Burnham Institute for Medical Research. Financial Statements as of and for the Years Ended June 30, 2007 and 2006 and Independent Auditors Report

Transcription

1 Burnham Institute for Medical Research Financial Statements as of and for the Years Ended June 30, 2007 and 2006 and Independent Auditors Report

2 INDEPENDENT AUDITORS REPORT Board of Trustees Burnham Institute for Medical Research: We have audited the accompanying balance sheets of Burnham Institute for Medical Research (the Institute ) as of June 30, 2007 and 2006, and the related statements of activity and cash flows for the years then ended. These financial statements are the responsibility of the management of the Institute. 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 of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Institute as of June 30, 2007 and 2006, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. September 14, 2007

3 BURNHAM INSTITUTE FOR MEDICAL RESEARCH BALANCE SHEETS JUNE 30, 2007 AND 2006 ASSETS CASH AND CASH EQUIVALENTS $ 62,751,000 $ 5,494,000 RESTRICTED CASH AND CASH EQUIVALENTS 6,082,000 10,076,000 SHORT-TERM INVESTMENTS 13,587,000 11,630,000 GRANTS RECEIVABLE 8,670,000 8,444,000 PREPAID AND OTHER ASSETS AND RECEIVABLES, Net of allowance of $16,000 in 2007 and ,889,000 3,023,000 USE OF LONG-LIVED ASSETS 4,743,000 DEFERRED FINANCING COSTS Net 2,575,000 2,729,000 PLEDGES RECEIVABLE, Net of allowance of $295,000 in 2007 and $0 in ,766,000 5,488,000 PROPERTY Net 74,442,000 58,478,000 LONG-TERM INVESTMENTS 15,869,000 9,012,000 TOTAL $ 205,374,000 $ 114,374,000 LIABILITIES AND NET ASSETS LIABILITIES: Accounts payable and accrued expenses $ 14,310,000 $ 11,290,000 Deferred revenue 21,368,000 3,505,000 Debt 64,214,000 67,372,000 Total liabilities 99,892,000 82,167,000 NET ASSETS: Unrestricted 44,196,000 20,888,000 Temporarily restricted 53,459,000 5,929,000 Permanently restricted 7,827,000 5,390,000 Total net assets 105,482,000 32,207,000 TOTAL $ 205,374,000 $ 114,374,000 See notes to financial statements

4 BURNHAM INSTITUTE FOR MEDICAL RESEARCH STATEMENTS OF ACTIVITIES YEARS ENDED JUNE 30, 2007 AND 2006 CHANGES IN UNRESTRICTED NET ASSETS: Revenues: Federal grants and contracts $ 74,594,000 $ 71,577,000 Private and other government grants 6,313,000 5,781,000 Contributions 26,388,000 1,144,000 Investment return 3,032,000 2,094,000 Royalties, rent revenue, and other 868,000 1,122,000 Net assets released from restrictions 1,306, ,000 Total unrestricted revenues 112,501,000 82,599,000 Expenses: Research 75,406,000 71,601,000 General and administrative 11,908,000 9,706,000 Fund raising 1,879,000 1,028,000 Loss on retirement of debt 180,000 Total expenses 89,193,000 82,515,000 Increase in unrestricted net assets 23,308,000 84,000 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS: Contributions 48,619,000 1,705,000 Investment return 512,000 Net assets released from restrictions (1,306,000) (881,000) Transfer of net assets (170,000) Provision for uncollectible pledges (295,000) Increase in temporarily restricted net assets 47,530, ,000 CHANGES IN PERMANENTLY RESTRICTED NET ASSETS: Contributions 2,437,000 1,000,000 Transfer of net assets 170,000 Increase in permanently restricted net assets 2,437,000 1,170,000 INCREASE IN NET ASSETS 73,275,000 1,908,000 NET ASSETS Beginning of year 32,207,000 30,299,000 NET ASSETS End of year $ 105,482,000 $ 32,207,000 See notes to financial statements

5 BURNHAM INSTITUTE FOR MEDICAL RESEARCH STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2007 AND 2006 CASH FLOWS FROM OPERATING ACTIVITIES: Increase in net assets $ 73,275,000 $ 1,908,000 Adjustments to reflect cash flows from operating activities: Depreciation and amortization 7,939,000 7,073,000 Amortization of debt premium (64,000) (20,000) Contributions restricted for endowment (2,437,000) (1,170,000) Contributions restricted for property acquisition (23,168,000) (10,000) Gifts in Kind (14,083,000) Interest on restricted cash and cash equivalents (361,000) (127,000) Net realized and unrealized gains (1,850,000) (1,113,000) Changes in assets and liabilities: Grants receivable (226,000) (335,000) Prepaid and other assets and receivables (3,948,000) (903,000) Pledges receivable (4,278,000) (401,000) Accounts payable and accrued expenses (28,000) 2,001,000 Deferred revenue 13,692, ,000 Net cash provided by operating activities 44,463,000 7,595,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (10,780,000) (22,659,000) Proceeds from sales of investments 3,816,000 17,379,000 Increase in restricted cash and cash equivalents (361,000) (9,668,000) Decrease in restricted cash and cash equivalents 4,716,000 4,935,000 Purchases of property, plant, and equipment (7,108,000) (7,746,000) Net cash used in investing activities (9,717,000) (17,759,000) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (3,094,000) (51,135,000) Net proceeds from issuance of debt 58,278,000 Contributions restricted for property acquisition 23,168,000 Contributions restricted for endowment 2,437,000 1,170,000 Net cash provided by financing activities 22,511,000 8,313,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 57,257,000 (1,851,000) CASH AND CASH EQUIVALENTS Beginning of year 5,494,000 7,345,000 CASH AND CASH EQUIVALENTS End of year $ 62,751,000 $ 5,494,000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 3,391,000 $ 3,775,000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Fixed asset acquisitions included in accounts payable $ 3,551,000 $ 503,000 NONCASH INVESTING AND FINANCING ACTIVITIES Gift of property $ 13,385,000 $ 10,000 See notes to financial statements

6 BURNHAM INSTITUTE FOR MEDICAL RESEARCH NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2007 AND SIGNIFICANT ACCOUNTING POLICIES General Burnham Institute for Medical Research (the Institute ), conducts basic biomedical research funded primarily by grants from agencies of the U.S. government. The Institute is a California not-for-profit public benefit corporation, exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. Funding Grant applications are submitted to various federal and nonfederal agencies. Those applications funded are typically awarded for a four-year period, with the amount awarded negotiated in advance. Grant revenue is recognized as unrestricted revenue when the research costs are incurred. Unspent grant funds received in advance of the related expenditure are reported as deferred revenue. The Institute established an operating division in Orlando, FL, Burnham Institute for Medical Research at Lake Nona, in May Funding is provided by a $155 million grant, plus interest, from the State of Florida to be disbursed in varying amounts ranging from $4.4 million to $45.4 million per year over a ten-year period commencing in March 2007, conditioned on compliance with certain covenants and conditions. Expended grant funds from the State of Florida are reflected as unrestricted revenue. Unspent grant funds from the State of Florida are reflected as temporarily restricted net assets until spent. Certain local governments and private entities (the Funding Parties ) agreed to provide temporary space, land, and $81 million in funding for the development of the Institute s temporary and permanent facility, to be located in the Lake Nona area of the City of Orlando. The estimated fair rental value of the use of temporary facilities applicable to future periods is reported as use of long-lived assets and an increase in temporarily restricted net assets and will be amortized ratably into unrestricted revenue and expense during occupancy. The grant for the construction of permanent facilities is recorded as construction in process (or property, upon completion) and deferred revenue as costs are incurred. Depreciation will commence upon occupancy. The balance in the deferred revenue account will be recognized as unrestricted revenue when completion and occupancy appear probable. The grant for the use of the land for the permanent site is reflected as use of long-lived assets and deferred revenue (until resolution of uncertainties about the project are resolved) which are amortized, ratably, over the life of the twenty-five year lease and reflected as unrestricted expense and revenue. The Funding Parties hold a joint leasehold mortgage in the permanent site, ground lease, and permanent facility. When occupancy appears probable, the remaining deferred revenue will be recognized as temporarily restricted revenue and subsequently will be transferred to unrestricted revenue ratably over the remaining life of the lease. The Institute has received conditional contributions to fund joint scientific faculty and research and equipment totaling $37 million. Receipts under these agreements have been recorded as deferred revenue and will be recognized as conditions are met

7 Contributions Contributions are recorded as revenue at their present value when unconditionally pledged or when received, whichever is earlier. The discounted values of recorded pledges are accreted to their full values, using a risk-free interest rate, during the period beginning when the pledge is made until the time it is expected to be paid. Contributions subject to donor-imposed restrictions for use in a future period or for a specific purpose are reported as either temporarily or permanently restricted, depending on the nature of the donor s restriction. When a donor restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Donor-restricted contributions whose restrictions are met in the same reporting period are reported as unrestricted contributions. The Institute reports gifts of equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the Institute reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Cash and Cash Equivalents Cash and cash equivalents are defined as cash on hand and in banks plus short-term investments with a maturity, at the date of purchase, of three months or less. Restricted Cash and Cash Equivalents Restricted cash and cash equivalents represent debt proceeds whose use are limited to the purchase of equipment (see Note 6). Prepaid and Other Assets and Receivables Included in prepaid and other assets and receivables is $615,000 and $489,000 at June 30, 2007 and 2006, respectively, for loans to employees for housing relocation. These loans are secured by deeds of trust and incur interest at rates ranging from 0% to 5.5%. Use of Long-Lived Assets Use of long-lived assets relate to the fair value of land and temporary facilities provided to the Institute to use to conduct research. The assets are amortized over the term of the agreements of 2 years for the use of temporary facilities and 25 years for the use of land for the permanent facility. Pledges Receivable The Institute records pledges receivable, net of allowances for uncollectible amounts, when there is sufficient evidence in the form of verifiable documentation that an unconditional promise was made. The Institute discounts pledges that are expected to be collected after one year, using the risk-free rate of return. The provision for uncollectible amounts, if any, is calculated based on specific identification of uncollectible accounts. Investments Investments are carried at fair value based on quoted market prices. Long-term investments include securities related to permanently restricted net assets and to the debt service reserve account of the Institute s certificates of participation (see Note 6). All other investments are reported as short term

8 Property and Depreciation Purchased property is recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements 7 40 Furniture and equipment 3 5 Years Deferred Financing Costs Deferred financing costs relate to certificates of participation and are amortized utilizing the effective interest method over the life of the related certificates. Deferred Rent The Institute entered into a new lease agreement during fiscal This resulted in a deferred rent balance of $1,684,000 and $1,864,000, due to a free rent period, which is included in accounts payable and accrued expenses as of June 30, 2007 and Use of Estimates 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INVESTMENTS Investments at fair value as of June 30, 2007 and 2006, are summarized as follows: Equity securities: Mutual and managed funds $ 13,696,000 $ 10,650,000 Individual securities 92,000 Fixed income securities: U.S. government 3,951,000 4,011,000 Mutual and managed funds 5,040,000 4,735,000 Short-term funds 6,769,000 1,154,000 Investments short- and long-term $ 29,456,000 $ 20,642,000 Long-term investments with a fair value of $3,951,000 and $4,011,000 as of June 30, 2007 and 2006, respectively, are restricted for use as a debt service reserve supporting the Institute s taxexempt certificates of participation debt issue. Also included in long-term investments is $6,600,000 that the trustees of the Institute designated as quasi-endowment during 2007, the earnings on which can be used to support the operations of the Institute

9 Investment return as of June 30, 2007 and 2006, is comprised of the following: Interest and dividends $ 1,757,000 $ 1,029,000 Net realized and unrealized gains 1,850,000 1,113,000 Management fees (63,000) (48,000) $ 3,544,000 $ 2,094, PLEDGES RECEIVABLE Pledges receivable due to be collected as of June 30, 2007 and 2006, are as follows: Gross amounts due in: Less than one year $ 2,779,000 $ 1,062,000 One to five years 4,653,000 4,393,000 More than five years 6,059,000 3,089,000 13,491,000 8,544,000 Less present value discount (3,430,000) (3,056,000) Less allowance for uncollectible pledges (295,000) Total $ 9,766,000 $ 5,488,000 The discount will be recognized as contribution income in future years, as the discount is amortized using an effective yield over the duration of the pledges. Management estimates collectibility on a pledge-by-pledge basis. Pledges receivable, net of present value discount, include $5,120,000 and $4,074,000 from trustees of the Institute at June 30, 2007 and 2006, respectively. The Institute received contributions from trustees of $3,084,000 and $2,027,000 for the years ended June 30, 2007 and 2006, respectively. The Institute is named as the beneficiary in various revocable trusts and wills. The contribution revenue will be recognized when the agreements become irrevocable or when the assets are distributed to the Institute for its unconditional use, whichever occurs first

10 4. PROPERTY The carrying value and related accumulated depreciation of property as of June 30, 2007 and 2006, are as follows: Land $ 18,552,000 $ 5,167,000 Buildings and building improvements 62,036,000 61,011,000 Furniture and equipment 36,317,000 32,263,000 Construction in progress 4,446, ,000 Total 121,351,000 98,944,000 Less accumulated depreciation 46,909,000 40,466,000 Property net $ 74,442,000 $ 58,478,000 Depreciation expense was $7,594,000 and $6,815,000 for the years ended June 30, 2007 and 2006, respectively. 5. DEFERRED REVENUE The $21,368,000 balance in deferred revenue in 2007 includes $17,341,000 in revenue, that the Institute received related to its Florida operations, which has been deferred to future periods due to uncertainties and/or conditions placed on the use of the assets. Revenue will be recognized in the periods these uncertainties and conditions have been met. Deferred revenue as of June 30, 2007 and 2006, consisted of the following: Conditional contribution $ 10,000,000 $ - Deferred contribution for land and buildings 7,341,000 Deferred grant revenue 4,027,000 3,505,000 Total $ 21,368,000 $ 3,505, DEBT During 2006, the Institute borrowed $59,405,000 through the issuance of tax-exempt serial and term certificates of participation ( COPs ) sponsored by the County of San Diego. The COPs are collateralized by a pledge of revenues and include certain covenants, including restrictions on the issuance of parity debt. Principal is due in varying annual installments through Interest is payable on a semiannual basis at 5.00%. The principal balance outstanding on the COPs at June 30, 2007 and 2006, was $58,450,000 and $59,405,000, respectively. The bonds were sold at a premium of $1,168,000, which is included in debt in the accompanying 2006 balance sheet and is amortized over the life of the COPs. At June 30, 2007 and 2006, the unamortized premium was $1,083,000 and $1,147,000, respectively

11 Proceeds from the issuance of the COPs were used to defease the 1999 certificates of participation sponsored by the County of San Diego and to finance certain new capital improvements and equipment purchases. Available funds for capital improvements and equipment purchases related to the COPs of $6,082,000 at June 30, 2007, are held in escrow and are reported as restricted cash in the accompanying balance sheet. The loss on extinguishment of the 1999 bonds, net of the expected future recovery through indirect cost reimbursement of grants, was $180,000. During 2004, the Institute obtained two loans from a commercial bank for $2,001,000 and $1,001,000 totaling $3,002,000 to finance the purchase of scientific equipment. The loans are secured by certain equipment of the Institute. The loans are payable in monthly installments of $46,722 and $23,320 and bear interest at rates of 5.71% and 5.60%, respectively. Final payment is due in The outstanding balance of the loans at June 30, 2007 and 2006, was $502,000 and $1,291,000, respectively. Included in debt is $339,000 and $478,000 at June 30, 2007 and 2006, respectively, representing a capital lease for equipment with a net book value of $389,000 and $546,000 at June 30, 2007 and 2006, respectively. Amortization of this equipment, is included with depreciation expense and totaled $156,000 for each of the years ended June 30, 2007 and The agreement expires in September Future minimum lease payments under this capital lease are $170,000 per year through fiscal 2009 and $28,000 for fiscal Of this amount, $102,000 represents interest payments. The present value of the minimum lease payments, $339,000, is included in the table below. During 2005, the Institute entered into an equipment financing arrangement through ABAG Finance Authority for Nonprofit Corporations totaling $6,300,000 (the lease line ) for the purchase of equipment during 2005 and Principal and interest payments of $117,000 are due monthly. The lease line bears interest at 4.22% and matures in Available funds related to the lease line of $0 and $392,000 at June 30, 2007 and 2006, respectively, are held in escrow and are reported as restricted cash in the accompanying balance sheets. At June 30, 2007 and 2006, included in accounts payable and accrued expenses are $0 and $388,000, respectively, of equipment purchases that will be reimbursed from this lease line. The outstanding lease line balance at June 30, 2007 and 2006, was $3,840,000 and $5,051,000, respectively. Total interest expense incurred for the years ended June 30, 2007 and 2006, is $3,471,000 and $3,697,000, respectively. Scheduled principal repayments on debt as of June 30, 2007, are as follows: Years Ending June $ 2,916, ,474, ,371, ,180, ,170,000 Thereafter 53,020,000 Total $ 63,131,

12 7. NET ASSETS Temporarily restricted net assets include net assets restricted for use in future periods, campus specific use, or for designated research purposes. Restricted for future periods $ 7,757,000 $ 5,151,000 Restricted for Burnham Institute at Lake Nona 43,587,000 Restricted for research purpose 2,115, ,000 Total $ 53,459,000 $ 5,929,000 Permanently restricted net assets are restricted to investment in perpetuity, the income from which is expendable to support research. 8. COMMITMENTS Operating Leases The Institute has entered into operating leases for equipment and facilities space. The lease agreements expire on various dates through May Future minimum payments due under the noncancelable operating leases with remaining terms in excess of one year as of June 30, 2007, are as follows: Years Ending June $ 3,165, ,165, ,233, ,000 Total $ 9,780,000 Rent expense totaled $2,776,000 and $2,735,000 for the years ended June 30, 2007 and 2006, respectively. The Institute leases space under operating leases to third parties. Rental income under the leases was $227,000 and $257,000 for the years ended June 30, 2007 and 2006, respectively, and is included in royalties, rent revenue, and other in the accompanying statements of activities. The leases expire on various dates through April Total minimum lease payments to be received are $176,000. Pension Plan The Institute has a defined contribution pension plan. For eligible employees, the Institute matches an employee s contribution after one year of continuous service to a maximum of 10% of the employee s annual salary if the employee s contributions are at least 5% of annual salary. The Institute s contributions expense related to this plan for fiscal 2007 and 2006 was $2,031,000 and $1,783,000, respectively. Deferred Compensation Plan The Institute established a deferred compensation plan in February Eligible employees may elect salary deferrals to be made to the plan up to the

13 maximum amount permitted by law. The Institute may make elective contributions and/or matching contributions at the sole discretion of the Board of Trustees. No elective contributions were made in 2007 and Plan assets and the related liabilities to participants are included in the accompanying balance sheets and totaled $462,000 and $348,000 at June 30, 2007 and 2006, respectively. Legal The Institute is, from time to time, a party to certain legal actions arising in the ordinary course of business. In the opinion of management, liabilities, if any, under these actions will not result in material charges against net assets. Guarantees and Indemnities From time to time, the Institute enters into certain types of contracts that contingently require the Institute to indemnify parties against third-party claims. These contracts primarily relate to (i) certain technology transfer/license agreements, under which the Institute may be required to indemnify licensees, (ii) certain real estate leases, under which the Institute may be required to indemnify property owners for environmental or other liabilities and other claims arising from the Institute s use of the premises, and (iii) certain agreements with the Institute s officers, directors, and employees, under which the Institute may be required to indemnify such persons for liabilities arising out of their employment relationship. The terms of such obligations vary by contract and, in most instances, a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on the Institute s balance sheets for any of the periods presented. 9. OTHER RELATED-PARTY DISCLOSURES During 2007 and 2006, the Institute received $48,000 and $125,000, respectively, from sponsored research agreements with companies at which two officers and trustees served as directors. In 2006, the Institute also received $40,000 for licensing fees from a company where an Institute trustee serves as a director. During 2007 and 2006, the Institute received $130,000 and $109,000, respectively, in rental revenue from a company at which a trustee served as a director. In 2007 and 2006, the Institute made payments of $1,605,000 and $1,080,000, respectively, to vendors of goods, services, and equipment at which officers or trustees served as directors. ******