OREGON SHAKESPEARE FESTIVAL ASSOCIATION AND OREGON SHAKESPEARE FESTIVAL ENDOWMENT FUND

Transcription

1 OREGON SHAKESPEARE FESTIVAL ASSOCIATION AND OREGON SHAKESPEARE FESTIVAL ENDOWMENT FUND Combined Audited Financial Statements For The Years Ended

2 TABLE OF CONTENTS Independent Auditor s Report 1 Combined Statements of Financial Position 3 Combined Statements of Activities 4 Combined Statements of Cash Flows 6 Notes to Combined Financial Statements 7 SUPPLEMENT AL INFORMAT ION Independent Auditor s Report On Supplemental Information 33 Statements of Functional Expenses - Schedule I 34 Combining Statements of Net Assets - Schedule II 36 Oregon Shakespeare Festival Association Statements of Financial Position - Schedule III 37 Statements of Activities - Schedule IV 38 Statements of Cash Flows - Schedule V 40 Oregon Shakespeare Festival Endowment Fund Statements of Financial Position - Schedule VI 41 Statements of Activities - Schedule VII 42 Statements of Cash Flows - Schedule VIII 43

3 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Oregon Shakespeare Festival Association and Oregon Shakespeare Festival Endowment Fund We have audited the accompanying combined financial statements of Oregon Shakespeare Festival Association and Oregon Shakespeare Festival Endowment Fund (nonprofit corporations), which comprise the combined statements of financial position as of, and the related combined statements of activities and cash flows for the years then ended, and the related notes to the combined financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined 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 combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United Print States of America. Area Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the organization s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the organization s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 520 SW Yamhill Street Suite 500 Portland, Oregon P: F: mail@mcdonaldjacobs.com mcdonaldjacobs.com - 1 -

4 Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Oregon Shakespeare Festival Association and Oregon Shakespeare Festival Endowment Fund as of, and changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Portland, Oregon March 6,

5 ORE GON SHAKE SPE ARE FE STIVAL ASSOCIATION AND ORE GON SHAKE SPE ARE FE STIVAL E NDOWME NT FUND COMBINED STATEMENTS OF FINANCIAL POSITION ASSE TS Current assets: Cash and cash equivalents $ 490, 538 $ 861, 794 Inve stme nts 966, 932 2, 702, 651 Accounts receivable 209, , 785 Pledges receivable, net 4,612,932 4,144,166 Due from E ndowment Fund 2,485,000 2,028,948 Prepaid expenses 1,738,099 1,458,655 Inventory 135, , 031 Total current assets 10,638,196 11,574,030 Noncurrent pledges receivable, net 1, 738, 653 2, 875, 817 Property and equipment, net 36,216,149 35,548,118 E ndowment Fund 37,787,412 35,385,002 TOTAL ASSE TS $ 86, 380, 410 $ 85, 382, 967 LIABILITIES AND NET ASSETS Current liabilities: Line of credit $ 1, 000, 000 $ 700, 000 Accounts payable and accrued expenses 3, 698, 162 2, 520, 579 Due to E ndowment Fund 1,407,502 1,026,591 Deferred revenue, tickets 572, ,127 Deferred revenue, program and other revenues 807,243 1,078,786 Current portion of long-term debt 313, , 386 Total current liabilities 7,798,653 5,998,469 Long-term debt, less current portion 6, 614, 701 6, 928, 084 Total liabilities 14,413,354 12,926,553 Net assets: Unrestricted 40,646,219 39,112,847 Temporarily restricted 13,826,933 16,230,207 Permanently restricted 17,493,904 17,113,360 Total net assets 71,967,056 72,456,414 TOTAL LIABILITIE S AND NE T ASSE TS $ 86, 380, 410 $ 85, 382, 967 See notes to combined financial statements

6 COMBINED STATEMENTS OF ACTIVITIES For the years ended Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Operating revenue: Plays $ 21,811,185 $ - $ - $ 21,811,185 $ 22,112,375 $ - $ - $ 22,112,375 Other events 354, , , ,356 Educational programs 319, , , ,144 Publications 272, , , ,494 Concessions 522, , , ,058 Investment income (loss) 3,847 5,440-9,287 (22,332) - - (22,332) Support from Endowment Fund 1,380, ,838-1,612,814 1,414, ,414,697 Insurance recoveries 712, , Other 558, , , ,088 Total operating revenue 25,935, ,278-26,172,581 25,573, ,573,880 Support: Memberships 4,777, ,777,491 4,226, ,226,175 Gifts and grants 3,147,557 3,253,124-6,400,681 3,161,086 4,100,852-7,261,938 Support groups 90, ,133 98, ,535 Net assets released from restrictions: Satisfaction of time and purpose restrictions 5,631,351 (5,631,351) - - 3,651,665 (3,651,665) - - Total support 13,646,532 (2,378,227) - 11,268,305 11,137, ,187-11,586,648 Total operating revenue and support 39,581,835 (2,140,949) - 37,440,886 36,711, ,187-37,160,528 Operating expenses: Plays and education 28,632, ,632,285 26,031, ,031,039 Marketing and audience services 4,870, ,870,422 4,783, ,783,261 General and administration 4,631, ,631,176 4,346, ,346,220 Membership and fundraising 2,116, ,116,849 1,882, ,882,213 Total operating expenses 40,250, ,250,732 37,042, ,042,733 Income (loss) from current endeavors (668,897) (2,140,949) - (2,809,846) (331,392) 449, ,795 Continued See notes to combined financial statements

7 COMBINED STATEMENTS OF ACTIVITIES For the years ended Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Income (loss) from current endeavors Brought forward (668,897) (2,140,949) - (2,809,846) (331,392) 449, ,795 Other funds and nonoperating activities, net (42,503) 61,331-18,828-45,007-45,007 Collective bargaining expenses (249,290) - - (249,290) Depreciation on assets funded by restricted gifts and grants (974,474) - - (974,474) (914,282) - - (914,282) Capital campaign contributions and earnings - 1,031,300-1,031,300-1,503,570-1,503,570 Capital campaign contributions released from restriction 2,386,164 (2,386,164) - - 1,189,420 (1,189,420) - - Capital campaign direct expenses - (157,576) - (157,576) Endowment activities: Endowment Fund contributions - 10, , ,544-50,000 5,325,872 5,375,872 Endowment Fund investment income 1,593,798 2,740,390-4,334, ,298 1,085,298-1,726,596 Change in value gift annuities - (53,436) - (53,436) - (85,227) - (85,227) Endowment support to Festival (677,559) (1,508,170) - (2,185,729) (657,387) (1,092,982) - (1,750,369) Endowment expenses (83,157) - - (83,157) (79,591) - - (79,591) Change in net assets 1,533,372 (2,403,274) 380,544 (489,358) (401,224) 765,433 5,325,872 5,690,081 Net assets: Beginning of year 39,112,847 16,230,207 17,113,360 72,456,414 39,514,071 15,464,774 11,787,488 66,766,333 End of year $ 40,646,219 $ 13,826,933 $ 17,493,904 $ 71,967,056 $ 39,112,847 $ 16,230,207 $ 17,113,360 $ 72,456,414 See notes to combined financial statements

8 COMBINED STATEMENTS OF CASH FLOWS For the years ended Cash flows from operating activities: Change in net assets $ (489,358) $ 5,690,081 Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation 2,081,299 1,847,823 Allowance for uncollectible pledges (12,388) 8,219 Net realized/unrealized loss on investments 27,701 51,302 Contributions restricted for capital improvements (1,242,545) (1,497,989) Net (increase) decrease in Endowment Fund (2,402,410) (5,187,281) (Increase) decrease in: Accounts and pledges receivable 696,265 (1,168,557) Net due to/due from Endowment Fund (75,141) 96,584 Other current assets (261,802) 54,135 Increase (decrease) in: Accounts payable and accrued expenses 1,177,583 (343,748) Deferred revenue (70,535) (13,621) Net cash used in operating activities (571,331) (463,052) Cash flows from investing activities: Proceeds from sale of investments 1,747,610 5,649,030 Purchase of investments (39,592) (4,562,356) Additions to property and equipment (2,749,330) (3,349,259) Net cash used in investing activities (1,041,312) (2,262,585) Cash flows from financing activities: Net proceeds from line of credit 300, ,000 Proceeds from long-term debt - 1,400,000 Payments on long-term debt (301,158) (266,797) Contributions restricted to capital improvements 1,242,545 1,497,989 Net cash provided by financing activities 1,241,387 3,331,192 Net increase (decrease) in cash and cash equivalents (371,256) 605,555 Cash and cash equivalents: Beginning of year 861, ,239 End of year $ 490,538 $ 861,794 See notes to combined financial statements

9 1. THE ORGANIZATIONS NOTES TO COMBINED FINANCIAL STATEMENTS The Oregon Shakespeare Festival Association (Festival) is an Oregon nonprofit corporation. The Festival is the nation's oldest and largest theater in rotating repertory. Its purpose is to provide for promotion of the arts, theatre and music, and to effectuate training, education and performances in the arts. The Festival presents a nine-month season (from February to October) of eleven plays, a mixture of Shakespeare and classic and contemporary playwrights. The plays are performed at the Festival's three theaters: the Allen Elizabethan Theater, the Angus Bowmer Theater and the Thomas Theater. The Festival has a contract with the Actors' Equity Association, which provides the employment rules of conduct between the two organizations. The current contract expires November 14, The contract provides that there may be no strike, boycott, interruption of work, temporary walk-out or lock-out for any reason during the term of this agreement. The Oregon Shakespeare Festival Endowment Fund (Endowment Fund) is also an Oregon nonprofit corporation. The Endowment Fund exists to invest certain assets for the benefit of the Festival. A trust agreement between the Festival and the Endowment Fund requires the Endowment Fund to pay the Festival an amount not to exceed 7% of the average Endowment Fund assets as annual support. During 2015, the Endowment Fund committed additional support totaling up to $1.8 million in connection with the Festival's development department expansion. The Endowment Fund will record support to the Festival as expenses are incurred, beginning in During 2016, the Endowment Fund received a restricted endowment contribution of approximately $5 million with earnings restricted to the Artistic Opportunity Fund. Distribution of restricted earnings is calculated following the same methodology as the annual support. Total support from the Endowment Fund to the Festival for 2017 and 2016 are as follows: Annual distribution $ 1,380,976 $ 1,414,697 Development department expansion 572, ,672 Artistic Opportunity Fund 231,838 - Total support $ 2,185,729 $ 1,750,369 Subsequent to yearend, the Trustees of the Endowment Fund approved a $750,000 loan to the Festival for operations, marketing and wildfire smoke contingency for 2018, if needed. In accordance with the terms of the loan, interest at 2% per annum will be payable quarterly on the average outstanding balance during such quarter, with the outstanding principal and interest due December 31,

10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Combination The combined financial statements include the accounts of the Festival and the Endowment Fund (collectively, the Organizations). Intercompany transactions and balances between the Festival and the Endowment Fund as of have not been eliminated. Because the transactions represent contractual obligations between the two entities, management believes it is appropriate not to eliminate the transactions in the combined statements. Basis of Presentation The accompanying combined financial statements have been prepared to focus on the Organizations as a whole and to present balances and transactions according to the existence or absence of donor-imposed restrictions. This has been accomplished by classification of the Organizations' net assets and transactions into three classes of net assets unrestricted, temporarily restricted and permanently restricted, as follows: Unrestricted net assets represent net assets not subject to donor-imposed stipulations. Temporarily restricted net assets represent net assets subject to donor-imposed stipulations that may or will be met by actions of the Organizations and/or the passage of time. Permanently restricted net assets represent net assets subject to donor-imposed stipulations that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of the Organizations. Cash and Cash Equivalents For purposes of the statements of cash flows, the Organizations consider all highly liquid investments available for current use with maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents held in investment accounts are considered investments

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Investments Festival investments are carried at fair value. Interest income is included as an increase in unrestricted net assets in the accompanying statements of activities since its use is unrestricted, except for earnings on donor restricted funds for which interest is restricted. Endowment Fund investments in marketable securities and mutual funds are carried at fair value. Investments in limited partnership interests have been estimated by management (in the absence of readily determinable fair values) based on information provided by fund managers or the general partners. Accounts Receivable Accounts receivable are reported at the amount management expects to collect on balances outstanding at year-end. Based on an assessment of the credit history with those having outstanding balances and current relationships with them, management has concluded that realization losses on balances outstanding at year-end will be insignificant. Promises to Give (Pledges) Unconditional promises to give (pledges) are recognized as revenue in the period the commitment is received and as assets, decreases of liabilities or expenses depending on the form of the benefits received. Promises to give are recorded at net realizable value if expected to be collected in one year and at fair value if expected to be collected in more than one year. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Bequests are recorded as revenue at the time the Organizations have an established right to the bequest and the proceeds are measurable. Prepaid Expenses Prepaid expenses primarily represent costs incurred in advance related to the following season's productions. These costs are recognized as expenses in the season when the productions are presented. Inventory Inventory, consisting of production, plant and office supplies, is stated at the lower of cost, determined by the first-in, first-out method, or market

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Property and Equipment Acquisitions of property and equipment in excess of $1,000 are capitalized. Property and equipment purchased are recorded at cost. Donated assets are reflected as contributions at their estimated values on the date received. Depreciation of buildings and equipment is provided over the estimated useful lives of the respective assets using the straight-line method. Depreciation expense is segregated between depreciation on assets funded from working capital and depreciation on assets funded by restricted gifts and grants. Ticket Sales and Deferred Revenue Ticket sales are recognized as revenue in the period earned as the related productions are presented. Deferred revenue represents monies collected in advance for ticket sales and other programs applicable to the following performance season. Contributions Contributions received are recorded as unrestricted, temporarily restricted or permanently restricted support, depending on the existence or nature of any donor restrictions. Donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Contributions of Long-Lived Assets Contributions of land, buildings and equipment, without donor stipulations concerning the use of such long-lived assets, are reported as revenues of the unrestricted net asset class. Contributions of cash or other assets to be used to acquire land, buildings and equipment with such donor stipulations are reported as revenues of the temporarily restricted net asset class; the restrictions are considered to be released at the time of acquisition of such long-lived assets

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Donated Assets and Services Donations of property, equipment, materials and other assets are recorded as support at their estimated fair value at the date of donation. Such donations are reported as unrestricted support unless the donor has restricted the donated asset to a specific purpose. The Organizations recognize donated services that create or enhance nonfinancial assets or that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. In addition, a number of volunteers have made significant contributions of their time in the furtherance of the Festival's programs. The value of this contributed time is not reflected in the accompanying statements of activities since the criteria for recording donated services has not been met. Advertising The Festival expenses advertising production and communication costs in the year the advertising first takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of direct mail brochures that include order forms for the Festival s tickets and memberships and telemarketing efforts. The capitalized costs of the advertising are amortized over the following season to which the tickets relate. Advertising costs approximating $59,000 and $78,000 are reported as prepaid expenses at, respectively. Total advertising expense approximated $724,000 and $579,000 and are included in total Marketing and audience services expense for the years ended, respectively. Income Taxes The Festival and the Endowment Fund are exempt from federal and state taxes on income derived from operations related to the purpose for which they are organized under Section 501(c)(3) of the Internal Revenue Code and applicable state law. The Organizations, at times, have unrelated business income from advertising, rental property and certain income from investments. Income taxes are not material to the financial statements and accordingly, are not reported separately in the accompanying financial statements. The Organizations are not private foundations. The Organizations follow the provisions of FASB ASC Topic Accounting for Uncertainty in Income Taxes. Management has evaluated the Organizations' tax positions and concluded that there are no uncertain tax positions that require adjustment to the financial statements to comply with provisions of this Topic

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued Expense Allocation The costs of providing the various programs and other activities have been summarized on a functional basis in the statements of activities. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Income (Loss) from Current Endeavors To facilitate comparisons of annual operating results with the Festival s general operating budget for the year, Festival management has chosen to group like accounts on the statements of activities as Current Endeavors". Summary totals in the unrestricted column for operating revenue, operating expenses, and support can thus be readily compared with the adopted budget totals and the income (loss) from current endeavors figure can be compared and contrasted with the budgeted net gain or loss for the year. Depreciation on assets funded by restricted gifts and grants primarily reflects the depreciation expense on leasehold improvements which were financed through restricted donations. Festival management has chosen not to fund this expense in its annual operating budget but through a reduction in its net assets and to exclude the cost from the total for current endeavors. 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of support and revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events The Organization has evaluated all subsequent events through March 6, 2018, the date the financial statements were available to be issued. Restatements to 2016 Restatements to previously presented 2016 financial statements include the following reclassifications: Additional depreciation of approximately $251,400 on assets funded by restricted gifts and grants reported on the combined statement of activities and statement of functional expenses was reclassified from depreciation reported in operations. Endowment Fund contributions of approximately $244,600 originally reported as unrestricted were reclassified as permanently restricted on the combined statement of activities. The restatements had no impact on the change in net assets or the combined total net assets

15 3. INVESTMENTS OREGON SHAKESPEARE FESTIVAL ASSOCIATION Investments of the Festival are recorded at fair value and consist of the following at : Money market accounts $ 478,124 $ 30,936 Corporate bonds - 721,809 Government bonds - 657,242 Corporate stocks 148, ,889 Certificates of deposit 340,550 1,153,775 Total investments $ 966,932 $ 2,702,651 Investment income consists of the following for the years ended October 31, 2017 and 2016: Interest and dividends $ 39,843 $ 56,446 Net realized/ unrealized loss (24,064) (51,302) Total investment income $ 15,779 $ 5,144 Reported in current endeavors $ 9,287 $ (22,332) Reported in nonoperating activities 6,492 27,476 Total investment income $ 15,779 $ 5,144 Certificates of deposit include funds restricted under a security agreement with the Actors' Equity Association. The agreement requires the Festival to maintain funds equal to two weeks' salary for each union actor employed. The funds are invested in a certificate of deposit and are carried at fair value. Interest on the security deposit is recognized by the Festival as earned. The certificates of deposit secure an irrevocable letter of credit that Actors Equity could draw on to meet the actors payroll if needed

16 4. PLEDGES RECEIVABLE Pledges receivable of the Festival at consist of the following: Pledges receivable: Within one year $ 4,618,044 $ 4,161,666 Within two to five years 1,794,653 2,831,817 More than five years - 100,000 Total pledges receivable 6,412,697 7,093,483 Less discount for long-term pledges 56,000 56,000 Less allowance for uncollectible accounts 5,112 17,500 Pledges receivable, net 6,351,585 7,019,983 Less current portion 4,612,932 4,144,166 Noncurrent portion $ 1,738,653 $ 2,875,817 Noncurrent pledges are discounted to present value using rates of 0.50% for years ended. At October 31, 2017, approximately 24% of pledges receivable are due from three sources. At October 31, 2016, approximately 69% of pledges receivable are due from three sources. At October 31, 2017, Festival has outstanding conditional pledges totaling $1,016,000, which are contingent on meeting specific program or matching requirements. Accordingly, these conditional pledges are not reflected in the financial statements. These pledges will be recorded as revenue when the conditions have been satisfied

17 5. PROPERTY AND EQUIPMENT Property and equipment of the Festival at are summarized by major classes as follows: Land $ 3,332,583 $ 3,332,583 Buildings and improvements, partially pledged 29,763,782 29,716,620 Leasehold improvements 14,999,307 12,563,691 Equipment, furniture, other 10,605,460 10,338,907 Total property and equipment 58,701,132 55,951,801 Accumulated depreciation (22,484,983) (20,403,683) Property and equipment, net $ 36,216,149 $ 35,548,118 As described in Note 11, all other real property used by the Festival is owned by the City of Ashland. Improvements to this property are capitalized by the Festival and depreciated over an estimated useful life of 40 years using the straight-line method. At the end of the lease term described in Note 11, title to the Thomas Theater (included in buildings, partially pledged) will be transferred to the City of Ashland. Also, as described in Note 8, real property is security for bank loans

18 6. ENDOWMENT FUND The Endowment Fund exists to invest certain assets for the benefit of the Festival. The financial information for the Endowment Fund is as follows: ASSET S: Investments $ 39,417,279 $ 36,952,607 Due from Festival 1,407,502 1,026,591 Property held for sale 11,000 11,000 Total assets $ 40,835,781 $ 37,990,198 LIABILITIES: Accounts payable $ 1,383 $ 1,383 Due to Festival 2,485,000 2,028,948 Obligations under gift annuities 561, ,865 Total liabilities $ 3,048,369 $ 2,605,196 NET ASSETS: Unrestricted $ 13,617,638 $ 12,784,556 Temporarily restricted 6,675,870 5,487,086 Permanently restricted 17,493,904 17,113,360 Total net assets $ 37,787,412 $ 35,385,

19 6. ENDOWMENT FUND, Continued Endowment Fund Investments Investments included in the Endowment Fund consist of the following at : Cash and equivalents $ 386,702 $ 5,787,340 Domestic and international equities 35,108,570 26,907,599 Limited partnership interests and other equity securities: Investment with minimal liquidation restrictions 1,043, ,857 Investment with liquidation restrictions 2,878,871 3,357,811 Total investments $ 39,417,279 $ 36,952,607 Investment income consists of the following for the years ended October 31, 2017 and 2016: Interest and dividends $ 539,581 $ 538,766 Net realized/ unrealized gains 3,794,607 1,187,830 Total investment income $ 4,334,188 $ 1,726,596 Investments in limited partnerships and other equity securities represent 10% and 12% of the Endowment s net assets, respectively, and have been estimated by management (in the absence of readily determinable fair values) based on information provided by fund managers or the general partners. See Note 16 for further discussion relating for fair value measurements. Commitments for limited partnership investments not yet funded totaled approximately $525,600 at October 31,

20 6. ENDOWMENT FUND, Continued Endowment Fund Gift Annuities The Endowment Fund has received several gift annuities and has been named as a beneficiary to a charitable remainder unitrust. Under the terms of the annuity agreements, the Endowment Fund will pay out specified amounts periodically over the lives of the annuitants. The portion of the gift annuity attributable to the present value of the future benefits to be received by the Endowment Fund is recorded in the statement of activities as a temporarily restricted contribution in the period the annuity is established. When terminated, the balance in the annuity account is transferred to unrestricted net assets. Annuity funds held in separate accounts are included in the Endowment Fund's investments, are reported at fair market value, and total $1,080,384 and $1,070,384 at, respectively. On an annual basis, the Endowment Fund re-determines its obligation for payments to the designated beneficiaries based on actuarial assumptions. The present value of the estimated future payments of $561,986 and $574,865 at, respectively, is calculated using a discount rate of 2.0% and applicable mortality tables. Based on the annuities having similar characteristics, management has used a single discount rate at the end of the fiscal year to determine the obligation for all annuities. 7. LINE OF CREDIT The Festival has a $1,000,000 stand-alone revolving line of credit with US Bank. Interest on outstanding advances is payable monthly at the bank's prime rate (4.50% and 3.50% at, respectively). The line matures on June 1, 2018 and is secured by assets of the Festival. Advances on the line totaled $1,000,000 and $700,000 for the years ended, respectively

21 8. LONG-TERM DEBT OREGON SHAKESPEARE FESTIVAL ASSOCIATION Long-term debt of the Festival consists of the following at : Mortgage payable to US Bank in monthly installments of $19,529 including interest at 3.45% through April 2024; secured by real property. $ 2,939,971 $ 3,069,029 Mortgage payable to US Bank in monthly installments of $7,356 including interest at 3.375% through March 2019; secured by real property. 121, ,449 Mortgage payable to US Bank in monthly installments of $10,578 including interest at 3.4% through March 2021; interest and principal payments to be adjusted to new applicable interest rate and payable through March 2026; secured by real property. 2,037,888 2,093,526 Note payable to two board members, with monthly interest only payments through October 1, Interest is adjustable monthly at the one-month LIBOR plus 2% with a minimum of 2% (3.25% and 2.60% at, respectively); secured by real property. 1,400,000 1,400,000 Note payable to an individual in monthly installments of $5,427 including interest at 7.0% through August 2026; secured by real property. 428, ,466 Total long-term debt 6,928,312 7,229,470 Less current portion 313, ,386 Long-term portion $ 6,614,701 $ 6,928,

22 8. LONG-TERM DEBT, Continued Future maturities of long-term debt are as follows: Year ending October 31, 2018 $ 313, ,673, , , ,990 Thereafter 4,169,374 $ 6,928,312 Interest totaled approximately $262,000 and $220,300 for the years ended October 31, 2017 and 2016, respectively. 9. RESTRICTIONS AND DESIGNATIONS ON NET ASSETS Unrestricted Net Assets Unrestricted net assets (deficit) are summarized as follows: Undesignated $ (2,259,256) $ (1,990,357) Board designated 13,617,638 12,784,556 Net property and equipment 29,287,837 28,318,648 Total unrestricted net assets $ 40,646,219 $ 39,112,847 Board Designated Net Assets At, the Organizations' Boards of Directors and Trustees have designated unrestricted net assets to be included in the Endowment to be used for future operations. (See Note 15, Endowment.)

23 9. RESTRICTIONS AND DESIGNATIONS ON NET ASSETS, Continued Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purposes or periods: Funding of future season operations $ 4,405,539 $ 5,875,193 Artistic Opportunities Fund 109, ,667 Capital campaign 2,162,257 3,674,696 Gifts of future interests (Note 15) 518, ,519 Earnings on permanently restricted funds (Note 15) 6,157,472 4,991,567 Other purpose restricted 473, ,565 Total temporarily restricted net assets $ 13,826,933 $ 16,230,207 Permanently Restricted Net Assets Permanently restricted net assets represent net assets subject to donor-imposed stipulations that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of the Organizations. (See Note 15, Endowment.) 10. SELF-FUNDED HEALTH INSURANCE AND REINSURANCE The Festival s employee health insurance is self-funded. An estimated liability is recorded for claims incurred, including claims incurred but not yet reported as of the balance sheet date. The estimated liability for self-insurance is based on management s judgment and assumptions and factors related to claims development history and the frequency and severity of claims. The Festival limits its exposure and maintains insurance coverage with a third party insurer to limit individual claims and total exposure under this program. For individual claims over $130,000, the coverage is unlimited and for total Organization claims over $2,480,000 per calendar year, the insurance policy covers up to a total of $1,000,000. The ultimate settlement of health insurance claims may differ significantly from amounts accrued in the combined financial statements

24 11. LEASE COMMITMENTS All real property used by the Festival, other than that indicated in Note 5, is owned by the City of Ashland. The Festival transferred this property and various leasehold improvements to the City of Ashland. The Festival leases this property rent-free from the City of Ashland. The lease term extends through The Festival also leases space and various office equipment under agreements with payments totaling approximately $24,700 per month and expiring at various dates through October In addition, the Festival leases apartments and housing units for artistic staff under short-term lease agreements. Rent expense under these leases totaled approximately $300,100 and $316,100 for the years ended, respectively. The Festival leases out space for use by the gift shop under a lease agreement through December 31, 2022, with rent at $7,277 subject to annual increases based on the Consumer Price Index. The Festival is reimbursed by the gift shop operators on a monthly basis. Also, beginning in September 2016, the Festival leases out commercial space for $3,348 per month through September Total rent expense, before reimbursement by the gift shop, and including short-term housing rentals, approximated $680,600 and $541,700 for the years ended October 31, 2017 and 2016, respectively. Future minimum lease payments and lease income for noncancellable leases are as follows: Lease Lease Expense Income Year ending October 31, 2018 $ 605,000 $ 128, , , , ,000 - Total $ 1,716,000 $ 128,

25 12. EMPLOYEES SAVING AND PROFIT-SHARING PLANS The Oregon Shakespeare Festival Association has a retirement plan and deferred compensation plan. Both the Festival and eligible employees contribute to the plans. The Festival s contributions are voluntary and at the discretion of management. The Festival s contributions for the years ended were approximately $375,000 and $363,000, respectively. As part of the collective bargaining agreement with Actors Equity Association for Equity employees, the Festival contributes 8% of Equity employees salaries. The Festival s contributions for the years ended were approximately $359,000 and $344,000, respectively. 13. RELATED PARTY DISCLOSURES During 2016, two board members loaned $700,000 each to the Festival in connection with the purchase of property. See Note 8 for the terms of the notes. Total interest paid on these loans approximated $42,700. Certain board members are business owners in the community. At times, the Festival enters into transactions with companies where board members are key employees or owners. These transactions occur in the normal course of business, were insignificant to the financial statements and disclosed to management as required by the Festival's conflict of interest policy

26 14. FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK The Organization maintains its cash balances in several financial institutions. Balances in each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The balances, at times, may exceed the federally insured limit. Cash balances (excluding cash held in investment sweep accounts) in excess of insured limits totaled approximately $368,000 and $398,000 at, respectively. To limit credit risk, the Organizations place cash equivalents and other short-term investments with high credit quality financial institutions. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of financial position. Concentrations of credit risk with respect to pledges receivable are limited due to the large number of contributors comprising the Organizations' contributor base and their dispersion across different industries and geographic areas. 15. ENDOWMENT The Oregon Shakespeare Festival Endowment Fund s endowment consists of funds established for educational programs and operations support. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law The Board of Trustees of the Oregon Shakespeare Festival Endowment Fund has interpreted Oregon s enacted Uniform Prudent Management of Institutional Funds Act (the Act or UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation,

27 15. ENDOWMENT, Continued Interpretation of Relevant Law, Continued the Endowment Fund classifies as permanently restricted net assets (a) the original value of gifts, including subsequent gifts, donated to the permanent endowment and (b) 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 Endowment Fund in a manner consistent with the standard of prudence prescribed by the Act. In accordance with UPMIFA, the Endowment Fund considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the Endowment Fund (2) The purposes of the Endowment Fund 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 Endowment Fund (7) The investment policies of the Endowment Fund Endowment net asset composition by type of fund as of is as follows: Other Temporarily Board Temporarily Restricted Permanently Designated Restricted Earnings Restricted Total October 31, 2017 Donor-restricted $ - $ 518,398 $ 6,157,472 $ 17,493,904 $ 24,169,774 Board-designated 13,617, ,617,638 Total Funds $ 13,617,638 $ 518,398 $ 6, 157, 472 $ 17,493,904 $ 37,787,412 October 31, 2016 Donor-restricted $ - $ 495,519 $ 4,991,567 $ 17,113,360 $ 22,600,446 Board-designated 12,784, ,784,556 $ 12,784,556 $ 495,519 $ 4,991, 567 $ 17,113,360 $ 35,385,

28 15. ENDOWMENT, Continued Changes in endowment net assets for the years ended are as follows: Other Temporarily Board Temporarily Restricted Permanently Designated Restricted Earnings Restricted Total E ndowment net assets - October 31, 2015 $ 12,880,236 $ 484,292 $ 5,045,705 $ 11,787,488 $ 30,197,721 Contributions - 50,000-5,325,872 5,375,872 Investment return: Investment income 195,184 19, , ,766 Net change in value 446,114 27, ,329-1,187,830 Appropriation of endowment assets for expenditure (736,978) - (1,092,982) - (1,829,960) Other changes - (85,227) - - (85,227) E ndowment net assets - October 31, ,784, ,519 4,991,567 17,113,360 35,385,002 Contributions - 10, , ,544 Investment return: Investment income 194,404 19, , ,581 Net change in value 1,399,394 47,309 2,347,904-3,794,607 Appropriation of endowment assets for expenditure (760,716) (1,508,170) - (2,268,886) Other changes - (53,436) - - (53,436) E ndowment net assets - October 31, 2017 $ 13,617,638 $ 518,398 $ 6, 157, 472 $ 17,493,904 $ 37,787,

29 15. ENDOWMENT, Continued Return Objectives and Risk Parameters Oregon Shakespeare Festival Endowment Fund 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 donorrestricted funds that the Endowment Fund must hold in perpetuity or for a donorspecified period(s) as well as board-designated funds. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the Endowment Fund 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 Endowment Fund targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy Oregon Shakespeare Festival Endowment Fund has a policy of appropriating for distribution each year between 4% and 7%, set by agreement between the Endowment Fund and the Festival. The distribution rate is 4.4% and 4.5% for October 31, 2017 and 2016, respectively, based upon the Endowment Fund s average fair value over the prior 37 months through the fiscal year-end preceding the fiscal year in which the distribution is planned. Over the long term, the Endowment Fund expects the current spending policy to allow its endowment to grow at a rate consistent with the market, less distributions, annually. This is consistent with the Endowment Fund s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return

30 16. FAIR VALUE MEASUREMENTS Assets and liabilities recorded at fair value in the combined statements of financial position are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs are defined as follows: Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. Level 2: Observable inputs other than those included in Level 1, such as quoted market prices for similar assets or liabilities in active markets, or quoted market prices for identical assets or liabilities in inactive markets. Level 3: Unobservable inputs reflecting management s own assumptions about the inputs used in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. Fair values of assets of the Festival measured on recurring basis at October 31, 2017 and 2016 are as follows: October 31, 2017 Total Level 1 Level 2 Level 3 Investments recorded at fair value: Corporate stocks $ 148,258 $ 148,258 $ - $ - Total fair value investments 148,258 $ 148,258 $ - $ - Money market accounts 478,124 Certificates of deposit 340,550 Total other investments 818,674 Total invested assets $ 966,

31 16. FAIR VALUE MEASUREMENTS, Continued October 31, 2016 Total Level 1 Level 2 Level 3 Investments recorded at fair value: Corporate stocks $ 138,889 $ 138,889 $ - $ - Government bonds 657, , Corporate bonds 721, ,809 - Total fair value investments 1,517,940 $ 796,131 $ 721,809 $ - Money market accounts 30,936 Certificates of deposit 1,153,775 Total other investments 1,184,711 Total invested assets $ 2,702,651 Fair values of assets and liabilities of the Endowment Funds measured on recurring basis at are as follows: Octob er 31, 2017 Total Level 1 Level 2 Level 3 Assets: Investments recorded at fair value: Mutual funds-equity securities $ 20,818,834 $ 20,818,834 $ - $ - Mutual funds-fixed income 10,538,796 10,538, Mutual funds-international 3,750,940 3,750, Limited partnership interests 3,922, ,922,007 Total fair value investments 39,030,577 $ 35,108,570 $ - $ 3,922,007 Cash and cash equivalents 386,702 Total invested assets $ 39,417,279 Liabilities: Obligation under gift annuities $ (561,986) $ - $ - $ (561,986)

32 16. FAIR VALUE MEASUREMENTS, Continued Octob er 31, 2016 Total Level 1 Level 2 Level 3 Assets: Investments recorded at fair value: Mutual funds-equity securities $ 16,450,602 $ 16,450,602 $ - $ - Mutual funds-fixed income 8,159,869 8,159, Mutual funds-international 2,297,128 2,297, Limited partnership interests 4,257, ,257,668 Total fair value investments 31,165,267 $ 26,907,599 $ - $ 4,257,668 Cash and cash equivalents 5,787,340 Total invested assets $ 36,952,607 Liabilities: Obligation under gift annuities $ (574,865) $ - $ - $ (574,865) Fair values for debt and equity securities, including government bonds, are determined by reference to quoted market prices and other relevant information generated by market transactions. Fair value for investments in corporate bonds are provided by custodians and are based on pricing models that incorporate available trade, bid and other market information. Quoted market prices are not available for limited partnership investments. These investments are recorded at their estimated fair market value; therefore, the reported value may differ from the value that would have been used had a quoted market price existed. Fair values for limited partnership investments are based on the net asset value of the Endowment Fund's ownership interest in the partners' capital, which includes assumptions and methods that were prepared by the general partners of the limited partnerships and were reviewed by the Endowment Fund's management. Fair values of the obligation under gift annuity agreements are determined using an income approach by calculating the present value of the future distributions to be made using published life expectancy tables and applicable discount rates

33 16. FAIR VALUE MEASUREMENTS, Continued Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3 inputs): Investments - Limited partnership interests: Balance at beginning of year $ 4,257,668 $ 5,051,007 Proceeds from limited partnership interests (721,108) (982,089) Change in value of limited partnerships 385, ,750 Balance at end of year $ 3,922,007 $ 4,257,668 Changes in value of limited partnerships are reported in the statements of activities as follows: Unrestricted $ 241,521 $ 117,856 Temporarily restricted 143,926 70,894 Change in value of limited partnerships $ 385,447 $ 188,750 Obligation under charitable gift annuities: Balance at beginning of year $ 574,865 $ 556,093 Change in value of split-interest agreements 53,436 85,227 Payments to beneficiaries (66,315) (66,455) Balance at end of year $ 561,986 $ 574,865 Change in value of split-interest agreements is reported as temporarily restricted investment income from the Endowment Fund