"EWING MARION KAUFFMAN FOUNDATION Financial Statements June 30, 2006"
EWING MARION KAUFFMAN FOUNDATION Financial Statements June 30, 2006 (With Independent Auditors’ Report Thereon) EWING MARION KAUFFMAN FOUNDATION Statement of Financial Position June 30, 2006 (In thousands) Assets: Cash and short-term investments $ 96,504 Investments: Fixed income (marketable) 222,996 Equities (marketable): Domestic 579,651 Foreign 428,930 Net trade receivables 192,673 Net trade payables (198,329) Total equities 1,002,925 Private equity/alternative assets/real assets 735,249 Other 2,071 Total investments 1,963,241 Total assets $ 2,059,745 Net assets: Unrestricted $ 2,059,745 Total net assets $ 2,059,745 See accompanying notes to the financial statements. 2 EWING MARION KAUFFMAN FOUNDATION Statement of Activities Year ended June 30, 2006 (In thousands) Revenues, gains, and other support: Investment income: Interest $ 10,787 Dividends 16,481 Gain on currency conversion 7,499 Realized gains on investments, net 279,719 Unrealized gains on investments, net 18,253 Total investment income 332,739 Grants received and other income 317 Total revenues, gains, and other support 333,056 Expenses and losses: Grants and payments to partnering organizations 76,928 Program operations and support 18,313 General and administrative 19,955 Investment manager, custodian, and other expenses 12,128 Bond interest expense 2,140 Excise taxes 3,644 Total expenses and losses 133,108 Change in net assets 199,948 Net assets, beginning of year 1,859,797 Net assets, end of year $ 2,059,745 See accompanying notes to the financial statements. 3 Independent Auditors’ Report The Board of Directors Ewing Marion Kauffman Foundation: We have audited the accompanying statement of financial position of the Ewing Marion Kauffman Foundation (the Foundation) as of June 30, 2006 and the related statement of activities for the year 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 audit. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Foundation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As more fully described in note 2, the Foundation has excluded certain items from the accompanying statement of financial position, the most significant of which are property of approximately $45 million, debt of approximately $55 million, and grants payable of approximately $50 million. The Foundation has also excluded a statement of cash flows summarizing the Foundation’s operating, investing and financing activities. These items should be included, in our opinion, for the financial statements to conform with U.S. generally accepted accounting principles. Inclusion of the items described in note 2, would have decreased net assets by approximately $70 million as of June 30, 2006 and increased the change in net assets by approximately $10 million, for the year then ended. In our opinion, except for the effects of the omissions discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of the Ewing Marion Kauffman Foundation as of June 30, 2006, and the results of its activities for the year then ended in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Kansas City, Missouri February 8, 2007 EWING MARION KAUFFMAN FOUNDATION Notes to Financial Statements June 30, 2006 (1) Description of the Foundation The Ewing Marion Kauffman Foundation (the Foundation) is a private foundation established in the mid-1960s by Ewing Marion Kauffman. The Foundation focuses its operations and grant making on two areas: entrepreneurship and education. The Foundation’s efforts involve fostering an environment nationwide in which entrepreneurs have the information and tools they need to succeed. The Foundation promotes entrepreneurial success at all levels. It works with leading educators and researchers nationwide to create awareness of the powerful economic impact of entrepreneurship, to develop and disseminate proven programs that enhance entrepreneurial skills and abilities, and to improve the environment in which entrepreneurs start and grow businesses. In education, the Foundation focuses its programming efforts on raising academic achievement of children, placing a special emphasis on building mathematics and science skills, particularly young people whose families have limited resources. The Foundation focuses its work largely in Kansas City to develop good ideas into model programs that can be applied in other communities. (2) Summary of Significant Accounting Policies The accompanying financial statements of the Foundation have generally been prepared in conformity with U.S. generally accepted accounting principles. Investments are recorded at fair value. Unrealized appreciation or depreciation is recognized in the period incurred. Investments are recorded on a trade-date basis. The fair value of fixed income and equity securities is based on quoted market prices. The fair value of investments in private equity/alternative asset/real asset partnerships is estimated by management based, in part, on estimates provided by the general partner. Private equity investment strategies employed include venture capital, mezzanine, and buyout funds. Alternative investment strategies include hedge funds. The following represent departures from U.S. generally accepted accounting principles in the accompanying financial statements: Income—Interest and dividend income is recognized when received. Interest and dividend receivables are not included in the accompanying financial statements. Grants and Expenses—Grants and expenses are recognized when paid. Unconditional grant commitments have not been included in the accompanying financial statements. See further information in note 5. Fixed Assets and Related Debt—The accompanying financial statements do not include the Foundation’s fixed assets (building, furniture and fixtures) or the related depreciation. Bonds payable used to finance construction of the building are also not included. See further information in note 4. Taxes—The Foundation is a private foundation and is subject to an excise tax of 1% – 2% on its net investment income. Included in the current year amount is the true-up payment or refund for the previous years’ estimated payments and the current year estimated payments. In addition, the Foundation has investments that may produce unrelated business income, which is subject to federal and state income tax at a combined 38% effective rate. Income tax on unrelated business income of $19,142 was paid in the 4 (Continued) EWING MARION KAUFFMAN FOUNDATION Notes to Financial Statements June 30, 2006 year ended June 30, 2006. Current and deferred tax liabilities are not included in the accompanying financial statements. Liabilities and Accruals—Accounts payable, accrued interest on outstanding bonds, accrued severance, accrued medical claims, and retiree healthcare plan liabilities are not included in the accompanying financial statements. Statement of Cash Flows—The Foundation has not presented a statement of cash flows. (3) Distributions The Tax Reform Act of 1969 requires that certain minimum distributions be made in accordance with a specified formula. At June 30, 2006 the Foundation was in compliance with this requirement. (4) Bonds Payable During 1997, the Industrial Development Authority of the City of Kansas City, Missouri issued $50 million of tax-exempt bonds with a final maturity of April 1, 2027. The proceeds of the bond issuance were used to make a loan to the Foundation to provide funds to purchase land and construct a building to house the headquarters of the Foundation. The issuance consisted of $20 million principal amount of Variable Rate Demand Revenue Bonds with interest payable monthly and $30 million principal amount of Fixed Rate Revenue Bonds with interest payable semiannually. The variable interest rate on the Variable Rate Demand Revenue Bonds was adjusted daily based upon the bond market, and the interest rate on the Fixed Rate Revenue Bonds was 5.7%. In December 2001, the Foundation refinanced the $30 million Fixed Rate Revenue Bonds. The Industrial Development Authority of the City of Kansas City, Missouri issued $32.8 million principal amount of Variable Rate Demand Revenue Bonds with interest payable monthly and a final maturity of April 1, 2027. The proceeds of the bond issuance were placed in escrow to retire the $30 million principal amount of Fixed Rate Revenue Bonds (issued in 1997) on the first call date on April 1, 2007 and to cover the semiannual interest payments up to and including April 1, 2007. Simultaneous with the issuance of the 2001 Variable Rate Demand Revenue Bonds, the Foundation entered into a swap agreement with JP Morgan Chase Bank (Chase) whereby Chase agreed to pay the Foundation an amount approximately equal to the variable rate due on the bonds in return for the Foundation’s agreement to pay Chase a fixed rate of 4.18% on the outstanding balance of the bonds. As a result of this agreement, the Foundation has effectively locked in a fixed rate of 4.18% on the 2001 bond issue. In February 2003, the Foundation refinanced the $20 million Variable Rate Demand Revenue Bonds by entering into a swap agreement with Chase whereby Chase agreed to pay the Foundation an amount approximately equal to the variable rate due on the bonds in return for the Foundation’s agreement to pay Chase a fixed rate of 3.58% on the outstanding balance of the bonds. As a result of this agreement, the Foundation has effectively locked in a fixed rate of 3.58% on the 1997 $20 million Variable Rate Demand Revenue Bonds. 5 (Continued) EWING MARION KAUFFMAN FOUNDATION Notes to Financial Statements June 30, 2006 The following is a schedule of debt service requirements: Principal due Interest due Total due Fiscal year: 2007 $ — 2,087,000 2,087,000 2008 — 2,087,000 2,087,000 2009 — 2,087,000 2,087,000 2010 — 2,087,000 2,087,000 2011 — 2,087,000 2,087,000 2012 – 2027 52,810,000 31,828,000 84,638,000 $ 52,810,000 42,263,000 95,073,000 (5) Commitments Grants—As of June 30, 2006, commitments for grants aggregating approximately $51.2 million had been authorized for payment in fiscal years subsequent to fiscal year 2006. Payment of future grants is expressly contingent upon the performance of the recipient organizations, and the Foundation may subsequently determine not to continue the payments. The commitments outstanding at June 30, 2006 are scheduled for payment as follows: 2007 $ 21,003,952 2008 17,175,018 2009 9,758,024 2010 1,299,653 2011 911,653 2012 1,033,650 $ 51,181,950 (6) Retirement Plans The Foundation has a defined contribution retirement plan and a tax-deferred savings (403(b)) plan that provide benefits to associates who meet the plan’s eligibility requirements. In April 2002, the Foundation adopted two deferred compensation plans (457(b) and 457(f)) that provide additional benefits to associates who meet the plan’s eligibility requirements. The contributions to the plans during the year ended June 30, 2006 was $1,072,000. The Foundation has a retiree healthcare plan. Associates who are age 55 and have at least 5 years of Foundation service are eligible to participate in the Foundation’s retiree healthcare plan. At present, the Foundation has agreed to subsidize between 50% and 90% of the total cost of retiree healthcare coverage. The contributions to the plan for year ended June 30, 2006 was $387,000. 6 (Continued) EWING MARION KAUFFMAN FOUNDATION Notes to Financial Statements June 30, 2006 (7) Lease Commitment The Foundation entered into a ground lease with the Missouri Department of Conservation, commencing on November 1, 1999 and expiring on October 31, 2049. The leased property consists of approximately 10 acres located in Kansas City, Missouri between 47th Street and Troost Avenue. The annual base rent payable by the Missouri Department of Conservation is one dollar. 7