Consolidated Financial Statements and Report of Independent Certified Public Accountants

Transcription

1 Consolidated Financial Statements and Report of Independent Certified Public Accountants

2 Contents Page Report of Independent Certified Public Accountants 3 Consolidated Statements of Financial Position 4 Consolidated Statements of Activities and Changes in Net Assets 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7

3 Report of Independent Certified Public Accountants To the Board of Trustees of the Audit Tax Advisory Grant Thornton LLP 150 Almaden Boulevard, Suite 600 San Jose, CA T F We have audited the accompanying consolidated statement of financial position of Monterey Bay Aquarium Foundation and its supporting organization (the Aquarium ) as of December 31, 2009, and the related consolidated statements of activities and changes in net assets and of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Aquarium s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Aquarium as of and for the year ended December 31, 2008, were audited by other auditors. Those auditors expressed an unqualified opinion on those financial statements in their report dated July 27, We conducted our audit in accordance with auditing standards generally accepted in the United States of America as established by the American Institute of Certified Public Accountants. 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 audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Aquarium 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 audit provides a reasonable basis for our opinion. In our opinion, the 2009 consolidated financial statements referred to above present fairly, in all material respects, the financial position of and its supporting organization as of December 31, 2009, and the changes in their net assets and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. San Jose, California August 31,

4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, ASSETS Assets: Cash and cash equivalents $ 13,151,000 $ 5,404,000 Accounts receivable 1,566,000 1,364,000 Prepaid expenses and other assets 378,000 1,007,000 Pledges and grants receivable, net 32,665,000 33,261,000 Beneficial interest in split-interest agreements 756,000 1,043,000 Investments 112,372,000 87,099,000 Investments restricted for exhibits 5,937,000 8,219,000 Property, equipment and exhibits, net 143,520, ,550,000 Total assets $ 310,345,000 $ 275,947,000 LIABILITIES AND NET ASSETS Liabilities: Accounts payable and accrued liabilities $ 5,543,000 $ 5,474,000 Deferred revenue 7,286,000 5,733,000 Gift annuity payment liability 306, ,000 Total liabilities 13,135,000 11,526,000 Net assets: Unrestricted Funds available for operations 183,637, ,627,000 Funds functioning as endowment 61,272,000 61,109,000 Total unrestricted net assets 244,909, ,736,000 Temporarily restricted 39,219,000 38,157,000 Permanently restricted 13,082,000 13,528,000 Total net assets 297,210, ,421,000 Total liabilities and net assets $ 310,345,000 $ 275,947,000 The accompanying notes are an integral part of these consolidated financial statements. 4

5 MONTEREY BAY AQUARIUM FOUNDATION CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS For the years ended Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total SUPPORT AND REVENUES: Admissions $ 32,565,000 $ - $ - $ 32,565,000 $ 28,540,000 $ - $ - $ 28,540,000 Contributions and grants 8,103,000 11,883,000 25,000 20,011,000 10,571,000 8,424,000 4,452,000 23,447,000 Memberships 8,488, ,488,000 7,953, ,953,000 Merchandising and food services 3,302, ,302,000 3,057, ,057,000 Endowment distribution 2,191, ,000-2,568,000 2,750, ,750,000 Rent 1,967, ,967,000 1,899, ,899,000 Programs 1,626, ,626,000 1,334, ,334,000 Other, net of cost of sales of $146,000 and $183,000, respectively 131, , , ,000 Net assets released from restrictions 12,173,000 (12,173,000) - - 2,360,000 (2,360,000) - - Total support and revenues 70,546,000 87,000 25,000 70,658,000 58,698,000 6,064,000 4,452,000 69,214,000 EXPENSES: Program services: Marine life exhibition and care 22,944, ,944,000 24,354, ,354,000 Guest services and marketing 8,541, ,541,000 8,118, ,118,000 Education and outreach 7,232, ,232,000 6,841, ,841,000 Conservation and research 5,574, ,574,000 5,567, ,567,000 Merchandising and food services 1,465, ,465,000 1,435, ,435,000 Support services: Management and general 6,553, ,553,000 6,575, ,575,000 Development 2,362, ,362,000 1,862, ,862,000 Membership services 1,728, ,728,000 1,512, ,512,000 Rental facilities expenses 1,164, ,164,000 1,300, ,300,000 Total expenses 57,563, ,563,000 57,564, ,564,000 INVESTMENT AND ENDOWMENT ACTIVITY: Dividends and interest 1,615, ,000-1,800,000 1,936, ,936,000 Net realized and unrealized gains (losses) on investments 19,766,000 1,167,000-20,933,000 (42,591,000) - - (42,591,000) Total investment income (loss) 21,381,000 1,352,000-22,733,000 (40,655,000) - - (40,655,000) Endowment distribution (2,191,000) (377,000) (2,568,000) (2,750,000) - - (2,750,000) Other loss - - (471,000) (471,000) Total investment and endowment activity 19,190, ,000 (471,000) 19,694,000 (43,405,000) - - (43,405,000) INCREASE (DECREASE) IN NET ASSETS 32,173,000 1,062,000 (446,000) 32,789,000 (42,271,000) 6,064,000 4,452,000 (31,755,000) NET ASSETS: Beginning of year 212,736,000 38,157,000 13,528, ,421, ,007,000 32,093,000 9,076, ,176,000 End of year $ 244,909,000 $ 39,219,000 $ 13,082,000 $ 297,210,000 $ 212,736,000 $ 38,157,000 $ 13,528,000 $ 264,421,000 The accompanying notes are an integral part of these consolidated financial statements. 5

6 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, Cash flows from operating activities: Increase (decrease) in net assets $ 32,789,000 $ (31,755,000) Adjustments to reconcile increase (decrease) in net assets to net cash provided by operating activities: Depreciation 8,316,000 8,070,000 Cancelled capital project - 1,505,000 Provision for doubtful pledges receivable (14,000) (8,000) Contributions of securities (1,784,000) (2,270,000) Contributions restricted for investment in endowment (2,387,000) (181,000) Other loss 471,000 - Loss on retirement of assets 662, ,000 Net realized and unrealized loss (gain) on investments (20,933,000) 42,591,000 Effect of change in: Other receivable, prepaid expenses, and other assets 427,000 (276,000) Pledges and grants receivable - net 139,000 (10,730,000) Beneficial interest in split-interest agreements 287, ,000 Accounts payable and accrued liabilities (1,874,000) (862,000) Deferred revenue 1,553,000 (512,000) Gift annuity payment liability (13,000) (174,000) Net cash provided by operating activities 17,639,000 6,353,000 Cash flows from investing activities: Purchases of investments (48,602,000) (48,610,000) Proceeds from sale of investments 48,328,000 47,984,000 Additions to property, equipment and exhibits (12,005,000) (14,386,000) Net cash used in investing activities (12,279,000) (15,012,000) Cash flows from financing activities - proceeds from contributions restricted for investment in endowment 2,387, ,000 Net increase (decrease) in cash and cash equivalents 7,747,000 (8,478,000) Cash and cash equivalents, beginning of year 5,404,000 13,882,000 Cash and cash equivalents, end of year $ 13,151,000 $ 5,404,000 Supplemental disclosures of noncash activites: Payables for purchase of property, equipment, and exhibits $ 1,943,000 $ 1,912,000 Pledges receivable restricted for investment in endowment $ - $ 4,271,000 accompanying notes are an integral part of these consolidated financial statements. 6

7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF ACCOUNTING POLICIES Organization The and its supporting organization, Monterey Bay Aquarium Support Services ( MBASS ), (collectively, the Aquarium ) are California not-for-profit corporations founded in 1978 and 2001, respectively. The Aquarium s mission is to inspire conservation of the oceans. It was created with an initial gift from David and Lucile Packard. Members of the Packard family continue to participate in directing its operations, as executive director and as members of the Aquarium s Board of Trustees ( Board ). The Aquarium facilities opened to the public in The Aquarium s major programs include a public aquarium whose exhibits focus primarily, but not exclusively, on marine life of Monterey Bay and California s central coast; education programs serving students from preschool through college as well as primary- and secondary-school educators; and research and conservation initiatives which include (a) the long-term survival of the southern sea otter, (b) understanding and conserving tunas and other highly migratory animals, (c) promoting seafood sustainability, and (d) conducting and communicating scientific research that promotes natural resource conservation and informs ocean policy. Basis of Presentation The accompanying consolidated financial statements have been prepared using the accrual basis of accounting in accordance with generally accepted accounting principles of the United States of America ( GAAP ) and are presented on the basis of unrestricted, temporarily restricted, and permanently restricted net assets. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Monterey Bay Aquarium Foundation and its supporting organization, MBASS. The controls and has an economic interest in MBASS. Intercompany transactions and accounts have been eliminated in consolidation. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand or in demand deposit accounts and highly liquid investments purchased with an original maturity of three months or less. Cash and cash equivalents managed by the Aquarium s investment managers are included in investments. Pledges and Grants Receivable, Net Pledges and grants receivable consist of unconditional promises to give that are expected to be collected in future years and grants classified as conditional promises to the extent that conditions have been met but reimbursement from the grantor has not yet been received. Pledges receivable are recorded at the present value of their estimated future cash flows. The discounts on these amounts are computed using risk-adjusted rates applicable in the years in which those promises are received. Amortization of the discounts is included in contributions and grants in the accompanying consolidated statements of activities and changes in net assets. Pledges and grants receivable are reviewed for collectability and a provision for doubtful pledges receivable is recorded based on management s judgment and analysis of the creditworthiness of the donors, past collection experience, and other relevant factors. 7

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF ACCOUNTING POLICIES (continued) Beneficial Interest in Split-Interest Agreements and Gift Annuity Payment Liability Assets contributed by donors under charitable remainder trust agreements and controlled by third parties are recognized at the present value of the estimated future distributions to be received by the Aquarium over the term of the agreement. Assets contributed by donors under gift annuity agreements and controlled by the Aquarium are recognized at fair value with a corresponding liability to beneficiaries of the annuity agreements. Such liability is calculated as the present value of the estimated future cash flows to be distributed to the income beneficiaries over their expected lives. The Aquarium has determined such liability using investment returns consistent with the composition of investment portfolios, single or joint life expectancies from the Internal Revenue Service Publication 1457, and the risk-adjusted rates applicable in the years in which the agreements were entered into. Investments Investments are reflected on the consolidated statements of financial position at fair value. Changes in unrealized gains and losses resulting from changes in fair value are reflected in the consolidated statements of activities and changes in net assets. Dividends and interest are recognized as they are earned. Property, Equipment and Exhibits, Net Property, equipment, and exhibits are stated at cost or at fair value at the date of donation and depreciated on the straight-line method over the estimated useful lives of the assets as follows: Asset Years Buildings Exhibits 2-15 Equipment, furniture, and fixtures 2-15 Capitalized costs for self-constructed property, equipment, and exhibits assets include direct labor and benefits for employees specifically identified with the project. Property, equipment, and exhibits assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Unrestricted Net Assets Unrestricted net assets represent unrestricted resources available to support the Aquarium s operations and temporarily restricted resources which have become available for use by the Aquarium in accordance with the intentions of donors. Unrestricted net assets include funds functioning as endowment through designation by the Board. 8

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF ACCOUNTING POLICIES (continued) Temporarily Restricted Net Assets Temporarily restricted net assets represent gifts that are subject to donor-imposed restrictions that can be fulfilled either by actions of the Aquarium pursuant to those restrictions and/or expire with the passage of time. Upon satisfaction of such restrictions, net assets are released from temporarily restricted net assets and recognized as unrestricted net assets. Temporarily restricted net assets also include undistributed earnings from donor restricted endowments which are released from temporarily restricted net assets and recognized as unrestricted net assets upon Board approval of endowment distributions. Permanently Restricted Net Assets Permanently restricted net assets represent gifts to endowment subject to donor-imposed restrictions that the original gift amounts be maintained in perpetuity (see Note 7 - Endowment). Revenue Recognition Contributions and unconditional grants are recognized as support and revenues when they are received or unconditionally pledged. The Aquarium reports gifts as restricted support and revenues if they are subject to donor-imposed restrictions. Temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of activities and changes in net assets as net assets released from restrictions when a stipulated time restriction ends and/or purpose restriction is accomplished. However, temporarily restricted contributions and grants are reported as unrestricted support and revenues when the restriction is met in the same calendar year that the gift is received. Conditional contributions are not recorded as support and revenues until the conditions are met. Grants classified as exchange transactions (reciprocal transfers between two entities in which goods and services of equal value is exchanged) are not recorded as other support and revenues until allowable expenditures are incurred. Contributions of services are recorded at estimated fair value when received if such services require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not donated. During 2009 and 2008, the value of such services (recognized as support and revenues and expenses in the consolidated statements of activities and changes in net assets) was $221,000 and $119,000, respectively, which consisted of professional diver services, legal services, and marketing services. Contributions of food, equipment, and other goods are recorded at estimated fair value when received. During 2009 and 2008, the value of such contributions (recognized as support and revenues and expenses in the consolidated statements of activities and changes in net assets) was $393,000 and $429,000, respectively. The Aquarium occasionally receives services or products through trade transactions for admission tickets. Support and revenues and expense is recorded at the ticket fair value unless the fair value of services or products received exceeds the ticket fair value, in which case contributions revenue is recorded for the excess amount. During 2009 and 2008, the value of such contributions (recognized as support and revenues in the consolidated statements of activities and changes in net assets) was $252,000 and $543,000, respectively. 9

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF ACCOUNTING POLICIES (continued) Revenue Recognition (continued) Memberships are recorded as deferred revenue and recognized as unrestricted support and revenues ratably over the membership period, which is one to three years. Rental income is recognized on a straight-line basis over the rental period and includes storage and parking fees and any reimbursements from tenants for common area maintenance, insurance, and real estate tax expenses. Functional Allocation of Expenses Certain expenses, such as depreciation and facilities operations, are allocated among program services and supporting services based primarily on space occupied and on estimates made by the Aquarium s management. Fair Value Measurements Assets and liabilities included in the Aquarium s consolidated statements of financial position which are considered to be financial instruments, are cash, cash equivalents, pledges and grants receivable, other receivables, beneficial interest in split-interest agreements, investments, accounts payable and accrued liabilities, deferred revenue and gift annuity payment liability. For cash, cash equivalents, other receivables, accounts payable and accrued liabilities, and deferred revenue, the carrying amounts represent a reasonable estimate of the fair values due to their short-term maturity. Pledges and grants receivable have been discounted using applicable risk-adjusted rates and approximate fair value. Beneficial interests in split-interest agreements and gift annuity payment liability are reflected at their estimated fair values using the methodology described above. Investments are reflected at estimated fair value as described below. In January 2008 the Aquarium adopted Accounting Standards Codification ( ASC ) 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework to measure fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value, which focuses on an exit price between market participants in an orderly transaction. The standard prioritizes (within the measurement of fair value) the use of market-based information over entityspecific information, and establishes a three-level hierarchy for fair value measurements, based on the transparency of information (such as the pricing source) used in the valuation of an asset or liability as of the measurement date. Assets and liabilities (subject to the standard and thus measured and reported at fair value) are classified and disclosed in one of the following categories: Level I - Quoted prices are available for identical financial instruments in active markets as of the reporting date, without adjustment. Level I include listed equity securities held in the name of the Aquarium, and exclude listed equities and other securities held indirectly through commingled funds. Level II - Price inputs are quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. 10

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF ACCOUNTING POLICIES (continued) Fair Value Measurements (continued) Level III - Pricing inputs are unobservable and include situations where there is little, if any, market activity. The inputs into the determination of fair value require significant management judgment or estimation. Level III includes debt and equity securities issued by private entities. Concentrations of Credit Risk Financial instruments which potentially subject the Aquarium to credit risk consist primarily of cash and cash equivalents, receivables, and investments. The Aquarium maintains its cash and cash equivalents in various major financial institution bank accounts and money market funds that, at times, may exceed federally insured limits. The Aquarium has not experienced, nor does it anticipate, any losses in such accounts. Receivables consist primarily of pledges due from donors. The Aquarium closely monitors these receivables and has not experienced, nor does it anticipate, significant credit losses. The Aquarium attempts to limit its credit risk associated with investments through diversification and by utilizing the expertise and processes of outside investment managers. Income Taxes and MBASS are recognized by the Internal Revenue Service as organizations exempt from federal income taxes on related income under Section 501(c)(3) of the Internal Revenue Code. They are also recognized by the Franchise Tax Board as exempt from California state tax on related income under Section 23701(d) of the California Revenue and Taxation Code. The and MBASS are not private Foundations. ASC , Accounting for Uncertainty in Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in an entity s consolidated financial statements and provides guidance on the recognition, de-recognition and measurement of benefits related to an entity s uncertain tax positions, if any. The Aquarium adopted ASC on January 1, 2009 and the adoption of this standard had no material effect on the Aquarium s consolidated financial statements as of January 1, 2009 or at December 31, 2009 and no material change is anticipated in the next twelve months. Advertising Costs The Aquarium expenses advertising costs as incurred. Advertising expenses incurred during 2009 and 2008 were $4,120,000 and $3,938,000, respectively, and consists of the direct costs associated with the creation, production, and placement of the Aquarium s advertising in various media. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowance for doubtful pledges receivable, the discount rate on multi-year pledges receivable and beneficial interest in split-interest agreements, the valuation of nonmarketable investments, the useful lives of property and equipment, and the present value of gift annuity payment liability. Actual results could differ from those estimates. 11

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF ACCOUNTING POLICIES (continued) Reclassification Certain items previously reported in the consolidated statement of activities and changes in net assets have been reclassified to conform to the current financial statement presentation. Recent Accounting Pronouncements In April 2009, the Financial Accounting Standards Board ( FASB ) issued guidance to amend FASB Accounting Standards Codification ( ASC ) 820 to provide additional guidance on estimating the fair value of an asset where the level of activity has decreased significantly, and affirms that the objective fair value is the price that would be received to sell the asset in an orderly transaction, even when the market for the asset is not active. The guidance was effective January 1, 2009 had no effect on the Aquarium s consolidated financial statements. In May 2009, FASB issued guidance outlined in ASC 855, Subsequent Events, which describes general standards of accounting for, and disclosures of, events that occur after the consolidated statement of financial position date but before the consolidated financial statements are issued or available to be issued. This guidance requires disclosure of such date through which management has conducted an evaluation for subsequent events. In June 2009, FASB issued Accounting Standards Update ( ASU ) Amendments based on Statement of Financial Accounting Standards No. 168 The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles which established the ASC as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities in the preparation of consolidated financial statements in conformity with GAAP. Applying the guidance in ASC 105 in 2009 did not impact the Aquarium s financial condition or results of operations. The Aquarium has revised its references to pre-codification GAAP in its financial statements. In September 2009, FASB issued ASU , Investment in Certain Entities That Calculate Net Asset Value Per Share, which amends ASC 820, adds disclosures, and provides guidance for estimating the fair value of investments in investment companies that calculate net asset value per share ( NAV ), allowing the NAV to be used as a practical expedient for fair value where investment companies follow GAAP standards in arriving at their reported NAV. The Aquarium adopted ASU on a prospective basis effective January 1, The adoption of ASU did not have a material effect on the Aquarium s consolidated financial statements. In January 2010, the FASB issued ASU , Improving Disclosures about Fair Value Measurements. This amends ASC 820 to require additional disclosures. The guidance requires entities to disclose transfers of assets in and out of Levels I and II of the fair value hierarchy, and the reasons for those transfers. These disclosures will be effective for the Aquarium in In addition, the guidance requires a separate presentation of purchases and sales in the Level III asset reconciliation which will be effective for the Aquarium in The adoption of this guidance in subsequent years is not expected to have a material effect on the Aquarium s consolidated financial statements. 12

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - PLEDGES AND GRANTS RECEIVABLE, NET Pledges and grants receivable as of are expected to be collected as follows: In one year or less $ 10,608,000 $ 12,919,000 Between one and five years 23,245,000 21,603,000 Greater than five years 404, ,000 Total 34,257,000 35,122,000 Less discount on multi-year pledges receivable (1,106,000) (1,832,000) Less allowance for doubtful pledges receivable (486,000) (29,000) Total pledges and grants receivable, net $ 32,665,000 $ 33,261,000 The present value discount rates for both 2009 and 2008 ranged from 0.57% to 4.91%. Pledges and grants receivable for conditional contributions are not reflected in the consolidated financial statements until the conditions are met. Such amounts totaled $1,647,000 at December 31, 2009 and were immaterial at December 31, NOTE 3 BENEFICIAL INTEREST IN SPLIT-INTEREST AGREEMENTS The Aquarium s beneficial interest in split-interest agreements consists of invested assets contributed by donors under charitable remainder trust agreements and gift annuity agreements. Management establishes the fair value of the assets using the valuation techniques described in Note 1 above. As of, the Aquarium s invested assets related to its beneficial interest in split-interest agreements consisted of the following: Cash and cash equivalents $ 44,000 $ 76,000 Fixed income funds 359, ,000 Equity funds 353, ,000 Total $ 756,000 $ 1,043,000 As of December 31, 2009, these invested assets were classified by level within the valuation hierarchy as follows: Total Level I Level II Level III Cash equivalents $ 44,000 $ 31,000 $ - $ 13,000 Fixed income funds 359, , ,000 Equity funds 353, , ,000 Total $ 756,000 $ 428,000 $ - $ 328,000 13

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 BENEFICIAL INTEREST IN SPLIT-INTEREST AGREEMENTS (continued) As of December 31, 2008, the Aquarium s investments were classified by level within the valuation hierarchy as follows: Total Level I Level II Level III Cash equivalents $ 75,000 $ 62,000 $ - $ 13,000 Fixed income funds 535, , ,000 Equity funds 433, , ,000 Total $ 1,043,000 $ 716,000 $ - $ 327,000 The changes in beneficial interest in split-interest agreements related to Level III investments for 2009 and 2008 were as follows: Balance as of December 31, 2007 $ 508,000 Change in the value of beneficial interest in split interest agreements (181,000) Balance as of December 31, ,000 Change in the value of beneficial interest in split interest agreements 1,000 Balance as of December 31, 2009 $ 328,000 Changes in value related to Level III beneficial interest in split-interest were reported in contributions and grants in the consolidated statements of activities and changes in net assets. The present value discount rates for both 2009 and 2008 ranged from 3.8% to 8.0%. NOTE 4 INVESTMENTS The Aquarium s investments consist of operating reserves, funds functioning as endowment, and funds which have been restricted by the donor as endowment. The Aquarium s investments are managed as a single diversified portfolio governed by the Aquarium s investment policy, which sets asset allocation ranges for marketable and nonmarketable investments, as well as equity and fixed income investments. All of the Aquarium s nonmarketable investments are managed by Commonfund. Management establishes the fair value of Level I investments based on quoted market prices. Management establishes the fair value of Level II investments through observation of trading activity reported at net asset value. Management establishes the fair value of Level III investments through a documented valuation process including review of audited financial statements for the investment funds, verification of the fair value of marketable securities in the funds, regular review of fund manager valuation approaches, and monitoring of fund activities. Because of the inherent uncertainty of valuation of nonmarketable investments, the estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Investment expenses incurred during 2009 and 2008 were $137,000 and $154,000, respectively, and were reported as a reduction of dividends and interest in the consolidated statements of activities and changes in net assets. 14

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 INVESTMENTS (continued) As of, the Aquarium s investments consisted of the following: Cash and cash equivalents $ 2,003,000 $ 2,390,000 Nonmarketable investments: Equity strategies: Multi-strategy equity fund 74,930,000 51,822,000 Hedged equities funds 12,570,000 12,856,000 Multi-strategy commodities fund 3,792,000 2,504,000 Private capital funds 2,582,000 1,244,000 Total equity strategies 93,874,000 68,426,000 Fixed income strategies: Multi-strategy bond fund 17,129,000 10,662,000 Absolute return funds 1,660,000 4,982,000 Investment grade bond funds - 3,800,000 Real estate fund 637,000 3,187,000 Distressed debt funds 3,006,000 1,871,000 Total fixed income strategies 22,432,000 24,502,000 Total nonmarketable investments 116,306,000 92,928,000 Less investments restricted for exhibits (5,937,000) (8,219,000) Total investments $ 112,372,000 $ 87,099,000 The Aquarium has commitments under partnership agreements with Commonfund to make additional capital contributions to investment funds of approximately $10,029,000 and $10,273,000 as of, respectively. 15

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 INVESTMENTS (continued) As of December 31, 2009, the Aquarium s investments were classified by level within the valuation hierarchy as follows: Total Level I Level II Level III Cash equivalents $ 642,000 $ 642,000 $ - $ - Multi-strategy equity fund 74,930,000-74,930,000 - Hedged equities funds 12,570,000-12,570,000 - Multi-strategy commodities fund 3,792,000-3,792,000 - Private capital funds 2,582, ,582,000 Multi-strategy bond fund 17,129,000-17,129,000 - Absolute return funds 1,660,000-1,086, ,000 Real estate fund 637, ,000 Distressed debt funds 3,006, ,006,000 Subtotal investment securities $ 116,948,000 $ 642,000 $ 109,507,000 $ 6,799,000 Plus cash held in investment accounts 1,361,000 Less investments restricted for exhibits (5,937,000) Total investments $112,372,000 As of December 31, 2008, the Aquarium s investments were classified by level within the valuation hierarchy as follows: Total Level I Level II Level III Cash equivalents $ 1,632,000 $ 1,632,000 $ - $ - Multi-strategy equity fund 51,822,000-51,822,000 - Hedged equities funds 12,856,000-7,105,000 5,751,000 Multi-strategy commodities fund 2,504,000-2,504,000 - Private capital funds 1,244, ,244,000 Multi-strategy bond fund 10,662,000-10,662,000 - Absolute return funds 4,982,000-4,982,000 - Investment grade bond funds 3,800,000-3,800,000 - Real estate fund 3,187, ,187,000 Distressed debt funds 1,871, ,871,000 Subtotal investment securities $ 94,560,000 $ 1,632,000 $ 80,875,000 $ 12,053,000 Plus cash held in investment accounts 758,000 Less investments restricted for exhibits (8,219,000) Total investments $ 87,099,

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 INVESTMENTS (continued) The following table summarizes the Aquarium s Level III investment activity during 2009 and 2008: Net Balances at Transfers Unrealized Unrealized Realized Balances at December 31, 2008 Purchases In (Out) Sales Gains (Losses) Losses December 31, 2009 Hedged equities funds $ 5,751,000 $ - $ (5,751,000) $ - $ - $ - $ - $ - Absolute return funds - - 4,982,000 (4,735,000) 647,000 - (320,000) 574,000 Private capital funds 1,244,000 1,152, ,000 (3,000) - 2,582,000 Real estate fund 3,187, (2,550,000) - 637,000 Distressed debt funds 1,871, , , ,006,000 Total investments $ 12,053,000 $ 1,744,000 $ (769,000) $ (4,735,000) $ 1,379,000 $ (2,553,000) $ (320,000) $ 6,799,000 Net Balances at Transfers Unrealized Unrealized Realized Balances at December 31, 2007 Purchases In (Out) Purchases Gains (Losses) Losses December 31, 2008 Hedged equities funds $ 6,946,000 $ - $ - $ - $ - $ (1,195,000) $ - $ 5,751,000 Private capital funds 585,000 1,022, (363,000) - 1,244,000 Real estate fund 1,951,000 3,279,000 (55,000) - - (1,988,000) - 3,187,000 Distressed debt funds 1,616,000 1,008, (753,000) - 1,871,000 Total investments $ 11,098,000 $ 5,309,000 $ (55,000) $ - $ - $ (4,299,000) $ - $ 12,053,000 Changes in unrealized gains (losses) and realized losses during 2009 and 2008 related to Level III investments were reported in net realized and unrealized gains (losses) on investments in the consolidated statements of activities and changes in net assets. As noted in Note 1, ASC 820 allows for the use of a practical expedient for the estimation of fair value of investments in investment companies for which the investment does not have a readily determinable fair value. The Aquarium utilizes the NAV as the practical expedient to value its funds for which the underlying investments (a) do not have a readily determinable fair value and (b) prepare their consolidated financial statements consistent with the measurement principles of an investment company or have the attributes of an investment company. The funds administrator, appointed by and under supervision of Commonfund, provides the NAV s considering variables such as the actual market exchanges and/or trade quotations provided by third parties. In the case of securities for which independent pricing is not available, a fund may adopt fair value pricing. The Aquarium reviewed the valuations provided by funds administrator and believes that the carrying amounts of these investments are reasonable estimates of fair value. 17

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 INVESTMENTS (continued) Per ASU , the following table lists such investments. Fund Objective NAV Multi-strategy equity fund Hedged equities funds Multi-strategy commodities fund Private capital funds The fund allocates assets across a broad spectrum of equity securities including allocations to equity securities of foreign companies in developed and emerging markets. The fund may also invest in hedge funds seeking opportunities in global equity type returns with a low correlation to the equity markets. The funds include investments in both long/short strategies and private investment funds that pursue differing strategies across global markets including commodities, currencies, fixed income and equities. The fund allocates to a broad spectrum of commodity-oriented assets including: futures, options on futures, and forward contracts on exchange traded commodities and foreign currencies. The fund further diversifies through: selection of customized swaps, enhanced cash transactions and Treasury Inflation Protected Securities. The funds investments include growth equity financing, leverage buyouts, acquisitions and/or industry consolidations, recapitalizations and restructurings, and venture capital, in the U.S. and internationally. Number of Funds Remaining Life Unfunded Commitments Redemption Terms $74,930,000 1 N.A. None 5 business days notice 12,570,000 4 N.A. None days notice Redemption Restrictions None Ranges from none to 20% gate provision 3,792,000 1 N.A. None 30 days notice None 2,582, years 9,113,000 No redemption permitted No redemption permitted 18

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 INVESTMENTS (continued) Fund Objective NAV Number of Funds Remaining Life Unfunded Commitments Redemption Terms Multi-strategy bond The fund allocates along a broad 17,129,000 1 N.A. None 5 business days fund spectrum of fixed income sectors, with notice the majority allocated to U.S. denominated investment grade bonds or other fixed income securities. The fund may have diversification through allocations to global bonds, inflation indexed bonds, high yield bonds, emerging markets debt, and opportunistic credit strategies. Absolute return funds Real estate fund Distressed debt funds The funds have allocations to merger arbitrage opportunities, investments in distressed securities, fixed income arbitrage, and equity long/short selections short sales, domestic and international derivatives, including foreign currency contracts, futures, and options and swaps. The fund invests in commercial and multi-family residential properties in the U.S. The funds invest in public liquid trading strategies and longer term illiquid strategies in the U.S. and internationally. Redemption Restrictions None 1,660,000 2 N.A. None 95 days notice 20% gate provision 637, years 0 No redemption permitted 3,006, years 916,000 Ranges between no redemption permitted and annual redemption with 120 days notice Total $116,306, $10,029,000 No redemption permitted 1 fund has a side pocket and carries a 20% gate provision 19

20 NOTES TO FINANCIAL STATEMENTS NOTE 5 PROPERTY, EQUIPMENT AND EXHIBITS, NET Property, equipment, and exhibits, net consist of the following as of December 31,: Land $ 24,209,000 $ 24,209,000 Buildings 134,145, ,274,000 Exhibits 39,750,000 37,279,000 Equipment, furniture and fixtures 23,385,000 22,723, ,489, ,485,000 Less accumulated depreciation (98,414,000) _(90,825,000) 123,075, ,660,000 Capital projects in process 20,445,000 12,890,000 Property, equipment and exhibits, net $143,520,000 $138,550,000 Depreciation expense for 2009 and 2008 was $8,316,000 and $8,070,000, respectively. For 2008, costs associated with a cancelled project totaled $1,505,000 and were included in the consolidated statements of activities and changes in net assets. Loss from the write-off of undepreciated balances associated with assets that were disposed of in 2009 and 2008 was $662,000 and $628,000, respectively. NOTE 6 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are available as follows as of December 31,: Purpose-restricted: Outer Bay Wing remodel $ 8,336,000 $ 8,219,000 Education programs 3,350, ,000 COMPASS marine research communication program 3, ,000 Tuna Research and Conservation Center 1,000 64,000 Seafood Watch sustainable seafood initiative - 877,000 Center for the Future of the Oceans - 275,000 Total purpose-restricted 11,690,000 9,930,000 Pledges receivable without a purpose restriction 26,554,000 28,227,000 Undistributed endowment earnings 975,000 - Total temporarily restricted net assets $ 39,219,000 $ 38,157,000 20

21 NOTES TO FINANCIAL STATEMENTS NOTE 6 TEMPORARILY RESTRICTED NET ASSETS (continued) In 2009, education programs funds totaling $102,000 were reclassified from purpose-restricted net assets to time-restricted net assets. These amounts were reclassified since the purpose restriction was satisfied in 2009 but the funds were not due to be received as of December 31, In 2008, program funds totaling $105,000 were reclassified from purpose-restricted net assets to timerestricted net assets, consisting of $21,000 of education programs funds and $84,000 of COMPASS funds. These amounts were reclassified since the purpose restriction was satisfied in 2008 but the funds were not due to be received as of December 31, Temporarily restricted net assets released from restriction include earnings from donor restricted endowment approved for endowment distribution by the Board and net assets released from restrictions by incurring expenses satisfying the donor-restricted purposes or time requirements as summarized in the table below: December 31, Purpose-restricted: Outer Bay Wing remodel $ 2,883,000 $ 561,000 Seafood Watch sustainable seafood initiative 877,000 - Center for the Future of the Oceans 275,000 25,000 Education programs 148, ,000 COMPASS marine research communication program 119, ,000 Tuna Research and Conservation Center 63,000 Total purpose-restricted 4,365,000 1,172,000 Time-restricted 7,431,000 1,188,000 Appropriated endowment distribution 377,000 - Total net assets released from restrictions $ 12,173,000 $ 2,360,000 NOTE 7 ENDOWMENT The Aquarium s endowment funds consist of (a) unrestricted funds functioning as endowment through designation by the Board and (b) donor-restricted endowment funds. The earnings of the Aquarium s endowment funds support education and conservation programs and the mission of the Aquarium. Net assets associated with endowment funds, including unrestricted funds functioning as endowment, are classified and reported based on the existence or absence of donor-imposed restrictions. 21

22 NOTE 7 ENDOWMENT (continued) NOTES TO FINANCIAL STATEMENTS Through December 31, 2008, the state of California Uniform Management of Institutional Funds Act ( UMIFA ) governed the management and use of donor-restricted endowment funds held by charitable institutions in the state of California. Under UMIFA, the Aquarium classified as permanently restricted net assets the original value of gifts donated to the permanent endowment and accumulations to the permanent endowment made in accordance with the direction, if any, of the applicable donor gift instrument. Accumulated earnings of donor-restricted endowment funds in excess of endowment distributions were classified as unrestricted net assets (funds available for operations). Effective January 1, 2009, the state of California adopted the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ), which governs the management and use of donor-restricted endowment funds held by charitable institutions in the state of California. GAAP provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of UPMIFA, and also improves disclosures about an organization s endowment funds (both donor-restricted and funds functioning as endowment). The Aquarium adopted the disclosure provisions in 2008 and the net asset classification provisions in The adoption of the net asset classification provisions had no effect on the Aquarium s consolidated financial statements in 2009 and Consistent with UPMIFA and Board policy, the Aquarium classifies as permanently restricted net assets the original value of gifts (including subsequent gifts) of donor-restricted endowment and, if applicable, accumulations of donor-restricted endowment as required by the donor. Accumulated earnings of donor-restricted endowment are classified as temporarily restricted net assets until distributed in accordance with UPMIFA and Board policy. As of December 31, 2009, the Aquarium s endowment net asset composition by type of fund was as follows: Funds Available for Funds Functioning as Temporarily Permanently Operations Endowment Restricted Restricted Total Funds functioning as endowment $ - $ 61,272,000 $ - $ - $ 61,272,000 Donor-restricted endowment funds ,000 13,082,000 14,057,000 Total endowment funds $ - $ 61,272,000 $ 975,000 $ 13,082,000 $ 75,329,000 As of December 31, 2008, the Aquarium s endowment net asset composition by type of fund was as follows: Funds Available for Funds Functioning as Temporarily Permanently Operations Endowment Restricted Restricted Total Funds functioning as endowment $ - $ 61,109,000 $ - $ - $ 61,109,000 Donor-restricted endowment funds (873,000) ,528,000 12,655,000 Total endowment funds $ (873,000) $ 61,109,000 $ - $ 13,528,000 $ 73,764,000 22

23 NOTE 7 ENDOWMENT (continued) NOTES TO FINANCIAL STATEMENTS During 2009, the Aquarium s endowment net assets changed as follows: Funds Available for Funds Functioning as Temporarily Permanently Operations Endowment Restricted Restricted Total Endowment net assets, beginning of year $ (873,000) $ 61,109,000 $ - $ 13,528,000 $ 73,764,000 Investment return Investment income (loss) (35,000) - 185, ,000 Net realized and unrealized gain (loss) on investment 908,000-1,167,000-2,075,000 Total investment return 873,000-1,352,000-2,225,000 Contributions - 163,000-3, ,000 Endowment distribution - - (377,000) - (377,000) Other changes: Change in value of annuity ,000 22,000 Write down of pledge receivable (471,000) (471,000) Total endowment funds $ - $ 61,272,000 $ 975,000 $ 13,082,000 $ 75,329,000 During 2008, the Aquarium s endowment net assets changed as follows: Funds Available for Funds Functioning as Temporarily Permanently Operations Endowment Restricted Restricted Total Endowment net assets, beginning of year $ - $ 56,795,000 $ - $ 9,076,000 $ 65,871,000 Investment return Investment income (loss) 35, ,000 Net realized and unrealized gain (loss) on investment (908,000) (908,000) Total investment return (873,000) (873,000) Contributions - 14,000-4,452,000 4,466,000 Endowment distribution Other changes: Addition to funds functioning as endowment - 4,300, ,300,000 Total endowment funds $ (873,000) $ 61,109,000 $ - $ 13,528,000 $ 73,764,000 23

24 N OTE 7 ENDOWMENT (continued) NOTES TO FINANCIAL STATEMENTS Description of amounts classified as permanently restricted net assets was as follows: Composition of permanently restricted net assets: Investments $ 11,402,000 $ 8,716,000 Pledges receivable 1,614,000 4,462,000 Beneficial interest in split interest agreements 251, ,000 Gift annuity payment liability (185,000) (192,000) The portion of perpetual endowment funds that is required to be retained permanently by donor stipulation or law $ 13,082,000 $ 13,528,000 From time to time the fair value of assets associated with individual funds of donor-restricted endowment may fall below the level required to be retained as funds of perpetual duration. When deficits exist, they are classified in unrestricted net assets and were $0 and $873,000 as of December 31, 2009 and 2008, respectively. These deficits resulted from unfavorable market fluctuations that occurred during The Aquarium does not authorize spending from such funds. The Board has adopted an investment policy which governs the management and oversight of the Aquarium s endowment funds and other investments. The policy sets forth the objectives, the strategies to achieve the objectives, procedures for monitoring and control, and the delineation of duties for those responsible for the Aquarium s investments. The Finance Committee of the Board is responsible for implementation of the investment policy. The policy is intended to allow for sufficient flexibility in the management oversight process to capture investment opportunities as they may occur, while at the same time setting forth reasonable risk control parameters to ensure prudence and care in the execution of the investment program. Investment assets are managed on a total return basis, with emphasis on both preservation of capital and acceptance of investment risk necessary to achieve favorable performance on a risk-adjusted basis. The policy calls for risk management of the investment program to be informed by both the investment and operational risks to which the investments are exposed, with an objective to minimize operational risks and require appropriate compensation for acceptable investment risks. Other objectives are to (a) provide a total return that, over the long term, exceeds inflation and optimizes the investment return on fund assets corresponding to a level of risk deemed appropriate by the Finance Committee, (b) outperform a policy portfolio benchmark return, after fees, at a comparable level of risk over five-year rolling periods, and (c) diversify investments to reduce the impact of losses in single investments, industries, or asset classes. The Aquarium s Board determines the method to be used to appropriate endowment funds for expenditure. The Aquarium s endowment spending policy is based on a spending rate percentage applied to the three-year trailing average of the endowment s market value. During 2009 and 2008, the policy spending rate percentage was 4.25% and 5%, respectively, of funds functioning as endowment and donor-restricted endowment. The investment portfolio return, net of investment fees, is expected to be in excess of the policy spending rate over the long term. The annual endowment distribution amount is approved by the Board in conjunction with its approval of the annual budget. In accordance with Board policy, the amount, if any, of net investment return on the endowment in excess of the endowment spending distribution in any calendar year is designated as funds functioning as endowment in the subsequent year. Such designations resulted in an increase in funds functioning as endowment of $0 and $4,300,000 in 2009 and 2008, respectively. 24