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NORTH CAROLINA TOBACCO FOUNDATION, INC.
FINANCIAL REPORT
JUNE 30, 2010 and 2009
North Carolina Tobacco Foundation, Inc.
CONTENTS Independent Auditor’s Report on the Financial Statements and Supplementary Information 1
Financial Statements Statements of assets, liabilities, and net assets – modified cash basis 2 Statements of revenues, gains, and other income and support and changes in net assets – modified cash basis 3 – 4 Statements of cash flows – modified cash basis 5 Notes to financial statements 6 – 16
Supplementary Information General fund budget vs. actual – unaudited 17 Ten year summary of asset growth – unaudited 18 Ten year summary of revenues and support - unaudited 19
Other Information Independent Auditor’s Communication with the Board of Directors 20-21
Independent Auditor's Report To the Board of Directors North Carolina Tobacco Foundation, Inc. Raleigh, North Carolina We have audited the accompanying statements of assets, liabilities, and net assets - modified cash basis of North Carolina Tobacco Foundation, Inc. (a nonprofit organization) as of June 30, 2010 and 2009, and the related statements of revenues, gains and other income and support and changes in net assets, and cash flows - modified cash basis for the years then ended. These financial statements are the responsibility of the Organization's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 audits provide a reasonable basis for our opinion. As described in Note 1 to the financial statements, these financial statements were prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of North Carolina Tobacco Foundation, Inc. as of June 30, 2010 and 2009, and the changes in its net assets and its cash flows for the years then ended, on the basis of accounting described in Note 1. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information, except for the portion marked "unaudited" on which we express no opinion, has been subjected to auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Raleigh, North Carolina November 2, 2010
1
North Carolina Tobacco Foundation, Inc.
Statements of Assets, Liabilities, and Net Assets -
Modified Cash Basis
June 30, 2010 and 2009
2010 2009
ASSETS
Cash and cash equivalents (Note 1) 2,789,350 $ 2,920,758 $
Intermediate investments (Note 1) 719,524 670,338
Marketable securities (Notes 1 and 3) 1,978,199 1,875,829
Total assets 5,487,073 $ 5,466,925 $
LIABILITIES AND NET ASSETS
Liabilities:
Agency funds held in custody for others (Note 6) 1,113,868 $ 1,439,401 $
Deferred revenue 136,629 -
Due to others (Note 1) 124,083 2,503
Total liabilities 1,374,580 1,441,904
Net assets:
Unrestricted:
Undesignated 571,368 507,283
Undesignated - underwater endowments (Notes 1 and 2) (1,364) (5,011)
Temporarily restricted (Note 7) 2,184,880 2,165,140
Permanently restricted (Note 8) 1,357,609 1,357,609
Total net assets 4,112,493 4,025,021
Total liabilities and net assets 5,487,073 $ 5,466,925 $
See Notes to Financial Statements.
2
Statements of Revenues, Gains, and Other Income and Support
and Changes in Net Assets - Modified Cash Basis
Year Ended June 30, 2010
Temporarily Permanently
Unrestricted Restricted Restricted Total
Revenues, gains, and other income:
Contributions (Note 1) 127,500 $ 587,635 $ - 715,135 $
Grant revenues - 274,856 - 274,856
Donated facilities and services (Note 5) 10,000 - - 10,000
Net asset reclassification - underwater endowments 3,647 (3,647) - -
Net investment gains 54,710 213,893 - 268,603
Interest and dividends 47,976 - - 47,976
Other income 18,179 - - 18,179
Net assets released from restrictions (Note 9) 1,054,602 (1,054,602) - -
Total revenues, gains,
and other income 1,316,614 18,135 - 1,334,749
Grants to support the University:
Program:
Scholarships and fellowships 331,300 - - 331,300
Faculty support and professorships 378,369 - - 378,369
Agricultural research support 77,318 - - 77,318
Cooperative extension support 8,765 - - 8,765
Departmental support 220,642 - - 220,642
Other current services 151,693 - - 151,693
Total program support 1,168,087 - - 1,168,087
Administrative 24,195 - - 24,195
Fund-raising 32,555 - - 32,555
Total other support 56,750 - - 56,750
Total support 1,224,837 - - 1,224,837
Excess of revenues, gains,
and other income over total support 91,777 18,135 - 109,912
Net transfers:
To other University-affiliated entity (22,440) (22,440)
Among funds (24,045) 24,045 - -
Total transfers (24,045) 1,605 - (22,440)
Change in net assets 67,732 19,740 - 87,472
Net assets:
Beginning 502,272 2,165,140 1,357,609 4,025,021
Ending 570,004 $ 2,184,880 $ 1,357,609 $ 4,112,493 $
See Notes to Financial Statements.
North Carolina Tobacco Foundation, Inc.
3
Statements of Revenues, Gains, and Other Income and Support
and Changes in Net Assets - Modified Cash Basis
Year Ended June 30, 2009
Temporarily Permanently
Unrestricted Restricted Restricted Total
Revenues, gains, and other income:
Contributions (Note 1) 181,500 $ 997,320 $ - 1,178,820 $
Grant revenues - 371,573 - 371,573
Donated facilities and services (Note 5) 10,000 - - 10,000
Net asset reclassification - underwater endowments (5,011) 5,011 - -
Net investment losses (136,036) (619,785) - (755,821)
Interest and dividends 41,408 - - 41,408
Other income 33,345 - - 33,345
Net assets released from restrictions (Note 9) 903,589 (903,589) - -
Total revenues, gains,
and other income 1,028,795 (149,470) - 879,325
Grants to support the University:
Program:
Scholarships and fellowships 274,421 - - 274,421
Faculty support and professorships 216,517 - - 216,517
Agricultural research support 107,056 - - 107,056
Cooperative extension support 20,663 - - 20,663
Departmental support 283,858 - - 283,858
Other current services 167,910 - - 167,910
Total program support 1,070,425 - - 1,070,425
Administrative 25,845 - - 25,845
Fund-raising 24,233 - - 24,233
Total other support 50,078 - - 50,078
Total support 1,120,503 - - 1,120,503
Deficiency of revenues, gains,
and other income over total support (91,708) (149,470) - (241,178)
Net transfers:
Among funds 10,073 (10,073) - -
Change in net assets (81,635) (159,543) - (241,178)
Net assets:
Beginning 583,907 2,324,683 1,357,609 4,266,199
Ending 502,272 $ 2,165,140 $ 1,357,609 $ 4,025,021 $
See Notes to Financial Statements.
North Carolina Tobacco Foundation, Inc.
4
North Carolina Tobacco Foundation, Inc.
Statements of Cash Flows - Modified Cash Basis
Years Ended June 30, 2010 and 2009
2010 2009
Cash Flows From Operating Activities:
Change in net assets 87,472 $ (241,178) $
Adjustments to reconcile change in net assets
to net cash provided by (used in) operating activities:
Net investment (gains) losses (268,603) 748,118
Increase (decrease) in:
Deferred revenue 136,629 -
Due to others 121,580 (45,529)
Agency funds held in custody for others (325,533) (827,098)
Net cash used in operating activities (248,455) (365,687)
Cash Flows From Investing Activities:
Net proceeds from sales of investments 433,629 1,015,693
Net purchases of investments (316,582) (478,213)
Net cash provided by investing activities 117,047 537,480
Net increase (decrease) in cash and cash equivalents (131,408) 171,793
Cash and cash equivalents:
Beginning 2,920,758 2,748,965
Ending 2,789,350 $ 2,920,758 $
Supplemental Disclosures of Noncash Activities:
Donated facilities and services 10,000 $ 10,000 $
T ransfer Between Funds 24,045 $ 10,073 $
See Notes to Financial Statements.
5
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements For the years ended June 30, 2010 and 2009 ___________________________________________________________________________________________
Note 1. Nature of Activities and Significant Accounting Policies
Nature of activities: The North Carolina Tobacco Foundation, Inc., ("Foundation") is one of a group of foundations which provides financial support exclusively to one or more of the colleges at North Carolina State University ("University"). The Foundation, established in 1975, provides aid and support for all types of extension and research pertaining to the production, manufacturing, and use of tobacco and tobacco products. A summary of the Foundation’s significant accounting policies follows: Basis of accounting: The Foundation’s policy is to prepare its financial statements on a modified cash basis of accounting which includes the recording of unrealized appreciation and depreciation in the value of its investments. The Foundation also recognizes a liability for future amounts due to grantors and/or beneficiaries of life income funds and a liability for amounts received by the Foundation on behalf of the University. Additionally, the Foundation recognizes donated facilities and services provided by the NC State University’s Foundations Accounting and Investments operations – Treasurer’s Division as revenue and expenses. As the Foundation applies this basis, contributions and earnings from interest and dividends are recognized when collected, rather than when the rights to receive accrue to the Foundation. Expenses are recognized when paid rather than when incurred. Pledges receivable, accounts payable and accrued expenses are not included in the financial statements. Therefore, the accompanying financial statements are not intended to present financial position or changes in net assets in conformity with accounting principles generally accepted in the United States of America.
Basis of presentation: In preparing its financial statements, the Foundation’s net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Foundation and changes therein are classified and reported as follows:
Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations. During the fiscal year, the Foundation’s Board may endow or designate funds for a specific purpose. The funds are called board designated funds and are classified in unrestricted net assets because the specific purpose is not donor-imposed. At June 30, 2010, ($1,364) was classified as undesignated underwater endowments, and the remaining balance of $571,368 was classified as undesignated. At June 30, 2009, ($5,011) was classified as undesignated underwater endowments, and the remaining balance of $507,283 was classified as undesignated. Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met either by actions of the Foundation and/or by the passage of time. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that they be maintained permanently by the Foundation. Generally, the donors of these assets permit the Foundation to use all or part of the earnings on related investments for the donor-restricted purpose.
Cash and cash equivalents: For purposes of reporting cash flows, the Foundation considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash designated or restricted for long-term purposes is included with investments. At times the Foundation places deposits with a high quality financial institution that may be in excess of federal insurance limits.
6
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Cash and cash equivalents consisted of accounts with the State Treasurer’s Short Term Investment Fund (STIF), BNY Mellon Liquidity DIRECT, and an operating checking account with Wachovia Bank, N.A. During fiscal year 2010, commonfund Short Term Fund was liquidated. BNY Mellon Liquidity DIRECT is a short-term investment vehicle for temporary assets. Liquidity DIRECT provides access to a wide range of money market funds and direct investment in individual money market securities on a single, centralized investment platform. The Foundation was invested in one fund of the BNY Mellon Liquidity DIRECT platform, and had balances of $75,124 and $1,936,538 as of June 30, 2010 and 2009, respectively. Effective September 29, 2008, Wachovia Bank, N.A., as Trustee of the commonfund for Short Term Investments (the “Short Term Fund”) announced its decision to terminate and liquidate the Short Term Fund. Under the liquidation plan, investors in the Short Term Fund were periodically allowed to withdraw balances based on their proportional interest in the Short Term Fund as assets matured or were sold. A certain portion of the Foundation’s holdings were placed in a “lock-up,” or not available for immediate release. Law Debenture became the custodian for these remaining assets. No additional contributions to the Short Term Fund were made. As of June 30, 2009, the balance was $296,096. During fiscal year 2010, no short term funds remained in lock-up, and all balances were liquidated. During fiscal year 2009, the Foundation invested current operating funds in the STIF pursuant to G.S. 147-69.3 (b) and the North Carolina Administrative Code (20 NCAC 1G. 0207) which allows for certain entities having funds not required to be deposited with the State Treasurer to voluntarily deposit them there for investment purposes. At June 30, 2010 and 2009, the amount shown on the Statement of Assets, Liabilities, and Net Assets – Modified Cash Basis as Cash and Cash Equivalents includes $2,503,195 and $494,105, respectively, which represents the Foundation’s operating cash invested in the STIF. Assets and shares of STIF are valued at amortized cost, which approximates fair value. UIntermediate investments U: Intermediate investments consist of an account with the commonfund Intermediate Term Fund for funds that can be invested for longer periods, but which are available in the event of short-term needs. These investments are reported at readily determinable fair values. During fiscal year 2009, the commonfund Intermediate Term fund also experienced lockups, where a certain portion of the Foundation’s operating funds had been unavailable. During fiscal year 2009, two mandatory redemptions occurred, totaling 41% and resulting in total realized losses of $49,017. The amounts that were released during the year were placed with BNY Mellon’s Liquidity DIRECT platform. As of June 30, 2009, the estimated losses to be realized upon withdrawal of the funds remaining in intermediate were $157,392. As of June 30, 2009, $335,169 remained locked up in the commonfund Intermediate Term fund out of the total $670,338 market value. As of June 30, 2010, the estimated losses to be realized upon withdrawal of the funds remaining in the commonfund Intermediate Term Fund decreased to $108,207. As of June 30, 2010, the market value of these funds was $719,524, and the commonfund Intermediate Term Fund had released all funds from lock-up. Marketable securities: Marketable securities are stated at fair value based on readily determinable fair values. The Foundation, in accordance with investment policies promulgated by its Board of Directors, utilizes services of the NC State Investment Fund, Inc. (NCSIF). The Foundation was previously invested with the Academy Centennial Fund, LLC (ACF), a limited liability corporation with venture capital investments that are related to North Carolina State University. ACF was dissolved on March 31, 2010 as described in Note 3.
7
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Contributions: Restricted contributions are segregated for income and expense reporting purposes; however, the assets are commingled. When a donor or grantor restriction expires because the stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported as net assets released from restrictions in the statement of revenues, gains, and other income and support and changes in net assets - modified cash basis. Investment income: Investment income is allocated on the basis of average fund balances for unrestricted and temporarily restricted net assets. For endowments, investment income is allocated on the “unit value” method of valuing interest in an investment portfolio and the investment earnings are recorded as unrestricted or temporarily restricted, as appropriate. Gains and losses on sales of investments are allocated on the unit value method. Investment income on investments owned individually by one fund is directly allocated to the owning fund. Earnings from investments are net of investment fees of approximately $11,000 for 2010 and 2009. An assessment of .25% for fund raising is charged on the fair value of the assets held in the investment portfolio. Due to others: Due to others at June 30, 2010 and 2009 consisted of $124,083 and $2,503, respectively, primarily due to North Carolina State University. Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect 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. Income taxes: The Foundation is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code and is classified as other than a private foundation.
Note 2. Endowment
The Foundation’s endowment consists of 8 individual funds established for a variety of purposes related to the mission of the University. As required by generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. The majority of the Foundation’s signed endowment gift agreements with donors have donor-imposed restrictions which stipulate that principal shall not be used to fund spending. Interpretation of relevant law: The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was adopted in North Carolina as NC General Statute 36E effective March 17, 2009. UPMIFA defines a prudence standard for management and investment of institutional funds. As a result of the Foundation’s interpretation of UPMIFA and the signed endowment agreements with donors, 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 that are required by the applicable donor gift instrument. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the foundation’s endowment spending policy.
8
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Funds with deficiencies: From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor requires the Foundation to retain as a fund of perpetual duration. In accordance with generally accepted accounting principles, deficiencies of this nature, underwater endowments, are reported in unrestricted net assets, and were ($1,364) and ($5,011) as of June 30, 2010 and 2009, respectively. These deficiencies resulted from unfavorable market fluctuations. Investment return objectives and risk parameters: The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a stable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for donor-specified periods as well as board-designated funds. The endowment assets are invested through the NCSIF in a manner that is intended to produce results that exceed a 70% S&P 500 Index/30% Barclays Aggregate Bond Index benchmark over rolling five and ten year periods while assuming a moderate level of investment risk. Spending policy: The Foundation has a policy of appropriating for distribution each year 4.0% of its endowment fund’s average market value over the prior 20 quarters through the fiscal year-end preceding the fiscal year in which the distribution is planned. This is consistent with the foundation’s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. However, in declining market conditions, many endowments are not able to fund spending at the 4.0% level. In this situation, as prescribed by the donor endowment agreements, the Foundation does not initiate or renew spending for the individual endowments affected by declining market conditions until their market value has been recovered and exceeds their original gift value. In establishing the spending policy, the Foundation considered the long-term expected return on its endowment. Spending budgets for fiscal year 2010 were calculated at $93,810 and $88,990 for fiscal year 2011. Strategies employed for achieving investment objectives: For the long term, the primary investment objective for the NCSIF is to earn a total return (net of investment and custodial fees), within prudent levels of risk, which is sufficient to maintain in real terms the purchasing power of the NCSIF and to meet the spending needs of the University. To meet this investment objective, the NCSIF invests in various asset classes to offer diversification. The purpose of diversification is to provide reasonable assurance that no single security or class of securities will have a disproportionate impact on the performance of the total fund. NCSIF’s investments are diversified both by asset class (e.g. common stocks and fixed income securities) and within asset classes (e.g., within common stocks by economic sector, geographic area, industry, quality, and size). In general, the Investment Manager(s) seek to diversify exposure to all asset classes by hiring multiple managers that use a variety of investment approaches.
9
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
The following represents changes in endowment net assets for the fiscal year ended June 30, 2010:
Unrestricted
Temporarily
Restricted
Permanently
Restricted Total
Endowment net assets, beginning of year $ 13,257 $ 485,028 $ 1,357,609 $ 1,855,894
Net asset reclassification - underwater endowments 3,647 (3,647) - -
Endowment net assets after reclassification 16,904 481,381 1,357,609 1,855,894
Investment return: investment income (48) (4,881) - (4,929)
Net appreciation, realized and unrealized 2,190 220,326 - 222,516
Total investment return 2,142 215,445 - 217,587
Appropriations of endowment assets for expenditure (983) (94,459) - (95,442)
Endowment net assets, end of year $ 18,063 $ 602,367 $ 1,357,609 $ 1,978,039
The following represents Endowment net asset composition by type of fund, as of June 30, 2010:
Unrestricted
Temporarily
Restricted
Permanently
Restricted Total
Undesignated - underwater endowments $ (1,364) $ - $ - $ (1,364)
Donor restricted endowment funds 19,427 602,367 1,357,609 1,979,403
Total funds $ 18,063 $ 602,367 $ 1,357,609 $ 1,978,039
10
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
The following represents changes in endowment net assets for the fiscal year ended June 30, 2009:
Unrestricted
Temporarily
Restricted
Permanently
Restricted Total
Endowment net assets, beginning of year $ 25,455 $ 1,197,669 $ 1,357,609 $ 2,580,733
Net asset reclassification - underwater endowments (5,011) 5,011 - -
Endowment net assets after reclassification 20,444 1,202,680 1,357,609 2,580,733
Investment return: investment income (77) (7,771) - (7,848)
Net depreciation, realized and unrealized (6,087) (611,298) - (617,385)
Total investment return (6,164) (619,069) - (625,233)
Appropriations of endowment assets for expenditure (1,023) (98,583) - (99,606)
Endowment net assets, end of year $ 13,257 $ 485,028 $ 1,357,609 $ 1,855,894
The following represents Endowment net asset composition by type of fund, as of June 30, 2009:
Unrestricted
Temporarily
Restricted
Permanently
Restricted Total
Undesignated - underwater endowments $ (5,011) $ - $ - $ (5,011)
Donor restr icted endowment funds 18,268 485,028 1,357,609 1,860,905
Total funds $ 13,257 $ 485,028 $ 1,357,609 $ 1,855,894
11
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Note 3. Marketable Securities
Marketable securities at June 30, 2010 and 2009 consisted of:
Fair Fair
Cost Value Cost Value
NC State Investment Fund, Inc. and STIF 2,220,141 $ 1,978,199 $ 2,317,665 $ 1,874,542 $
Academy Centennial Fund, LLC - - 43,651 1,287
2,220,141 $ 1,978,199 $ 2,361,316 $ 1,875,829 $
2010 2009
Marketable securities held by the NCSIF at June 30, 2010 were made up of limited partnerships with a cost of $2,006,788 and a fair value of $1,764,846, and a cost of $2,317,665 and a fair value of $1,874,542 at June 30, 2009. As of June 30, 2010, approximately 89% of these limited partnerships were with the UNC Management Company (UNCMC), and 11% were in other private equity investments with JP Morgan, Blackrock, and SEI. The Foundation’s investment in the NCSIF represents approximately 1% of the member equity of the NCSIF at June 30, 2010 and 2009. NCSIF’s net assets were primarily invested with UNCMC at June 30, 2010 and 2009 and were valued at approximately $313,828,000 and $259,010,000, respectively. Academy Centennial Fund, LLC (ACF), a venture capital investment held outside of the NC State Investment Fund, was legally dissolved in fiscal year 2010. The Foundation’s net investment of $43,651 had been written down in a prior year to $1,287 in recognition of a permanent decline in value. Upon dissolution, the Foundation received cash in the amount of $2,612 in addition to various securities, and recognized a total loss of $41,039. To cover anticipated final accounting expenses, a minimal amount of approximately $83 was held back from the proceeds. In addition to cash, common and preferred stock for start-up companies in which ACF had invested were distributed. These securities, though not currently marketable and valued at $0 for financial reporting purposes, will be held and the companies monitored for future redemption opportunities. The Foundation invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of assets, liabilities, and net assets – modified cash basis.
12
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Note 4. Fair Value Measurement
Effective June 30, 2009, the Foundation adopted the requirements of the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, (formerly Statement of Financial Accounting Standards No. 157, Fair Value Measurements), which establishes a framework for measuring fair value under Generally Accepted Accounting Principles. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels. The three-tier hierarchy of inputs is summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical investments Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, credit risks, etc.) Level 3 – significant unobservable inputs (including the fund’s own assumptions in determining the fair value of investments)
To measure fair value, there are three general valuation techniques that may be used, as described below: A) Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sales transactions, market trades, or other sources B) Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and C) Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.
13
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Assets itemized below were measured at fair value during the year using market and income approaches. The market approach was used for level 2 and the income approach was used for level 3.
Level 1 Level 2 Level 3 Total Fair Value
STIF 213,353$ -$ -$ $ 213,353
NC State Investment Fund, Inc. - - 1,764,846 1,764,846
Academy Centennial Fund, LLC - - - -
213,353$ -$ 1,764,846$ $ 1,978,199
2010
Level 1 Level 2 Level 3 Total Fair Value
NC State Investment Fund, Inc. -$ -$ 1,874,542$ $ 1,874,542
Academy Centennial Fund, LLC - - 1,287 1,287
-$ -$ 1,875,829$ $ 1,875,829
2009
The following is a reconciliation of the investments in which significant unobservable inputs (Level 3) were used in determining value:
NC State
Investment
Fund, Inc.
Academy
Centennial
Fund, LLC
NC State
Investment
Fund, Inc.
Academy
Centennial
Fund, LLC
Beginning Balance 1,874,542 $ 1,287 $ 2,577,943 $ 2,745 $
Unrealized loss on investments 201,180 (281) (336,601) (1,458)
Realized loss on investments 20,010 (1,006) (279,326) -
Net investment income 40,982 - (79,619) -
Net transfers in/and or out of Level 3 (371,868) - (7,855) -
Ending balance 1,764,846 $ -$ 1,874,542 $ 1,287 $
2010 2009
14
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Note 5. Donated Services
Donated services during the years ended June 30, 2010 and 2009 were $10,000 and have been reflected in the financial statements for accounting services provided by the NC State University Foundations Accounting and Investments operations - Treasurer’s Division.
Note 6. Agency Funds
The Foundation has a directed fund agreement with the Tobacco Education and Research Council, Inc. (TERC) to maintain proceeds of a settlement agreement with Philip Morris USA. Under this agreement, the funds are held by the Foundation, and used for land grant university tobacco programs, continuing support of tobacco farmer projects to improve the quality of leaf tobacco, and to reduce Tobacco Specific Nitrosamines and/or suspected harmful substances in the tobacco leaf.
Note 7. Temporarily Restricted Net Assets
Temporarily restricted net assets at June 30, 2010 and 2009 are available for the following purposes:
2010 2009
Scholarships 49,357 $ 49,343 $
Fellowships 62,016 74,772
Professorships 198,423 179,724
Research and related support 960,150 826,751
Endowment cumulative earnings 602,367 485,028
Other 312,567 549,522
2,184,880 $ 2,165,140 $
Temporarily restricted net asset grouping “Other” includes amounts designated for general college support, research, and funds with multiple purposes.
15
North Carolina Tobacco Foundation, Inc. Notes to Financial Statements, continued For the years ended June 30, 2010 and 2009 ____________________________________________________________________________________________
Note 8. Permanently Restricted Net Assets
Permanently restricted net assets at June 30, 2010 and 2009 are restricted to:
2010 2009
Investment in perpetuity, the income from
which is expendable to support:
Scholarships 577,267 $ 542,318 $
Professorships 1,360,759 1,276,882
Amounts reported as unrestricted or temporarily
restricted net assets (620,430) (498,285)
Other 40,013 36,694
1,357,609 $ 1,357,609 $
Permanently restricted net asset grouping “Other” includes amounts designated for general college support, research, and funds with multiple purposes.
Note 9. Net Assets Released From Donor Restrictions
Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes specified by donors as follows:
2010 2009
Scholarships 61,346 $ 60,348 $
Fellowships 53,757 14,103
Professorships 51,217 5,529
Research and related support 658,196 618,200
Other 230,086 205,409
1,054,602 $ 903,589 $
The grouping “Other” includes amounts spent for general college support, research, and funds with multiple purposes. Note 10. Subsequent Events The Foundation has evaluated subsequent events through November 2, 2010, the date which the financial statements were available to be issued, and there were none to report.
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North Carolina Tobacco Foundation, Inc.
General Fund Budget vs. Actual - Unaudited
Year Ended June 30, 2010
Approved Variance
Budget Actual Over/(Under)
Income:
Contributions 150,000 $ 127,500 $ (22,500) $
Interest and dividends 27,000 44,699 17,699
Endowment assessment 3,590 3,590 -
Grant administration fee 5,000 4,430 (570)
Total income 185,590 180,219 (5,371)
Support:
Program support 132,129 86,083 (46,046)
Endowment fee transferred to University Advancement 3,590 3,590 -
Foundation administration 47,895 43,160 (4,735) commonf und Intermediate loss - 21,000 21,000
Total support 183,614 153,833 (29,781)
Income less support 1,976 26,386 24,410
General fund balance:
Beginning 656,865 656,865 -
Ending 658,841 $ 683,251 $ 24,410 $
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(Dollars in Millions)
North Carolina Tobacco Foundation, Inc.
Ten Year Summary of Asset Growth - UNAUDITED
Fiscal Years Ended June 30
TOTAL ASSETS
3.83 3.82 3.82 3.924.10 4.13
7.51
6.58
5.47 5.49
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Years
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(Dollars in Thousands)
(Dollars in Thousands)
TOTAL SUPPORT
North Carolina Tobacco Foundation, Inc.
Ten Year Summary of Revenues and Support - UNAUDITED
Fiscal Years Ended June 30
TOTAL REVENUES
879 1,3351,606
1,164
1,588 1,629
1,234 1,296
2,186
539
(800)
(400)
0
400
800
1,200
1,600
2,000
2,400
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10Years
Other Income Investment Income Contributions
1,537
1,135
1,448
1,644
1,043
1,2211,167
1,082 1,1201,225
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10Years
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November 2, 2010 To the Board of Directors North Carolina Tobacco Foundation, Inc. Raleigh, North Carolina We have audited the financial statements of North Carolina Tobacco Foundation, Inc. for the year ended June 30, 2010, and have issued our report thereon dated November 2, 2010. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated June 23, 2010. Professional standards also require that we communicate to you the following information related to our audit. Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by North Carolina Tobacco Foundation, Inc. are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year ended June 30, 2010. We noted no transactions entered into by the Foundation during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosure affecting the financial statements was:
The disclosure of significant accounting policies in Note 1 to the financial statements. Without the information in Note 1 of the financial statements, users may misinterpret the financial statements.
Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatement Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. No material misstatements were found throughout the audit, and as such, no adjustments were necessary.
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Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor’s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated November 2, 2010. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation involves application of an accounting principle to the Foundation’s financial statements or a determination of the type of auditor’s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Foundation’s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Information in Documents Containing Audited Financial Statements This information is intended solely for the use of the Board of Directors and management of North Carolina Tobacco Foundation, Inc. and is not intended to be and should not be used by anyone other than these specified parties.
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