Audited Financial Statements TRUSTEES OF THE CORCORAN GALLERY OF ART. June 30, 2010

Transcription

1 Audited Financial Statements TRUSTEES OF THE CORCORAN GALLERY OF ART June 30, 2010

2 Contents Independent Auditor s Report 1 Financial Statements Statements of financial position 2 Statements of activities 3 Statements of cash flows 4 Notes to the financial statements 5-24

3 Independent Auditor s Report To the Board of Trustees Trustees of the Corcoran We have audited the accompanying statement of financial position of Trustees of the Corcoran (the Corcoran) as of June 30, 2010, and the related statements of activities and cash flows for the year then ended. These financial statements are the responsibility of the Corcoran s management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year summarized comparative information has been derived from the Corcoran s 2009 financial statements and, in our report dated October 19, 2009, we expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trustees of the Corcoran as of June 30, 2010, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Washington, DC October 19,

4 Statements of Financial Position June 30, Assets Cash and cash equivalents - Notes B & T $ 11,071,843 $ 1,085,047 Accounts receivable - Note D 635, ,718 Merchandise inventory 125, ,517 Prepaid expenses and other assets 663, ,620 Contributions receivable - Notes E & L 1,558,173 4,333,186 Federal student financial aid receivable - Note F 536, ,053 Cash held in escrow - Notes B & C 396,476 6,579,928 Property held for sale - Note H 9,214,818 8,873,543 Investments - Notes B, C, L, & T 9,262,320 22,237,905 Beneficial interest in charitable trust - Notes C, G, & L 985, ,289 Property and equipment - Note H 18,346,746 10,658,219 Collection - Note I - - Total assets $ 52,796,529 $ 56,904,025 Liabilities and Net Assets Liabilities Accounts payable and accrued expenses $ 3,925,421 $ 4,217,873 Lines of credit - Note R 6,594,000 10,594,000 Deferred revenue 478,416 1,359,515 Refundable advance - U.S. Government student loans 57,820 61,239 Term loan - Note J 3,555,952 3,819,357 Interest rate swap - Notes C & J 492, ,268 Total liabilities 15,103,891 20,402,252 Commitments and contingencies - Note R - - Net assets - Notes K & L Unrestricted 8,960, ,571 Temporarily restricted 9,792,568 20,811,195 Permanently restricted 18,939,373 15,057,007 Total net assets 37,692,638 36,501,773 Total liabilities and net assets $ 52,796,529 $ 56,904,025 See notes to the financial statements. 2

5 Statements of Activities Year Ended June 30, 2010, with Comparative Totals for 2009 Temporarily Permanently Unrestricted Restricted Restricted Total Total Revenue and support Contributions and grants - Note M $ 3,095,896 $ 1,793,873 $ 42,853 $ 4,932,622 $ 5,018,491 Tuition, fees and other college income - Note N 13,760,626 13,760,626 12,461,998 Programs and enterprise 1,109,006 1,109,006 1,775,737 Operating investment return - Notes L & O 822,843 3,475,481 4,298,324 (1,213,714) Exhibitions and other income 2,300,805 2,300,805 1,474,636 Net assets released from restriction: Satisfaction of program restrictions 2,840,409 (2,840,409) - - Expiration of time restrictions 1,379,257 (1,379,257) - - Total revenue and support 25,308,842 1,049,688 42,853 26,401,383 19,517,148 Expense Program services Museum operations 1,490,002 1,490,002 1,482,213 Museum exhibitions 2,217,012 2,217,012 1,618,428 Museum projects 1,051,408 1,051,408 1,067,711 College operations 13,392,132 13,392,132 12,151,192 Programs and enterprise 1,359,191 1,359,191 1,690,499 Total program services 19,509, ,509,745 18,010,043 Supporting services Administration 3,997,797 3,997,797 4,152,312 Fund raising 1,556,224 1,556,224 1,282,074 Total supporting services 5,554, ,554,021 5,434,386 Total expense 25,063, ,063,766 23,444,429 Changes in net assets from operations 245,076 1,049,688 42,853 1,337,617 (3,927,281) Other changes Non-operating investment return - Notes L & O (2,220,765) (341,363) 7,278 (2,554,850) (4,451,330) Unrealized loss on interest rate swap - Notes C & J (142,014) (142,014) (243,983) Change in value of split-interest agreements - Notes C, G, & L 41,977 41,977 (270,488) Campaign contributions 19,565 19,565 - Satisfaction of Campaign restrictions 19,565 (19,565) - - Campaign activities and pledge write-offs (1,258,710) (1,258,710) (11,807) Satisfaction of building improvement restrictions 11,713,974 (11,713,974) - - Sale of collection items - Note I 3,878,035 3,878, ,389 Collection items purchased (30,000) (12,978) (87,777) (130,755) (139,750) Change in net assets 8,327,126 (11,018,627) 3,882,366 1,190,865 (8,225,250) Net assets, beginning of year 633,571 20,811,195 15,057,007 36,501,773 44,727,023 Net assets, end of year $ 8,960,697 $ 9,792,568 $ 18,939,373 $ 37,692,638 $ 36,501,773 See notes to the financial statements. Certain 2009 amounts have been reclassified for comparative purposes. 3

6 Statements of Cash Flows Year Ended June 30, Cash flows from operating activities Change in net assets $ 1,190,865 $ (8,225,250) Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities: Depreciation and amortization 620, ,732 Provision for uncollectible accounts and pledges 1,408, ,831 Change in discount on contributions receivable (253,988) - Net realized and unrealized (gain) loss on investments (1,557,262) 6,204,639 Change in value of split-interest agreements (41,977) 270,488 Unrealized loss on interest rate swap 142, ,983 Contributions and income restricted for building renovation (226,619) (132,037) Contributions restricted for long-term purposes (42,853) (35,813) Collection activity (3,747,280) (679,639) Changes in assets and liabilities: Accounts receivable (303,499) 726,084 Merchandise inventory 188,092 (5,565) Prepaid expenses and other assets 256,544 (336,137) Contributions receivable 703,351 (1,223,840) Federal student financial aid receivable 8,234 (16,786) Accounts payable and accrued expenses (292,452) 1,775,338 Deferred revenue (881,099) 774,248 Refundable advance (3,419) (17,986) Total adjustments (4,023,144) 8,398,540 Net cash (used in) provided by operating activities (2,832,279) 173,290 Cash flows from investing activities Change in cash held in escrow 6,183,452 1,464,134 Purchases of property and equipment (8,650,571) (5,105,298) Proceeds from sale of investments, net of purchases 14,532, ,156 Proceeds from sale of collection items 3,878,035 1,063,951 Purchases of collection items (130,755) (139,750) Net cash provided by (used in) investing activities 15,813,008 (2,071,807) Cash flows from financing activities Net (payments) borrowings under line of credit agreements (4,000,000) 1,000,000 Principal payments on loan payable (263,405) (263,404) Contributions and income received for building renovation 1,226,619 1,382,037 Contributions received for long-term purposes 42,853 35,813 Net cash (used in) provided by financing activities (2,993,933) 2,154,446 Net increase in cash and cash equivalents 9,986, ,929 Cash and cash equivalents, beginning of year 1,085, ,118 Cash and cash equivalents, end of year $ 11,071,843 $ 1,085,047 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 261,952 $ 274,528 Supplemental schedule of noncash investing and financing activities Stock gifts $ 140,120 $ 78,456 See notes to the financial statements. Certain 2009 amounts have been reclassified for comparative purposes. 4

7 A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: Trustees of the Corcoran (the Corcoran) was formed on May 18, The Corcoran was formed to establish an institution in Washington, DC, dedicated to art and used for the purpose of encouraging American genius in the production and preservation of works pertaining to the fine arts and kindred objects. The Corcoran includes the museum operations and an undergraduate and graduate curriculum in the Corcoran College of Art and Design (the College). Income taxes: The Corcoran is exempt from the payment of income taxes on its exempt activities under Section 501(c)(3) of the Internal Revenue Code and has been classified by the Internal Revenue Service as other than a private foundation within the meaning of Section 509(a)(1) of the Internal Revenue Code. The Corcoran has adopted the accounting standards related to uncertain income tax positions. The standard requires that an uncertain income tax position must be more likely than not (greater than 50% likelihood of realization) before it is recognized in the financial statements. Furthermore, the standard requires that the amount recognized be the same as that which would be determined as a result of a review by tax authorities having all relevant information. During the year ended June 30, 2010, management did not identify any uncertain income tax positions. At a minimum, the tax years beginning in 2006 through 2009 are open for examination by tax authorities. Basis of accounting: The accompanying financial statements have been prepared using the accrual basis of accounting. Accordingly, revenue is recognized when earned and expenses are recognized when the underlying obligations are incurred. Use of estimates: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Cash and cash equivalents: For financial statement purposes, the Corcoran considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents, except that any such investments purchased with funds held by endowment fund managers are classified as investments. Cash held in escrow: Cash held in escrow is comprised of the unspent portion of an $8 million grant from the government of the District of Columbia. The grant is in an escrow account and is restricted for use in performing renovations to the roof of the Corcoran s building on 17 th Street in northwest Washington, DC. Accounts receivable: Accounts receivable are presented at the gross, or face, amount due to the Corcoran. The Corcoran s management periodically reviews the status of all accounts receivable balances for collectability. The Corcoran provides for probable losses on accounts receivable using the allowance method. The allowance is determined based on management s experience and collection efforts. Balances that remain outstanding after the Corcoran has used reasonable collection efforts are written off. Inventory: Inventory, which consists of merchandise available for sale, is stated at the lower of cost or market, with cost based on the average cost method. 5

8 A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Pooled investments and total return policy: The Corcoran's investment portfolio includes permanently restricted, temporarily restricted, and unrestricted liquid net assets. Total investment return is allocated to specific net asset categories on a per unit basis (referred to as the total return policy). Total investment return consists of interest and dividends, net realized and unrealized gain or loss on investments, and investment fees. Contributions receivable: The Corcoran recognizes unconditional promises to give as contributions receivable and contribution revenue in the period in which the Corcoran is notified by the donor of a commitment to make a contribution. The receivable is recorded at the net present value based on the risk-free rate of return. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Cash received prior to conditions being met is recorded as deferred revenue. Property and equipment: Acquisitions of property and equipment of more than $5,000 are capitalized at cost. Depreciation and amortization are provided for using the straight-line basis over the following estimated useful lives: furniture and fixtures 3 to 5 years, equipment 3 to10 years, and building and improvements 20 to 40 years. Depreciation on construction-in-process assets starts when the asset is put in use. Property held for sale: Property held for sale is measured at the lower of cost or fair value less costs to sell when the property was not placed in service. Collection: The value of the collection has been excluded from the statements of financial position because the collection is a) held for public exhibition, education, or research in furtherance of public service rather than financial gain; b) are protected, kept unencumbered, cared for, and preserved; and c) subject to an organizational policy that requires the proceeds of items that are sold to be used to acquire other items for collections. Only current year purchases and proceeds from sale are reflected in the statements of activities. The Corcoran established collection plans and a deaccessioning policy that conform to established museum standard guidelines. Included in these guidelines is a policy of the Corcoran that proceeds from the sale of any collection items are to be used to purchase additional collection items. Deferred revenue: Deferred revenue primarily consists of exhibition and tuition payments received in advance of the period in which they are to be earned. Refundable advance: The refundable advance is an estimate of the potential liability to the U.S. Government from the administration of the Perkins Student Loan program. This primarily consists of the cash advanced from the U.S. Government to administer the Perkins Student Loan program and an estimate of defaulted loans that Corcoran guarantees to the U.S. Government. Net assets: For financial statement purposes, net assets are classified as follows: Unrestricted: Unrestricted net assets include those net assets whose use is not restricted by donors, even though its use may be designated by the Board of Trustees. Temporarily restricted: Temporarily restricted net assets include those net assets whose use by the Corcoran has been donor-restricted by specified time or purpose limitations. 6

9 A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Permanently restricted: Permanently restricted net assets include donorimposed restrictions stipulating that the donated funds be maintained in perpetuity but permit the Corcoran to use investment income derived from the donated assets for either specified or unspecified purposes. Restricted and unrestricted revenue and support: Contributions and investment income received are recorded as unrestricted, temporarily restricted, or permanently restricted revenue and support, depending on the existence or nature of any donor restrictions. Revenue and support that is restricted by the donor is reported as an increase in temporarily or permanently restricted net assets, as applicable. Within temporarily restricted net assets, amounts are reclassified to unrestricted net assets when restrictions expire. Donations of property and equipment are recorded as contributions at their estimated fair value at the date of donation. Such donations are reported as increases in unrestricted net assets unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted contributions. Absent donor stipulations regarding how long those donated assets must be maintained, the Corcoran reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. The Corcoran reclassifies temporarily restricted net assets to unrestricted net assets at that time. Grants: The Corcoran receives grants from various institutions to support specific exhibitions and other purposes. As expenses are incurred, the corresponding revenue is recognized. Any cash received in advance is recorded as deferred revenue. Tuition, fees and other college income: The Corcoran maintains a policy of offering qualified applicants admission to the Corcoran College of Art & Design without regard to financial circumstance. This policy provides for financial aid to eligible students in the form of direct grants, loans, and employment during the academic year. Tuition discounts in the form of scholarships and grants have been reported as a reduction of tuition revenues. A tuition discount represents the difference between the stated charge for tuition and fees and the amount that is billed to the student and/or third parties making payments on behalf of the student. Functional allocation of expenses: The costs of providing various program and supporting services have been summarized on a functional basis in the statement of activities. Accordingly, certain costs have been allocated among the program and supporting services benefited. Measure of operations: The Corcoran uses a spending-rate methodology to determine the amount of investment return to be generally included in operating revenue as described in Note L. Generally, investment return in excess of the spending rate is reported as a non-operating activity. Activities that the Corcoran considers to be non-recurring or peripheral activities are reported as non-operating, including changes in the value of split-interest agreements, unrealized gains and losses on derivatives, and activity relating to the Campaign for the Corcoran (Campaign). In addition, income in excess of the spending rate from the donor-restricted endowment and individual unrestricted contributions that the Board designated to the endowment are reported as non-operating. 7

10 A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Operating activities are defined to encompass transactions that relate directly to the support of the mission of the Corcoran and College of Art and Design. These include soliciting contributions and sponsoring college and museum activities. These also include investment income from the board-designated endowment other than the non-operating portion (referred to as the operating endowment). Prior-year comparative totals: The financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Corcoran s financial statements for the year ended June 30, 2009, from which the summarized information was derived. Subsequent events: Subsequent events have been evaluated through October 19, B. RISKS AND CONCENTRATIONS Credit risk: The Corcoran maintains demand deposits with commercial banks and money market funds with financial institutions. At times, certain balances held within these accounts may not be fully guaranteed or insured by the U.S. federal government. The uninsured portion of cash and money market accounts are backed solely by the assets of the underlying institution. As such, the failure of an underlying institution could result in financial loss to the Corcoran. Market value risk: The Corcoran also invests funds in common stock and professionally managed mutual funds. Such investments are exposed to market and credit risks. The Corcoran s investments may be subject to significant fluctuations in fair value. As a result, the investment balances reported in the accompanying financial statements may not be reflective of the portfolio's value during subsequent periods. Geographic risk: The Corcoran operates in the metropolitan Washington, DC, area. This concentration in one geographic area could potentially expose the Corcoran to economic losses in the event of economic hardship and disasters in Washington, DC. 8

11 C. FAIR VALUE MEASUREMENTS In accordance with generally accepted accounting principles, the Corcoran uses the following prioritized input levels to measure fair value of financial instruments. The input levels used for valuing financial instruments are not necessarily an indication of risk. Level 1 Observable inputs that reflect quoted prices for identical assets or liabilities in active markets such as stock quotes; Level 2 Includes inputs other than level 1 inputs that are directly or indirectly observable in the marketplace such as yield curves or other market data; Level 3 Unobservable inputs which reflect the reporting entity s assessment of the assumptions that market participants would use in pricing the asset or liability including assumptions about risk such as bid/ask spreads and liquidity discounts. Fair values of assets (liabilities) measured on a recurring basis were as follows at June 30, 2010, with comparative totals for 2009: Fair value Level 1 Level 2 Level 3 Total Cash in escrow $ 396,476 $ 396,476 $ - $ - $ 6,579,928 Investments Cash and cash equivalents 1,277,312 1,277, ,561 Fixed income mutual funds 3,130,606 3,130,606 9,213,435 Equity mutual funds 4,273,111 4,273,111 9,960,794 Common stock 581, ,291 1,084,739 Private investment fund - 1,356,376 Total investments 9,262,320 9,262, ,237,905 Beneficial interest in charitable trust 985, , ,289 Interest rate swap (492,282) (492,282) (350,268) Total $ 10,151,780 $ 9,658,796 $ - $ 492,984 $ 29,410,854 9

12 C. FAIR VALUE MEASUREMENTS CONTINUED Changes in the fair value of assets that use level 3 inputs consisted of the following for the year ended June 30, 2010: Beneficial Interest in Private Charitable Interest Investment Trust Rate Swap Fund Beginning of year $ 943,289 $ (350,268) $ 1,356,376 Gains (losses) Realized gains ,134 Change in unrealized gains (losses) 41,977 (142,014) (504,566) Total gains (losses) 41,977 (142,014) 73,568 Purchases Sales - - (1,430,220) End of year $ 985,266 $ (492,282) $ - Gains (losses) are reported in the statements of activities as follows: Change in value of split-interest agreements Unrealized loss on interest rate swap Investment return The cash in escrow and the investments have been valued using the market approach. The interest rate swap and beneficial interest in split-interest agreement have been valued using an income approach. D. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at June 30,: General and trade receivables $ 350,019 $ 248,026 Grants receivable 423, ,960 Federal financial aid funds receivable (Pell grants) - 37, , ,941 Less allowance for doubtful accounts (137,912) (104,223) $ 635,567 $ 412,718 10

13 E. CONTRIBUTIONS RECEIVABLE Contributions receivable consisted of the following at June 30,: Receivable within one year $ 1,633,023 $ 3,791,928 Receivable in one to five years 27,000 1,277,000 1,660,023 5,068,928 Allowance for uncollectible contributions (101,850) (481,754) Discount to present value - (253,988) $ 1,558,173 $ 4,333,186 Contributions receivable at June 30, 2010 and 2009, have been discounted using a rate of 6% for pledges received before June 30, 2000, and after July 1, 2007, and 5% for pledges received between June 30, 2000, and June 30, Two pledges comprised approximately 90% of the Corcoran s contributions receivable balance at June 30, Three pledges comprised approximately 68% of the Corcoran s contributions receivable balance at June 30, F. FEDERAL STUDENT FINANCIAL AID RECEIVABLE Federal student financial aid receivable is comprised of amounts due from students participating in the Perkins Student Loan Program. Federal student financial aid receivable consisted of the following at June 30,: Perkins student loans receivable $ 561,894 $ 572,128 Allowance for doubtful accounts (25,075) (25,075) $ 536,819 $ 547,053 G. BENEFICIAL INTEREST IN CHARITABLE TRUST The Corcoran was named as beneficiary in an irrevocable charitable remainder unitrust. The trust pays its donor an annual amount equal to 5.5% of the net fair market value of the trust assets. Upon the donor's death, the remaining assets in the trust are distributed to the specified charitable organizations in the manner specified in the trust document. The assets of the trust are held by an outside trustee and consist of a mixture of fixed income and equity securities. The Corcoran records its interest in the trust at fair value equal to the estimated future cash receipts, discounted at 4% and 6% over the expected life of the donor as of June 30, 2010 and 2009, respectively. 11

14 H. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30,: Land $ 1,255,835 $ 1,255,835 Buildings and improvements 20,958,319 8,944,620 Equipment 5,884,613 5,571,116 Furniture and fixtures 817, ,702 Construction in process - 4,178,229 28,916,469 20,767,502 Less accumulated depreciation and amortization (10,569,723) (10,109,283) $ 18,346,746 $ 10,658,219 Depreciation and amortization expense for the years ended June 30, 2010 and 2009, was $620,769 and $738,732, respectively. Interest that was capitalized during the years ended June 30, 2010 and 2009, was $91,818 and $189,599, respectively. During February 2005, the Corcoran entered into a contract to purchase the Randall School in southwest Washington, DC, for $6.2 million. The Corcoran placed a lien on the Fillmore School in Georgetown located in Washington, DC, in order to secure the financing to purchase the Randall School. During August 2006, the Corcoran entered into a contract to sell the Randall School to an unrelated development company (the company) for $8.2 million plus the costs to bring the building into compliance with the building code of the District of Columbia with respect to the portion of the building appurtenant to the museum and fine arts use. The company placed a total deposit of $500,000 in escrow held by a third party. However, the company defaulted on the purchase agreement during the year ended June 30, 2009, and released the escrow deposit with interest to the Corcoran in the amount of $528,738, which is reported in exhibitions and other income in the statement of activities for the year ended June 30, The Corcoran began actively marketing the Randall School to prospective buyers upon the default of the developer. During the year ended June 30, 2010, the Corcoran entered into a new agreement to sell the Randall School, which is subject to various terms and conditions. As of October 19, 2010, the due diligence period for the Randall School purchase has concluded and the purchaser has indicated an intent to proceed with the transaction. The District of Columbia Council (the DC Council) has approved legislation authorizing the purchaser's proposed development plan for the property. The amount of the sale is estimated at $6.5 million. At June 30, 2010 and 2009, the Randall School was classified as property held for sale and consisted of land recorded at $4,030,000 for both periods and buildings and improvements recorded at $5,184,818 and $4,843,543, respectively. The Corcoran has also entered into a ground lease agreement as the lessor subsequent to June 30, 2010 for the parking lot adjacent to its main building. As of October 19, 2010, there is a $1 million deposit in escrow. The lease is a 99-year lease with an option to renew for 50 more years. The Corcoran expects to receive about $400,000 per year with annual escalations in rent until any building construction performed by the lessee is complete. Following the completion of construction, the Corcoran expects to receive about $1.2 million per year with annual escalations in rent. The lease also contains an option for the lessor to purchase the property after 30 years. The purchase price would be agreed upon by both parties in accordance with the lease agreement. 12

15 I. COLLECTION The collection of the Corcoran was founded with the personal art collection of William Wilson Corcoran in In 1925, the Trustees of the Corcoran added to the collection by accepting the bequest of William Andrews Clark s collection of art. Over the years, many donors have generously enriched the museum s collection by gifts of art works and contributions for acquisition. In the course of its history, the Corcoran has established collections in five distinct areas: historic American art (c ), historic European art (c ), photography and media arts, decorative arts (classical antiquity present), and contemporary art (post-1980). The Corcoran serves three major constituencies through its exhibitions and programming: local area residents, national and international visitors to the nation s capital, and the local artistic community. The Corcoran employs curatorial staff to ensure that the collection is protected and preserved. During the year ended June 30, 2008, the Corcoran s curatorial department completed collections management plans for each of the five permanent collections and began a process to deaccession redundant, irrelevant, and low quality works from the collection. During the year ended June 30, 2009, the Corcoran deaccessioned 19 American paintings and 17 Indo-Islamic rugs in accordance with the criteria set forth in the collection plans and the deaccession policy. Seven paintings sold at auction during the fiscal year and proceeds were deposited in a restricted account for the purchase of art. During the year ended June 30, 2010, the Corcoran deaccessioned 18 American paintings in accordance with the criteria set forth in the collection plans and the deaccession policy. The net proceeds from the auction of these objects will be held in a permanently restricted fund for the purpose of new acquisition for the collections (see Note K). J. TERM LOAN AND DERIVATIVE Term loan: During November 2003, the Corcoran had drawn $6,935,008 under a line of credit facility that was converted to an unsecured term loan payable in 240 equal monthly principal installments plus variable interest at a rate of LIBOR plus 0.45%. With the sale of the Chillum Facility on May 25, 2004, a lump sum payment was made to reduce the term loan balance by $1,735,008. Total interest expense on all debt obligations for the years ended June 30, 2010 and 2009, was $260,856 and $275,088, respectively. As of June 30, 2010 and 2009, the balance of the amount payable under the term loan was $3,555,952 and $3,819,357, respectively. Future projected maturities on the loan are as follows: Year Ended June 30, 2011 $ 263, , , , ,404 Thereafter 2,238,932 $ 3,555,952 13

16 J. TERM LOAN AND DERIVATIVE CONTINUED As of June 30, 2009, the Corcoran failed to meet certain financial covenants as defined in the loan agreement. The lender has not exercised any remedies available to it as a result of the Corcoran s failure to meet the requirements of the loan covenants. As of June 30, 2010, the Corcoran was in compliance with the financial covenants as defined in the loan agreement. In June 2009 the Corcoran pledged certain investments to be used as collateral. In addition, the term loan is included in the revised terms of the debt obligations as described in Note T. Interest rate swap: In September 2005, the Corcoran entered into an interest rate swap with a financial institution under which the Corcoran will obtain a fixed rate of 5.31% in exchange for the term loan s stated variable rate of LIBOR plus 0.45%. The term of this interest rate swap agreement runs from October 3, 2005, to November 30, The fair value of the interest rate swap was a liability of $492,282 and $350,268 at June 30, 2010 and 2009, respectively. Note C includes additional information about the valuation of the interest rate swap. K. NET ASSETS Unrestricted net assets: Unrestricted net assets consisted of the following as of June 30,: Undesignated $ 3,314,254 $ (13,464,146) Board-designated Collateral on debt obligations (Note T) 3,017,017 6,889,233 Board-designated endowment (Note L) Museum 6,006,105 7,832,002 College - 674,103 Total board-designated endowment 6,006,105 8,506,105 Deficiencies in donor-restricted endowment (Note L) (3,376,679) (1,297,621) Total board-designated 5,646,443 14,097,717 Total unrestricted net assets $ 8,960,697 $ 633,571 14

17 K. NET ASSETS CONTINUED Temporarily restricted net assets: Temporarily restricted net assets were available for the following purposes or periods as of June 30,: Time Restricted Endowment (Note L) Without purpose restrictions $ 3,086 $ 2,388 With purpose restrictions for: Exhibitions 167, ,343 Art acquisition 244, ,644 Maintenance of Clark Collection and Gallery 766, ,457 Research and publications 197, ,685 College projects 24, ,315 Scholarships 156, ,129 Total time restricted 1,559,598 1,900,961 Purpose Restricted Exhibitions 201, ,195 Museum projects 232, ,210 Art acquisition 569, ,265 Maintenance of Clark Collection and Gallery 965,119 54,978 Research and publications 371, ,720 College projects 3,247,038 3,324,884 Building renovation - 12,544,349 Scholarships 2,645,667 1,606,633 Total purpose restricted 8,232,970 18,910,234 $ 9,792,568 $ 20,811,195 15

18 K. NET ASSETS CONTINUED Permanently restricted net assets: Permanently restricted net assets are restricted to the following as of June 30,: Endowment (Note L) Exhibitions $ 535,816 $ 535,816 Museum projects 1,146,889 1,143,941 Art acquisition 449, ,725 Maintenance of Clark Collection and Gallery 657, ,001 Research and publications 817, ,916 College projects 1,317,244 1,277,244 Scholarships 4,307,969 4,308,064 General operations 4,918,211 4,876,234 Total endowment 14,150,771 14,065,941 Assets required to be used to purchase collection items 4,788, ,066 $ 18,939,373 $ 15,057,007 L. ENDOWMENT The Corcoran s endowment consists of several individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees. The Corcoran s operating endowment consists of board-designated endowment funds that are not directly related to individual contributions. The Corcoran s nonoperating endowment consists of endowment funds that resulted from unrestricted (through board designation) and restricted individual contributions. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of relevant law: The Board of Trustees of the Corcoran has interpreted the Uniform Prudent Management of Institutional Funds Act of 2007 (UPMIFA) as adopted by the Council of the District of Columbia as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Corcoran classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Corcoran in a manner consistent with the standard of prudence prescribed by UPMIFA. 16

19 L. ENDOWMENT CONTINUED In accordance with UPMIFA, the Corcoran considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Organization (7) The investment policies of the Organization. Return objectives and risk parameters: The Corcoran has adopted investment and spending policies for endowment assets that attempt to preserve and enhance the fund s real inflationadjusted purchasing power by aligning average annual spending with inflation adjusted long-term returns. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for a donor-specified period(s) as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to achieve a three-year moving average of the consumer price index plus 6%. The Corcoran expects its endowment funds, over time, to provide a real total return of at least 5% over the long-term (rolling five-year periods). Actual returns in any given year may vary from this amount. Strategies employed for achieving objectives: To satisfy its long-term rate-of-return objectives, the Corcoran relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Corcoran targets a diversified asset allocation and selection of managers of diverse investment styles. The asset allocation places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending policy and how the investment objectives relate to spending policy: The Corcoran adopted a policy in 2001 limiting the amount of investment return available for general operations in any year to 5% of the average quarterly market value of the portfolio during the three-year period ending on the December 31 prior to the beginning of the fiscal year in which the return is to be spent. Investment return includes interest, dividends, and realized and unrealized gains and losses. The investment objective of the fund is to protect the principal, to achieve a total return that satisfies the annual spending policy requirement, and provides growth for the assets in real dollars. Funds with deficiencies: From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Corcoran to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $3,376,679 and $1,297,621 as of June 30, 2010 and 2009, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriations that were deemed prudent by the Board of Trustees. 17

20 L. ENDOWMENT CONTINUED Endowment net asset composition by type of asset (liability) was as follows as of June 30, 2010, with comparative totals for 2009: Te mpora rily Permanently Unrestricted Restricted Restricted Total Total Contributions receivable $ - $ - $ - $ - $ 8,095 Investments 9,262,320 9,262,320 15,348,672 Beneficial interest in charitable trust 985, , ,289 Due from operating fund 2, 629,426 1,559,598 3,903,185 8,092,209 6,875,330 $ 2, 629,426 $ 1,559,598 $ 14,150,771 $ 18,339,795 $ 23,175,386 Endowment net asset composition by type of fund was as follows as of June 30, 2010, with comparative totals for 2009: Temporarily Permanently Unrestricted Restricted Restricted Total Total Board-designated endowment funds Museum $ 6,006,105 $ - $ - $ 6,006,105 $ 7,832,002 College ,103 Total board-designated endowment 6,006, ,006,105 8,506,105 Donor-restricted endowment funds Exhibitions (124,302) 167, , , ,087 Museum Projects (329,720) - 1,146, , ,946 Art Acquisition - 244, , , ,369 Maintenance of Clark Collection - 766, ,001 1,423,048 1,418,458 Research and Publications - 197, ,916 1,015,315 1,009,601 College Projects (684,565) 24,069 1,317, ,748 1,539,224 Scholarships (1,084,181) 156,989 4,307,969 3,380,777 3,728,795 General Operations (1,153,911) 3,086 4,918,211 3,767,386 4,858,801 Total donor-restricted endowment (3,376,679) 1,559,598 14,150,771 12,333,690 14,669,281 $ 2,629,426 $ 1,559,598 $ 14,150,771 $ 18,339,795 $ 23,175,386 18

21 L. ENDOWMENT CONTINUED Changes in endowment net assets were as follows for the year ended June 30, 2010, with comparative totals for 2009: Temporarily Permanently Unrestricted Restricted Restricted Total Total Endowment net assets, beginning of year $ 7,208,484 $ 1,900,961 $ 14,065,941 $ 23,175,386 $ 27,862,594 Investment return: Interest and dividends 69,478 40, , ,871 Net loss 986, ,048 1,557,262 (6,204,639) Investment fees (31,603) (18,299) (49,902) (60,083) Total investment return 1,024, ,978-1,617,067 (5,828,851) Contributions 42,853 42,853 35,813 Appropriation per spending policy (945,369) (550,159) (1,495,528) (1,514,156) Additional appropriation (4,615,818) (384,182) (5,000,000) - Other changes: Change in value of split-interest agreements 41,977 41,977 (270,488) Transfer (out) in of board-designated endowment funds (41,960) (41,960) 2,890,474 Endowment net assets, end of year $ 2,629,426 $ 1,559,598 $ 14,150,771 $ 18,339,795 $ 23,175,386 Endowment investment income as reported in the statements of activities for the year ended June 30, 2010, with comparative totals for 2009 (see Note O) was as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Total Operating endowment return $ 574,361 $ - $ - $ 574,361 $ (2,294,947) Non-operating endowment return 449, ,978 1,042,706 (3,533,904) $ 1,024,089 $ 592,978 $ - $ 1,617,067 $ (5,828,851) 19

22 L. ENDOWMENT CONTINUED Endowment appropriations as reported in the statements of activities for the year ended June 30, 2010, with comparative totals for 2009 (see Note O) were as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Total Appropriation per spending policy from: Operating endowment $ (532,401) $ - $ - $ (532,401) $ (595,527) Non-operating endowment (412,968) (550,159) (963,127) (918,629) Total appropriation per spending policy (945,369) (550,159) - (1,495,528) (1,514,156) Additional appropriation from: Operating endowment (2,358,293) (2,358,293) - Non-operating endowment (2,257,525) (384,182) (2,641,707) - Total additional appropriation (4,615,818) (384,182) - (5,000,000) - $ (5,561,187) $ (934,341) $ - $ (6,495,528) $ (1,514,156) M. IN-KIND CONTRIBUTIONS Contributed time for professional services that enhance non-financial assets or require specialized skills are reflected as contributions in the financial statements at fair value. The fair value of these services for the years ended June 30, 2010 and 2009 totaled $469,338 and $94,277, respectively, and are primarily for catering, legal and other consulting services. A substantial number of unpaid volunteers have made significant contributions of their time in the furtherance of the Corcoran s programs. The value of this contributed time is not reflected in the financial statements since it does not meet established criteria for inclusion. N. TUITION, FEES, AND OTHER COLLEGE REVENUE Tuition, fees, and other college revenue is presented net of scholarships as follows for the year ended June 30,: Tuition, fees, and other college revenue $ 17,149,774 $ 14,801,184 Less scholarships (3,389,148) (2,339,186) $ 13,760,626 $ 12,461,998 20

23 O. INVESTMENTS RETURN The investment return consists of the following for the years ended June 30,: Interest and dividends $ 236,114 $ 599,678 Net gain (loss) 1,557,262 (6,204,639) 1,793,376 (5,604,961) Less investment fees (49,902) (60,083) $ 1,743,474 $ (5,665,044) The following summarizes how the investment income is reported based on the total return policy in the statement of activities for the year ended June 30, 2010, with comparative totals for 2009: Temporarily Permanently Unrestricted Restricted Restricted Total Total Operating investment return: Operations Non-endowment return $ 106,775 $ 12,354 $ - $ 119,129 $ 162,604 Appropriation from operating endowment 532, , ,527 Additional appropriation from operating endowment 2,358,293 2,358,293 - Endowment appropriation 412, , , ,629 Additional endowment appropriation 2,257, ,182 2,641,707 - Apply restrictions on appropriation of funds in deficit (412,968) 412, Apply restrictions on additional appropriation of funds in deficit (2,115,818) 2,115, Total operations 3,139,176 3,475,481-6,614,657 1,676,760 Operating endowment Endowment return 574, ,361 (2,294,947) Appropriation to operations (532,401) (532,401) (595,527) Additional appropriation to operations (2,358,293) (2,358,293) - Total operating endowment (2,316,333) - - (2,316,333) (2,890,474) Operating investment return 822,843 3,475,481-4,298,324 (1,213,714) Non-operating investment return: Non-endowment return 7,278 7,278 1,203 Endowment return 449, ,978 1,042,706 (3,533,904) Endowment appropriation (412,968) (550,159) (963,127) (918,629) Additional endowment appropriation (2,257,525) (384,182) (2,641,707) - Non-operating investment return (2,220,765) (341,363) 7,278 (2,554,850) (4,451,330) $ (1,397,922) $ 3,134,118 $ 7,278 $ 1,743,474 $ (5,665,044) 21

24 P. NET ASSET RECLASSIFICATION DUE TO DONOR AGREEMENT During the year ended June 30, 2009, the Corcoran entered into an agreement with a donor that specifies that the Corcoran use $3 million of unrestricted net assets for certain college projects. Accordingly, the Corcoran transferred $3 million from unrestricted net assets to temporarily restricted net assets. Q. RETIREMENT PLANS The Corcoran has three plans in which eligible employees are able to participate. The plans include a defined contribution retirement plan, a tax-deferred annuity plan, and a 457(b) deferred compensation plan. Defined Contribution Retirement Plan: The Corcoran sponsors a 403(b) retirement plan for eligible employees who have completed at least one year of service and attained the age of 21. The Corcoran contributes 5% of the employees annual salary to the individual s account. As of May 1, 2009, employer contributions to the plan have been temporarily suspended until further notice. Tax-Deferred Annuity Plan: The Corcoran sponsors a tax-deferred annuity plan under section 403(b) of the Internal Revenue Code. Employees are eligible to participate on the first day of the month following their employment date. Employees may contribute a portion of their compensation to the plan, and it is applied on a before-tax basis to an annuity contract owned by the employee. 457(b) Deferred Compensation Plan: The Corcoran sponsors a 457(b) deferred compensation plan for a select group of management and highly compensated employees as defined in the plan document. Compensation deferrals may be employee elective deferrals, employer non-elective contributions, or employer matching contributions. During the years ended June 30, 2010 and 2009, there were no participants or assets in this plan. Pension expense for the years ended June 30, 2010 and 2009, was $0 and $248,214, respectively. 22

25 R. COMMITMENTS AND CONTINGENCIES Operating leases: In March 2004, the Corcoran entered into an agreement with Potomac Apartment Group LLC, as agent for Pennsylvania House Associates Limited Partnership, to rent apartment units for student housing. The lease currently expires May 31, In lieu of a cash security deposit, the Corcoran has obtained a letter of credit in the amount of $255,000 which expires on June 30, As described in Note T, the letter of credit is included in the revised terms of the debt obligations. No draws have been made on the letter of credit as of June 30, 2010 and The Corcoran also leases various office equipment for its operations. Approximate future minimum lease payments under the above lease agreements as of June 30, 2010, are as follows: Year Ending June 30, Office Equipment Student Housing Total 2011 $ 10,451 $ 901,211 $ 911, ,360-9, ,360-9, ,360-9, ,580-8,580 $ 47,111 $ 901,211 $ 948,322 Total rental expense for the years ended June 30, 2010 and 2009, was $1,002,959 and $873,449, respectively. Grants and student financial aid: Amounts received and expended by the Corcoran under various federal and state programs are subject to audit by government agencies. The Corcoran has reported one instance of non-compliance with Federal student financial aid cash management requirements to the U.S. Department of Education during the year ended June 30, Management believes that adjustments, if any, which might result from audits or inquiries by government agencies would not have a material impact on the financial position of the Corcoran. Litigation: The Corcoran from time to time is a party to litigation arising in the ordinary course of business. Management believes that no pending legal proceeding will have a material adverse effect on the business, financial condition, or changes in net assets and cash flows of the Corcoran. Lines of credit: In September 2004, the Corcoran entered into an agreement with a financial institution for a revolving credit facility (referred to as the revolving line of credit) in the amount of $10 million to be used for the purchase and renovation of the Randall School from the District of Columbia pending issuance of tax-exempt bonds. The interest rate is LIBOR plus 1%. As long as the interest rate is variable, there is no prepayment penalty. In October 2006, the Corcoran converted its $10 million line of credit to an $8 million line of credit. The interest rate terms were unchanged by the line of credit conversion. The agreement expires on November 30, In August 2008 the Corcoran pledged certain investments to be used as collateral. In addition, the revolving line of credit is included in the revised terms of the debt obligations as described in Note T. At June 30, 2010 and 2009, the Corcoran owed $6,594,000 and $7,594,000 under the revolving line of credit agreement, respectively. 23