Theater and Arts Foundation of San Diego County dba La Jolla Playhouse

Transcription

1 Financial Statements Years Ended March 31, 2010 and 2009

2 Contents Independent Auditors Report 3 Financial Statements Statements of Financial Position 4 Statement of Activities for the year ended March 31, Statement of Activities for the year ended March 31, Statements of Cash Flows

3 Independent Auditors Report To the Board of Trustees Theater and Arts Foundation La Jolla, California We have audited the accompanying statements of financial position of the Theater and Arts Foundation (the Foundation ) as of March 31, 2010 and 2009, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the Foundation s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Theater and Arts Foundation dba La Jolla Playhouse as of March 31, 2010 and 2009, and the changes in its net assets and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. June 29, 2010

4 Statements of Financial Position March 31, Assets Cash and cash equivalents $ 3,070,473 $ 1,174,324 Certificate of deposit 40,787 65,000 Receivables Pledges 1,733,454 2,956,981 Accounts 274, ,036 Split-interest agreements (Temporarily restricted) 1,155,475 1,140,599 Split-interest agreements (Permanently restricted) 3,237,558 2,660,624 Total receivables 6,401,377 7,087,240 Prepaid expenses and other assets 150,299 72,287 Fixed assets, net 20,008,637 16,320,932 Endowment assets Beneficial interest in perpetual trust 1,454,637 1,161, Investments 1,273, ,951 Beneficial interest in assets held by others 845, ,177 Total endowment assets 3,573,608 2,733,201 Total assets $ 33,245,181 $ 27,452,984 Liabilities and Net Assets Liabilities Capital leases payable $ - $ 35,984 Accounts payable and accrued expenses 796, ,704 Deferred revenue 1,458,271 1,647,677 Notes payable 7,936,546 3,581,252 Total liabilities 10,191,707 5,775,617 Net Assets Unrestricted 2,807,932 1,235,081 Temporarily restricted 14,722,031 16,009,803 Permanently restricted 5,523,511 4,432,483 Total net assets 23,053,474 21,677,367 Total liabilities and net assets $ 33,245,181 $ 27,452,984 The accompanying notes are an integral part of these financial statements. 4

5 Statement of Activities Temporarily Permanently Year Ended March 31, 2010 Unrestricted Restricted Restricted Total Revenues Box office receipts $ 3,811,395 $ - $ - $ 3,811,395 Royalties 3,099, ,099,179 Co-production/enhancements 1,155, ,155,939 Investment return 343, ,930 Educational programs 110, ,948 Spending distributions from permanent funds 98, ,326 Miscellaneous 98, ,057 Interest and dividends 53, ,691 Concessions and gift shop sales 17, ,235 Total revenues 8,788, ,788,700 Expenses Production 4,580, ,580,997 Salaries, taxes and benefits-nonproduction 3,728, ,728,275 Administration 1,009, ,009,785 Marketing 990, ,137 Development 404, ,211 Educational programs 237, ,013 Artistic 235, ,574 Write-off of uncollectible pledges 46, ,250 Costs of direct benefits to donors 45, ,790 Concessions and gift shop 13, ,747 Total expenses 11,291, ,291,779 Change in net assets before support and other revenues and expenses (2,503,079) - - (2,503,079) Support Individuals 1,490, ,891-1,607,982 Special events 1,063,499 16,000-1,079,499 Government 394, ,950 Corporations 254, , ,377 In-kind 379, ,298 Foundations 299, ,000 Change in value of split-interest agreements - 14, , ,810 Change in value of beneficial interest in perpetual trust, net of spending distribution , ,564 Change in value of beneficial interest in assets held by others, net of spending distribution , ,530 Net assets released from restrictions- future seasons 639,500 (639,500) - - Total support 4,520,715 (351,733) 1,091,028 5,260,010 Change in net assets from operations 2,017,636 (351,733) 1,091,028 2,756,931 Other revenue and expense Net assets released from restrictions 936,039 (936,039) - - Depreciation and amortization (1,177,559) - - (1,177,559) Interest expense (203,265) - - (203,265) Net other revenue and expense (444,785) (936,039) - (1,380,824) Change in Net Assets 1,572,851 (1,287,772) 1,091,028 1,376,107 Net Assets at Beginning of Period 1,235,081 16,009,803 4,432,483 21,677,367 Net Assets at End of Period $ 2,807,932 $ 14,722,031 $ 5,523,511 $ 23,053,474 The accompanying notes are an integral part of this financial statement. 5

6 Statement of Activities Temporarily Permanently Year Ended March 31, 2009 Unrestricted Restricted Restricted Total Revenues Box office receipts $ 3,856,419 $ - $ - $ 3,856,419 Royalties 3,057, ,057,107 Co-production/enhancements 2,397, ,397,478 Miscellaneous 109, ,305 Spending distributions from permanent funds 100, ,051 Educational programs 94, ,554 Interest and dividends 50, ,230 Concessions and gift shop sales 29, ,416 Investment return (427,100) - - (427,100) Total revenues 9,267, ,267,460 Expenses Production 6,757, ,757,967 Salaries, taxes and benefits-nonproduction 4,026, ,026,561 Administration 1,133, ,133,827 Marketing 941, ,660 Development 258, ,400 Educational programs 229, ,806 Artistic 197, ,334 Write-off of uncollectible pledges 118, ,167 Costs of direct benefits to donors 93, ,500 Concessions and gift shop 23, ,031 Total expenses 13,780, ,780,253 Change in net assets before support and other revenues and expenses (4,512,793) - - (4,512,793) Support Individuals 2,131, ,786-2,330,606 Foundations 310, , ,100 Special events 674,316 1, ,316 Government 454,871 30, ,871 Corporations 358,585 40, ,585 In-kind 275, ,802 Net assets released from restrictions - future seasons 846,000 (846,000) - - Change in value of split-interest agreements - (113,192) (970,585) (1,083,777) Change in value of beneficial interest in perpetual trust, net of spending distribution - - (534,704) (534,704) Change in value of beneficial interest in assets held by others, net of spending distribution - - (340,326) (340,326) Total support 5,051,495 (139,406) (1,845,615) 3,066,473 Change in net assets from operations 538,702 (139,406) (1,845,615) (1,446,319) Other revenue and expense Net assets released from restrictions 957,737 (957,737) - - Depreciation and amortization (1,100,170) - - (1,100,170) Interest expense (180,521) - - (180,521) Net other revenue and expense (322,954) (957,737) - (1,280,691) Change in Net Assets 215,748 (1,097,143) (1,845,615) (2,727,010) Net Assets (Deficit) at Beginning of Period before Reclassification (387,962) 17,106,946 7,685,393 24,404,377 Net Asset Reclassification Based on Change in Law (Note 6) 1,407,295 - (1,407,295) - Net Assets at Beginning of Period after Reclassification 1,019,333 17,106,946 6,278,098 24,404,377 Net Assets at End of Period $ 1,235,081 $ 16,009,803 $ 4,432,483 $ 21,677,367 The accompanying notes are an integral part of this financial statement. 6

7 Statements of Cash Flows Years Ended March 31, Cash Flows From Operating Activities Change in net assets $ 1,376,107 $ (2,727,010) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 1,177,559 1,100,170 Change in value of split-interest agreements (591,810) 1,083,777 Net unrealized and realized (gain) loss on investments (343,930) 431,133 Change in value of beneficial interest in perpetual trust, net of spending distribution (293,564) 534,704 Change in value of beneficial interest in assets held by others, net of spending distribution (220,530) 340,326 Contributions of stock (115,928) (149,995) Write-off of uncollectible pledges 46, ,167 Present value adjustment on pledges receivable (33,090) (41,521) (Increase) decrease in operating assets Pledges receivable 930, ,959 Accounts receivable 54,146 (7,122) Prepaid expenses and other current assets (78,012) 460,552 Increase (decrease) in operating liabilities Accounts payable and accrued expenses 286,186 (742,802) Deferred revenue (189,406) (228,414) Net cash provided by operating activities 2,004, ,924 Cash Flows From Investing Activities Proceeds from sales of investments 273, ,443 Purchases of investments (139,983) (120,237) Acquisition of property and equipment (77,579) (1,358,131) Redemption of certificate of deposit 24,213 23,820 Net cash provided by (used in) investing activities 80,179 (1,155,105) Cash Flows From Financing Activities Payments on note payable (432,391) (462,748) Cash received for capital campaign 280, ,094 Payments on capital leases (35,984) (87,894) Net payments on line of credit - (300,000) Proceeds from note payable - 165,000 Net cash used in financing activities (188,240) (63,548) Net Increase in Cash and Cash Equivalents 1,896,149 (688,729) Cash and Cash Equivalents at Beginning of Period 1,174,324 1,863,053 Cash and Cash Equivalents at End of Period $ 3,070,473 $ 1,174,324 The accompanying notes are an integral part of these financial statements. 7

8 Statements of Cash Flows, Continued Years Ended March 31, Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 203,308 $ 159,462 Non-cash financing activities: During the year ended March 31, 2010, the Foundation executed a loan for $4,787,685. The proceeds of the loan were used to finance the acquisition of condominiums for artist housing. Total costs of $4,865,262 for the acquisition were incurred and capitalized during the year. Refer to the footnotes for related disclosure. The accompanying notes are an integral part of these financial statements. 8

9 1. Summary of Significant Accounting Policies Nature of organization Method of accounting Financial statement presentation A summary of the significant accounting principles for the Theater and Arts Foundation which were consistently applied in the preparation of the accompanying financial statements follows. The Theater and Arts Foundation dba La Jolla Playhouse (the Foundation ) is a California not-for-profit corporation formed for the primary purposes of presenting theatrical arts to the public for specified ticket admission prices, providing an extensive range of educational and outreach services and programs to its community, and providing internship programs in the artistic, management, and technical aspects of professional theater. The accompanying financial statements have been prepared on the accrual basis of accounting. The financial statements of the Foundation have been presented in accordance with authoritative guidance for Not-for-Profit organizations. The Foundation reports its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. Unrestricted net assets represent expendable funds available for operations which are not otherwise limited by donor restrictions. Temporarily restricted net assets consist of contributed funds subject to specific donor-imposed restrictions contingent upon specific performance of a future event or a specific passage of time before the Foundation can spend the funds. Permanently restricted net assets are subject to irrevocable donor restrictions requiring that the assets be maintained in perpetuity, usually for the purpose of generating investment income to fund current operations. Cash and cash equivalents The Foundation considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. 9

10 Certificate of deposit Revenue recognition At March 31, 2010 and 2009, the Foundation had a restricted certificate of deposit of approximately $41,000 and $65,000, respectively, in accordance with its agreement with Actors Equity Association. Box Office Receipts Box office receipts are recorded as revenue on a specific performance basis. Ticket sales for future performances are initially deferred and subsequently recognized as revenue when the performance takes place. Co-production/Enhancements - Co-production enhancement revenue represents funds received from others to expand budgets for specific Foundation productions. Revenue is recognized when the related production is performed. Educational Programs - Educational program revenue is recognized at the time the programs are offered. Any amounts received in advance are deferred until the programs take place. Concessions and Gift Shop Sales - Concessions and gift shop sales revenue is recognized at the time of sale. Royalties - Royalties represent revenue earned under agreements with other performing arts related entities for the use of specific productions created by the Foundation. Revenue is recognized as the productions are performed. Support Contributions - Contributions are recognized as revenue when received or unconditionally pledged. Contributions subject to donor-imposed restrictions for use in a future period or for a specific purpose are reported as either temporarily or permanently restricted depending on the nature of the restrictions. When a donor restriction expires, temporarily restricted net assets are classified to unrestricted net assets and reported in the statement of activities as net assets released from restriction. Donor restricted contributions whose restrictions are met in the same reporting periods are reported as unrestricted contributions. Government Grants - Revenue from grants is recognized to the extent of eligible costs incurred, up to the maximum grant amount. Any amounts received in advance are deferred until the funds are spent. 10

11 Support, cont d In-Kind Donations - The value of services and facilities donated are recorded as unrestricted contributions and expensed in the year donated. These contributions are valued at the estimated fair value of similar services and materials. Donated fixed assets are capitalized at fair value on the date of donation and are recorded as unrestricted, temporarily restricted, or permanently restricted in-kind contribution support, depending on the wishes of the donor. Receivables Pledges receivable consist of unconditional promises to give. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The discounts to present value are computed using risk-adjusted rates applicable in the years in which those promises are received. Amortization of the discounts is included in support on the statements of activities. Conditional promises to give are not recorded as revenue until the conditions are substantially met. An allowance for estimated uncollectible pledges is based on past experience and on an analysis of current amounts. Pledges deemed uncollectible are written-off in the year in which they are deemed uncollectible. Management has determined that an allowance for doubtful accounts of $100,000 was necessary at March 31, 2010 and Accounts receivable are recorded when services are provided and are presented net of any allowance for doubtful accounts. No collateral is obtained. Management has determined that an allowance for doubtful accounts was not necessary at March 31, 2010 and Purchased land, property and equipment Land, property and equipment are recorded at cost if purchased. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets, which is generally five years for furniture, equipment, and production equipment, thirty years for real property, and in the case of leasehold improvements, over the lesser of the useful lives of the related assets or the lease term. It is the Foundation s policy to capitalize fixed assets costing in excess of $2,000. Donated property and equipment Donations of property and equipment are recorded as contributions at their estimated fair value at the date of donation. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as increases in temporarily restricted net assets. It is the Foundation s policy to imply a 11

12 Donated property and equipment, cont d time restriction, based on the assets estimated useful lives, on donations of property and equipment that are not restricted as to their use by the donor. Accordingly, those donations are recorded as increases in temporarily restricted net assets. The Foundation reclassifies temporarily restricted net assets to unrestricted net assets each year for the amount of depreciation expense relating to the donated property and equipment. Impairment of long lived assets Investments The Foundation evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down will be recorded to reduce the related asset to its estimated fair value. To date, no such write-downs have occurred. Investments are accounted for in accordance with authoritative guidance which states that investments in equity securities with readily determinable fair market values and all debt securities should be reported at fair value with gains and losses included in the statements of activities. Investments consist of marketable securities and are accounted for as follows: Marketable securities consist of mutual funds, equity, and fixed income securities and are recorded at fair market value. The fair value of investments in securities is based on quoted market prices and is valued at the closing price on the last business day of the year. Realized gains and losses on the sale of investments are calculated using the specific-identification method. Unrealized gains and losses represent the change in the fair market value of the individual investments for the period or since the acquisition date, if acquired during the period, and are recorded as a component of unrestricted net assets, unless restricted by donor. Donated investments are initially recorded at fair value at the date of the gift. It is Foundation s policy to sell donated investments upon receipt. 12

13 Production costs Advertising Functional allocation of expenses Costs of scenery, costumes, and stage properties are recorded as expenses in the period in which the related production is first performed. Production costs relating to future performances are deferred until the production is presented. Production expenses include all direct costs of the performances. Direct costs include payroll, artist fees, scenery, costumes, and other costs. The Foundation expenses advertising as incurred. Advertising expense was approximately $690,000 and $680,000 for the years ended March 31, 2010 and 2009, respectively. The expense is included in marketing expenses. The cost of providing the various programs and other activities has been summarized on a functional basis in the statement of activities. Accordingly, certain costs have been allocated among the program and supporting services benefited. The information below presents all expenses functionally and reflects the allocation of depreciation and interest expense generally on the basis of the department for which the assets were purchased or constructed. Year Ended March 31, Programs $ 7,764,635 $ 10,244,683 Management and general 3,737,313 3,674,934 Fundraising 1,170,655 1,141,327 $ 12,672,603 $ 15,060,944 Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates used in preparation of these financial statements include the valuation of split-interest agreements, beneficial interests, and the functional allocation of expenses. 13

14 Transactions with UCSD The Foundation conducts a significant amount of transactions with the University of California, San Diego (the University ). The Foundation has entered into the following transactions with the University: A construction and operation agreement (Note 5); An endowment fund (Note 6); An unsecured note payable to the University (Note 8); and A lease agreement with the University for rental space to construct and operate a restaurant (Note 10). Additionally, for the year ended March 31, 2010 and 2009, the Foundation paid the University approximately $788,000 and $895,000, respectively, for joint staff, parking permits, rent, and general operations. The Foundation also provides services for the University during productions performed by the University. The Foundation received approximately $395,000 and $428,000 for the years ended March 31, 2010 and 2009, respectively, from the University related to these services and as a spending distribution for the endowment fund. At March 31, 2010 and 2009, the Foundation had receivables of approximately $69,000 and $154,000, respectively due from the University. Fair value measurements The Foundation measures fair value at the price that would be received upon sale of an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative guidance establishes a hierarchy for ranking the quality and reliability of the information used to determine fair values, requiring that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Unadjusted quoted market prices for identical assets or liabilities in active markets. Level 2: Unadjusted quoted market prices for similar assets and liabilities in active markets, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3: Significant unobservable inputs for the asset or liability. 14

15 Fair value measurements, cont d The following tables summarize the valuation of the Foundation s fair value measurements in accordance with authoritative guidance at March 31, 2010: Level 1 Level 2 Level 3 Total Equity mutual funds Large value $ 558,069 $ - $ - $ 558,069 Large growth 166, ,375 Mid growth 104, ,505 Mid value 101, ,969 Bond mutual fund Intermediate term bond 342, ,346 Certificate of deposit - 40,787-40,787 Beneficial interest in assets held by others , ,707 Beneficial interest in perpetual trust - - 1,454,637 1,454,637 Split-interest agreements (Temporarily restricted) - - 1,155,475 1,155,475 Split-interest agreements (Permanently restricted) - - 3,237,558 3,237,558 Total $1,273,264 $ 40,787 $6,693,377 $8,007,428 Changes in Level 3 fair value measurements during the year ending March 31, 2010 were as follows: Beneficial interest in assets held by others Beneficial interest in perpetual trust Splitinterest trust assets Total April 1, 2009 $ 625,177 $1,161,073 $3,801,223 $5,587,473 Change in value of beneficial interest in assets held by others 220, ,530 Change in value of beneficial interest in perpetual trust - 293, ,564 Change in value of splitinterest agreements , ,810 March 31, 2010 $ 845,707 $1,454,637 $4,393,033 $6,693,377 15

16 Fair value measurements, cont d The following tables summarize the valuation of the Foundation s fair value measurements in accordance with authoritative guidance at March 31, 2009: Level 1 Level 2 Level 3 Total Equity mutual funds $ 651,299 $ - $ - $ 651,299 Bond mutual funds 290, ,859 Certificate of deposit - 65,000-65,000 Money market funds 4, ,793 Beneficial interest in assets held by others , ,177 Beneficial interest in perpetual trust - - 1,161,073 1,161,073 Split-interest agreements (Temporarily restricted) - - 1,140,599 1,140,599 Split-interest agreements (Permanently restricted) - - 2,660,624 2,660,624 Total $ 946,951 $ 65,000 $5,587,473 $6,599,424 Changes in Level 3 fair value measurements during the year ending March 31, 2009 were as follows: Beneficial interest in assets held by others Beneficial interest in perpetual trust Splitinterest trust assets Total April 1, 2008 $ 965,503 $1,695,777 $4,885,000 $7,546,280 Change in value of beneficial interest in assets held by others (340,326) - - (340,326) Change in value of beneficial interest in perpetual trust - (534,704) - (534,704) Change in value of splitinterest agreements - - (1,083,777) (1,083,777) March 31, 2009 $ 625,177 $1,161,073 $3,801,223 $5,587,473 Income tax status The Foundation is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code and Section 23701(d) of the California Revenue and Taxation Code. The Foundation, however, may be subject to tax on income which is not related to its exempt purpose. The Foundation had no unrelated business income tax for the years ended March 31, 2010 and

17 New accounting standards As of April 1, 2009, the Foundation adopted the guidance related to uncertain tax positions and it did not result in an adjustment to the financial statements. In June 2009 the FASB issued authoritative guidance related to the hierarchy of GAAP, which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The authoritative guidance is effective for interim and annual periods ending after September 15, 2009 and did not have a material impact on the Foundation s financial statements. Reclassifications Certain amounts in the 2009 financial statements have been reclassified to conform with the 2010 classifications. These reclassifications have no effect on reported net assets or change in net assets. 2. Concentration of Credit Risk The Foundation maintains its cash and cash equivalents in bank deposit accounts which at times exceed federally insured deposit limits. The Foundation has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents. Investments are exposed to various risks, such as interest rates, credit, and overall market volatility. It is at least reasonably possible given the level of risk associated with investments that changes in the near term could materially affect the amounts reported in the financial statements. 3. Pledges Receivables As of March 31, pledges receivable were: Receivables due in less than one year $ 837,818 $ 1,957,435 Receivables due in one to five years 1,043,000 1,165,000 Receivables due in more than five years 5,000 20,000 Total unconditional promises to give 1,885,818 3,142,435 Less allowance for doubtful receivables (100,000) (100,000) Less discount to net present value (52,364) (85,454) Net unconditional promises to give $ 1,733,454 $ 2,956,981 17

18 3. Pledges Receivables, Cont d 4. Split-Interest Agreements Long-term pledges receivables are discounted using risk-adjusted rates of return ranging from 1.02% to 4.70% per annum. In 1996, the Foundation received a contribution of an interest in an irrevocable remainder trust. The underlying assets in the trust had a total value of approximately $5.6 million and $5.3 million at March 31, 2010 and 2009, respectively, when applying the cost and fair market value basis of accounting, as applicable. The terms of the trust grants the Foundation a minimum of 25% of the trust, approximately $1.4 million, upon the death of the beneficiary. The use of such funds is unrestricted by the donor. The current value of the gift is approximately $1.1 million. The current value of the gift has been discounted to its present value using a risk adjusted rate of approximately 3.8% over the anticipated life expectancy of the beneficiaries at March 31, In 2002, the Foundation received a contribution of an interest in an irrevocable remainder trust. The trust had a fair value of approximately $939,000 and $728,000 at March 31, 2010 and 2009, respectively. The terms of the trust grants the Foundation 15% of the trust, approximately $141,000, upon the death of the beneficiary. The current value of the gift is approximately $86,000. The current value of the gift has been discounted to its present value using a risk adjusted of return of approximately 4.4% over the anticipated life expectancy of the beneficiary at March 31, In 2003, the Foundation received an endowment contribution of a 100% interest in an irrevocable remainder trust. The trust had a current value of approximately $3.2 million and $2.7 million at March 31, 2010 and 2009, respectively. The current value of the gift has been discounted to its present value using a risk adjusted rate of return of approximately 3.2% and 2.4% per annum over the anticipated life of the beneficiary as of March 31, 2010 and 2009, respectively. 18

19 5. Fixed Assets Fixed assets at March 31, are comprised of: Condominiums Land $ 3,426,162 $ - Improvements 1,384,046 - Leasehold improvements 19,343,698 19,335,030 Furniture and equipment 1,478,956 1,432,569 Production equipment 371, ,236 26,004,098 21,138,835 Less accumulated depreciation (5,995,461) (4,817,903) $ 20,008,637 $ 16,320,932 Included in furniture and equipment above are $353,673 of assets acquired under capital leases which expired during the year ended March 31, 2010 (Note 9). Accumulated amortization recognized on capital leases was approximately $256,000 and $202,000 at March 31, 2010 and 2009, respectively. The Foundation performs in three theatres: the Mandell Weiss Theatre, the Mandell Weiss Forum Theatre, and the Sheila and Hughes Potiker Theatre located in the Joan and Irwin Jacobs Center. The theaters are located on the campus of the University and are owned by the University. The Foundation has a contractual arrangement, which expires in December 2050, with the University whereby the use of the theatres is shared by the Foundation and the University s Department of Theatre and Dance. In 2000, the Foundation entered into an agreement with the University for the construction and operation of the Joan and Irwin Jacobs Center which houses the Sheila and Hughes Potiker Theatre, the Charmaine and Maury Kaplan administrative offices, an educational center, the Rao and Padma Makineni Play Development Center, Seuss rehearsal rooms, and related facilities (reflected as leasehold improvements) on the University campus adjacent to the Mandell Weiss Theatre. The Foundation raised approximately $14.8 million to fund the cost of these facilities and agreed to transfer those funds to the University (Note 8). Additionally, the Foundation raised approximately $1.2 million to fund capital additions to the facilities, including the completion of a restaurant shell that is 19

20 5. Fixed Assets, Cont d reflected as leasehold improvements. The Foundation also secured financing in 2008 to complete leasehold improvements on the restaurant (Notes 8 and 10), which was completed in June The amounts paid for construction of leasehold improvements have been capitalized and are being depreciated over the useful life of the leasehold improvements. Since the Foundation provided funding to help build the theaters, the University allows the Foundation to use the theaters at no cost. Beginning in April 2009, the Foundation began acquiring condominiums for use by visiting artists. As of March 31, 2010, the Foundation acquired 23 units costing approximately $4.8 million. As discussed in Note 8, the Foundation secured financing to assist with the purchase of the units. The units have been capitalized and are being depreciated over 30 years. 6. Endowment Assets Beneficial Interest in Perpetual Trust - In 2000, an endowment fund was established at University of California San Diego Foundation (Trustee) with the Foundation named as the irrevocable beneficiary. The Foundation does not have access to the fund principal. The Foundation receives distributions from the endowment in accordance with the Trustee s standard endowment spending policy with any excess amounts remaining in the endowment fund in perpetuity. Distributions from the endowment fund of 4.35% annually are recorded as unrestricted income when they become distributable. The assets in the trust consist of stocks, fixed income securities, and alternative investments and are recorded at fair value. The fair value of alternative investments, for which quoted market prices are not available, are determined by investment managers in good faith using methods considered appropriate, and is subject to oversight and review by management. The beneficial interest in the perpetual trust is recorded at the fair value which approximates expected future cash flows from the trust. Beneficial Interest in Assets Held by Others - In 2006 the Foundation received a $1.0 million gift that is held in a custodial account at the San Diego Jewish Community Foundation. An annual distribution of 5% of the market value of the endowment is distributed to the Foundation for new play development. The beneficial interest in assets held by others is recorded at fair value which approximates expected future cash flows from the beneficial interest. 20

21 6. Endowment Assets, Cont d Investments The Board-designated endowments funds consist of the following at March 31: Equity mutual funds $ 930,918 $ 651,299 Bond mutual funds 342, ,859 Money market funds - 4,793 $ 1,273,264 $ 946,951 The Foundation s Board of Trustees has established a spending policy to annually transfer up to 5% of the fair value of the endowment investments to support operations. The following summarizes the total investment return on endowment investments for the years ended March 31: Interest and dividends $ 32,144 $ 34,049 Spending distribution 49,761 70,035 Net unrealized and realized gains (losses) 343,930 (431,133) $ 425,835 $ (327,049) In August 2008, the Financial Accounting Standards Board ( FASB ) issued authoritative guidance for endowments of Not-for-Profit Organizations in relation to an enacted version of the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ), and authoritative guidance for enhanced disclosures for all endowment funds. The provisions of this guidance improve disclosures about an organization s endowment funds (both donor-restricted endowment funds and board designated endowment funds). The State of California enacted UPMIFA and the Foundation adopted the legislation and this authoritative guidance, effective January 1, The Board of Trustees of the Foundation interprets UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of donor-restricted endowment funds absent explicit donor stipulations to the contrary. 21

22 6. Endowment Assets, Cont d As a result of this interpretation, the Foundation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Foundation considers the following factors in making a determination to invest or appropriate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the organization (7) The investment policies of the organization Through the Board s interpretation of the law, the Foundation has determined that the provisions do not apply to the Endowment Fund at the University. The Foundation holds certain permanently restricted net assets under a split-interest agreements that are not currently invested as endowment investments as of March 31, 2010 and 2009 and, therefore, are not included in this disclosure. Upon maturity of the split interest agreements, the investments will be invested in accordance with the Foundation s endowment investment policy. The Foundation s endowment investment policy and strategy is to emphasize total return; that is, the aggregate return from capital appreciation and dividend and interest income. Within this framework, specific investment objectives for endowment investments include liquidity, preservation of capital, preservation of purchasing power and long-term growth of capital. 22

23 6. Endowment Assets, Cont d Endowment net asset composition by type of fund as of March 31, 2010 were as follows: Unrestricted Permanently Restricted Total Donor restricted endowment fund $ - $ 2,300,344 $ 2,300,344 Board designated endowment fund 1,273,264-1,273,264 Total endowment funds $ 1,273,264 $ 2,300,344 $ 3,573,608 Changes in endowment net assets for the year ended March 31, 2010 were as follows: Unrestricted Permanently Restricted Total Endowment assets, April 1, 2009 $ 946,951 $ 1,786,250 $ 2,733,201 Interest and dividends 32,144-32,144 Net appreciation (realized and unrealized) 343, ,930 Change in value of beneficial interest in assets held by others - 264, ,864 Change in value of beneficial interest in perpetual trust - 347, ,556 Spending distribution (49,761) (98,326) (148,087) Endowment assets, March 31, 2010 $ 1,273,264 $ 2,300,344 $ 3,573,608 Endowment net asset composition by type of fund as of March 31, 2009 were as follows: Permanently Unrestricted Restricted Total Donor restricted endowment fund $ - $ 1,786,250 $ 1,786,250 Board designated endowment fund 946, ,951 Total endowment funds $ 946,951 $ 1,786,250 $ 2,733,201 23

24 6. Endowment Assets, Cont d Changes in endowment net assets for the year ended March 31, 2009 were as follows: Unrestricted Permanently Restricted Total Endowment assets, April 1, 2008 $ - $4,068,576 $4,068,576 Net asset reclassification based on change in law 1,407,295 (1,407,295) - Endowment net assets after reclassification 1,407,295 2,661,281 4,068,576 Interest and dividends 34,049 34,049 Net depreciation (realized and unrealized) (431,133) - (431,133) Contributions to Board - designated endowment fund 6,775-6,775 Change in value of beneficial interest in assets held by others - (292,406) (292,406) Change in value of beneficial interest in perpetual trust - (482,574) (482,574) Spending distribution (70,035) (100,051) (170,086) Endowment assets, March 31, 2009 $ 946,951 $1,786,250 $2,733,201 In 2008 management, in consultation with the Foundation s legal counsel, interpreted the corpus of the permanently restricted funds to be approximately $2.7 million in accordance with UPMIFA. These permanently restricted funds are a beneficial interest in a perpetual trust and a beneficial interest in assets held by others and as such the change in value is reported in permanently restricted net assets. Approximately $1.4 million was reclassed from permanently restricted to unrestricted net assets at January 1, 2009 to reflect the adjusted corpus balance in accordance with the new law. 7. Line of Credit The Foundation has a $1.1 million unsecured line of credit available from a local bank that expires on January 30, Interest is payable monthly at the greater of 3.5% or prime plus one-half percent (3.75% at March 31, 2010 and 2009). At March 31, 2010 and 2009, the line of credit did not have an outstanding balance. Interest expense recognized on the line of credit was $0 and approximately $6,000 for the years ended March 31, 2010 and 2009, respectively. 24

25 7. Line of Credit, Cont d The Foundation had to satisfy certain financial and non-financial contractual covenants related to the line of credit. At March 31, 2010, management was not aware of any violations of these covenants. The line of credit agreement has a letter of credit facility that allows for up to $100,000 in letters of credit. The Foundation had no outstanding letters of credit at March 31, 2010 and Notes Payable The Foundation has an unsecured note payable to the University which is due in December Interest is accrued monthly at the University s interest rate plus one-quarter percent (2.77% and 4.00% at March 31, 2010 and 2009, respectively). The balance of the note was approximately $1.2 million and $1.7 million at March 31, 2010 and 2009, respectively. Principal payments on the note payable are due in annual installments payable by December of each year until the note maturity date in December Interest expense of approximately $43,000 and $80,000 was recognized for the years ended March 31, 2010 and 2009, respectively. In March 2008, the Foundation entered into an unsecured loan agreement with a Trustee of the Board pursuant to which the Foundation borrowed approximately $1.8 million to fund the Improvement Allowance for the restaurant (the Loan ) (Note 10). The Loan is repayable over a 20 year period from restaurant profits and is due in full in The interest rate on the Loan is 4.46% per annum. The outstanding balance on the Loan was approximately $1.8 million at March 31, 2010 and 2009, respectively. In November 2008, the Foundation entered into an additional loan agreement with the same Trustee pursuant to which the Foundation borrowed $165,000 to fund additional improvements to the restaurant (Note 10). The Loan is repayable over a 20 year period from restaurant profits and is due in full in The interest rate on the Loan is 4.24% per annum. The outstanding balance on the loan was $165,000 at March 31, 2010 and 2009, respectively. Interest expense for these notes was approximately $85,000 and $87,000 for the years ended March 31, 2010 and 2009, respectively. 25

26 8. Notes Payable, Cont d In June 2009, the Foundation entered into a $5 million non-revolving / multi-disbursement term loan with a local financial institution secured by the same Trustee s and her spouse s personal assets. The interest rate on the loan is the greater of 3% or prime rate (3.25% at March 31, 2010). Additionally, the loan is also secured by residential deeds-of-trust that are consistent with traditional residential mortgage financing. The loan proceeds have been utilized to purchase residential units (condominium units located in San Diego County) that provide housing for visiting artists. As of March 31, 2010, the Foundation drew approximately $4.8 million for the acquisition of 23 condominium units. Interest expense for the year ended March 31, 2010 was approximately $74,000. Future minimum principal payments on notes payable are as follows: Years Ending March 31, 2011 $ 33, , ,187, , Thereafter 1,915,000 Total $ 7,936, Capital Leases Payable At March 31, capital leases were as follows: Capital lease payable; finance company; payable in monthly lease payments of approximately $6,188 at 7.4% per annum through August 2009, secured by the equipment leased. $ - $ 25,632 Capital lease payable; finance company; payable in monthly lease payments of $1,188 at 7.9% per annum through January 2010, secured by the furniture leased. - 10,352 $ - $ 35,984 26

27 9. Capital Leases Payable, Cont d Interest expense recognized on the capital leases was approximately $1,200 and $7,000 for the years ended March 31, 2010 and 2009, respectively. Amortization expense recognized on the capital leases was approximately $54,000 for the years ended March 31, 2010 and 2009, respectively. 10. Commitments and Contingencies Operating leases The Foundation leases certain office equipment and telecommunications lines under non-cancelable operating leases, which expire at various dates through December The following is a schedule of future minimum payments due: Years Ending March 31, 2011 $ 53, , ,475 Total $ 93,484 In April 2007 the Foundation executed a lease agreement with the University for rental space to construct and operate a restaurant. The agreement is for ten years (two successive five-year terms) and the base rent is $2,000 per month. Additional rent is based on a percentage of gross restaurant sales and is in addition to the base rent. In June 2007 the Foundation entered into a Management Agreement with Wolfgang Puck Special Events and Catering ( Puck ), pursuant to which Puck would design and operate the restaurant. The Foundation provided leasehold improvements of approximately $2 million. The restaurant opened in June A lease agreement was executed in June 2008 between the Foundation and Puck for the restaurant. The lease is for ten years (two successive five-year terms) and the Foundation receives rental income from Puck of $4,000 per month. 27

28 Grants and contracts Litigation The Foundation has grants and contracts with government agencies which are subject to audit. No provision has been made for any liabilities that may arise from such audits since the amounts, if any, cannot be determined. Management believes that any liability which may result from such audits would not be material. In the normal course of business, the Foundation is occasionally named as a defendant in various lawsuits. It is the opinion of management that the outcome of any pending lawsuits will not materially affect the operation or the financial position of the Foundation. 11. Temporarily As of March 31, temporarily restricted net assets are available for: Restricted Net Assets Purpose restrictions: Capital campaign $12,518,826 $13,484,864 Time restrictions: Future seasons expenses 1,047,730 1,384,340 Split-interest agreements 1,155,475 1,140,599 $14,722,031 $16,009, Permanently Restricted Net Assets 13. Net Assets Released from Restrictions Permanently restricted net assets of $2.3 million and $1.8 million as of March 31, 2010 and 2009, respectively, are restricted for investment in perpetuity, the income from which is expendable to support Foundation activities. Approximately $3.2 million and $2.7 million at March 31, 2010 and 2009, respectively, of permanently restricted net assets represent a deferred gift, primarily a split interest gift (Note 6), which is not yet available to support Foundation activities. During the years ended March 31, net assets were released from donor restrictions by incurring expenditures satisfying the restricted purposes as follows: Depreciation and interest $ 936,039 $ 957,737 Season expenses 639, ,000 $ 1,575,539 $ 1,803,737 28

29 13. Net Assets Released from Restrictions, Cont d 14. Donated Materials, Facilities, and Services 15. Retirement Plans Sources of the releases for season expenses during the years ended March 31, were: Foundations $ 400,000 $ 670,000 Individuals 168, ,000 Corporate 40,000 10,000 Government 30,000 - Other 1,000 1,000 Total season expenses $ 639,500 $ 846,000 Materials and facilities donated to the Foundation by individuals and organizations for the years ended March 31, 2010 and 2009 totaling approximately $379,000 and $276,000, respectively, have been included in the accompanying statement of activities. The Foundation also received donated legal services during the year. These services amounted to approximately $10,000 and $13,000 for the years ended March 31, 2010 and 2009, respectively, and have been included in the accompanying statements of activities. The Foundation has a 403(b) plan with a discretionary employer match. No match was contributed during the year ended March 31, For the year ended March 31, 2009, the Foundation contributed approximately $140,000 to the plan (5.5% for the nine-month period ended December 31, 2008 and 3.0% for the three-month period ended March 31, 2009). 16. Collective Bargaining Agreements Substantially all actors, directors, choreographers, designers and musicians employed by the Foundation are subject to collective bargaining agreements with various associations expiring in Related Parties As discussed in Notes 8 and 10, the Foundation had entered into loan agreements with a Trustee of the Board pursuant to which the Foundation borrowed $1.9 million related to the construction of the restaurant. As discussed in Note 8, the same Trustee and her spouse guaranteed a loan of up to $5 million for the purchase of condominiums. 29