18,792 Global equity and convertible securities 26,398 26,398 Total nonmarketable securities - 26, , ,492 Gift annuities and unitrusts: Cash and short-term investment funds Global equity and convertible securities 1,136 1,136 Government, mortgage, and corporate debt funds 3,380 3,380 Total gift annuities and unitrusts 5, ,156 Total $ 285,456 $ 44,841 $ 107,094 $ 437,391 Liabilities Gift annuities and unitrusts $ 1,273 $ 1,273 There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended September 30, 2014 and The changes in Level 3 instruments measured on a recurring basis for the years ended September 30, 2014 and 2013, are as follows (in thousands): Balance September 30, 2012 $ 100,302 Transfers into (out of) Level 3 Net realized and unrealized gains 5,156 Purchases 9,486 Settlements (7,850) Balance September 30, ,094 Transfers into (out of) Level 3 Net realized and unrealized gains 4,301 Purchases 31,499 Settlements (25,234) Balance September 30, 2014 $ 117,660 Gains and losses (realized and unrealized) for the periods above are reported in investment income in the unrestricted and temporarily restricted sections, and in contributions and other support in the permanently restricted section of the accompanying statements of activities

17 Investments for which market quotations are not readily available, may be valued using the stated NAV, which is known as using the practical expedient method to estimate the fair value of investment under ASC 820 and Accounting Standards Update (ASU) No A summary of investments with a reported NAV as of September 30, 2014 and 2013, is as follows (in thousands): Fair Value Estimated Using NAV per Share September 30, 2014 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Short term investment funds (a) $ 22,933 $ - Monthly <31 days Alternative investment funds Nonmarketable: Directional hedge funds (b) 50,325 Quarterly: 2-year rolling days Private equity real estate LPs (b) 8,636 1,842 N/A Not eligible for redemption N/A Private equity LPs (b) 27,335 10,632 N/A Not eligible for redemption N/A Private oil and gas LPs (b) 6,881 3,325 N/A Not eligible for redemption N/A Absolute return strategy funds (b) 24,483 Quarterly annual days Total $ 140,593 $ 15,799 Fair Value Estimated Using NAV per Share September 30, 2013 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Commingled funds Nonmarketable: Global equity and convertible securities (a) $ 26,398 $ - Monthly <31 days Government, mortgage, and corporate debt (a) 18,443 Monthly <31 days Alternative investment funds Nonmarketable: Directional hedge funds (b) 42,443 Quarterly: 2-Year Rolling days Private equity real estate LPs (b) 10,572 2,867 N/A Not eligible for redemption N/A Private equity LPs (b) 26,144 13,130 N/A Not eligible for redemption N/A Private oil and gas LPs (b) 9,143 5,005 N/A Not eligible for redemption N/A Absolute return strategy funds (b) 18,792 Quarterly Annual days Total $ 151,935 $ 21,002 * The fair values of investments have been estimated using the NAV of the investment. (a) Commingled Funds Interests in units/shares of these funds do not trade in active markets; however, managers are restricted by their investment mandates to investing in common stock, real estate investment trusts, and fixed-income securities. Fair value is primarily determined by aggregating the close of market prices of such securities, which are observable market inputs. Although the funds have other assets and liabilities, such as foreign currency hedges, securities lending collateral and receivables and payables, these generally comprise a small portion of total assets of NAV. (b) Alternative Investment Funds Interests in units/shares of these funds do not trade in active markets. For directional hedge funds and absolute return strategy funds, fair value is determined based upon a combination of readily observable market prices, third-party pricing sources, and discounted cash flow and other valuation models. For direct partnership investments in private equity, real estate, and oil and gas LPs, fair value is determined based upon discounted cash flow or other valuation models. For fund-of-funds partnership investments in private equity LPs, fair value is based upon a review of underlying fund investments, as reported by individual managers. Endowment TSRI s endowment consists of approximately 69 individual funds established for various purposes, including both donor-restricted funds and funds designated by the Board to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions

18 TSRI s Board intends to preserve 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, TSRI 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 as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in a prudent manner. TSRI considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund The purposes of the organization and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the organization The investment policies of the organization TSRI 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. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for donor-specified periods. Under this policy, as approved by the Board, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a customized index while assuming a moderate level of investment risk. To satisfy its long-term investment return objectives, TSRI 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). TSRI targets a diversified asset allocation that places a greater emphasis on equity or equity-like investments to achieve its long-term return objectives within prudent risk constraints. TSRI expects its endowment funds over time to provide an average annual rate of return of approximately the consumer price index (CPI), plus 5%, net of fees. Actual returns in any given year may vary from this amount. Each year, TSRI appropriates for expenditure 5% of the endowment fund s average fair value for the 12 quarters approximately preceding May 31 in the fiscal year before which the distribution is planned. In establishing this policy, TSRI considered the long-term expected return on its endowment. Over the long term, TSRI expects the current spending policy to allow its endowment to grow at the inflation rate expressed as the change in the CPI. This is consistent with TSRI s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term as well as to provide additional growth through new gifts and investment return. Net Assets Temporarily restricted net assets as of September 30, 2014 and 2013, include net assets restricted for use in future periods or for designated research purposes as follows (in thousands): Restricted for future periods $ 77,351 $ 74,660 Restricted for research purposes 128, ,386 Total $ 205,955 $ 223,

19 Net assets released from donor restriction by the satisfaction of time restrictions or by incurring expenses satisfying the restricted purposes during the years ended September 30, 2014 and 2013, are as follows (in thousands): Satisfaction of time restrictions $ 7,367 $ 6,483 Purpose restrictions research 31,243 29,401 Total net assets released from restrictions $ 38,610 $ 35,884 The endowment net assets composition by type of fund as of September 30, 2014 and 2013, is as follows (in thousands): Temporarily Permanently 2014 Unrestricted Restricted Restricted Total Donor-restricted endowment funds and net appreciation $ - $ 74,965 $ 41,744 $ 116,709 Board-designated endowment funds 23,898 23,898 Total funds $ 23,898 $ 74,965 $ 41,744 $ 140, Donor-restricted endowment funds and net appreciation $ - $ 70,604 $ 41,819 $ 112,423 Board-designated endowment funds 23,330 23,330 Total funds $ 23,330 $ 70,604 $ 41,819 $ 135,753 The changes in endowment net assets as of September 30, 2014 and 2013, are as follows (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets September 30, 2012 $ 22,178 $ 65,703 $ 41,237 $ 129,118 Investment income 244 1, ,888 Realized and unrealized gains 1,530 6, ,807 Contributions Appropriation of endowment assets for expenditure (622) (3,640) (4,262) Other changes unitrust disbursements (50) (50) Endowment net assets September 30, ,330 70,604 41, ,753 Investment income 310 2, ,265 Realized and unrealized gains 1,729 6,796 (416) 8,109 Contributions Appropriation of endowment assets for expenditure (1,471) (5,334) (6,805) Other changes unitrust disbursements (38) (38) Endowment net assets September 30, 2014 $ 23,898 $ 74,965 $ 41,744 $ 140,

20 The description of the amounts classified as restricted net assets as of September 30, 2014 and 2013, are as follows (in thousands): Permanently restricted net assets the portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by FASB ASC 958 $ 41,744 $ 41,819 Temporarily restricted net assets the portion of perpetual endowment funds subject to a time restriction under FASB ASC 958 $ 74,965 $ 70, PLEDGES RECEIVABLE NET Pledges receivable net as of September 30, 2014 and 2013, included in other assets and receivables in the accompanying balance sheets, are summarized as follows (in thousands): Pledges receivable restricted to future periods net: Unconditional promises to give $ 3,716 $ 4,555 Less unamortized discount (320) (390) Subtotal 3,396 4,165 Less allowance for uncollectibles (1,011) (110) Total $ 2,385 $ 4,055 Amounts due in: Less than one year $ 698 $ 550 One to five years 2,486 3,423 More than five years Total $ 3,716 $ 4,555 Discount rates ranged from 0.3% to 5.25% for 2013 and PROPERTY Property as of September 30, 2014 and 2013, is summarized as follows (in thousands): Land $ 42,646 $ 42,646 Buildings 426, ,466 Equipment 258, ,489 Other assets 4,029 4,510 Total property 730, ,111 Less accumulated depreciation and amortization (381,877) (363,764) Property net $ 349,043 $ 359,347 The estimated useful lives of building and equipment spans up to 35 years.

21 5. DEBT TSRI borrows money through the issuance of tax-exempt and taxable debt pursuant to a Master Indenture of Trust entered into in The 1994 Master Indenture of Trust contains certain covenants, including limitations on the incurrence of additional debt. TSRI was in compliance with those covenants at September 30, 2014 and In 2000, TSRI borrowed $16 million through the issuance of tax-exempt serial and term bonds sponsored by the California Infrastructure and Economic Development Bank. Principal is due in varying annual installments through Interest is payable on a semiannual basis at rates ranging from 4.80% to 5.75%. These bonds are collateralized by a pledge of revenues. In 2005, TSRI borrowed $44.5 million, which included $36.3 million in tax-exempt debt and $8.2 million in taxable debt, in serial and term bonds sponsored by the California Infrastructure and Economic Development Bank. These bonds are collateralized by a pledge of revenues. Principal is due in varying annual installments through Interest is payable on a semiannual basis at rates ranging from 5.00% to 5.04%. Approximately $22 million of this debt was issued to redeem the 1994 debt issue. At September 30, 2014 and 2013, the unamortized original issue premium on the 2005 bonds was $2 million and $2.1 million, respectively. Interest paid in fiscal years 2014 and 2013 on long-term debt was $2.3 million and $2.4 million, respectively. The estimated fair value of the tax-exempt bonds, calculated using market observable interest rates (Level 2 inputs) was $44.7 million and $46.9 million at September 30, 2014 and 2013, respectively. Scheduled principal repayments on long-term debt as of September 30, 2014, are as follows (in thousands): Years Ending September $ 2, , , , ,210 Thereafter 30,615 Total $ 42, POSTRETIREMENT BENEFITS AND OTHER Postretirement benefits and other as of September 30, 2014 and 2013, include benefit obligations as follows (in thousands): Defined benefit plan $ 23,808 $ 18,823 Deferred compensation and other 7,561 6,539 Total postretirement benefits $ 31,369 $ 25,

22 Defined Benefit Plan Eligible TSRI employees who were not covered by the TSRI Faculty and Management Retirement Plan were covered by a defined benefit plan (the TSRI Cash Balance Retirement Plan). Pension benefits under the plan were based on specified benefit amounts and years of service. TSRI funds the pension liability, through contributions to an independent trust, at an amount equal to the net periodic pension expense. In September 2013, TSRI amended the plan to cease the accrual of additional benefits effective December 31, This amendment resulted in a curtailment, which decreased the 2013 Post Retirement and Other liability and decreased Pension Related Changes Other Than Net Periodic Pension Expense by $3.8 million. Active plan participants receive employer contributions, determined as a percentage of participant salary, in the new TSRI Employment Retirement Plan, which totaled $2 million for the year ended September 30, Deferred Compensation and other TSRI has a deferred compensation plan for certain employees. Generally, this plan offers a deferred compensation benefit equal to 25% of base compensation accrued each month during the course of employment. The benefits are payable in a lump sum following the earlier of: i) separation from service or departure from TSRI; ii) death; or iii) permanent disability. Defined Contribution Plans TSRI provides a noncontributory money purchase plan for scientific staff and management (the TSRI Faculty and Management Retirement Plan). Contributions under this plan, determined as a percentage of participant salary, were $8.6 million and $6.8 million for the years ended September 30, 2014, and 2013, respectively. Employees who were eligible to participate in the TSRI Cash Balance Retirement Plan, or its new replacement defined contribution plan (the TSRI Employment Retirement Plan), also receive an employer matching contribution into a Tax Sheltered Annuity Plan of 50% of the employee contribution up to 6% of compensation. TSRI contributions to the Tax-Sheltered Annuity Plan were $779,000 and $684,000 for the years ended September 30, 2014 and 2013, respectively

23 A summary of the changes in the benefit obligation and Plan assets at September 30, 2014 and 2013, is presented below (in thousands): Change in projected benefit obligation (PBO): PBO at prior measurement date $ 73,721 $ 87,731 Service cost 1,057 4,166 Interest cost 3,760 3,648 Actuarial loss (gain) 10,098 (12,688) Benefits paid (5,327) (5,032) Curtailments (3,800) Administrative expenses paid (370) (304) PBO at current measurement date $ 82,939 $ 73,721 Change in plan assets: Fair value of assets at prior measurement date $ 54,898 $ 49,603 Actual gain on assets 7,194 3,082 Employer contributions 2,736 7,549 Benefits paid (5,327) (5,032) Administrative expenses paid (370) (304) Fair value of assets at current measurement date $ 59,131 $ 54,898 Components of net periodic pension expense: Service cost $ 1,057 $ 4,166 Interest cost 3,760 3,648 Expected return on assets (3,749) (4,012) Amortization of prior service cost 120 Curtailments (16) Net gain amortization 1,668 3,627 Net periodic pension expense $ 2,736 $ 7,533 Assuming no further significant changes in the Plan s design or valuation assumptions, net periodic pension expense for the year ended September 30, 2015, is approximately $2.8 million. The amortization of net loss and net prior service cost for the year ended September 30, 2015, is $2.6 million. A reconciliation of the funded status of the Plan at September 30, 2014 and 2013, is as follows (in thousands): Accumulated benefit obligation $ (82,939) $ (73,646) Projected benefit obligation $ (82,939) $ (73,721) Fair value of assets 59,131 54,898 Funded status $ (23,808) $ (18,823)

24 Assumptions used to determine the projected benefit obligation for the years ended September 30, 2014 and 2013, are as follows: Discount rate 4.5 % 5.3 % Compensation increase rate 3.0 Measurement date September Census date January Assumptions used to determine expense for the years ended September 30, 2014 and 2013, are as follows: Discount rate 5.3 % 4.3 % Long-term rate of return on assets Compensation increase rate Expected benefit payments as of September 30, 2014, are as follows (in thousands): Years Ending September $ 4, , , , ,672 Thereafter through ,626 The Investment Committee of the Board is responsible for the safety of the invested assets of the Plan through (i) the identification, adoption, and maintenance of an appropriate asset allocation that provides a target for the asset class within a minimum and maximum range; (ii) the identification, adoption, and maintenance of appropriate investment guidelines, policies, and procedures; and (iii) performance monitoring of portfolio managers against expectations as set forth in the investment guidelines. The policies are intended to provide for safety of principal through diversification in portfolios of domestic and international common stocks, bonds, LP interests, and cash equivalents at return objectives consistent with the risk levels established by the Board. The equity portion of the portfolio is diversified by economic sector, industry, quality, and size and is invested at the discretion of managers with distinct investment styles and specific guidelines. The allocation to absolute return strategies is invested in a multistrategy hedge fund-of-funds LP. The allocation to private equity is invested in fund-of-funds LPs, including a mix of venture capital, buyout, and distressed debt. Real assets consist of global real estate mutual funds. Professional investment advisors manage Plan investments. An independent Outsourced Chief Investment Office recommends alternative diversification models, provides professional performance evaluation, selects investment managers, and estimates the long-term rate of return for the asset allocation in place. The return is based on weighted-average capital market assumptions, including historical returns and the standard deviation and correlation of those historical returns, adjusted to anticipate the effects of inflation and economic market conditions for each asset class in the Plan

25 The Plan invests in mutual funds, common collective trust funds, commingled funds, and LPs. Plan assets include securities whose values are subject to fluctuations in the securities market. Changes in the fair value of these assets attributable to differences between actual and assumed returns are deferred as unrecognized gains or losses and included in the determination of net pension expense over time. Fair value is determined by quoted market prices for the same or similar instruments, except for absolute return strategy LPs and private equity fund LPs, which require substantial judgment and estimation of factors not currently observable in the market. In accordance with FASB ASC , Employers Disclosures about Postretirement Benefit Plan Assets, the Plan assets measured at fair value on a recurring basis as of September 30, 2014 and 2013, including the fair value hierarchy of the valuation techniques utilized to determine such fair value are as follows (see Note 3 Investments for a description) (in thousands): Total % of Plan % Target Assets Assets Allocation Balance as of September 30, 2014 Level 1 Level 2 Level Marketable securities: Cash and short-term funds $ - $ 378 $ - $ % - % Global equity and convertible securities 28,238 28, Real asset funds Government, mortgage, and corporate debt funds - 30 Total marketable securities 28, , Nonmarketable securities: Directional hedge funds 5,125 5, Private equity LPs 4,675 4, Private oil and gas LPs Absolute return strategy funds 1,937 1, Government, mortgage, and corporate debt funds 17,564 17, Total nonmarketable securities - 17,564 12,351 29, Total $ 28,838 $ 17,942 $ 12,351 $ 59, % 100 % Total % of Plan % Target Assets Assets Allocation Balance as of September 30, 2013 Level 1 Level 2 Level Marketable securities: Cash and short-term funds $ - $ 952 $ - $ % - % Global equity and convertible securities 20,227 20, Real asset funds 1,718 1, Government, mortgage, and corporate debt funds 14,099 2,665 16, Total marketable securities 36,044 3,617-39, Nonmarketable securities: Private equity LPs 3,962 3, Absolute return strategy funds 6,127 6, Global equity and convertible securities 5,148 5,148 9 Total nonmarketable securities - 5,148 10,089 15, Total $ 36,044 $ 8,765 $ 10,089 $ 54, % 100 %

26 There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended September 30, 2014 and The changes in Level 3 instruments measured on a recurring basis for the years ended September 30, 2014 and 2013, are as follows (in thousands): Balance September 30, 2012 $ 9,735 Transfers into (out of) Level 3 Net realized and unrealized gains (179) Purchases 957 Settlements (424) Balance September 30, ,089 Transfers into (out of) Level 3 Net realized and unrealized gains 2,385 Purchases 5,691 Settlements (5,814) Balance September 30, 2014 $ 12,351 A summary of the Plan s investments with a reported NAV as of September 30, 2014 and 2013, is as follows (in thousands): Fair Value Estimated Using NAV per Share September 30, 2014 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Common/collective trust funds and other: Cash and short-term funds (a) $ 378 $ - Daily None Government, mortgage and corporate debt funds (b) 17,564 Weekly <31 days Alternative investment funds: Absolute return strategy funds (b) 1,937 Semiannual 90 days Directional hedge funds 5,125 Quarterly 60 days Private oil and gas LPs (b) N/A Not eligible N/A Private equity LPs (b) 4,675 2,080 N/A Not eligible N/A Total $ 30,293 $ 2,629 Fair Value Estimated Using NAV per Share September 30, 2013 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Common/collective trust funds and other: Cash and short-term funds (a) $ 952 $ - Daily None Nonmarketable global equity and convertible securities (a) 2,158 Monthly <31 days Global equity and convertible securities (b) 2,990 Monthly <31 days Government, mortgage and corporate debt funds(b) 2,665 Monthly <31 days Alternative Investment funds: Absolute return strategy funds (b) 6,127 Semiannual 90 days Private equity LPs (b) 3,962 3,761 N/A Not eligible N/A Total $ 18,854 $ 3,

27 * The fair values of the investments have been estimated using the NAV of the investment. (a) Common/Collective Trust Funds The Plan has units/shares in the funds that do not trade in active markets; however, managers of these funds are restricted by their investment mandates to investing in common stock, real estate investment trusts, and fixed-income securities. Fair value is primarily determined by aggregating the close of market prices of such securities, which are observable market inputs. Although the funds have other assets and liabilities, such as foreign currency hedges, securities lending collateral, receivables and payables, these generally comprise a small portion of total assets of NAV. (b) Alternative Investment Funds Interests in units/shares of these funds do not trade in active markets. For directional hedge funds and absolute return strategy funds, fair value is determined based upon a combination of readily observable market prices, third-party pricing sources, and discounted cash flow and other valuation models. For direct partnership investments in private equity and oil and gas LPs, fair value is determined based upon discounted cash flow or other valuation models. For fund-of-funds partnership investments in private equity LPs, fair value is based upon a review of underlying fund investments, as reported by individual managers. 7. COMMITMENTS AND CONTINGENCIES Long-Term Leases TSRI has entered into noncancelable operating lease agreements for buildings and equipment, expiring on various dates through Approximate minimum future rental payments required by these leases as of September 30, 2014, are summarized as follows (in thousands): Years Ending September $ 21, , , , ,983 Total $ 88,560 Rental expense for operating leases totaled $23.6 million for the years ended September 30, 2014 and The deferred rent liability on operating leases is included in postretirement benefits and other in the accompanying balance sheets and was $8.1 million and $10 million at September 30, 2014 and 2013, respectively. The receivable from third parties for scheduled rent increases was $7.2 million and $9 million at September 30, 2014 and 2013, respectively. This receivable is included in grants and contracts in the accompanying balance sheets. Contingencies TSRI is a party to certain legal and other actions arising in the ordinary course of business. While it is not possible to predict or determine the outcome of these actions, it is the opinion of management that these liabilities do not have a material impact on the financial statements. 8. RECENTLY ISSUED ACCOUNTING STANDARDS The following summarizes noteworthy, recently issued accounting standards: In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers. ASU No outlines a single comprehensive model for entities to use in accounting for revenue from contracts with customers. This standard supersedes most other revenue recognition guidance, including industry-specific guidance. ASU No is effective for accounting periods beginning after December 15, Management of TSRI is in the process of evaluating the impact that the adoption of ASU will have on the financial statements

28 In August 2014, the FASB issued ASU No , Disclosure of Uncertainties About an Entity s Ability to Continue as a Going Concern. This standard provides guidance on disclosing going-concern uncertainties in the financial statements. The standard requires management to perform interim and annual assessments of the entity s ability to continue as a going concern within one year of the issuance of the financial statements. ASU is effective for annual periods ending after December 31, Management of TSRI does not expect the adoption of ASU to have an impact on the financial statements. ******

29 The Scripps Research Institute Financial Statements as of and for the Years Ended September 30, 2014 and 2013, Supplemental Combining Information as of and for the Year Ended September 30, 2014, and Independent Auditors Report

30 THE SCRIPPS RESEARCH INSTITUTE TABLE OF CONTENTS MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING 1 INDEPENDENT AUDITORS REPORT 2 3 FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013: Balance Sheets 4 Statements of Activities 5 Statements of Cash Flows 6 Notes to Financial Statements 7 25 SUPPLEMENTAL COMBINING INFORMATION AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 2014: 26 Balance Sheet Information 27 Statement of Activities Information 28 Statement of Cash Flows Information 29 Page

31 THE SCRIPPS RESEARCH INSTITUTE MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING Management has the primary responsibility for the preparation of the financial statements and for ascertaining that the financial statements and other information fairly reflect the financial position and results of operations of The Scripps Research Institute. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include amounts that are based on best estimates and judgments with appropriate consideration given to materiality. Management has made these estimates and judgments based on extensive experience and a substantive understanding of the underlying events and transactions. In fulfilling its responsibility for the reliability and integrity of financial information, management has established and maintains accounting procedures and related internal control systems. Management believes that these systems and controls provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management s authorizations and properly recorded to permit the preparation of reliable financial statements in conformity with accounting principles generally accepted in the United States of America, and that material errors or irregularities are either prevented or detected within a timely manner by employees in the normal course of performing their assigned duties. The Scripps Research Institute s independent auditors consider the established internal control systems to the extent necessary to express an opinion on the financial statements

32 INDEPENDENT AUDITORS REPORT To The Board of Trustees The Scripps Research Institute: Report on the Financial Statements We have audited the accompanying financial statements of The Scripps Research Institute (the Institute ), which comprise the balance sheets as of September 30, 2014 and 2013, and the related statements of activities and cash flows for the years 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 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 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 entity 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 Institute 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

33 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Institute as of September 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The supplemental combining information for 2014 listed in the table of contents is presented for the purpose of additional analysis of the financial statements rather than to present the financial position, changes in net assets, and cash flows of the individual divisions of the Institute, and is not a required part of the financial statements. This supplemental combining information is the responsibility of The Scripps Research Institute s management and was derived from and relates directly to the underlying accounting and other records used to prepare the 2014 financial statements. Such information has been subjected to the auditing procedures applied in our audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the 2014 financial statements or to the 2014 financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such information is fairly stated in all material respects in relation to the 2014 financial statements as a whole. December 18,

34 THE SCRIPPS RESEARCH INSTITUTE BALANCE SHEETS AS OF SEPTEMBER 30, 2014 AND 2013 (In thousands) ASSETS CASH AND CASH EQUIVALENTS $ 17,930 $ 17,619 GRANTS AND CONTRACTS 43,290 51,265 OTHER ASSETS AND RECEIVABLES Net 15,033 17,492 INVESTMENTS 421, ,391 PROPERTY Net 349, ,347 TOTAL $ 846,528 $ 883,114 LIABILITIES AND NET ASSETS ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 36,242 $ 39,941 DEFERRED REVENUE 29,012 30,605 DEBT 44,671 46,980 POSTRETIREMENT BENEFITS AND OTHER 39,949 38,114 Total liabilities 149, ,640 NET ASSETS: Unrestricted 448, ,609 Temporarily restricted 205, ,046 Permanently restricted 41,744 41,819 Total net assets 696, ,474 TOTAL $ 846,528 $ 883,114 See notes to the financial statements

35 THE SCRIPPS RESEARCH INSTITUTE STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands) CHANGES IN UNRESTRICTED NET ASSETS: Revenue: Grants and contracts $ 312,445 $ 320,212 Other revenue and support 15,182 16,055 Investment income 11,325 18,059 Net assets released from restrictions 38,610 35,884 Total revenue 377, ,210 Expenses: Research 343, ,117 Postgraduate and graduate education 22,214 22,554 Management and general 16,053 16,378 Other 4,337 3,850 Total expenses 386, ,899 DEFICIENCY OF REVENUES OVER EXPENSES (8,669) (9,689) PENSION-RELATED CHANGES OTHER THAN NET PERIODIC PENSION EXPENSE (4,985) 19,305 Changes in unrestricted net assets (13,654) 9,616 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS: Grants 300 4,700 Other support and contributions 3,977 6,335 Investment income 17,242 14,580 Net assets released from restrictions (38,610) (35,884) Changes in temporarily restricted net assets (17,091) (10,269) CHANGES IN PERMANENTLY RESTRICTED NET ASSETS Contributions and other support (75) 582 CHANGES IN NET ASSETS (30,820) (71) NET ASSETS Beginning of year 727, ,545 NET ASSETS End of year $ 696,654 $ 727,474 See notes to financial statements

36 THE SCRIPPS RESEARCH INSTITUTE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets $ (30,820) $ (71) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization 32,985 35,394 Loss on disposal of property 1,107 1,046 Realized and unrealized gain on investments (18,356) (23,551) Contributions restricted for endowment (285) (209) Pension-related changes other than net periodic pension costs 4,985 (19,305) Changes in assets and liabilities: Grants and contracts 7,974 1,074 Other assets and receivables net 2,459 (190) Accounts payable and accrued expenses (772) (3,295) Deferred revenue (1,593) (1,864) Postretirement benefits and other (3,150) (2,568) Net cash used in operating activities (5,466) (13,539) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (249,791) (38,183) Proceeds from sales of investments 284,307 83,771 Property additions (26,849) (24,609) Net cash provided by investing activities 7,667 20,979 CASH FLOWS FROM FINANCING ACTIVITIES: Payments on debt (2,175) (2,065) Contributions restricted for endowment Net cash used in financing activities (1,890) (1,863) NET INCREASE IN CASH AND CASH EQUIVALENTS 311 5,577 CASH AND CASH EQUIVALENTS Beginning of year 17,619 12,042 CASH AND CASH EQUIVALENTS End of year $ 17,930 $ 17,619 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Interest paid $ 2,331 $ 2,410 Property additions included in accounts payable $ 2,609 $ 5,537 See notes to financial statements

37 THE SCRIPPS RESEARCH INSTITUTE NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Scripps Research Institute (TSRI) conducts biomedical research in California and Florida funded primarily with grants from agencies of the United States government. TSRI is a California not-for-profit public benefit corporation, exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. A significant reduction in funding from U.S. government agencies could have a material impact on the operations and cash flows of TSRI. TSRI also operates a graduate school known as The Kellogg School of Science and Technology ( The Kellogg School ). Accredited by the Western Association of Schools and Colleges, The Kellogg School provides an interdisciplinary program in the chemical and biological sciences and confers the degrees of Doctor of Philosophy, Doctor of Philosophy Honorary, and Master of Science. Scripps Florida Scripps Florida was established in January 2004 as an operating division of TSRI. Using the latest technology, scientists at Scripps Florida focus on basic biomedical research and drug discovery. In addition to resources provided by the National Institutes of Health and other grantors, funding is also provided by a grant of $310 million, plus interest, from the State of Florida. At September 30, 2014, the entire grant was awarded and distributed. In February 2006, the County of Palm Beach (the County ) voted to provide Scripps Florida with permanent facilities on a campus that includes a 30-acre site on the Jupiter campus of Florida Atlantic University (FAU) and 70 acres on the parcel (the Briger parcel ) located across the street from FAU. The County grant agreement for the permanent facilities includes: (i) a 99-year sublease for the FAU land, (ii) $187 million in funding for construction of the permanent facilities on the FAU land, and (iii) an option to enter into a lease for the Briger parcel. Occupancy of the permanent facility, and depreciation, commenced on March 31, The lease for the Briger parcel was signed by TSRI and the County on January 24, 2012, and expires on February 6, 2021, after which the County is required to convey fee simple title to TSRI. The $23 million appraised value of the grant for the use of the Briger property as of the date of the lease, is reflected as land and temporarily restricted revenue and is being amortized into unrestricted revenue over the term of the lease. The $13 million grant for the use of the underlying FAU land is being amortized as unrestricted revenue ratably over the life of the lease. Basis of Presentation TSRI s net assets and its revenues, gains, and losses are classified based on the existence, or absence, of donor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Unrestricted Net Assets Unrestricted net assets are not subject to donor-imposed or other restrictions and include the carrying value of all land, buildings, investments and equipment. Items that affect this category consist of unrestricted gifts, plus revenue and expenses associated with the primary objectives of TSRI, and releases of temporarily restricted net assets as described below. Unspent grant funds from federal and other grantors received in advance of the related expenditure are reported as deferred revenue

38 Temporarily Restricted Net Assets Temporarily restricted net assets result from amounts designated by donors for use in future periods, generally for specific research projects. Expirations of temporary restrictions are reported as net assets released from restrictions upon appropriation or upon the expiration of the restriction period. Gifts of cash for the acquisition of property are reported as net assets released from restriction when the property is placed in service. Restricted amounts whose restrictions are met in the same reporting period are reported as increases to temporarily restricted net assets with a corresponding release from restriction. Permanently Restricted Net Assets Permanently restricted net assets include donor-restricted gifts and bequests for permanent projects. Unconditional pledges are recorded at their estimated present value reduced by an allowance for uncollectible amounts. Technology Licensing Agreements The transfer of research results into the commercial marketplace is a fundamental component of TSRI s research activities. Accordingly, TSRI is a party to various arrangements that generally provide for the licensing of technology developed at TSRI s California and Florida campuses in exchange for research funding, royalties, other compensation, or ownership participation. In arrangements that contain multiple elements, the revenue allocation is based on each element s relative fair value provided that (i) each element meets the criteria as a separate unit of accounting, (ii) the element has value to the customer on a stand-alone basis, and (iii) there is objective and verifiable evidence of the fair value of the separate elements. The total value of the arrangement is recognized either ratably over the period of the transaction or as amounts are expended if the fair value of each element cannot be objectively determined. The Patent and Trademark Law Amendments Act of 1980 as amended, more commonly known as the Bayh-Dole Act, requires that academic institutions share with the inventor(s) a portion of any revenue received from the licensing of an invention. The requirements of this act result in royalty-sharing arrangements between TSRI and its faculty, some of whom may be related parties. Cash and Cash Equivalents Liquid investments, which fund the daily operating activities of TSRI and have a maturity of three months or less at the time of purchase, are reported as cash and cash equivalents. Investments Investments are carried at fair value, which is generally determined by management based on quoted market prices provided by independent outside valuation services. Investments for which readily determinable market values do not exist are recorded at estimated fair value as determined by TSRI, with the assistance of fund managers, the general partners, or third-party service providers, using methods and assumptions TSRI considers appropriate based on its understanding of the underlying characteristics of the investments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of volatility associated with certain investment securities, it is probable that changes in the values of investment securities will occur from time to time and that such changes could materially affect the amounts reported in the accompanying balance sheets. Use of Estimates and Assumptions The preparation 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, the amounts of revenues and expenses, and the related financial statement disclosures. Actual results could differ from those estimates

39 Subsequent Events In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 855, Subsequent Events, TSRI evaluated subsequent events through December 18, 2014, the date of the release of these financial statements. 2. INVESTMENTS General TSRI s investment portfolio includes cash, marketable securities, and nonmarketable securities managed by independent professional investment managers. Certain of these managers are authorized to invest a limited portion of TSRI s portfolio in derivative instruments to increase portfolio diversification and return and to reduce volatility. Investments at fair value as of September 30, 2014 and 2013, are summarized as follows (in thousands): Cash and short-term investment funds $ 147,685 $ 142,183 Growth assets: Global equity and convertible securities 123, ,833 Directional hedge funds 50,325 42,442 Private equity LPs 27,335 26,144 Inflation protection assets: Private real estate LPs 8,636 10,572 Private oil and gas LPs 6,881 9,143 Risk reduction assets: Government, mortgage, and corporate debt funds 32,151 48,282 Absolute return strategy funds 24,483 18,792 Total $ 421,232 $ 437,391 Investments with a fair value of $5.3 million and $5.2 million at September 30, 2014 and 2013, respectively, included above, have been received under annuity and unitrust agreements, which require annual payments from the trust to the beneficiaries during their lifetimes. Upon the death of the beneficiaries, substantially all of the remaining assets are available for general purposes, unless restricted. The liability to such beneficiaries of $1.1 million and $1.3 million at September 30, 2014 and 2013, is based on life expectancies and the annual payment required, discounted at the risk-free interest rate of 6% for 2014 and 2013, respectively. Unspent grant funds restricted to support the Florida division totaled $91.1 million and $108.7 million at September 30, 2014 and 2013, respectively. The majority of these unspent funds are invested through a mutual fund in short-term, fixed-income obligations with maturities of up to one year

40 The composition of investment income for the years ended September 30, 2014 and 2013, includes the following (in thousands): Interest and dividends: Unrestricted $ 3,893 $ 4,594 Temporarily restricted 5,902 4,774 Permanently restricted Net gains: Unrestricted 7,432 13,465 Temporarily restricted 11,340 9,806 Permanently restricted (416) 280 Investment income net $ 28,207 $ 33,019 Fair Value Assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC 820, Fair Value Measurements and Disclosures. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting management s own assumptions and include situations where there is little or no market activity for the asset or liability. The following is a general description of the valuation methodologies used for financial assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy: Marketable Securities Utilizing Level 1 inputs include listed equity and bond market mutual funds, and exchange-traded equity securities held in professionally managed separate accounts, with valuation based upon quoted prices in active markets. Nonmarketable Securities Utilizing Level 2 inputs include shares in funds, such as unlisted mutual funds, limited exempted corporations, limited partnerships (LPs), and common trust funds (collectively, commingled funds ). Commingled funds have a net asset value (NAV) determined by market corroborated pricing or other models using observable inputs and are invested by professional asset management firms in the global equity, convertible, and fixed-income securities markets. In almost all cases, the individual securities held in commingled funds have readily determinable market values and provide daily or monthly liquidity. TSRI s investment in these vehicles may not be equal to the ratable portion of market values of those securities. A portion of TSRI s nonmarketable securities, including directional hedge funds, absolute return strategy funds, and private equity, real estate, and oil and gas LPs, (collectively, alternative investments ), has been classified as utilizing Level 3 inputs since valuation requires substantial judgment and estimation of factors not currently observable in the market. Alternative investments consist of fund holdings with varying redemption terms and conditions and are valued at TSRI s pro rata allocation of the fund s NAV or LP s equity balance, as determined by the fund s investment manager or general partner, respectively. Certain funds, structured as LPs, are illiquid, long-term commitments and are subject to future capital calls of $15.8 million and $21.0 million at September 30, 2014 and 2013, respectively

41 Nonmarketable securities that meet all of the following criteria are classified as Level 2 under the fair value hierarchy: The notice period for redemption is 90 days or less No lock up is in effect A full redemption is available at a determination date No gate or other redemption restriction is in effect No right to suspend redemptions exists Nonmarketable securities not meeting the above criteria are classified as Level 3. Gift Annuities and Unitrusts Obligations from donated assets are held by a bank custodian and subject to a payment schedule specified in the terms of the donor s agreement with TSRI. These assets have been classified as Level 1 as the fair value can be determined by quoted prices in active markets. TSRI s liabilities under the agreements with the donors calculated by utilizing interest rate and actuarial inputs have been classified as Level 2. The assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and 2013, including the fair value hierarchy of the valuation techniques utilized to determine such fair value, are as follows (in thousands): Quoted Prices in Active Markets for Significant Other Observable Significant Unobservable Balance 2014 Identical Assets Inputs Inputs September 30, Assets (Level 1) (Level 2) (Level 3) 2014 Marketable securities: Cash and short-term investment funds $ 124,012 $ 22,933 $ - $ 146,945 Global equity and convertible securities 122, ,677 Government, mortgage, and corporate debt funds 28,684 28,684 Total marketable securities 275,373 22, ,306 Nonmarketable securities: Directional hedge funds 50,325 50,325 Private real estate LPs 8,636 8,636 Private equity LPs 27,335 27,335 Private oil and gas LPs 6,881 6,881 Absolute return strategy funds 24,483 24,483 Total nonmarketable securities , ,660 Gift annuities and unitrusts: Cash and short-term investment funds Global equity and convertible securities 1,059 1,059 Government, mortgage, and corporate debt funds 3,468 3,468 Total gift annuities and unitrusts 5, ,266 Total $ 280,639 $ 22,933 $ 117,660 $ 421,232 Liabilities Gift annuities and unitrusts $ 1,121 $ 1,

42 Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Balance 2013 Identical Assets Inputs Inputs September 30, Assets (Level 1) (Level 2) (Level 3) 2013 Marketable securities: Cash and short-term investment funds $ 137,243 $ 4,300 $ - $ 141,543 Global equity and convertible securities 112, ,298 Government, mortgage, and corporate debt funds 30,759 14,143 44,902 Total marketable securities 280,300 18, ,743 Nonmarketable securities: Directional hedge funds 42,443 42,443 Private real estate LPs 10,572 10,572 Private equity LPs 26,144 26,144 Private oil and gas LPs 9,143 9,143 Absolute return strategy funds 18,792 18,792 Global equity and convertible securities 26,398 26,398 Total nonmarketable securities - 26, , ,492 Gift annuities and unitrusts: Cash and short-term investment funds Global equity and convertible securities 1,136 1,136 Government, mortgage, and corporate debt funds 3,380 3,380 Total gift annuities and unitrusts 5, ,156 Total $ 285,456 $ 44,841 $ 107,094 $ 437,391 Liabilities Gift annuities and unitrusts $ 1,273 $ 1,273 There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended September 30, 2014 and The changes in Level 3 instruments measured on a recurring basis for the years ended September 30, 2014 and 2013, are as follows (in thousands): Balance September 30, 2012 $ 100,302 Transfers into (out of) Level 3 Net realized and unrealized gains 5,156 Purchases 9,486 Settlements (7,850) Balance September 30, ,094 Transfers into (out of) Level 3 Net realized and unrealized gains 4,301 Purchases 31,499 Settlements (25,234) Balance September 30, 2014 $ 117,

43 Gains and losses (realized and unrealized) for the periods above are reported in investment income in the unrestricted and temporarily restricted sections, and in contributions and other support in the permanently restricted section of the accompanying statements of activities. Investments for which market quotations are not readily available, may be valued using the stated NAV, which is known as using the practical expedient method to estimate the fair value of investment under ASC 820 and Accounting Standards Update (ASU) No A summary of investments with a reported NAV as of September 30, 2014 and 2013, is as follows (in thousands): Fair Value Estimated Using NAV per Share September 30, 2014 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Short term investment funds (a) $ 22,933 $ - Monthly <31 days Alternative investment funds Nonmarketable: Directional hedge funds (b) 50,325 Quarterly: 2-year rolling days Private equity real estate LPs (b) 8,636 1,842 N/A Not eligible for redemption N/A Private equity LPs (b) 27,335 10,632 N/A Not eligible for redemption N/A Private oil and gas LPs (b) 6,881 3,325 N/A Not eligible for redemption N/A Absolute return strategy funds (b) 24,483 Quarterly annual days Total $ 140,593 $ 15,799 Fair Value Estimated Using NAV per Share September 30, 2013 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Commingled funds Nonmarketable: Global equity and convertible securities (a) $ 26,398 $ - Monthly <31 days Government, mortgage, and corporate debt (a) 18,443 Monthly <31 days Alternative investment funds Nonmarketable: Directional hedge funds (b) 42,443 Quarterly: 2-Year Rolling days Private equity real estate LPs (b) 10,572 2,867 N/A Not eligible for redemption N/A Private equity LPs (b) 26,144 13,130 N/A Not eligible for redemption N/A Private oil and gas LPs (b) 9,143 5,005 N/A Not eligible for redemption N/A Absolute return strategy funds (b) 18,792 Quarterly Annual days Total $ 151,935 $ 21,002 * The fair values of investments have been estimated using the NAV of the investment. (a) Commingled Funds Interests in units/shares of these funds do not trade in active markets; however, managers are restricted by their investment mandates to investing in common stock, real estate investment trusts, and fixed-income securities. Fair value is primarily determined by aggregating the close of market prices of such securities, which are observable market inputs. Although the funds have other assets and liabilities, such as foreign currency hedges, securities lending collateral and receivables and payables, these generally comprise a small portion of total assets of NAV. (b) Alternative Investment Funds Interests in units/shares of these funds do not trade in active markets. For directional hedge funds and absolute return strategy funds, fair value is determined based upon a combination of readily observable market prices, thirdparty pricing sources, and discounted cash flow and other valuation models. For direct partnership investments in private equity, real estate, and oil and gas LPs, fair value is determined based upon discounted cash flow or other valuation models. For fund-of

44 funds partnership investments in private equity LPs, fair value is based upon a review of underlying fund investments, as reported by individual managers. Endowment TSRI s endowment consists of approximately 69 individual funds established for various purposes, including both donor-restricted funds and funds designated by the Board to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. TSRI s Board intends to preserve 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, TSRI 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 as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in a prudent manner. TSRI considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund The purposes of the organization and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the organization The investment policies of the organization TSRI 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. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for donor-specified periods. Under this policy, as approved by the Board, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a customized index while assuming a moderate level of investment risk. To satisfy its long-term investment return objectives, TSRI 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). TSRI targets a diversified asset allocation that places a greater emphasis on equity or equity-like investments to achieve its long-term return objectives within prudent risk constraints. TSRI expects its endowment funds over time to provide an average annual rate of return of approximately the consumer price index (CPI), plus 5%, net of fees. Actual returns in any given year may vary from this amount. Each year, TSRI appropriates for expenditure 5% of the endowment fund s average fair value for the 12 quarters approximately preceding May 31 in the fiscal year before which the distribution is planned. In establishing this policy, TSRI considered the long-term expected return on its endowment. Over the long term, TSRI expects the current spending policy to allow its endowment to grow at the inflation rate expressed as the change in the CPI. This is consistent with TSRI s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term as well as to provide additional growth through new gifts and investment return

45 Net Assets Temporarily restricted net assets as of September 30, 2014 and 2013, include net assets restricted for use in future periods or for designated research purposes as follows (in thousands): Restricted for future periods $ 77,351 $ 74,660 Restricted for research purposes 128, ,386 Total $ 205,955 $ 223,046 Net assets released from donor restriction by the satisfaction of time restrictions or by incurring expenses satisfying the restricted purposes during the years ended September 30, 2014 and 2013, are as follows (in thousands): Satisfaction of time restrictions $ 7,367 $ 6,483 Purpose restrictions research 31,243 29,401 Total net assets released from restrictions $ 38,610 $ 35,884 The endowment net assets composition by type of fund as of September 30, 2014 and 2013, is as follows (in thousands): Temporarily Permanently 2014 Unrestricted Restricted Restricted Total Donor-restricted endowment funds and net appreciation $ - $ 74,965 $ 41,744 $ 116,709 Board-designated endowment funds 23,898 23,898 Total funds $ 23,898 $ 74,965 $ 41,744 $ 140, Donor-restricted endowment funds and net appreciation $ - $ 70,604 $ 41,819 $ 112,423 Board-designated endowment funds 23,330 23,330 Total funds $ 23,330 $ 70,604 $ 41,819 $ 135,

46 The changes in endowment net assets as of September 30, 2014 and 2013, are as follows (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets September 30, 2012 $ 22,178 $ 65,703 $ 41,237 $ 129,118 Investment income 244 1, ,888 Realized and unrealized gains 1,530 6, ,807 Contributions Appropriation of endowment assets for expenditure (622) (3,640) (4,262) Other changes unitrust disbursements (50) (50) Endowment net assets September 30, ,330 70,604 41, ,753 Investment income 310 2, ,265 Realized and unrealized gains 1,729 6,796 (416) 8,109 Contributions Appropriation of endowment assets for expenditure (1,471) (5,334) (6,805) Other changes unitrust disbursements (38) (38) Endowment net assets September 30, 2014 $ 23,898 $ 74,965 $ 41,744 $ 140,607 The description of the amounts classified as restricted net assets as of September 30, 2014 and 2013, are as follows (in thousands): Permanently restricted net assets the portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by FASB ASC 958 $ 41,744 $ 41,819 Temporarily restricted net assets the portion of perpetual endowment funds subject to a time restriction under FASB ASC 958 $ 74,965 $ 70,

47 3. PLEDGES RECEIVABLE NET Pledges receivable net as of September 30, 2014 and 2013, included in other assets and receivables in the accompanying balance sheets, are summarized as follows (in thousands): Pledges receivable restricted to future periods net: Unconditional promises to give $ 3,716 $ 4,555 Less unamortized discount (320) (390) Subtotal 3,396 4,165 Less allowance for uncollectibles (1,011) (110) Total $ 2,385 $ 4,055 Amounts due in: Less than one year $ 698 $ 550 One to five years 2,486 3,423 More than five years Total $ 3,716 $ 4,555 Discount rates ranged from 0.3% to 5.25% for 2013 and PROPERTY Property as of September 30, 2014 and 2013, is summarized as follows (in thousands): Land $ 42,646 $ 42,646 Buildings 426, ,466 Equipment 258, ,489 Other assets 4,029 4,510 Total property 730, ,111 Less accumulated depreciation and amortization (381,877) (363,764) Property net $ 349,043 $ 359,347 The estimated useful lives of building and equipment spans up to 35 years. 5. DEBT TSRI borrows money through the issuance of tax-exempt and taxable debt pursuant to a Master Indenture of Trust entered into in The 1994 Master Indenture of Trust contains certain covenants, including limitations on the incurrence of additional debt. TSRI was in compliance with those covenants at September 30, 2014 and

48 In 2000, TSRI borrowed $16 million through the issuance of tax-exempt serial and term bonds sponsored by the California Infrastructure and Economic Development Bank. Principal is due in varying annual installments through Interest is payable on a semiannual basis at rates ranging from 4.80% to 5.75%. These bonds are collateralized by a pledge of revenues. In 2005, TSRI borrowed $44.5 million, which included $36.3 million in tax-exempt debt and $8.2 million in taxable debt, in serial and term bonds sponsored by the California Infrastructure and Economic Development Bank. These bonds are collateralized by a pledge of revenues. Principal is due in varying annual installments through Interest is payable on a semiannual basis at rates ranging from 5.00% to 5.04%. Approximately $22 million of this debt was issued to redeem the 1994 debt issue. At September 30, 2014 and 2013, the unamortized original issue premium on the 2005 bonds was $2 million and $2.1 million, respectively. Interest paid in fiscal years 2014 and 2013 on long-term debt was $2.3 million and $2.4 million, respectively. The estimated fair value of the tax-exempt bonds, calculated using market observable interest rates (Level 2 inputs) was $44.7 million and $46.9 million at September 30, 2014 and 2013, respectively. Scheduled principal repayments on long-term debt as of September 30, 2014, are as follows (in thousands): Years Ending September $ 2, , , , ,210 Thereafter 30,615 Total $ 42, POSTRETIREMENT BENEFITS AND OTHER Postretirement benefits and other as of September 30, 2014 and 2013, include benefit obligations as follows (in thousands): Defined benefit plan $ 23,808 $ 18,823 Deferred compensation and other 7,561 6,539 Total postretirement benefits $ 31,369 $ 25,362 Defined Benefit Plan Eligible TSRI employees who were not covered by the TSRI Faculty and Management Retirement Plan were covered by a defined benefit plan (the TSRI Cash Balance Retirement Plan). Pension benefits under the plan were based on specified benefit amounts and years of service. TSRI funds the pension liability, through contributions to an independent trust, at an amount equal to the net periodic pension expense

49 In September 2013, TSRI amended the plan to cease the accrual of additional benefits effective December 31, This amendment resulted in a curtailment, which decreased the 2013 Post Retirement and Other liability and decreased Pension Related Changes Other Than Net Periodic Pension Expense by $3.8 million. Active plan participants receive employer contributions, determined as a percentage of participant salary, in the new TSRI Employment Retirement Plan, which totaled $2 million for the year ended September 30, Deferred Compensation and other TSRI has a deferred compensation plan for certain employees. Generally, this plan offers a deferred compensation benefit equal to 25% of base compensation accrued each month during the course of employment. The benefits are payable in a lump sum following the earlier of: i) separation from service or departure from TSRI; ii) death; or iii) permanent disability. Defined Contribution Plans TSRI provides a noncontributory money purchase plan for scientific staff and management (the TSRI Faculty and Management Retirement Plan). Contributions under this plan, determined as a percentage of participant salary, were $8.6 million and $6.8 million for the years ended September 30, 2014, and 2013, respectively. Employees who were eligible to participate in the TSRI Cash Balance Retirement Plan, or its new replacement defined contribution plan (the TSRI Employment Retirement Plan), also receive an employer matching contribution into a Tax Sheltered Annuity Plan of 50% of the employee contribution up to 6% of compensation. TSRI contributions to the Tax-Sheltered Annuity Plan were $779,000 and $684,000 for the years ended September 30, 2014 and 2013, respectively

50 A summary of the changes in the benefit obligation and Plan assets at September 30, 2014 and 2013, is presented below (in thousands): Change in projected benefit obligation (PBO): PBO at prior measurement date $ 73,721 $ 87,731 Service cost 1,057 4,166 Interest cost 3,760 3,648 Actuarial loss (gain) 10,098 (12,688) Benefits paid (5,327) (5,032) Curtailments (3,800) Administrative expenses paid (370) (304) PBO at current measurement date $ 82,939 $ 73,721 Change in plan assets: Fair value of assets at prior measurement date $ 54,898 $ 49,603 Actual gain on assets 7,194 3,082 Employer contributions 2,736 7,549 Benefits paid (5,327) (5,032) Administrative expenses paid (370) (304) Fair value of assets at current measurement date $ 59,131 $ 54,898 Components of net periodic pension expense: Service cost $ 1,057 $ 4,166 Interest cost 3,760 3,648 Expected return on assets (3,749) (4,012) Amortization of prior service cost 120 Curtailments (16) Net gain amortization 1,668 3,627 Net periodic pension expense $ 2,736 $ 7,533 Assuming no further significant changes in the Plan s design or valuation assumptions, net periodic pension expense for the year ended September 30, 2015, is approximately $2.8 million. The amortization of net loss and net prior service cost for the year ended September 30, 2015, is $2.6 million

51 A reconciliation of the funded status of the Plan at September 30, 2014 and 2013, is as follows (in thousands): Accumulated benefit obligation $ (82,939) $ (73,646) Projected benefit obligation $ (82,939) $ (73,721) Fair value of assets 59,131 54,898 Funded status $ (23,808) $ (18,823) Assumptions used to determine the projected benefit obligation for the years ended September 30, 2014 and 2013, are as follows: Discount rate 4.5 % 5.3 % Compensation increase rate 3.0 Measurement date September Census date January Assumptions used to determine expense for the years ended September 30, 2014 and 2013, are as follows: Discount rate 5.3 % 4.3 % Long-term rate of return on assets Compensation increase rate Expected benefit payments as of September 30, 2014, are as follows (in thousands): Years Ending September $ 4, , , , ,672 Thereafter through ,626 The Investment Committee of the Board is responsible for the safety of the invested assets of the Plan through (i) the identification, adoption, and maintenance of an appropriate asset allocation that provides a target for the asset class within a minimum and maximum range; (ii) the identification, adoption, and maintenance of appropriate investment guidelines, policies, and procedures; and (iii) performance monitoring of portfolio managers against expectations as set forth in the

52 investment guidelines. The policies are intended to provide for safety of principal through diversification in portfolios of domestic and international common stocks, bonds, LP interests, and cash equivalents at return objectives consistent with the risk levels established by the Board. The equity portion of the portfolio is diversified by economic sector, industry, quality, and size and is invested at the discretion of managers with distinct investment styles and specific guidelines. The allocation to absolute return strategies is invested in a multistrategy hedge fund-of-funds LP. The allocation to private equity is invested in fund-of-funds LPs, including a mix of venture capital, buyout, and distressed debt. Real assets consist of global real estate mutual funds. Professional investment advisors manage Plan investments. An independent Outsourced Chief Investment Office recommends alternative diversification models, provides professional performance evaluation, selects investment managers, and estimates the long-term rate of return for the asset allocation in place. The return is based on weighted-average capital market assumptions, including historical returns and the standard deviation and correlation of those historical returns, adjusted to anticipate the effects of inflation and economic market conditions for each asset class in the Plan. The Plan invests in mutual funds, common collective trust funds, commingled funds, and LPs. Plan assets include securities whose values are subject to fluctuations in the securities market. Changes in the fair value of these assets attributable to differences between actual and assumed returns are deferred as unrecognized gains or losses and included in the determination of net pension expense over time. Fair value is determined by quoted market prices for the same or similar instruments, except for absolute return strategy LPs and private equity fund LPs, which require substantial judgment and estimation of factors not currently observable in the market. In accordance with FASB ASC , Employers Disclosures about Postretirement Benefit Plan Assets, the Plan assets measured at fair value on a recurring basis as of September 30, 2014 and 2013, including the fair value hierarchy of the valuation techniques utilized to determine such fair value are as follows (see Note 3 Investments for a description) (in thousands): Total % of Plan % Target Assets Assets Allocation Balance as of September 30, 2014 Level 1 Level 2 Level Marketable securities: Cash and short-term funds $ - $ 378 $ - $ % - % Global equity and convertible securities 28,238 28, Real asset funds Government, mortgage, and corporate debt funds - 30 Total marketable securities 28, , Nonmarketable securities: Directional hedge funds 5,125 5, Private equity LPs 4,675 4, Private oil and gas LPs Absolute return strategy funds 1,937 1, Government, mortgage, and corporate debt funds 17,564 17, Total nonmarketable securities - 17,564 12,351 29, Total $ 28,838 $ 17,942 $ 12,351 $ 59, % 100 %

53 Total % of Plan % Target Assets Assets Allocation Balance as of September 30, 2013 Level 1 Level 2 Level Marketable securities: Cash and short-term funds $ - $ 952 $ - $ % - % Global equity and convertible securities 20,227 20, Real asset funds 1,718 1, Government, mortgage, and corporate debt funds 14,099 2,665 16, Total marketable securities 36,044 3,617-39, Nonmarketable securities: Private equity LPs 3,962 3, Absolute return strategy funds 6,127 6, Global equity and convertible securities 5,148 5,148 9 Total nonmarketable securities - 5,148 10,089 15, Total $ 36,044 $ 8,765 $ 10,089 $ 54, % 100 % There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended September 30, 2014 and The changes in Level 3 instruments measured on a recurring basis for the years ended September 30, 2014 and 2013, are as follows (in thousands): Balance September 30, 2012 $ 9,735 Transfers into (out of) Level 3 Net realized and unrealized gains (179) Purchases 957 Settlements (424) Balance September 30, ,089 Transfers into (out of) Level 3 Net realized and unrealized gains 2,385 Purchases 5,691 Settlements (5,814) Balance September 30, 2014 $ 12,

54 A summary of the Plan s investments with a reported NAV as of September 30, 2014 and 2013, is as follows (in thousands): Fair Value Estimated Using NAV per Share September 30, 2014 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Common/collective trust funds and other: Cash and short-term funds (a) $ 378 $ - Daily None Government, mortgage and corporate debt funds (b) 17,564 Weekly <31 days Alternative investment funds: Absolute return strategy funds (b) 1,937 Semiannual 90 days Directional hedge funds 5,125 Quarterly 60 days Private oil and gas LPs (b) N/A Not eligible N/A Private equity LPs (b) 4,675 2,080 N/A Not eligible N/A Total $ 30,293 $ 2,629 Fair Value Estimated Using NAV per Share September 30, 2013 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Common/collective trust funds and other: Cash and short-term funds (a) $ 952 $ - Daily None Nonmarketable global equity and convertible securities (a) 2,158 Monthly <31 days Global equity and convertible securities (b) 2,990 Monthly <31 days Government, mortgage and corporate debt funds(b) 2,665 Monthly <31 days Alternative Investment funds: Absolute return strategy funds (b) 6,127 Semiannual 90 days Private equity LPs (b) 3,962 3,761 N/A Not eligible N/A Total $ 18,854 $ 3,761 * The fair values of the investments have been estimated using the NAV of the investment. (a) Common/Collective Trust Funds The Plan has units/shares in the funds that do not trade in active markets; however, managers of these funds are restricted by their investment mandates to investing in common stock, real estate investment trusts, and fixed-income securities. Fair value is primarily determined by aggregating the close of market prices of such securities, which are observable market inputs. Although the funds have other assets and liabilities, such as foreign currency hedges, securities lending collateral, receivables and payables, these generally comprise a small portion of total assets of NAV. (b) Alternative Investment Funds Interests in units/shares of these funds do not trade in active markets. For directional hedge funds and absolute return strategy funds, fair value is determined based upon a combination of readily observable market prices, third-party pricing sources, and discounted cash flow and other valuation models. For direct partnership investments in private equity and oil and gas LPs, fair value is determined based upon discounted cash flow or other valuation models. For fund-of-funds partnership investments in private equity LPs, fair value is based upon a review of underlying fund investments, as reported by individual managers

55 7. COMMITMENTS AND CONTINGENCIES Long-Term Leases TSRI has entered into noncancelable operating lease agreements for buildings and equipment, expiring on various dates through Approximate minimum future rental payments required by these leases as of September 30, 2014, are summarized as follows (in thousands): Years Ending September $ 21, , , , ,983 Total $ 88,560 Rental expense for operating leases totaled $23.6 million for the years ended September 30, 2014 and The deferred rent liability on operating leases is included in postretirement benefits and other in the accompanying balance sheets and was $8.1 million and $10 million at September 30, 2014 and 2013, respectively. The receivable from third parties for scheduled rent increases was $7.2 million and $9 million at September 30, 2014 and 2013, respectively. This receivable is included in grants and contracts in the accompanying balance sheets. Contingencies TSRI is a party to certain legal and other actions arising in the ordinary course of business. While it is not possible to predict or determine the outcome of these actions, it is the opinion of management that these liabilities do not have a material impact on the financial statements. 8. RECENTLY ISSUED ACCOUNTING STANDARDS The following summarizes noteworthy, recently issued accounting standards: In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers. ASU No outlines a single comprehensive model for entities to use in accounting for revenue from contracts with customers. This standard supersedes most other revenue recognition guidance, including industry-specific guidance. ASU No is effective for accounting periods beginning after December 15, Management of TSRI is in the process of evaluating the impact that the adoption of ASU will have on the financial statements. In August 2014, the FASB issued ASU No , Disclosure of Uncertainties About an Entity s Ability to Continue as a Going Concern. This standard provides guidance on disclosing goingconcern uncertainties in the financial statements. The standard requires management to perform interim and annual assessments of the entity s ability to continue as a going concern within one year of the issuance of the financial statements. ASU is effective for annual periods ending after December 31, Management of TSRI does not expect the adoption of ASU to have an impact on the financial statements. ******

56 SUPPLEMENTAL COMBINING INFORMATION

57 THE SCRIPPS RESEARCH INSTITUTE SUPPLEMENTAL COMBINING BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 2014 (In thousands) ASSETS Florida California Total CASH AND CASH EQUIVALENTS $ 8,675 $ 9,255 $ 17,930 GRANTS AND CONTRACTS 16,132 27,158 43,290 OTHER ASSETS AND RECEIVABLES Net 10,636 4,397 15,033 INVESTMENTS 158, , ,232 PROPERTY Net 196, , ,043 TOTAL $ 391,092 $ 455,436 $ 846,528 LIABILITIES AND NET ASSETS ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 5,656 $ 30,586 $ 36,242 INTERDIVISIONAL 650 (650) - DEFERRED REVENUE 7,695 21,317 29,012 DEBT 44,671 44,671 POSTRETIREMENT BENEFITS AND OTHER 39,949 39,949 Total liabilities 14, , ,874 NET ASSETS: Unrestricted 250, , ,955 Temporarily restricted 126,163 79, ,955 Permanently restricted ,175 41,744 Total net assets 377, , ,654 TOTAL $ 391,092 $ 455,436 $ 846,528 See notes to financial statements

58 THE SCRIPPS RESEARCH INSTITUTE SUPPLEMENTAL COMBINING STATEMENT OF ACTIVITIES INFORMATION FOR THE YEAR ENDED SEPTEMBER 30, 2014 (In thousands) Florida California Total CHANGES IN UNRESTRICTED NET ASSETS: Revenue: Grants and contracts $ 55,060 $ 257,385 $ 312,445 Other revenue and support ,612 15,182 Investment income 1,740 9,585 11,325 Net assets released from restrictions 31,699 6,911 38,610 Total revenue 89, , ,562 Expenses: Research 74, , ,627 Postgraduate and graduate education 7,112 15,102 22,214 Management and general 3,926 12,127 16,053 Other 1,870 2,467 4,337 Total expenses 87, , ,231 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES 1,858 (10,527) (8,669) PENSION-RELATED CHANGES OTHER THAN NET PERIODIC PENSION EXPENSE (4,985) (4,985) Changes in unrestricted net assets 1,858 (15,512) (13,654) CHANGES IN TEMPORARILY RESTRICTED NET ASSETS: Grants Other support and contributions 857 3,120 3,977 Investment income 6,114 11,128 17,242 Net assets released from restrictions (31,699) (6,911) (38,610) Changes in temporarily restricted net assets (24,428) 7,337 (17,091) CHANGES IN PERMANENTLY RESTRICTED NET ASSETS Contributions and other support (72) (3) (75) CHANGES IN NET ASSETS (22,642) (8,178) (30,820) NET ASSETS Beginning of year 399, , ,474 NET ASSETS End of year $ 377,091 $ 319,563 $ 696,654 See notes to financial statements

59 THE SCRIPPS RESEARCH INSTITUTE SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS INFORMATION FOR THE YEAR ENDED SEPTEMBER 30, 2014 (In thousands) Florida California Total CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets $ (22,642) $ (8,178) $ (30,820) Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities: Depreciation and amortization 11,364 21,621 32,985 Loss on disposal of property 1, ,107 Realized and unrealized gain on investments (3,724) (14,632) (18,356) Contributions restricted for endowment (285) (285) Pension-related changes other than net periodic pension costs 4,985 4,985 Changes in assets and liabilities: Grants and contracts 765 7,209 7,974 Other assets and receivables net 1, ,459 Accounts payable and accrued expenses (2,048) 1,276 (772) Deferred revenue 1,810 (3,403) (1,593) Postretirement benefits and other (3,150) (3,150) Net cash (used in) provided by operating activities (11,663) 6,197 (5,466) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (9,975) (239,816) (249,791) Proceeds from sales of investments 23, , ,307 Property additions (3,848) (23,001) (26,849) Net cash provided by (used in) investing activities 9,913 (2,246) 7,667 CASH FLOWS FROM FINANCING ACTIVITIES: Payments on debt (2,175) (2,175) Contributions restricted for endowment (71) Net cash used in financing activities (71) (1,819) (1,890) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,821) 2, CASH AND CASH EQUIVALENTS Beginning of year 10,496 7,123 17,619 CASH AND CASH EQUIVALENTS End of year $ 8,675 $ 9,255 $ 17,930 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Interest paid $ - $ 2,331 $ 2,331 Property additions included in accounts payable $ 47 $ 2,562 $ 2,609 See notes to financial statements

60 The Scripps Research Institute Financial Statements as of and for the Years Ended September 30, 2014 and 2013, Independent Auditors Report, Schedule of Expenditures of Federal Awards for the Year Ended September 30, 2014, and Reports on Compliance with Office of Management and Budget Circular A-133

61 THE SCRIPPS RESEARCH INSTITUTE TABLE OF CONTENTS MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING 1 INDEPENDENT AUDITORS REPORT 2 3 FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013: Balance Sheets 4 Statements of Activities 5 Statements of Cash Flows 6 Notes to Financial Statements 7 25 SUPPLEMENTAL SCHEDULE FOR THE YEAR ENDED SEPTEMBER 30, 2014: 26 Page Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 31 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY OMB CIRCULAR A SCHEDULE OF FINDINGS AND QUESTIONED COSTS 36

62 THE SCRIPPS RESEARCH INSTITUTE MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING Management has the primary responsibility for the preparation of the financial statements and for ascertaining that the financial statements and other information fairly reflect the financial position and results of operations of The Scripps Research Institute. The financial statements and supplemental schedule of expenditures of federal awards were prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include amounts that are based on best estimates and judgments with appropriate consideration given to materiality. Management has made these estimates and judgments based on extensive experience and a substantive understanding of the underlying events and transactions. In fulfilling its responsibility for the reliability and integrity of financial information, management has established and maintains accounting procedures and related internal control systems. Management believes that these systems and controls provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management s authorizations and properly recorded to permit the preparation of reliable financial statements in conformity with accounting principles generally accepted in the United States of America, and that material errors or irregularities are either prevented or detected within a timely manner by employees in the normal course of performing their assigned duties. The Scripps Research Institute s independent auditors consider the established internal control systems to the extent they deem necessary to express an opinion on the financial statements

63 INDEPENDENT AUDITORS REPORT To The Board of Trustees The Scripps Research Institute: Report on the Financial Statements We have audited the accompanying financial statements of The Scripps Research Institute (the Institute ), which comprise the balance sheets as of September 30, 2014 and 2013, and the related statements of activities and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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 entity 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 Institute 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.

64 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Institute as of September 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The Schedule of Expenditures of Federal Awards, as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the 2014 financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 2014 financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 18, 2014, on our consideration of the Institute s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Institute s internal control over financial reporting and compliance. December 18,

65 THE SCRIPPS RESEARCH INSTITUTE BALANCE SHEETS AS OF SEPTEMBER 30, 2014 AND 2013 (In thousands) ASSETS CASH AND CASH EQUIVALENTS $ 17,930 $ 17,619 GRANTS AND CONTRACTS 43,290 51,265 OTHER ASSETS AND RECEIVABLES Net 15,033 17,492 INVESTMENTS 421, ,391 PROPERTY Net 349, ,347 TOTAL $ 846,528 $ 883,114 LIABILITIES AND NET ASSETS ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 36,242 $ 39,941 DEFERRED REVENUE 29,012 30,605 DEBT 44,671 46,980 POSTRETIREMENT BENEFITS AND OTHER 39,949 38,114 Total liabilities 149, ,640 NET ASSETS: Unrestricted 448, ,609 Temporarily restricted 205, ,046 Permanently restricted 41,744 41,819 Total net assets 696, ,474 TOTAL $ 846,528 $ 883,114 See notes to the financial statements

66 THE SCRIPPS RESEARCH INSTITUTE STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands) CHANGES IN UNRESTRICTED NET ASSETS: Revenue: Grants and contracts $ 312,445 $ 320,212 Other revenue and support 15,182 16,055 Investment income 11,325 18,059 Net assets released from restrictions 38,610 35,884 Total revenue 377, ,210 Expenses: Research 343, ,117 Postgraduate and graduate education 22,214 22,554 Management and general 16,053 16,378 Other 4,337 3,850 Total expenses 386, ,899 DEFICIENCY OF REVENUES OVER EXPENSES (8,669) (9,689) PENSION-RELATED CHANGES OTHER THAN NET PERIODIC PENSION EXPENSE (4,985) 19,305 Changes in unrestricted net assets (13,654) 9,616 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS: Grants 300 4,700 Other support and contributions 3,977 6,335 Investment income 17,242 14,580 Net assets released from restrictions (38,610) (35,884) Changes in temporarily restricted net assets (17,091) (10,269) CHANGES IN PERMANENTLY RESTRICTED NET ASSETS Contributions and other support (75) 582 CHANGES IN NET ASSETS (30,820) (71) NET ASSETS Beginning of year 727, ,545 NET ASSETS End of year $ 696,654 $ 727,474 See notes to financial statements

67 THE SCRIPPS RESEARCH INSTITUTE STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets $ (30,820) $ (71) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization 32,985 35,394 Loss on disposal of property 1,107 1,046 Realized and unrealized gain on investments (18,356) (23,551) Contributions restricted for endowment (285) (209) Pension-related changes other than net periodic pension costs 4,985 (19,305) Changes in assets and liabilities: Grants and contracts 7,974 1,074 Other assets and receivables net 2,459 (190) Accounts payable and accrued expenses (772) (3,295) Deferred revenue (1,593) (1,864) Postretirement benefits and other (3,150) (2,568) Net cash used in operating activities (5,466) (13,539) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments (249,791) (38,183) Proceeds from sales of investments 284,307 83,771 Property additions (26,849) (24,609) Net cash provided by investing activities 7,667 20,979 CASH FLOWS FROM FINANCING ACTIVITIES: Payments on debt (2,175) (2,065) Contributions restricted for endowment Net cash used in financing activities (1,890) (1,863) NET INCREASE IN CASH AND CASH EQUIVALENTS 311 5,577 CASH AND CASH EQUIVALENTS Beginning of year 17,619 12,042 CASH AND CASH EQUIVALENTS End of year $ 17,930 $ 17,619 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Interest paid $ 2,331 $ 2,410 Property additions included in accounts payable $ 2,609 $ 5,537 See notes to financial statements

68 THE SCRIPPS RESEARCH INSTITUTE NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Scripps Research Institute (TSRI) conducts biomedical research in California and Florida funded primarily with grants from agencies of the United States government. TSRI is a California not-for-profit public benefit corporation, exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. A significant reduction in funding from U.S. government agencies could have a material impact on the operations and cash flows of TSRI. TSRI also operates a graduate school known as The Kellogg School of Science and Technology ( The Kellogg School ). Accredited by the Western Association of Schools and Colleges, The Kellogg School provides an interdisciplinary program in the chemical and biological sciences and confers the degrees of Doctor of Philosophy, Doctor of Philosophy Honorary, and Master of Science. Scripps Florida Scripps Florida was established in January 2004 as an operating division of TSRI. Using the latest technology, scientists at Scripps Florida focus on basic biomedical research and drug discovery. In addition to resources provided by the National Institutes of Health and other grantors, funding is also provided by a grant of $310 million, plus interest, from the State of Florida. At September 30, 2014, the entire grant was awarded and distributed. In February 2006, the County of Palm Beach (the County ) voted to provide Scripps Florida with permanent facilities on a campus that includes a 30-acre site on the Jupiter campus of Florida Atlantic University (FAU) and 70 acres on the parcel (the Briger parcel ) located across the street from FAU. The County grant agreement for the permanent facilities includes: (i) a 99-year sublease for the FAU land, (ii) $187 million in funding for construction of the permanent facilities on the FAU land, and (iii) an option to enter into a lease for the Briger parcel. Occupancy of the permanent facility, and depreciation, commenced on March 31, The lease for the Briger parcel was signed by TSRI and the County on January 24, 2012, and expires on February 6, 2021, after which the County is required to convey fee simple title to TSRI. The $23 million appraised value of the grant for the use of the Briger property as of the date of the lease, is reflected as land and temporarily restricted revenue and is being amortized into unrestricted revenue over the term of the lease. The $13 million grant for the use of the underlying FAU land is being amortized as unrestricted revenue ratably over the life of the lease. Basis of Presentation TSRI s net assets and its revenues, gains, and losses are classified based on the existence, or absence, of donor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Unrestricted Net Assets Unrestricted net assets are not subject to donor-imposed or other restrictions and include the carrying value of all land, buildings, investments and equipment. Items that affect this category consist of unrestricted gifts, plus revenue and expenses associated with the primary objectives of TSRI, and releases of temporarily restricted net assets as described below. Unspent grant funds from federal and other grantors received in advance of the related expenditure are reported as deferred revenue. Temporarily Restricted Net Assets Temporarily restricted net assets result from amounts designated by donors for use in future periods, generally for specific research projects. Expirations of temporary - 7 -

69 restrictions are reported as net assets released from restrictions upon appropriation or upon the expiration of the restriction period. Gifts of cash for the acquisition of property are reported as net assets released from restriction when the property is placed in service. Restricted amounts whose restrictions are met in the same reporting period are reported as increases to temporarily restricted net assets with a corresponding release from restriction. Permanently Restricted Net Assets Permanently restricted net assets include donor-restricted gifts and bequests for permanent projects. Unconditional pledges are recorded at their estimated present value reduced by an allowance for uncollectible amounts. Technology Licensing Agreements The transfer of research results into the commercial marketplace is a fundamental component of TSRI s research activities. Accordingly, TSRI is a party to various arrangements that generally provide for the licensing of technology developed at TSRI s California and Florida campuses in exchange for research funding, royalties, other compensation, or ownership participation. In arrangements that contain multiple elements, the revenue allocation is based on each element s relative fair value provided that (i) each element meets the criteria as a separate unit of accounting, (ii) the element has value to the customer on a stand-alone basis, and (iii) there is objective and verifiable evidence of the fair value of the separate elements. The total value of the arrangement is recognized either ratably over the period of the transaction or as amounts are expended if the fair value of each element cannot be objectively determined. The Patent and Trademark Law Amendments Act of 1980 as amended, more commonly known as the Bayh-Dole Act, requires that academic institutions share with the inventor(s) a portion of any revenue received from the licensing of an invention. The requirements of this act result in royalty-sharing arrangements between TSRI and its faculty, some of whom may be related parties. Cash and Cash Equivalents Liquid investments, which fund the daily operating activities of TSRI and have a maturity of three months or less at the time of purchase, are reported as cash and cash equivalents. Investments Investments are carried at fair value, which is generally determined by management based on quoted market prices provided by independent outside valuation services. Investments for which readily determinable market values do not exist are recorded at estimated fair value as determined by TSRI, with the assistance of fund managers, the general partners, or third-party service providers, using methods and assumptions TSRI considers appropriate based on its understanding of the underlying characteristics of the investments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of volatility associated with certain investment securities, it is probable that changes in the values of investment securities will occur from time to time and that such changes could materially affect the amounts reported in the accompanying balance sheets. Use of Estimates and Assumptions The preparation 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, the amounts of revenues and expenses, and the related financial statement disclosures. Actual results could differ from those estimates

70 Subsequent Events In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 855, Subsequent Events, TSRI evaluated subsequent events through December 18, 2014, the date of the release of these financial statements. 2. INVESTMENTS General TSRI s investment portfolio includes cash, marketable securities, and nonmarketable securities managed by independent professional investment managers. Certain of these managers are authorized to invest a limited portion of TSRI s portfolio in derivative instruments to increase portfolio diversification and return and to reduce volatility. Investments at fair value as of September 30, 2014 and 2013, are summarized as follows (in thousands): Cash and short-term investment funds $ 147,685 $ 142,183 Growth assets: Global equity and convertible securities 123, ,833 Directional hedge funds 50,325 42,442 Private equity LPs 27,335 26,144 Inflation protection assets: Private real estate LPs 8,636 10,572 Private oil and gas LPs 6,881 9,143 Risk reduction assets: Government, mortgage, and corporate debt funds 32,151 48,282 Absolute return strategy funds 24,483 18,792 Total $ 421,232 $ 437,391 Investments with a fair value of $5.3 million and $5.2 million at September 30, 2014 and 2013, respectively, included above, have been received under annuity and unitrust agreements, which require annual payments from the trust to the beneficiaries during their lifetimes. Upon the death of the beneficiaries, substantially all of the remaining assets are available for general purposes, unless restricted. The liability to such beneficiaries of $1.1 million and $1.3 million at September 30, 2014 and 2013, is based on life expectancies and the annual payment required, discounted at the risk-free interest rate of 6% for 2014 and 2013, respectively. Unspent grant funds restricted to support the Florida division totaled $91.1 million and $108.7 million at September 30, 2014 and 2013, respectively. The majority of these unspent funds are invested through a mutual fund in short-term, fixed-income obligations with maturities of up to one year

71 The composition of investment income for the years ended September 30, 2014 and 2013, includes the following (in thousands): Interest and dividends: Unrestricted $ 3,893 $ 4,594 Temporarily restricted 5,902 4,774 Permanently restricted Net gains: Unrestricted 7,432 13,465 Temporarily restricted 11,340 9,806 Permanently restricted (416) 280 Investment income net $ 28,207 $ 33,019 Fair Value Assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC 820, Fair Value Measurements and Disclosures. Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Level 2 inputs are based on other observable market data, such as quoted prices for similar assets and liabilities, and inputs other than quoted prices that are observable, such as interest rates and yield curves. Level 3 inputs are developed from unobservable data reflecting management s own assumptions and include situations where there is little or no market activity for the asset or liability. The following is a general description of the valuation methodologies used for financial assets and liabilities measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy: Marketable Securities Utilizing Level 1 inputs include listed equity and bond market mutual funds, and exchange-traded equity securities held in professionally managed separate accounts, with valuation based upon quoted prices in active markets. Nonmarketable Securities Utilizing Level 2 inputs include shares in funds, such as unlisted mutual funds, limited exempted corporations, limited partnerships (LPs), and common trust funds (collectively, commingled funds ). Commingled funds have a net asset value (NAV) determined by market corroborated pricing or other models using observable inputs and are invested by professional asset management firms in the global equity, convertible, and fixed-income securities markets. In almost all cases, the individual securities held in commingled funds have readily determinable market values and provide daily or monthly liquidity. TSRI s investment in these vehicles may not be equal to the ratable portion of market values of those securities. A portion of TSRI s nonmarketable securities, including directional hedge funds, absolute return strategy funds, and private equity, real estate, and oil and gas LPs, (collectively, alternative investments ), has been classified as utilizing Level 3 inputs since valuation requires substantial judgment and estimation of factors not currently observable in the market. Alternative investments consist of fund holdings with varying redemption terms and conditions and are valued at TSRI s pro rata allocation of the fund s NAV or LP s equity balance, as determined by the fund s investment manager or general partner, respectively. Certain funds, structured as LPs, are illiquid, long-term commitments and are subject to future capital calls of $15.8 million and $21.0 million at September 30, 2014 and 2013, respectively

72 Nonmarketable securities that meet all of the following criteria are classified as Level 2 under the fair value hierarchy: The notice period for redemption is 90 days or less No lock up is in effect A full redemption is available at a determination date No gate or other redemption restriction is in effect No right to suspend redemptions exists Nonmarketable securities not meeting the above criteria are classified as Level 3. Gift Annuities and Unitrusts Obligations from donated assets are held by a bank custodian and subject to a payment schedule specified in the terms of the donor s agreement with TSRI. These assets have been classified as Level 1 as the fair value can be determined by quoted prices in active markets. TSRI s liabilities under the agreements with the donors calculated by utilizing interest rate and actuarial inputs have been classified as Level 2. The assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and 2013, including the fair value hierarchy of the valuation techniques utilized to determine such fair value, are as follows (in thousands): Quoted Prices in Active Markets for Significant Other Observable Significant Unobservable Balance 2014 Identical Assets Inputs Inputs September 30, Assets (Level 1) (Level 2) (Level 3) 2014 Marketable securities: Cash and short-term investment funds $ 124,012 $ 22,933 $ - $ 146,945 Global equity and convertible securities 122, ,677 Government, mortgage, and corporate debt funds 28,684 28,684 Total marketable securities 275,373 22, ,306 Nonmarketable securities: Directional hedge funds 50,325 50,325 Private real estate LPs 8,636 8,636 Private equity LPs 27,335 27,335 Private oil and gas LPs 6,881 6,881 Absolute return strategy funds 24,483 24,483 Total nonmarketable securities , ,660 Gift annuities and unitrusts: Cash and short-term investment funds Global equity and convertible securities 1,059 1,059 Government, mortgage, and corporate debt funds 3,468 3,468 Total gift annuities and unitrusts 5, ,266 Total $ 280,639 $ 22,933 $ 117,660 $ 421,232 Liabilities Gift annuities and unitrusts $ 1,121 $ 1,

73 Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Balance 2013 Identical Assets Inputs Inputs September 30, Assets (Level 1) (Level 2) (Level 3) 2013 Marketable securities: Cash and short-term investment funds $ 137,243 $ 4,300 $ - $ 141,543 Global equity and convertible securities 112, ,298 Government, mortgage, and corporate debt funds 30,759 14,143 44,902 Total marketable securities 280,300 18, ,743 Nonmarketable securities: Directional hedge funds 42,443 42,443 Private real estate LPs 10,572 10,572 Private equity LPs 26,144 26,144 Private oil and gas LPs 9,143 9,143 Absolute return strategy funds 18,792 18,792 Global equity and convertible securities 26,398 26,398 Total nonmarketable securities - 26, , ,492 Gift annuities and unitrusts: Cash and short-term investment funds Global equity and convertible securities 1,136 1,136 Government, mortgage, and corporate debt funds 3,380 3,380 Total gift annuities and unitrusts 5, ,156 Total $ 285,456 $ 44,841 $ 107,094 $ 437,391 Liabilities Gift annuities and unitrusts $ 1,273 $ 1,273 There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended September 30, 2014 and The changes in Level 3 instruments measured on a recurring basis for the years ended September 30, 2014 and 2013, are as follows (in thousands): Balance September 30, 2012 $ 100,302 Transfers into (out of) Level 3 Net realized and unrealized gains 5,156 Purchases 9,486 Settlements (7,850) Balance September 30, ,094 Transfers into (out of) Level 3 Net realized and unrealized gains 4,301 Purchases 31,499 Settlements (25,234) Balance September 30, 2014 $ 117,660 Gains and losses (realized and unrealized) for the periods above are reported in investment income in the unrestricted and temporarily restricted sections, and in contributions and other support in the permanently restricted section of the accompanying statements of activities

74 Investments for which market quotations are not readily available, may be valued using the stated NAV, which is known as using the practical expedient method to estimate the fair value of investment under ASC 820 and Accounting Standards Update (ASU) No A summary of investments with a reported NAV as of September 30, 2014 and 2013, is as follows (in thousands): Fair Value Estimated Using NAV per Share September 30, 2014 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Short term investment funds (a) $ 22,933 $ - Monthly <31 days Alternative investment funds Nonmarketable: Directional hedge funds (b) 50,325 Quarterly: 2-year rolling days Private equity real estate LPs (b) 8,636 1,842 N/A Not eligible for redemption N/A Private equity LPs (b) 27,335 10,632 N/A Not eligible for redemption N/A Private oil and gas LPs (b) 6,881 3,325 N/A Not eligible for redemption N/A Absolute return strategy funds (b) 24,483 Quarterly annual days Total $ 140,593 $ 15,799 Fair Value Estimated Using NAV per Share September 30, 2013 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Commingled funds Nonmarketable: Global equity and convertible securities (a) $ 26,398 $ - Monthly <31 days Government, mortgage, and corporate debt (a) 18,443 Monthly <31 days Alternative investment funds Nonmarketable: Directional hedge funds (b) 42,443 Quarterly: 2-Year Rolling days Private equity real estate LPs (b) 10,572 2,867 N/A Not eligible for redemption N/A Private equity LPs (b) 26,144 13,130 N/A Not eligible for redemption N/A Private oil and gas LPs (b) 9,143 5,005 N/A Not eligible for redemption N/A Absolute return strategy funds (b) 18,792 Quarterly Annual days Total $ 151,935 $ 21,002 * The fair values of investments have been estimated using the NAV of the investment. (a) Commingled Funds Interests in units/shares of these funds do not trade in active markets; however, managers are restricted by their investment mandates to investing in common stock, real estate investment trusts, and fixed-income securities. Fair value is primarily determined by aggregating the close of market prices of such securities, which are observable market inputs. Although the funds have other assets and liabilities, such as foreign currency hedges, securities lending collateral and receivables and payables, these generally comprise a small portion of total assets of NAV. (b) Alternative Investment Funds Interests in units/shares of these funds do not trade in active markets. For directional hedge funds and absolute return strategy funds, fair value is determined based upon a combination of readily observable market prices, third-party pricing sources, and discounted cash flow and other valuation models. For direct partnership investments in private equity, real estate, and oil and gas LPs, fair value is determined based upon discounted cash flow or other valuation models. For fund-of-funds partnership investments in private equity LPs, fair value is based upon a review of underlying fund investments, as reported by individual managers

75 Endowment TSRI s endowment consists of approximately 69 individual funds established for various purposes, including both donor-restricted funds and funds designated by the Board to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. TSRI s Board intends to preserve 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, TSRI 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 as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in a prudent manner. TSRI considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund The purposes of the organization and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the organization The investment policies of the organization TSRI 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. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for donor-specified periods. Under this policy, as approved by the Board, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a customized index while assuming a moderate level of investment risk. To satisfy its long-term investment return objectives, TSRI 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). TSRI targets a diversified asset allocation that places a greater emphasis on equity or equity-like investments to achieve its long-term return objectives within prudent risk constraints. TSRI expects its endowment funds over time to provide an average annual rate of return of approximately the consumer price index (CPI), plus 5%, net of fees. Actual returns in any given year may vary from this amount. Each year, TSRI appropriates for expenditure 5% of the endowment fund s average fair value for the 12 quarters approximately preceding May 31 in the fiscal year before which the distribution is planned. In establishing this policy, TSRI considered the long-term expected return on its endowment. Over the long term, TSRI expects the current spending policy to allow its endowment to grow at the inflation rate expressed as the change in the CPI. This is consistent with TSRI s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term as well as to provide additional growth through new gifts and investment return

76 Net Assets Temporarily restricted net assets as of September 30, 2014 and 2013, include net assets restricted for use in future periods or for designated research purposes as follows (in thousands): Restricted for future periods $ 77,351 $ 74,660 Restricted for research purposes 128, ,386 Total $ 205,955 $ 223,046 Net assets released from donor restriction by the satisfaction of time restrictions or by incurring expenses satisfying the restricted purposes during the years ended September 30, 2014 and 2013, are as follows (in thousands): Satisfaction of time restrictions $ 7,367 $ 6,483 Purpose restrictions research 31,243 29,401 Total net assets released from restrictions $ 38,610 $ 35,884 The endowment net assets composition by type of fund as of September 30, 2014 and 2013, is as follows (in thousands): Temporarily Permanently 2014 Unrestricted Restricted Restricted Total Donor-restricted endowment funds and net appreciation $ - $ 74,965 $ 41,744 $ 116,709 Board-designated endowment funds 23,898 23,898 Total funds $ 23,898 $ 74,965 $ 41,744 $ 140, Donor-restricted endowment funds and net appreciation $ - $ 70,604 $ 41,819 $ 112,423 Board-designated endowment funds 23,330 23,330 Total funds $ 23,330 $ 70,604 $ 41,819 $ 135,

77 The changes in endowment net assets as of September 30, 2014 and 2013, are as follows (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets September 30, 2012 $ 22,178 $ 65,703 $ 41,237 $ 129,118 Investment income 244 1, ,888 Realized and unrealized gains 1,530 6, ,807 Contributions Appropriation of endowment assets for expenditure (622) (3,640) (4,262) Other changes unitrust disbursements (50) (50) Endowment net assets September 30, ,330 70,604 41, ,753 Investment income 310 2, ,265 Realized and unrealized gains 1,729 6,796 (416) 8,109 Contributions Appropriation of endowment assets for expenditure (1,471) (5,334) (6,805) Other changes unitrust disbursements (38) (38) Endowment net assets September 30, 2014 $ 23,898 $ 74,965 $ 41,744 $ 140,607 The description of the amounts classified as restricted net assets as of September 30, 2014 and 2013, are as follows (in thousands): Permanently restricted net assets the portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by FASB ASC 958 $ 41,744 $ 41,819 Temporarily restricted net assets the portion of perpetual endowment funds subject to a time restriction under FASB ASC 958 $ 74,965 $ 70,

78 3. PLEDGES RECEIVABLE NET Pledges receivable net as of September 30, 2014 and 2013, included in other assets and receivables in the accompanying balance sheets, are summarized as follows (in thousands): Pledges receivable restricted to future periods net: Unconditional promises to give $ 3,716 $ 4,555 Less unamortized discount (320) (390) Subtotal 3,396 4,165 Less allowance for uncollectibles (1,011) (110) Total $ 2,385 $ 4,055 Amounts due in: Less than one year $ 698 $ 550 One to five years 2,486 3,423 More than five years Total $ 3,716 $ 4,555 Discount rates ranged from 0.3% to 5.25% for 2013 and PROPERTY Property as of September 30, 2014 and 2013, is summarized as follows (in thousands): Land $ 42,646 $ 42,646 Buildings 426, ,466 Equipment 258, ,489 Other assets 4,029 4,510 Total property 730, ,111 Less accumulated depreciation and amortization (381,877) (363,764) Property net $ 349,043 $ 359,347 The estimated useful lives of building and equipment spans up to 35 years. 5. DEBT TSRI borrows money through the issuance of tax-exempt and taxable debt pursuant to a Master Indenture of Trust entered into in The 1994 Master Indenture of Trust contains certain covenants, including limitations on the incurrence of additional debt. TSRI was in compliance with those covenants at September 30, 2014 and In 2000, TSRI borrowed $16 million through the issuance of tax-exempt serial and term bonds sponsored by the California Infrastructure and Economic Development Bank. Principal is due in varying

79 annual installments through Interest is payable on a semiannual basis at rates ranging from 4.80% to 5.75%. These bonds are collateralized by a pledge of revenues. In 2005, TSRI borrowed $44.5 million, which included $36.3 million in tax-exempt debt and $8.2 million in taxable debt, in serial and term bonds sponsored by the California Infrastructure and Economic Development Bank. These bonds are collateralized by a pledge of revenues. Principal is due in varying annual installments through Interest is payable on a semiannual basis at rates ranging from 5.00% to 5.04%. Approximately $22 million of this debt was issued to redeem the 1994 debt issue. At September 30, 2014 and 2013, the unamortized original issue premium on the 2005 bonds was $2 million and $2.1 million, respectively. Interest paid in fiscal years 2014 and 2013 on long-term debt was $2.3 million and $2.4 million, respectively. The estimated fair value of the tax-exempt bonds, calculated using market observable interest rates (Level 2 inputs) was $44.7 million and $46.9 million at September 30, 2014 and 2013, respectively. Scheduled principal repayments on long-term debt as of September 30, 2014, are as follows (in thousands): Years Ending September $ 2, , , , ,210 Thereafter 30,615 Total $ 42, POSTRETIREMENT BENEFITS AND OTHER Postretirement benefits and other as of September 30, 2014 and 2013, include benefit obligations as follows (in thousands): Defined benefit plan $ 23,808 $ 18,823 Deferred compensation and other 7,561 6,539 Total postretirement benefits $ 31,369 $ 25,362 Defined Benefit Plan Eligible TSRI employees who were not covered by the TSRI Faculty and Management Retirement Plan were covered by a defined benefit plan (the TSRI Cash Balance Retirement Plan). Pension benefits under the plan were based on specified benefit amounts and years of service. TSRI funds the pension liability, through contributions to an independent trust, at an amount equal to the net periodic pension expense. In September 2013, TSRI amended the plan to cease the accrual of additional benefits effective December 31, This amendment resulted in a curtailment, which decreased the 2013 Post Retirement and Other liability and decreased Pension Related Changes Other Than Net Periodic Pension

80 Expense by $3.8 million. Active plan participants receive employer contributions, determined as a percentage of participant salary, in the new TSRI Employment Retirement Plan, which totaled $2 million for the year ended September 30, Deferred Compensation and other TSRI has a deferred compensation plan for certain employees. Generally, this plan offers a deferred compensation benefit equal to 25% of base compensation accrued each month during the course of employment. The benefits are payable in a lump sum following the earlier of: i) separation from service or departure from TSRI; ii) death; or iii) permanent disability. Defined Contribution Plans TSRI provides a noncontributory money purchase plan for scientific staff and management (the TSRI Faculty and Management Retirement Plan). Contributions under this plan, determined as a percentage of participant salary, were $8.6 million and $6.8 million for the years ended September 30, 2014, and 2013, respectively. Employees who were eligible to participate in the TSRI Cash Balance Retirement Plan, or its new replacement defined contribution plan (the TSRI Employment Retirement Plan), also receive an employer matching contribution into a Tax Sheltered Annuity Plan of 50% of the employee contribution up to 6% of compensation. TSRI contributions to the Tax-Sheltered Annuity Plan were $779,000 and $684,000 for the years ended September 30, 2014 and 2013, respectively

81 A summary of the changes in the benefit obligation and Plan assets at September 30, 2014 and 2013, is presented below (in thousands): Change in projected benefit obligation (PBO): PBO at prior measurement date $ 73,721 $ 87,731 Service cost 1,057 4,166 Interest cost 3,760 3,648 Actuarial loss (gain) 10,098 (12,688) Benefits paid (5,327) (5,032) Curtailments (3,800) Administrative expenses paid (370) (304) PBO at current measurement date $ 82,939 $ 73,721 Change in plan assets: Fair value of assets at prior measurement date $ 54,898 $ 49,603 Actual gain on assets 7,194 3,082 Employer contributions 2,736 7,549 Benefits paid (5,327) (5,032) Administrative expenses paid (370) (304) Fair value of assets at current measurement date $ 59,131 $ 54,898 Components of net periodic pension expense: Service cost $ 1,057 $ 4,166 Interest cost 3,760 3,648 Expected return on assets (3,749) (4,012) Amortization of prior service cost 120 Curtailments (16) Net gain amortization 1,668 3,627 Net periodic pension expense $ 2,736 $ 7,533 Assuming no further significant changes in the Plan s design or valuation assumptions, net periodic pension expense for the year ended September 30, 2015, is approximately $2.8 million. The amortization of net loss and net prior service cost for the year ended September 30, 2015, is $2.6 million. A reconciliation of the funded status of the Plan at September 30, 2014 and 2013, is as follows (in thousands): Accumulated benefit obligation $ (82,939) $ (73,646) Projected benefit obligation $ (82,939) $ (73,721) Fair value of assets 59,131 54,898 Funded status $ (23,808) $ (18,823)

82 Assumptions used to determine the projected benefit obligation for the years ended September 30, 2014 and 2013, are as follows: Discount rate 4.5 % 5.3 % Compensation increase rate 3.0 Measurement date September Census date January Assumptions used to determine expense for the years ended September 30, 2014 and 2013, are as follows: Discount rate 5.3 % 4.3 % Long-term rate of return on assets Compensation increase rate Expected benefit payments as of September 30, 2014, are as follows (in thousands): Years Ending September $ 4, , , , ,672 Thereafter through ,626 The Investment Committee of the Board is responsible for the safety of the invested assets of the Plan through (i) the identification, adoption, and maintenance of an appropriate asset allocation that provides a target for the asset class within a minimum and maximum range; (ii) the identification, adoption, and maintenance of appropriate investment guidelines, policies, and procedures; and (iii) performance monitoring of portfolio managers against expectations as set forth in the investment guidelines. The policies are intended to provide for safety of principal through diversification in portfolios of domestic and international common stocks, bonds, LP interests, and cash equivalents at return objectives consistent with the risk levels established by the Board. The equity portion of the portfolio is diversified by economic sector, industry, quality, and size and is invested at the discretion of managers with distinct investment styles and specific guidelines. The allocation to absolute return strategies is invested in a multistrategy hedge fund-of-funds LP. The allocation to private equity is invested in fund-of-funds LPs, including a mix of venture capital, buyout, and distressed debt. Real assets consist of global real estate mutual funds. Professional investment advisors manage Plan investments. An independent Outsourced Chief Investment Office recommends alternative diversification models, provides professional performance evaluation, selects investment managers, and estimates the long-term rate of return for the asset allocation in place. The return is based on weighted-average capital market assumptions, including historical returns and the standard deviation and correlation of those historical returns, adjusted to anticipate the effects of inflation and economic market conditions for each asset class in the Plan

83 The Plan invests in mutual funds, common collective trust funds, commingled funds, and LPs. Plan assets include securities whose values are subject to fluctuations in the securities market. Changes in the fair value of these assets attributable to differences between actual and assumed returns are deferred as unrecognized gains or losses and included in the determination of net pension expense over time. Fair value is determined by quoted market prices for the same or similar instruments, except for absolute return strategy LPs and private equity fund LPs, which require substantial judgment and estimation of factors not currently observable in the market. In accordance with FASB ASC , Employers Disclosures about Postretirement Benefit Plan Assets, the Plan assets measured at fair value on a recurring basis as of September 30, 2014 and 2013, including the fair value hierarchy of the valuation techniques utilized to determine such fair value are as follows (see Note 3 Investments for a description) (in thousands): Total % of Plan % Target Assets Assets Allocation Balance as of September 30, 2014 Level 1 Level 2 Level Marketable securities: Cash and short-term funds $ - $ 378 $ - $ % - % Global equity and convertible securities 28,238 28, Real asset funds Government, mortgage, and corporate debt funds - 30 Total marketable securities 28, , Nonmarketable securities: Directional hedge funds 5,125 5, Private equity LPs 4,675 4, Private oil and gas LPs Absolute return strategy funds 1,937 1, Government, mortgage, and corporate debt funds 17,564 17, Total nonmarketable securities - 17,564 12,351 29, Total $ 28,838 $ 17,942 $ 12,351 $ 59, % 100 % Total % of Plan % Target Assets Assets Allocation Balance as of September 30, 2013 Level 1 Level 2 Level Marketable securities: Cash and short-term funds $ - $ 952 $ - $ % - % Global equity and convertible securities 20,227 20, Real asset funds 1,718 1, Government, mortgage, and corporate debt funds 14,099 2,665 16, Total marketable securities 36,044 3,617-39, Nonmarketable securities: Private equity LPs 3,962 3, Absolute return strategy funds 6,127 6, Global equity and convertible securities 5,148 5,148 9 Total nonmarketable securities - 5,148 10,089 15, Total $ 36,044 $ 8,765 $ 10,089 $ 54, % 100 %

84 There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended September 30, 2014 and The changes in Level 3 instruments measured on a recurring basis for the years ended September 30, 2014 and 2013, are as follows (in thousands): Balance September 30, 2012 $ 9,735 Transfers into (out of) Level 3 Net realized and unrealized gains (179) Purchases 957 Settlements (424) Balance September 30, ,089 Transfers into (out of) Level 3 Net realized and unrealized gains 2,385 Purchases 5,691 Settlements (5,814) Balance September 30, 2014 $ 12,351 A summary of the Plan s investments with a reported NAV as of September 30, 2014 and 2013, is as follows (in thousands): Fair Value Estimated Using NAV per Share September 30, 2014 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Common/collective trust funds and other: Cash and short-term funds (a) $ 378 $ - Daily None Government, mortgage and corporate debt funds (b) 17,564 Weekly <31 days Alternative investment funds: Absolute return strategy funds (b) 1,937 Semiannual 90 days Directional hedge funds 5,125 Quarterly 60 days Private oil and gas LPs (b) N/A Not eligible N/A Private equity LPs (b) 4,675 2,080 N/A Not eligible N/A Total $ 30,293 $ 2,

85 Fair Value Estimated Using NAV per Share September 30, 2013 Other Redemption Unfunded Redemption Redemption Notice Investment Fair Value * Commitment Frequency Restrictions Period Common/collective trust funds and other: Cash and short-term funds (a) $ 952 $ - Daily None Nonmarketable global equity and convertible securities (a) 2,158 Monthly <31 days Global equity and convertible securities (b) 2,990 Monthly <31 days Government, mortgage and corporate debt funds(b) 2,665 Monthly <31 days Alternative Investment funds: Absolute return strategy funds (b) 6,127 Semiannual 90 days Private equity LPs (b) 3,962 3,761 N/A Not eligible N/A Total $ 18,854 $ 3,761 * The fair values of the investments have been estimated using the NAV of the investment. (a) Common/Collective Trust Funds The Plan has units/shares in the funds that do not trade in active markets; however, managers of these funds are restricted by their investment mandates to investing in common stock, real estate investment trusts, and fixed-income securities. Fair value is primarily determined by aggregating the close of market prices of such securities, which are observable market inputs. Although the funds have other assets and liabilities, such as foreign currency hedges, securities lending collateral, receivables and payables, these generally comprise a small portion of total assets of NAV. (b) Alternative Investment Funds Interests in units/shares of these funds do not trade in active markets. For directional hedge funds and absolute return strategy funds, fair value is determined based upon a combination of readily observable market prices, third-party pricing sources, and discounted cash flow and other valuation models. For direct partnership investments in private equity and oil and gas LPs, fair value is determined based upon discounted cash flow or other valuation models. For fund-of-funds partnership investments in private equity LPs, fair value is based upon a review of underlying fund investments, as reported by individual managers. 7. COMMITMENTS AND CONTINGENCIES Long-Term Leases TSRI has entered into noncancelable operating lease agreements for buildings and equipment, expiring on various dates through Approximate minimum future rental payments required by these leases as of September 30, 2014, are summarized as follows (in thousands): Years Ending September $ 21, , , , ,983 Total $ 88,

86 Rental expense for operating leases totaled $23.6 million for the years ended September 30, 2014 and The deferred rent liability on operating leases is included in postretirement benefits and other in the accompanying balance sheets and was $8.1 million and $10 million at September 30, 2014 and 2013, respectively. The receivable from third parties for scheduled rent increases was $7.2 million and $9 million at September 30, 2014 and 2013, respectively. This receivable is included in grants and contracts in the accompanying balance sheets. Contingencies TSRI is a party to certain legal and other actions arising in the ordinary course of business. While it is not possible to predict or determine the outcome of these actions, it is the opinion of management that these liabilities do not have a material impact on the financial statements. 8. RECENTLY ISSUED ACCOUNTING STANDARDS The following summarizes noteworthy, recently issued accounting standards: In May 2014, the FASB issued ASU No , Revenue from Contracts with Customers. ASU No outlines a single comprehensive model for entities to use in accounting for revenue from contracts with customers. This standard supersedes most other revenue recognition guidance, including industry-specific guidance. ASU No is effective for accounting periods beginning after December 15, Management of TSRI is in the process of evaluating the impact that the adoption of ASU will have on the financial statements. In August 2014, the FASB issued ASU No , Disclosure of Uncertainties About an Entity s Ability to Continue as a Going Concern. This standard provides guidance on disclosing going-concern uncertainties in the financial statements. The standard requires management to perform interim and annual assessments of the entity s ability to continue as a going concern within one year of the issuance of the financial statements. ASU is effective for annual periods ending after December 31, Management of TSRI does not expect the adoption of ASU to have an impact on the financial statements. ******

87 SUPPLEMENTAL SCHEDULE

88 THE SCRIPPS RESEARCH INSTITUTE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Pass-Through Program Title/Federal Grantor/ Grant or Pass-Through Grantor Contract Number Expenditures RESEARCH AND DEVELOPMENT U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES: Direct 93RD $ 191,593,611 Direct Scripps Florida 93RD 39,459,875 Albert Einstein College of Medicine at Yeshiva University AI ,932 Albert Einstein College of Medicine at Yeshiva University AI ,016 Baylor College of Medicine DA ,253 Beth Israel Deaconess Medical Center AI ,001 Blood Center of Wisconsin, Inc. AI California Pacific Medical Center AG ,197 Carnegie Mellon University GM ,816 Case Western Reserve GM ,234 Cassia, LLC HHSN C 152,011 Columbia University AG ,125 Corgenix Medical Corporation AI ,014 Cornell University AI ,584 Emory University GM ,754 Georgia Institute of Technology GM ,370 Johns Hopkins University CA ,189 Johns Hopkins University HL ,533 ARRA La Jolla Institute for Allergy & Immunology AI ,386 Lawrence Berkeley National Labs CA ,711 Leidos Biomedical Research, INC HHSN E 1,084,146 Loma Linda University AI ,231 Massachusetts General Hospital AI ,791 Massachusetts General Hospital AI ,394 Medical College of Wisconsin HL ,312 Microbiotix, Inc. AI ,078 New York University AI ,017 Northwestern University AI ,595 Oak Crest Institute of Science AI ,304 Pacific Institute for Research and Evaluation AA ,003 Rutgers University GM ,159 Salk Institute DK ,168 San Diego Biomedical Research Institute CA ,147 San Diego Biomedical Research Institute HL ,439 Sanford-Burnham Medical Research Institute CA ,917 Scripps Florida AA ,149 Scripps Florida AI ,222 Scripps Florida GM ,572 Scripps Health HG ,613 Seattle Biomed AI ,141 Seattle Biomed AI ,930 Stanford Research Institute DA ,963 Torrey Pines Institute for Molecular Studies CA ,851 Torrey Pines Institute for Molecular Studies HL ,881 Tufts University EY ,984 (Continued)

89 THE SCRIPPS RESEARCH INSTITUTE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Pass-Through Program Title/Federal Grantor/ Grant or Pass-Through Grantor Contract Number Expenditures RESEARCH AND DEVELOPMENT U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES (Continued): Tulane University HHSN C $ 496,769 University of California Berkeley AG ,463 University of California Irvine AI ,385 University of California Los Angeles HHSN C 735,355 University of California San Diego AI ,929 University of California San Diego AR ,285 University of California San Diego CA ,820 University of California San Diego ES ,502 University of California San Diego ES ,634 University of California San Diego GM ,838 University of California San Diego GM ,000 University of California San Diego GM ,211 University of California San Diego GM ,672 University of California San Diego HD ,125 University of California San Diego HL ,762 University of California San Diego HL ,687 University of California San Diego MH ,425 University of California San Diego MH ,098 University of California San Diego MH ,337 University of California San Diego NS ,853 University of California San Diego NS ,213 University of Chicago AI ,567 University of Connecticut ES ,602 University of Iowa DE ,641 University of Massachusetts, Amherst GM ,955 University of Miami AI ,876 University of Miami AI ,244 University of Miami AI ,472 University of Minnesota AI ,907 University of Nebraska Medical Center MH ,405 University of North Carolina Chapel Hill DA ,707 University of North Carolina Chapel Hill DK ,838 University of Pennsylvania AI ,569 University of Pennsylvania GM ,531 University of Pennsylvania MH ,513 University of Rochester DE ,230 University of Southern California HL ,371 University of Southern California MH ,876 University of Texas Medical Branch at Galveston AI ,520 University of Texas Medical Branch at Galveston AI ,830 University of Utah GM ,696 University of Virginia HL ,646 University of Vermont College of Medicine HL ,768 University of Washington AI ,375 University of Washington GM ,380 University of Washington HL ,029 (Continued)

90 THE SCRIPPS RESEARCH INSTITUTE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Pass-Through Program Title/Federal Grantor/ Grant or Pass-Through Grantor Contract Number Expenditures RESEARCH AND DEVELOPMENT U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES (Continued): University of Wisconsin at Madison HL $ 323,635 Vaxinnate HHS C 142,400 Veterans Medical Research Foundation AI ,258 Weill Medical College of Cornell University DA ,429 Weill Medical College of Cornell University DA ,595 Virginia Commonwealth University DA ,830 Washington University AI ,241 SCRIPPS FLORIDA: Blood Systems, Inc. AI ,719 Broad Institute HG ,572 Dana-Farber Cancer Institute CA ,413 Dana-Farber Cancer Institute DK ,055 ARRA Dana-Farber Cancer Institute DK ,339 Emory University NS ,713 Fred Hutchinson Cancer Research Institute CA ,010 Harvard University AI ,055 La Jolla Institute for Alergy and Immunology AI ,998 McLean Hospital Corporation MH ,439 McLean Hospital Corporation MH ,491 Medical College of Wisconsin AI ,551 Modulation Therapeutics CA ,517 Moffitt Cancer Center and Research Institute CA ,489 Moffitt Cancer Center and Research Institute CA ,820 Mt Sinai School of Medicine DA ,183 Mt Sinai School of Medicine NS ,174 Rice University GM ,835 Sirenas Marine Discovery AI ,670 Stanford Research Institute HHSN C 214,164 State University of New York CA ,343 Texas Tech University Health Sciences Center DK ,788 TSRI CA GM ,030 TSRI CA GM ,958 TSRI CA MH ,012,093 TSRI CA NS ,236 Torrey Pines Institute for Molecular Studies AR ,922 University of California San Diego DA ,188 University of California San Francisco AI ,143 University of Pittsburgh AG ,757 University of Pittsburgh HL ,906 University of Southern California CA ,905 University of Michigan HL ,474 University of Minnesota HL ,224 University of Minnesota NS ,967 Van Andel Institute DK ,823 Van Andel Institute GM ,741 Total U.S. Department of Health and Human Services 257,843,756 (Continued)

91 THE SCRIPPS RESEARCH INSTITUTE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, 2014 Pass-Through Program Title/Federal Grantor/ Grant or Pass-Through Grantor Contract Number Expenditures RESEARCH AND DEVELOPMENT NATIONAL SCIENCE FOUNDATION: Direct Program 47RD $ 1,751,096 Direct Program Scripps Florida 47RD 420,975 Passed through: Georgia Institute of Technology CHE ,941 Emory University CHE ,474 Milwaukee School of Engineering DUE (6,927) Rutgers University DBI ,678 WestEd DRL ,410 Total National Science Foundation 3,305,647 DEPARTMENT OF DEFENSE: Direct Program 12RD 737,505 Direct Program Scripps Florida 12RD 1,856,657 Passed through: Ernest Gallo Clinic & Research Center W81XWH ,150 Leidos Biomedical Research, INC N C ,968 Scripps Florida Mayo Clinic, Jacksonville X81XWH ,723 Total Department of Defense 3,110,003 DEPARTMENT OF EDUCATION Passed Through WestEd (GAN) R305AI ,660 DEPARTMENT OF ENERGY: Direct Program 81RD 148,853 Passed through: Lawrence Berkeley National Labs DE-AC02-05CH ,465 Lawrence Berkeley National Labs DE-AC03-76SF ,184 Scripps Florida University of Virginia DE-SC ,090 Total Department of Energy 845,592 DEPARTMENT OF JUSTICE Direct Program 16.RD 1,051 NATIONAL AERONAUTICS AND SPACE ADMINISTRATION Direct Program 43.RD 610,602 Passed Through University of Missouri NNX12AD66G 41,061 Total National Aeronautics and Space Administration 651,663 OTHER FEDERAL State of Florida Scripps Florida 26,218,596 TOTAL EXPENDITURES OF FEDERAL AWARDS RESEARCH AND DEVELOPMENT $ 292,267,968 See notes to schedule of expenditures of federal awards. (Concluded)

92 THE SCRIPPS RESEARCH INSTITUTE NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED SEPTEMBER 30, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accompanying schedule of expenditures of federal awards has been prepared from The Scripps Research Institute s (TSRI) accounting records and is presented on the accrual basis of accounting. Because the schedule of expenditures of federal awards presents only a selected portion of the activities of TSRI in accordance with OMB Circular A-133, it is not intended to and does not present either the financial position or changes in net assets of TSRI. 2. SUBRECIPIENTS Of the federal expenditures presented in the accompanying schedule of expenditures of federal awards, TSRI provided federal awards to subrecipients totaling $41.4 million. 3. SCRIPPS FLORIDA TSRI receives federal awards from the National Institutes of Health, a portion of which are passed through to the Florida division for work performed at that location. The portion passed through is presented in the accompanying schedule of expenditures of federal awards as TSRI CA grants, and is not included in the amount of grants passed through to subrecipients outlined above. ******

93 INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Trustees The Scripps Research Institute: We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statementsof The Scripps Research Institute (the Institute ), which comprise the balance sheets as of September 30, 2014, the related statements of activities and cash flowsfor the year then ended, and the related notes to the financial statements, and have issued our report thereon dated December 18, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Institute s internal control over financial reporting ( internal control ) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Institute s internal control. Accordingly, we do not express an opinion on the effectiveness of the Institute s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

94 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Institute s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. December 18,

95 INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY OMB CIRCULAR A-133 To the Board of Trustees The Scripps Research Institute: Report on Compliance for Major Federal Program We have audited The Scripps Research Institute s (the Institute ) compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on the Institute s major federal program for the year ended September 30, The Institute s major federal program is identified in the summary of auditors results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal program. Auditor s Responsibility Our responsibility is to express an opinion on compliance for the Institute s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Institute s compliance with those requirements and performing such other procedures, as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of the Institute s compliance. Opinion on Major Federal Program In our opinion, the Institute complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended September 30, 2014.

96 Report on Internal Control Over Compliance Management of the Institute is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Institute s internal control over compliance with the types of requirements that could have a direct and material effect on its major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for its major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Institute s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. December 18,

97 THE SCRIPPS RESEARCH INSTITUTE SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED SEPTEMBER 30, SUMMARY OF AUDITORS RESULTS Financial Statements Type of auditors report issued: Internal control over financial reporting: Material weakness(es) identified? Significant deficiency(ies) identified? Noncompliance material to the financial statements noted? Unqualified No None reported No Federal Awards Internal control over major program: Material weakness(es) identified? Significant deficiency(ies) identified? Type of auditors report issued on compliance for the major program: Any audit findings disclosed that are required to be reported in accordance with Section 510(a) of OMB Circular A-133? Major program: No None reported Unqualified Dollar threshold used to distinguish Type A and Type B programs: $3,000,000 Auditee qualified as a low-risk auditee? No 2. FINANCIAL STATEMENT FINDINGS SECTION The audit disclosed no findings that are required to be reported. 3. FEDERAL AWARD FINDINGS AND QUESTIONED COSTS SECTION The audit disclosed no findings or questioned costs that are required to be reported. 4. OTHER MATTERS No Research and development cluster A Summary Schedule of Prior Year Audit Findings is not necessary because there were no prior year audit findings

98 Scripps Florida (A Division of The Scripps Research Institute) Financial Statements as of and for the Years Ended September 30, 2014 and 2013, Independent Auditors Report, and Report on Compliance

99 SCRIPPS FLORIDA (A Division of The Scripps Research Institute) TABLE OF CONTENTS MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING 1 INDEPENDENT AUDITORS REPORT 2 3 FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013: Balance Sheets 4 Statements of Activities 5 Statements of Cash Flows 6 Notes to Financial Statements 7 17 Page INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 18 19

100 SCRIPPS FLORIDA (A Division of The Scripps Research Institute) MANAGEMENT S STATEMENT ON RESPONSIBILITY FOR ACCOUNTING AND FINANCIAL REPORTING Management has the primary responsibility for the preparation of the financial statements and for ascertaining that the financial statements and other information fairly reflect the financial position and results of operations of Scripps Florida, a division of The Scripps Research Institute. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include amounts that are based on best estimates and judgments with appropriate consideration given to materiality. Management has made these estimates and judgments based on extensive experience and a substantive understanding of the underlying events and transactions. In fulfilling its responsibility for the reliability and integrity of financial information, management has established and maintains accounting procedures and related internal control systems. Management believes that these systems and controls provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management s authorizations and properly recorded to permit the preparation of reliable financial statements in conformity with accounting principles generally accepted in the United States of America, and that material errors or irregularities are either prevented or detected within a timely manner by employees in the normal course of performing their assigned duties. Scripps Florida s independent auditors consider the established internal control systems to the extent they deem necessary to express an opinion on the financial statements

101 DCS Proofread/Unprotected v6 Preliminary Draft For Discussion Purposes Only December 19, 2014 REPORT 1 TSRI FL REPORT DOC DOC v4 To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission 3:05 PM INDEPENDENT AUDITORS REPORT To The Board of Trustees The Scripps Research Institute: Report on the Financial Statements We have audited the accompanying financial statements of Scripps Florida, a division of The Scripps Research Institute (the Institute ), which comprise the balance sheets as of September 30, 2014 and 2013, and the related statements of activities and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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 entity 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 Scripps Florida 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.