PHOENIX ART MUSEUM AND PHOENIX ART MUSEUM ENDOWMENT FUND, INC. Phoenix, Arizona. CONSOLIDATED FINANCIAL STATEMENTS June 30, 2012

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1 PHOENIX ART MUSEUM ENDOWMENT FUND, INC. Phoenix, Arizona CONSOLIDATED FINANCIAL STATEMENTS June 30, 2012

2 TABLE OF CONTENTS PAGE INDEPENDENT AUDITOR S REPORT... 1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position... 2 Consolidated Statement of Activities and Changes in Net Assets... 3 Consolidated Statement of Functional Expenses... 4 Consolidated Statement of Cash Flows... 5 Notes to Consolidated Financial Statements... 6 SUPPLEMENTARY INFORMATION Independent Auditor s Report on Supplementary Information Consolidating Statement of Financial Position Consolidating Statement of Activities and Changes in Net Assets... 35

3 CliftonLarsonAllen LLP INDEPENDENT AUDITOR S REPORT To the Board of Trustees of the Phoenix Art Museum and Phoenix Art Museum Endowment Fund, Inc. Phoenix, Arizona We have audited the accompanying consolidated statement of financial position of the Phoenix Art Museum and Phoenix Art Museum Endowment Fund, Inc. as of June 30, 2012, and the related consolidated statements of activities and changes in net assets, functional expenses and cash flows for the year then ended. These consolidated financial statements are the responsibility of the management of the Phoenix Art Museum and Phoenix Art Museum Endowment Fund, Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The prior year summarized comparative information has been derived from the Phoenix Art Museum and Phoenix Art Museum Endowment Fund, Inc. s 2011 consolidated financial statements and in our report dated October 10, 2011, we expressed an unqualified opinion on those consolidated financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Phoenix Art Museum and Phoenix Art Museum Endowment Fund, Inc. as of June 30, 2012, 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.! Phoenix, Arizona October 26,

4 CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2012 (With Comparative Totals at June 30, 2011) ASSETS Temporarily Endowment Totals Unrestricted Restricted Restricted CURRENT ASSETS Cash and cash equivalents $ 773,140 $ 1,174,913 $ - $ 1,948,053 $ 1,932,738 Accounts receivable 117, ,511 89,276 Pledges receivable, net - 384, , ,595 Museum store inventories 397, , ,073 Prepaid expenses 108, , ,354 Total current assets 1,396,698 1,558,930-2,955,628 3,083,036 INVENTORY ,870 CASH DUE FROM INTERNAL FUNDS - 1,923,012-1,923,012 2,125,937 ASSETS WHOSE USE IS LIMITED ,832 CHARITABLE GIFT ANNUITIES - 1,242,543-1,242,543 1,390,667 PROPERTY AND EQUIPMENT, net 6,073, ,073,947 6,471,189 ASSETS RESTRICTED TO LONG-TERM INVESTMENT PURPOSES - 747,454 26, , ,311 LAND HELD FOR SALE - - 1,104,000 1,104,000 1,104,000 INVESTMENTS - 59,406 22,937,734 22,997,140 22,298,727 TOTAL ASSETS $ 7,470,645 $ 5,531,345 $ 24,067,874 $ 37,069,864 $ 37,362,569 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Bonds payable - current portion $ - $ - $ - $ - $ 50,000 Accounts payable and accrued expenses 788, ,763 1,131,309 Deferred revenue 581, , ,733 Total current liabilities 1,370, ,370,383 1,730,042 BONDS PAYABLE, net of current portion ,000 LINE OF CREDIT 1,700, ,700,010 - CASH DUE TO INTERNAL FUNDS 1,923, ,923,012 2,125,937 CHARITABLE GIFT ANNUITIES LIABILITY - 978, , ,332 ACCRUED PENSION LIABILITY 1,423, ,423, ,424 Total liabilities 6,416, ,302-7,395,174 6,158,735 NET ASSETS Unrestricted: Board designated for working capital reserve 650, , ,000 Unrestricted endowment realized/ unrealized loss - - (747,943) (747,943) (363,819) Undesignated 403, ,773 2,215,967 Total unrestricted 1,053,773 - (747,943) 305,830 2,502,148 Donor restricted - 4,553,043 24,815,817 29,368,860 28,701,686 TOTAL NET ASSETS 1,053,773 4,553,043 24,067,874 29,674,690 31,203,834 TOTAL LIABILITIES AND NET ASSETS $ 7,470,645 $ 5,531,345 $ 24,067,874 $ 37,069,864 $ 37,362,569 The accompanying notes are an integral part of the consolidated financial statements. 2

5 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS Temporarily Endowment Totals Unrestricted Restricted Restricted OPERATING ACTIVITIES Revenues: Admissions $ 515,123 $ - $ - $ 515,123 $ 461,518 Museum store income 738, , ,690 Membership income 951, ,330 1,032,106 Projects and fundraising activities 1,443, ,443,713 1,923,280 Less cost of direct donor benefits (560,447) - - (560,447) (624,766) Dividend and interest income 539,683 (11,382) - 528, ,815 Other 562, , ,964 Total revenues 4,189,811 (11,382) - 4,178,429 4,299,607 Public support: Contributions: Private 1,780,881 1,729,152 1,064,339 4,574,372 4,220,289 Less cost of direct donor benefits (121,726) - - (121,726) (93,508) Change in charitable gift annuities - (148,124) - (148,124) 101,637 Governmental 249, ,114 98,419 Donated facilities, materials and services: Governmental 5,070, ,070,886 5,190,328 Private 445, , ,095 Total public support 7,425,112 1,581,028 1,064,339 10,070,479 9,956,260 Net assets released from restrictions: Purpose restrictions met 1,969,510 (1,969,510) Total revenues and public support 13,584,433 (399,864) 1,064,339 14,248,908 14,255,867 Expenses: Programs and exhibitions 11,494, ,494,822 11,224,288 Management and general 2,308, ,308,358 2,079,338 Fundraising 1,007, ,007, ,746 Total expenses 14,811, ,811,109 14,126,372 OPERATING PROFIT (LOSS) (1,226,676) (399,864) 1,064,339 (562,201) 129,495 NONOPERATING ACTIVITIES Net realized/unrealized investment gain (loss) (340,368) 2,699 (384,124) (721,793) 2,502,982 Acquisitions of fine art (245,150) - - (245,150) (378,910) TOTAL NONOPERATING ACTIVITIES (585,518) 2,699 (384,124) (966,943) 2,124,072 CHANGES IN NET ASSETS (1,812,194) (397,165) 680,215 (1,529,144) 2,253,567 NET ASSETS, BEGINNING OF YEAR 2,865,967 4,950,208 23,387,659 31,203,834 28,950,267 NET ASSETS, END OF YEAR $ 1,053,773 $ 4,553,043 $ 24,067,874 $ 29,674,690 $ 31,203,834 The accompanying notes are an integral part of the consolidated financial statements. 3

6 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES Program Services Supporting Services Education Collections and Total Management Total and Community Museum Program and Fund Supporting Total Exhibits Services Store Membership Services General Raising Services Salaries and employee benefits: Salaries and wages $ 1,854,596 $ 224,116 $ 154,551 $ 108,102 $ 2,341,365 $ 755,243 $ 441,890 $ 1,197,133 $ 3,538,498 $ 3,340,794 Employee benefits 856, ,635 75,337 41,112 1,081, , , ,074 1,627, ,442 Total salaries and employee benefits 2,711, , , ,214 3,423,056 1,105, ,777 1,743,207 5,166,263 3,890,236 Advertising and marketing 261, ,563 16, , , ,637 Artist commission fees 145, , , ,857 Artists and performers 86,972 16, , , ,312 Audit fees 1, ,850 35,750-35,750 37,600 37,200 Bad debt expense ,037 46,532 48,569 49, ,156 Bank fees , , ,306 87,371 Catering and hospitality 17,829 7,567-6,406 31,802 34,561 12,085 46,646 78, ,132 Collections conservation 18, , ,908 7,140 Collections management 1, , ,890 3,804 Conferences and meetings 3,071 1, ,499 1,154 2,000 3,154 7,653 19,073 Cost of sales , , , ,736 Depreciation and amortization 449,666 66,842 30,383 18, ,121 18,230 24,306 42, , ,458 Dues and subscription 27,383 16,463 1, ,984 36,716 1,319 38,035 84,019 69,618 Equipment rental 10,247 6, ,887 3,190 21,887 25,077 41,964 74,566 Facilities - other 236,742 28,603 7,969 2, ,160 59,010 4,269 63, , ,603 Fundraising expenses - other ,790 4,366 2,195 8,826 11,021 15,387 33,112 Fundraising professionals ,300 Honoraria 6,400 20, ,350-2,375 2,375 29,725 24,756 In-kind contributions 4,173, , ,100 53,607 4,825, , , ,138 5,516,843 5,619,423 Insurance 102,603 2, ,314 19, , ,355 90,971 Interest expense ,543-7,543 7,543 2,685 Internet and website 3, ,000 12,418-12,418 15,418 10,818 Legal fees ,039-3,039 3,039 2,239 Lodging and meals 4, ,010 8,149 8,795 16,944 21,954 14,326 Office expense - other 20,130 1, ,371 27,456 66,381 10,640 77, , ,964 Other ,297 16,488 1,288 17,776 19,073 6,095 Postage and shipping 134,987 3,588 23,883 48, ,698 4,223 11,868 16, , ,383 Printing 59,096 20, , ,787 3,379 22,801 26, , ,317 Production and exhibition costs 275,390 25, ,850 3,134-3, , ,375 Professional development , Professional fees - other 96,058 2,408 2,752 1, ,250 99,621 2, , , ,277 Repairs and maintenance 64, ,348 55,411-55, , ,336 Supplies 6,082 5,736 1,223 1,576 14,617 17,499 1,967 19,466 34,083 40,919 Support organizations 352, , , ,479 Telephone 1, ,257 19,110 2,716 21,826 23,083 23,470 Travel 26,803 25, ,173 27,680 18,258 45,938 99, ,287 Utilities 247,692 29,926 8,339 2, ,934 37,649 4,467 42, , ,835 Utilities credit (305,137) (36,867) (10,272) (3,668) (355,944) (42,003) (5,503) (47,506) (403,450) - TOTAL FUNCTIONAL EXPENSES $ 9,245,023 $ 1,048,580 $ 819,437 $ 381,782 $ 11,494,822 $ 2,308,358 $ 1,007,929 $ 3,316,287 $ 14,811,109 $ 14,126,372 The accompanying notes are an integral part of the consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Changes in net assets $ (1,529,144) $ 2,253,567 Adjustments to reconcile changes in net assets to net cash provided by (used in) operating activities: Depreciation and amortization 607, ,458 Change in discount on pledges receivable 5,198 (2,293) Provision for doubtful pledges - 138,881 Net realized/unrealized investment gain (loss) 721,793 (2,502,982) Change in charitable gift annuities, net 158,094 (148,405) Change in operating assets and liabilities: Decrease (increase) in: Accounts receivable (28,235) 40,022 Pledges receivable 81,097 (105,238) Museum store inventories 17,695 15,711 Prepaid expenses 151,555 (57,659) Increase (decrease) in: Accounts payable and accrued expenses (342,546) 136,743 Deferred revenue 32,887 (274,346) Accrued pension liability 589,043 (470,174) Net cash provided by (used in) operating activities 465,094 (348,715) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments (7,164,463) (7,216,051) Proceeds from the sale of investments 5,744,257 7,260,356 Purchases of property and equipment (210,415) (316,284) Proceeds from assets restricted to long-term investment purposes 3, ,055 Change in assets whose use is limited 27, ,070 Net cash provided by (used in) investing activities (1,599,789) 81,146 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit 1,700,010 - Repayments on bonds (550,000) (265,000) Net cash provided by (used in) financing activities 1,150,010 (265,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,315 (532,569) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,932,738 2,465,307 CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,948,053 $ 1,932,738 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 7,543 $ 2,685 The accompanying notes are an integral part of the consolidated financial statements. 5

8 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Museum and Endowment Fund Operations: The Phoenix Art Museum is a nonprofit museum incorporated in May 1949 as an Arizona nonprofit corporation. The purpose of the Museum is to educate and expose the broadest segment of the population to the historical and aesthetic attributes of the visual arts. Phoenix Art Museum Endowment Fund, Inc. was incorporated in January 1994 as an Arizona nonprofit corporation. The purpose of the Endowment Fund is to receive and accept title to donated assets, to hold such assets as an endowment, to invest said assets, and to distribute income and gains from these assets for the benefit of the Museum. The significant accounting policies followed by the Museum and the Endowment Fund are as follows: Consolidated Financial Statements The Phoenix Art Museum has an economic interest and control over the Phoenix Art Museum Endowment Fund, Inc. The consolidated financial statements include both the accounts of the Phoenix Art Museum and the Phoenix Art Museum Endowment Fund, Inc. (collectively referred to as the Museum ). In addition, the Museum is supported by 11 volunteer organizations as follows:! Phoenix Art Museum League! Docent Committee of the Phoenix Art Museum! Western Art Associates! Arizona Costume Institute! Contemporary Forum! Asian Arts Council! Friends of European Art! Latin America Art Alliance! Women s Metropolitan Arts Council! In Focus! Collectors Study Club All of the financial activities and balances of these organizations are included in these consolidated financial statements. All significant interorganization accounts and transactions have been eliminated. 6

9 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of Presentation The accompanying consolidated financial statements are presented in accordance with the American Institute of Certified Public Accountants Audit and Accounting Guide for Not-For-Profit Organizations (Audit Guide). Under the Audit Guide, the Museum is required to report information regarding the financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets as follows: Unrestricted Net Assets Unrestricted net assets are not subject to donor imposed stipulations and are those currently available at the discretion of the Board of Directors for use in the Museum s operations, in accordance with its bylaws. Temporarily Restricted Net Assets Temporarily restricted net assets are those which are subject to donor-imposed stipulations that will be met by the Museum and/or the passage of time. Permanently Restricted Net Assets Permanently restricted net assets are those which represent permanent endowments where it is stipulated by donors that the principal remain in perpetuity and only the income is available as unrestricted or temporarily restricted, as per the endowment agreements. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted explicitly by donor stipulation or by law. Expirations of temporary restrictions on net assets, i.e., the donor stipulated purpose has been fulfilled and/or the stipulated time period has elapsed, are reported as reclassifications to unrestricted net assets. Prior Year Summarized Information The consolidated financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the consolidated financial statements for the year ended June 30, 2011, from which the summarized information was derived. 7

10 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. Cash and Cash Equivalents Cash consists of cash and at times cash equivalents consisting of highly liquid financial instruments purchased with original maturities of three months or less. Cash and cash equivalents on the consolidated statement of cash flows is reflected net of cash due to internal funds. Accounts Receivable Accounts receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts through a charge to earnings and an increase to a valuation allowance based upon its assessment of the current status of individual balances. Account balances with invoices over ninety days old are considered delinquent. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a reduction of accounts receivable. Accounts receivable as of June 30, 2012 and 2011 are considered by management to be collectible in full and, accordingly, an allowance for doubtful accounts has not been provided. Pledges Receivable Unconditional promises to give (pledges receivable) are recognized as revenues in the period the promise is received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Monies received pursuant to conditional promises are reflected as deferred revenue. Unconditional promises to give that are to be collected within one year are recorded at their net realizable value. 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 on those amounts are computed using rates as determined by management, applicable to the years in which the promises are received. Amortization of the discounts is included in contribution support. The carrying amount of pledges receivable is reduced by a valuation allowance that reflects management s best estimate of amounts that will not be collected. 8

11 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments Investments, consisting primarily of equity mutual funds (domestic and international) and U.S. government securities, with readily determinable market values are measured at fair value as of year-end in the consolidated statement of financial position. Investment income or loss (including realized and unrealized gains and losses on investments, interest and dividends) are recognized in the consolidated statement of activities and changes in net assets. Investments in equity securities with readily determinable fair values and all investments in debt securities are presented at fair value in the consolidated statement of financial position as determined by available market prices. Limited marketability investments, representing amounts in hedge funds are valued at the quoted market price for securities for which market quotations are readily available or an estimate of value (fair value) as determined in good faith by the general partner. Changes in the values of limited marketability investments that occur between the time audited net asset values are last communicated by the general partner and the close of the Museum s fiscal year are reflected in the fair value recorded in the Museum s consolidated financial statements. Museum Store Inventories Museum store inventories consist of books, gift items and art related objects held for resale and are carried at average cost. Property and Equipment Purchased property and equipment are initially recorded at cost and donated property and equipment is recorded at the fair value at the date of gift to the Museum. Maintenance and repairs are charged to operations when incurred. Betterments and renewals in excess of $1,500 are capitalized. When property and equipment is sold or otherwise disposed of, the assets and related accumulated depreciation accounts are relieved, and any gain or loss is included in operations. Depreciation and amortization of property and equipment is computed on a straightline basis over the following estimated useful lives: Estimated Useful Lives Buildings and improvements 5 to 50 years Furniture, fixtures and equipment 5 to 50 years Donations of property and equipment are recorded as contributions at their estimated fair value at the date of donation. Such donations are reported as increases in unrestricted net assets unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as temporarily restricted contributions absent donor stipulations regarding how long those donated assets must be maintained. The Museum reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. The Museum reclassifies temporarily restricted net assets to unrestricted net assets at that time. 9

12 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of Long-Lived Assets The Museum reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Management does not believe impairment indicators are present. Deferred Revenue Deferred revenue consists of prepaid membership dues and money received in advance for fiscal 2013 dues and events. Admissions Admissions revenue consists of ticket sales and is recognized when the tickets are sold. Membership Dues The Museum defers revenue from membership dues collected in advance. Deferred revenue is amortized into revenue over the membership period. Contributions Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support depending on the existence and/or nature of any donor restrictions. All donorrestricted support is reported as an increase in temporarily or permanently restricted net assets depending on the nature of the restrictions. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished or a donor removes a restriction), temporarily or permanently restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities and changes in net assets as net assets released from restrictions. Special Events Revenue The Museum conducts special events in which a portion of the gross proceeds paid by the participant represents payments for the direct cost of the benefits received by the participant at the event. Unless a verifiable objective means exists to demonstrate otherwise, the fair value of meals and entertainment provided at special events is measured at the actual cost to the Museum. The direct costs of the special events which ultimately benefit the donor rather than the Museum are included in special events revenues and then expensed as costs of direct donor benefits. 10

13 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Non-Operating Activities Changes in unrestricted net assets, which are excluded from operating profit (loss) include net realized and unrealized investment gains and losses and acquisition of fine art, which is consistent with industry practice. Donated Services and Materials Donated services and materials are recorded at their estimated fair value if they enhance the Museum s nonfinancial assets or require specialized skills that the Museum would normally purchase if not provided by donation. The Museum recognized $445,957 and $439,095 of contributed materials and services related to specialized skills during the years ended June 30, 2012 and 2011, respectively. No amounts have been reflected in the consolidated financial statements for certain donated volunteer services because they did not qualify for recording under the generally accepted accounting principle guidelines; however, a substantial number of volunteers have donated significant amounts of their time to the Museum s program services and fund-raising campaigns. Advertising The Museum uses advertising to promote its programs to the various groups it serves. Advertising costs are charged to operations as incurred. Advertising expense charged to operations was $196,320 and $106,959 during the years ended June 30, 2012 and 2011, respectively. Functional Expenses The costs of providing various programs and other activities have been summarized on a functional basis in the consolidated statement of activities and changes in net assets and detailed in the consolidated statement of functional expenses. Accordingly, certain costs have been allocated among program and supporting services benefited. Management and general expenses include those expenses that are not directly identifiable with any specific program but provide for the overall support and direction of the Museum. Income Taxes The Phoenix Art Museum and the Phoenix Art Museum Endowment Fund, Inc. qualify as taxexempt organizations under Section 501(c)(3) of the Internal Revenue Code (the Code ) and, accordingly, there is no provision for corporate income taxes. In addition, they qualify for the charitable contribution deduction under Section 170 of the Code and have been classified as organizations that are not private foundations. Income determined to be unrelated business taxable income (UBTI) would be taxable. 11

14 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes (Continued) The federal and state corporate tax returns of the Museum for 2009, 2010 and 2011 are subject to examination by the Internal Revenue Service and state taxing authorities, generally for three years after they were filed. NOTE 2 PLEDGES RECEIVABLE Pledges receivable consist of the following unconditional promises to give: Receivable in less than one year $ 384,017 $ 406,595 Receivable in one to five years - - Total pledges receivable 384, ,595 Less unamortized discount - - Less allowance for uncollectible pledges - - Net pledges receivable 384, ,595 Less current portion (384,017) (406,595) Noncurrent portion $ - $ - The estimated cash flows for pledges receivable are discounted over a five-year collection period using a management determined discount rate of 3.9%. Four and three donors make up 62% and 66% of the pledges receivable balance at June 30, 2012 and 2011, respectively. 12

15 NOTE 3 ENDOWMENT RESTRICTED INVESTMENTS Endowment restricted investments consist of the following: Fair Value Cost Fair Value Cost Equity mutual funds domestic $ 6,641,559 $ 6,099,652 $ 4,516,166 $ 3,973,723 Equity mutual funds international 2,566,124 2,709,788 3,372,029 3,130,554 Corporate bonds domestic 6,951,778 6,545,366 7,840,021 7,327,781 Corporate bonds international 1,592,585 1,639, , ,721 Alternative investments 4,218,308 3,772,771 4,127,080 3,667,869 Money market 967, ,380 1,526,278 1,323,437 Total investments $ 22,937,734 $21,734,158 $ 22,242,020 $ 20,258,085 Investment return on the long-term investments, which includes net realized and unrealized gains and losses that are included as part of the change in unrestricted and temporarily restricted net assets, consist of the following: Dividend and interest income $ 528,301 $ 431,815 Net realized/unrealized investment gains (loss) (721,793) 2,502,982 Investment return $ (193,492) $ 2,934,797 NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS In determining fair value, the Museum uses various valuation approaches within the fair value measurement framework. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. Fair value measurements framework establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Fair value measurements define levels within the hierarchy based on the reliability of inputs as follows:! Level 1 Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;! Level 2 Valuations based on quoted prices for similar assets or liabilities or identical assets or liabilities in less active markets, such as dealer or broker markets; and 13

16 NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)! Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as pricing models, discounted cash flow models and similar techniques not based on market, exchange, dealer or broker-traded transactions. Following is a description of the nature and risks of the categories of assets by major security type. Endowment Restricted Investments Equity securities, corporate bonds, government issued securities, money market funds, and other funds listed on a national market or exchange are valued at the last sales price, or if there is no sale and the market is still considered active at the last transaction price before year-end. Such securities are classified within Level 1 of the valuation hierarchy. Debt securities consisting of government agency debt obligations are generally valued at the most recent price of the equivalent quoted yield for such securities, or those of comparable maturity, quality and type. There are no directly held debt securities in the investment portfolio. Debt securities are generally classified within Level 2 of the valuation hierarchy. Hedge funds, private equity, venture capital, and other investments for which there is not an active market are valued at the quoted market price for underlying marketable securities or an estimate of underlying asset fair values as determined in good faith by the general partner. These alternative investments are classified within Level 3 of the valuation hierarchy. Temporarily Restricted Investments Temporarily restricted investments are common stocks with readily available quoted market prices. These securities are classified within Level 1 of the valuation hierarchy. Charitable Gift Annuities The charitable gift annuity assets are carried at fair value and are invested in funds listed on the national market or exchange. 14

17 NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents assets measured at fair value by classification within the fair value hierarchy as of June 30, 2012: Fair Value Measurements Using (Level 1) (Level 2) (Level 3) Total Equities: US large cap $ 4,938,974 $ - $ - $ 4,938,974 US mid cap/small cap 1,702, ,702,585 Non US equity 2,566, ,566,124 Debt securities: US corporate bonds 6,951, ,951,778 Non US corporate bonds 1,592, ,592,585 Alternative assets: Hedge funds - - 3,429,594 3,429,594 Private equity , ,712 Real estate , ,002 Money market 967, ,380 Total endowment restricted investments $18,719,426 $ - $ 4,218,308 $ 22,937,734 Temporarily restricted investments $ 59,406 $ - $ - $ 59,406 Charitable gift annuities: Cash and cash equivalents $ 75,870 $ - $ - $ 75,870 Equities: U.S. mid-cap/small-cap 289, ,710 Non-U.S. equity 192, ,240 Debt securities: U.S. corporate bonds 440, ,663 Complementary strategies 97, ,664 Real estate 146, ,396 Charitable gift annuities $ 1,242,543 $ - $ - $ 1,242,543 15

18 NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The Museum uses the Net Asset Value (NAV) to determine the fair value of all the underlying investments which (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 following table lists investments in other investment companies (in partnership format) by major category at June 30, 2012: NAV Strategy in Funds Redemption Frequency and Restrictions Commingled funds: Ranges from semi-annual to quarterly redemption with Global funds, traditional 95-days notice, one fund has a lock-up provision of Stock and bond portfolio $ 2,214,394 one year and side pockets exist for one fund. Absolute return: Global equity and corporate Quarterly redemption with 65 days notice, 6-month debt strategies 1,215,200 hard lock-up and side pockets may exist. Real assets: Global real estate, commercial Semi-annual redemption with 90-day notice and has mortgage-backed securities 425,002 lock-up provision of 18 months. Private equity:* Diversified across general partners, industries, stages of business development and geographies 363,712 N/A Total $ 4,218,308 *Unfunded commitment totals $723,909, term to draw down is 10 years. 16

19 NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents assets measured at fair value by classification within the fair value hierarchy as of June 30, 2011: Fair Value Measurements Using (Level 1) (Level 2) (Level 3) Total Equities: US large cap $ 3,039,810 $ - $ - $ 3,039,810 US mid cap/small cap 1,476, ,476,356 Non US equity 3,372, ,372,029 Debt securities: US corporate bonds 7,840, ,840,021 Non US corporate bonds 860, ,446 Alternative assets: Hedge funds - - 3,490,434 3,490,434 Private equity , ,009 Real estate , ,637 Money market 1,526, ,526,278 Total endowment restricted investments $18,114,940 $ - $ 4,127,080 $ 22,242,020 Temporarily restricted investments $ 56,707 $ - $ - $ 56,707 Charitable gift annuities: Cash and cash equivalents $ 77,047 $ - $ - $ 77,047 Equities: U.S. mid-cap/small-cap 345, ,294 Non-U.S. equity 218, ,230 Debt securities: U.S. corporate bonds 479, ,410 Complementary strategies 109, ,984 Real estate 160, ,702 Charitable gift annuities $ 1,390,667 $ - $ - $ 1,390,667 17

20 NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The Museum uses the Net Asset Value (NAV) to determine the fair value of all the underlying investments which (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 following table lists investments in other investment companies (in partnership format) by major category at June 30, 2011: NAV Strategy in Funds Redemption Frequency and Restrictions Commingled funds: Ranges from semi-annual to quarterly redemption with Global funds, traditional 95-days notice, one fund has a lock-up provision of Stock and bond portfolio $ 2,256,655 one year and side pockets exist for one fund. Absolute return: Global equity and corporate Quarterly redemption with 65 days notice, 6-month debt strategies 1,233,779 hard lock-up and side pockets may exist. Real assets: Global real estate, commercial Semi-annual redemption with 90-day notice and has mortgage-backed securities 413,637 lock-up provision of 18 months. Private equity:* Diversified across general partners, industries, stages of business development and geographies 223,009 N/A Total $4,127,080 *Unfunded commitment totals $333,909, term to draw down is 10 years. The following table presents the change in fair value measurements that used Level 3 inputs during the years ended June 30, 2012 and 2011: Balance, beginning of year $ 4,127,080 $ 3,541,709 Total purchases/sales - 46,160 Total realized and unrealized gain 91, ,211 Balance, end of year $ 4,218,308 $ 4,127,080 18

21 NOTE 5 ASSETS WHOSE USE IS LIMITED Pursuant to the terms of the Cultural Facilities Revenue Bonds, Series 2006 (Bonds) issued by the Industrial Development Authority (IDA) of the City of Phoenix, Arizona, the Museum is required to maintain amounts on deposit with a trustee. At June 30, 2011, these funds consisted entirely of cash and cash equivalents. At June 30, 2012, the bond was paid off and these accounts were closed. Project Fund Proceeds received from the Bonds through the IDA are to be maintained in the Project Fund. The available funds are invested by the trustee so that interest may be earned. Disbursements are made from this fund to pay the City of Phoenix for the construction of the building or to pay for invoices and direct costs of the sculpture garden. Sinking Fund The Museum is required to wire transfer periodically, collections received on pledges for the building expansion and sculpture garden into the Sinking Fund. On a monthly basis, the trustee withdraws the amount of bond interest from this account and deposits it into the Interest Fund. Bond principal payments will be transferred to the Principal Fund. Principal Fund Funds transferred into the Principal Fund shall be used for the payment of the principal of and premium, if any, on the Bonds. Interest Fund Funds transferred into the Interest Fund shall be used for payment of interest on the Bonds or to reimburse the Letter of Credit Bank for drawings on the Letter of Credit provided the money drawn on the Letter of Credit is not used to pay principal or interest on the Bonds. There was a zero balance at June 30, 2012 and Savings Fund (excess collateral) Funds transferred into the Savings Fund represents capital pledge collections in excess of the Bond covenant requirements. The Museum is to maintain a one to one ratio of current year bond maturities to qualified pledge receivables plus Sinking Fund account balance. Of the funds in the Savings Fund, a $100,000 minimum balance was required to be retained by the Museum, with the remainder available for additional capital expenditures. The $100,000 minimum balance requirement was discontinued as of June 30, Assets whose use is limited consists of: Project fund $ - $ 395 Sinking fund - 27,394 Principal fund - 43 Total $ - $ 27,832 19

22 NOTE 6 PROPERTY AND EQUIPMENT Property and equipment consists of: Cost and donated value: Land $ 699,253 $ 699,253 Building and improvements 10,700,484 10,674,786 Furniture, fixtures and equipment 3,133,440 2,948,722 Total cost and donated value 14,533,177 14,322,761 Less accumulated depreciation and amortization (8,459,230) (7,851,572) Property and equipment, net of accumulated depreciation and amortization $ 6,073,947 $ 6,471,189 Depreciation and amortization expense charged to operations was $607,657 and $627,458 for the years ended June 30, 2012 and 2011, respectively. NOTE 7 ASSETS RESTRICTED TO LONG-TERM INVESTMENT PURPOSES The Museum had conducted a capital campaign to raise funds for expansion of the facility and endowment funds. Assets attributable to long-term investment purposes consist of: Pledges receivable $ 773,594 $ 840,311 Pledges receivable consist of unconditional promises to give as follows: Due in less than one year $ 988,375 $ 1,046,894 Due in one to five years 3,000 6,000 Total pledges receivable 991,375 1,052,894 Less discount to present value (5,745) (547) Less allowance for uncollectible pledges (212,036) (212,036) Net pledges receivable $ 773,594 $ 840,311 20

23 NOTE 7 ASSETS RESTRICTED TO LONG-TERM INVESTMENT PURPOSES (CONTINUED) Two donors make up 92% and 87% of the long-term pledges receivable balance at June 30, 2012 and 2011, respectively. The estimated cash flows for pledges receivable are discounted over a five-year collection period using a management determined discount rate of 3.9%. NOTE 8 BONDS PAYABLE On March 30, 2006, the Museum issued $6,120,000 of Cultural Facilities Revenue Bonds, Series 2006, (the Bonds) through the Industrial Development Authority of the City of Phoenix, Arizona. The proceeds were used to renovate and expand the Museum. The Bonds were collateralized by an irrevocable transferable direct pay Letter of Credit (Letter of Credit) of the Museum as set forth in the Trust Indenture dated March 1, Interest on the Bonds is payable monthly under variable interest rate provisions. The Bonds were initially issued in the weekly rate mode under which the interest rate was determined on a weekly basis. The Bonds contain conversion features to other adjustable and fixed rate methods of interest rate determination. The weekly interest rate in effect was.222% and.370% at June 30, 2012 and 2011, respectively. The stated maturity date of the Bonds was March 30, 2014, and was subject to optional redemption provisions prior to maturity based upon certain circumstances described in the Trust Indenture. In March 2012, the Museum paid off the bond for $550,000. The Letter of Credit which provided collateral for the Bonds had a maximum borrowing amount of $1,375,453 of which $1,300,000 may be drawn to pay principal of the Bonds and $75,453 may be drawn to pay interest on the Bonds. The Letter of Credit was unsecured and bears a variable interest rate which was determined based upon the nature of the amounts drawn, and provides for a variable facility fee amount based upon certain liquidity provisions. The Letter of Credit expires on March 30, The amounts outstanding on the Letter of Credit as of June 30, 2012 and 2011, were $0 and $550,000, respectively. NOTE 9 LINE OF CREDIT The Museum established a line of credit with Wells Fargo Bank, N.A. with an available limit of $1,000,000, collateralized by accounts and pledges receivable with a variable interest rate payable at a fixed rate of 3.25% and 3.00% as of June 30, 2012 and 2011, respectively. The line of credit matured on December 31, Management did not renew the line of credit. The outstanding balance on the line of credit was $0 at June 30, 2012 and

24 NOTE 10 LINE OF CREDIT The Museum obtained a line of credit with JP Morgan Chase Bank, N.A. on February 24, 2012, with an available limit of $3,000,000; collateralized by marketable securities with a variable interest rate payable at a floating rate equal to an adjusted LIBOR rate plus 1.00% or a rate equal to the money market rate (1.25% as of June 30, 2012). The line of credit matures and is payable on February 28, The outstanding balance on the line of credit was $1,700,010 at June 30, NOTE 11 CHARITABLE GIFT ANNUITIES The Museum administered ten charitable gift annuities. The assets contributed under the charitable gift annuities are carried at fair value. Contribution support is recognized at the date the annuities are established after recording liabilities for the present value of the estimated future payments to be made to the donors and/or other beneficiaries. Present values are calculated using a risk-free discount rate determined at the time the annuities are established, and actuarial table and guidelines are used for calculating the available deduction for income tax purposes. The liabilities are adjusted for the accretion of the discount and other changes in the estimates of future benefits. The present value of the estimated annuity payments associated with the gift annuities was $978,302 and $968,332 at June 30, 2012 and 2011, respectively. See Note 4 for assets held under charitable gift annuities. NOTE 12 PENSION PLAN The Museum has a defined benefit pension plan covering eligible employees. The plan calls for benefits to be paid to employees at retirement based on an actuarial valuation consisting primarily of years of service and compensation. Employees are 100% vested after five years employment with the Museum. The following sets forth the funded status, change in plan assets, and net periodic benefit costs of the plan at June 30: Projected benefit obligation $ 4,145,253 $ 3,393,282 Fair value of plan assets $ 2,721,786 $ 2,558,858 Funded status of plan at year-end $ (1,423,467) $ (834,424) Accumulated benefit obligation $ 3,760,500 $ 3,153,237 Assumptions used to determine benefit obligation: Discount rate 3.25% 4.50% Rate of compensation increase 2.00% 2.00% 22

25 NOTE 12 PENSION PLAN (CONTINUED) Employer contributions $ 282,934 $ 215,847 Plan participants contributions $ - $ - Benefits paid $ (135,953) $ (83,686) Net pension cost $ 190,986 $ 353,880 Assumptions used to develop net pension cost were: Discount rate 4.50% 5.00% Expected long-term rate of return on plan assets 6.50% 6.50% Rate of compensation increase 2.00% 4.00% The following sets forth the amounts recognized in the consolidated statement of financial condition at June 30: Noncurrent assets $ - $ - Current assets (liabilities) - - Noncurrent assets (liabilities) (1,423,467) (834,424) Total amount recognized $ (1,423,467) $ (834,424) The following sets forth the amounts recognized in operations for the year ended June 30: Net loss $ 715,303 $ 33,067 Prior service cost 5,368 6,613 Transition obligation (asset) - - Net amount recognized $ 720,671 $ 39,680 The discount rate and expected rate of return on plan assets are critical assumptions which significantly affect pension accounting. Even relatively small changes in these rates would significantly change the recorded pension expense and accrued liability. Management believes the discount rate and expected rate of return on plan assets used in determining its year-end pension accounting are reasonable based on currently available information. However, it is at least reasonably possible that these assumed rates will be revised in the near term, based on future events and changes in circumstances. 23

26 NOTE 12 PENSION PLAN (CONTINUED) The overall expected long-term rate of return on plan assets represents a weighted average composition rate based on expected rates of return. The Museum s pension plan weighted average asset allocations by asset category are as follows: Cash and cash equivalents 2.69% 5.80% Fixed income 27.71% 25.73% Equity securities 69.60% 68.47% The Museum s overall strategy is to invest in high-grade securities with a minimum amount of market fluctuation. In general, the Museum s goal is to maintain the following allocation ranges: Fixed income 35.0% 35.00% Equity securities 65.0% 65.00% Such rates are estimated by adjusting historical results for each category of investment for anticipated market movement. Under its terms, the plan investments will be limited to marketable securities including common and preferred stocks, convertible securities, government, municipal and corporate bonds, mutual and collective investment funds, and shortterm money market instruments. The fair value of the Museum s pension plan assets, by asset category, at June 30, 2012, are as follows: Fair Value Measurements Using Asset Category (Level 1) (Level 2) (Level 3) Total Money market fund $ 73,289 $ - $ - $ 73,289 Equities: US large cap 1,785, ,785,984 US small cap 199, ,976 Non US equity 276, ,609 Debt securities 385, ,928 Total assets at fair value $ 2,721,786 $ - $ - $ 2,721,786 24

27 NOTE 12 PENSION PLAN (CONTINUED) The fair value of the Museum s pension plan assets, by asset category, at June 30, 2011, are as follows: Fair Value Measurements Using Asset Category (Level 1) (Level 2) (Level 3) Total Money market fund $ 89,601 $ - $ - $ 89,601 Equities: US large cap 448, ,062 US small cap 1,073, ,073,950 Non US equity 268, ,215 Debt securities 679, ,030 Total assets at fair value $ 2,558,858 $ - $ - $ 2,558,858 The Museum s expected contribution for 2013 is $355,139. The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: 2013 $ 305, , ,682, , ,725 Thereafter 739,550 Total $ 3,421,486 25

28 NOTE 13 LEASE COMMITMENTS The Museum leases equipment and a vehicle under non-cancelable operating leases expiring at various dates through January Rent expense under these leases was $45,544 and $46,705 for the years ended June 30, 2012 and 2011, respectively. Future minimum lease payments are as follows: 2013 $ 25, , , , ,008 Total $ 113,799 NOTE 14 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets consist of: Purpose restrictions for: Deaccessed art $ 1,281,114 $ 1,281,114 Building construction 966,514 1,017,733 Art acquisition 337, ,697 Exhibits and education 860, ,782 Program restricted interest 288, ,641 Other 458, ,604 Total purpose restrictions 4,191,322 4,355,571 Timing restrictions Time restricted gifts 38, ,595 Charitable gift annuities, net 264, ,335 Stock held 59,406 56,707 Total temporarily restricted net assets $ 4,553,043 $ 4,950,208 During June 30, 2012 and 2011, donors released their restrictions on $1,969,510 and $2,230,609, respectively, of temporarily restricted funds which related to building, art acquisition, exhibits and education and time restricted restrictions. During June 30, 2012 and 2011, the Museum had $1,923,012 and $2,125,937, respectively, outstanding from the temporarily restricted funds of which was used for operations. This amount has been classified in the accompanying consolidated statement of financial position as cash due to internal funds. 26