Financial Statements
Statements of Financial Position
| December 31 | 2011 | 2010 | ||
|---|---|---|---|---|
Assets |
||||
| Cash and cash equivalents | $ | 15,880,763 | $ | 12,928,903 |
| Investments | 406,746,691 | 433,650,005 | ||
| Interest and dividends receivable | 449,814 | 475,190 | ||
| Federal excise tax | 207,572 | 109,822 | ||
| Other assets | 295,006 | 342,846 | ||
| Total assets | $ | 423,579,846 | $ | 447,506,766 |
Liabilities |
||||
| Accounts payable and accrued expenses | $ | 473,388 | $ | 466,875 |
| Grants payable | 5,721,094 | 9,723,166 | ||
| Deferred federal excise tax | 2,638,420 | 3,261,262 | ||
| Total liabilities | 8,832,902 | 13,451,303 | ||
Net Assets |
||||
| Unrestricted | 414,746,944 | 434,055,463 | ||
| Total liabilities and net assets | $ | 423,579,846 | $ | 447,506,766 |
The accompanying notes are an integral part of the financial statements.
Statements of Activities
| For the years ended December 31 | 2011 | 2010 | ||
|---|---|---|---|---|
Revenues, Gains and Losses |
||||
| Net realized investment gains | $ | 14,977,369 | $ | 14,217,640 |
| Net unrealized investment gains (losses) | (18,511,014) | 26,843,106 | ||
| Dividend income | 4,479,384 | 4,307,274 | ||
| Interest income | 1,258,451 | 1,568,213 | ||
| Other income | 24,864 | 119,938 | ||
| Net revenue, gains and losses | 2,229,054 | 47,056,171 | ||
Expenses |
||||
| Grants expensed | 17,324,630 | 23,513,160 | ||
| Administrative expenses | 4,328,988 | 4,183,260 | ||
| Total expenses | 21,653,618 | 27,696,420 | ||
| Increase (decrease) in net assets before federal excise tax provision | (19,424,564) | 19,359,751 | ||
| Federal excise tax provision (benefit) | (116,045) | 741,711 | ||
| Net increase (decrease) in net assets | (19,308,519) | 18,618,040 | ||
| Net assets – beginning | 434,055,463 | 415,437,423 | ||
| Net assets – ending | $ | 414,746,944 | $ | 434,055,463 |
The accompanying notes are an integral part of the financial statements.
Statements of Cash Flows
| For the years ended December 31 | 2011 | 2010 | ||
|---|---|---|---|---|
Cash Flows From Operating Activities |
||||
| Increase (decrease) in net assets | $ | (19,308,519) | $ | 18,618,040 |
| Adjustments to reconcile increase (decrease) in net assets to net cash used in operating activities: |
||||
| Depreciation and amortization | 70,132 | 52,254 | ||
| Net realized gains on investments | (14,977,369) | (14,217,640) | ||
| Net unrealized (gains) losses on investments | 18,555,055 | (26,858,599) | ||
| Deferred federal excise tax | (622,842) | 546,096 | ||
| Note receivable converted to grant | 750,000 | — | ||
| Changes in assets and liabilities: | ||||
| Receivables | (72,374) | 75,422 | ||
| Other assets | 65,239 | (61,399) | ||
| Accounts payable and accrued expenses | 6,513 | 83,882 | ||
| Grants payable | (4,002,072) | 3,603,166 | ||
| Net cash used in operating activities | (19,536,237) | (18,158,778) | ||
Cash Flows from Investing Activities |
||||
| Proceeds from sale of investments | 65,498,416 | 61,286,982 | ||
| Purchase of investments | (42,922,788) | (53,475,635) | ||
| Purchase of equipment and improvements | (87,531) | (45,248) | ||
| Net cash provided by investing activities | 22,488,097 | 7,766,099 | ||
| Net increase (decrease) in cash and cash equivalents | 2,951,860 | (10,392,679) | ||
| Cash and cash equivalents – beginning | 12,928,903 | 23,321,582 | ||
| Cash and cash equivalents – ending | $ | 15,880,763 | $ | 12,928,903 |
Supplemental Disclosure of Cash Flow Information |
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| Cash paid during the year: | ||||
| Income taxes, excise | $ | 595,000 | $ | 210,000 |
| Interest | $ | — | $ | — |
| Non-cash investing and financing activities: | ||||
| Note receivable converted to grant | $ | 750,000 | $ | — |
The accompanying notes are an integral part of the financial statements.
Notes to Financial Statements – December 31, 2011 and 2010
NOTE 1 – Summary of Significant Accounting Policies
Nature of operations The George Gund Foundation (“the Foundation") is a private foundation which makes grants to educational, community service and philanthropic organizations, basically in Greater Cleveland.
Basis of accounting The Foundation's financial statements are presented on the accrual basis of accounting. Accordingly, revenues are recorded when earned, and expenses are recognized when incurred. The Foundation has only unrestricted net assets.
Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents Cash and cash equivalents consist of highly-liquid investments with maturity dates of three months or less which are readily convertible into cash and a common trust fund that is readily convertible into cash.
Investments Marketable and U.S. government securities are reported at their market values. Securities traded on a national securities exchange are valued at the last reported trading price on the last business day of the year. Realized gains or losses are determined by comparison of asset cost to net proceeds received. Unrealized gains or losses are determined by comparison of asset cost to market values at the end of the year.
Investments include notes receivable which are due from various not-for-profit organizations valued at $9,971,109 and $11,637,949 at December 31, 2011 and 2010, respectively. The notes receivable are due at various dates from 2011 through 2038. The loans carry interest rates between 1% and 3%; principal and interest payment arrangements vary by note.
The Foundation invests in certain alternative investments which include investments in limited partnerships. Market values represent the Foundation's pro rata interest in the net assets of each limited partnership as of December 31, 2011 and 2010, as provided by the fund managers. Market values as of December 31, 2011 and 2010 are not based on audited financial information supplied by the general partner or manager of the funds. Audited information is only available annually based on the partnerships’ or funds’ year end. Management reviews monthly valuations provided by the general partner or manager of the funds and assesses the reasonableness of the fair values provided at the interim dates and included in the financial statements. As of December 31, 2011 and 2010, the Foundation had total unfunded capital commitments to alternative investments of $4,539,158 and $6,295,296, respectively. Because of the inherent uncertainty of the valuation of alternative investments, the market values reflected in the accompanying financial statements may differ significantly from realizable values.
Furniture, equipment and leasehold improvements Furniture, equipment and leasehold improvements are stated at cost. Amortization and depreciation is recorded using both straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation and amortization expense amounted to $70,132 and $52,254 for the years ended December 31, 2011 and 2010, respectively.
Fair value measurement-definition and hierarchy The Foundation follows FASB ASC 820-10, “Fair Value Measurements.” Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Foundation uses various valuation approaches, including market, income and / or cost approaches. FASB ASC 820-10 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. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Foundation. Unobservable inputs reflect the Foundation’s assumptions used in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
- Level 1 Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Foundation has the ability to access.
- Assets and liabilities utilizing Level 1 inputs include exchange-traded equity securities that are actively traded.
- Level 2 Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
- Assets and liabilities utilizing Level 2 inputs include: government bonds, corporate bonds, foreign bonds, private equity investments in mutual funds, common trust funds and program related compensating balances.
- Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
- Assets and liabilities utilizing Level 3 inputs include equity securities that are not actively traded, private equity investments and program related investments held in loans and private equity investments.
Reclassifications Certain prior year amounts have been reclassified to conform to the current year classifications.
NOTE 2 – Investments
Cost and market value of investments were as follows:
| 2011 | 2010 | |||||||
| Market Value | Cost | Market Value | Cost | |||||
|---|---|---|---|---|---|---|---|---|
| Fixed income securities | $ | 13,694,785 | $ | 13,673,036 | $ | 14,710,685 | $ | 14,707,551 |
| Common stocks and alternative investments | 393,051,906 | 260,493,566 | 418,939,320 | 256,006,743 | ||||
| Total | $ | 406,746,691 | $ | 274,166,602 | $ | 433,650,005 | $ | 270,714,294 |
Market values of investments are based on December 31, 2011 and 2010 published quotations, except that estimates are used when quotations are not available. Fixed income securities consist of U.S. government securities, U.S. government guaranteed securities and corporate securities. Common stocks and alternative investments consist principally of U.S. and international equity securities, investments in equity mutual funds, program-related investments and investments in limited partnerships.
Published market quotations do not necessarily represent realizable values, particularly where sizable holdings of a company’s stock exist, as in the case of the Foundation’s holding of the Kellogg Company common stock.
NOTE 3 – Fair Value Disclosure and Measurement
The Foundation’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC 820-10. See Note 1 for a discussion of the Foundation's policies regarding this hierarchy.
The following fair value hierarchy tables present information about the Foundation’s assets and liabilities measured at fair value on a recurring basis:
| Fair Value Measurements at Reporting Date Using | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance | ||||
| Corporate Stock | ||||||||
| Consumer Staples | $ | 116,216,350 | — | — | $ | 116,216,350 | ||
| Transportation | 3,624,334 | — | — | 3,624,334 | ||||
| Capital Goods | 6,531,246 | — | — | 6,531,246 | ||||
| Consumer Cyclical | 18,499,595 | — | — | 18,499,595 | ||||
| Energy and Utilities | 4,502,580 | — | — | 4,502,580 | ||||
| Financial | 20,181,725 | — | — | 20,181,725 | ||||
| Technology | 6,550,022 | — | — | 6,550,022 | ||||
| Closely– held | — | — | 100 | 100 | ||||
| Bonds | ||||||||
| Corporate | — | 6,588,199 | — | 6,588,199 | ||||
| United States Treasury and Agency | — | 5,675,461 | — | 5,675,461 | ||||
| State and Municipal | — | 642,523 | — | 642,523 | ||||
| Foreign | — | 788,602 | — | 788,602 | ||||
| Limited Partnerships | — | — | 55,130,898 | 55,130,898 | ||||
| Limited Partnerships – Mutual Funds | — | 151,556,141 | — | 151,556,141 | ||||
| Other Investments | ||||||||
| Program Related Compensating Balances | — | 275,032 | — | 275,032 | ||||
| Program Related Interest in Limited Partnership | — | — | 12,774 | 12,774 | ||||
| Program Related Loans | — | — | 9,971,109 | 9,971,109 | ||||
| Total Investments | 176,105,852 | 165,525,958 | 65,114,881 | 406,746,691 | ||||
| Common Trust Fund (included in cash and cash equivalents) |
— | 9,680,633 | — | 9,680,633 | ||||
| Total Fair Value Assets | $ | 176,105,852 | $ | 175,206,591 | $ | 65,114,881 | $ | 416,427,324 |
| Fair Value Measurements at Reporting Date Using | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, 2010 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance | ||||
| Corporate Stock | ||||||||
| Consumer Staples | $ | 122,727,064 | — | — | $ | 122,727,064 | ||
| Transportation | 2,967,019 | — | — | 2,967,019 | ||||
| Capital Goods | 5,753,828 | — | — | 5,753,828 | ||||
| Consumer Cyclical | 20,591,105 | — | — | 20,591,105 | ||||
| Energy and Utilities | 9,574,820 | — | — | 9,574,820 | ||||
| Financial | 19,892,585 | — | — | 19,892,585 | ||||
| Technology | 9,823,564 | — | — | 9,823,564 | ||||
| Closely– held | — | — | 100 | 100 | ||||
| Bonds | ||||||||
| Corporate | — | 7,463,988 | — | 7,463,988 | ||||
| United States Treasury and Agency | — | 6,583,757 | — | 6,583,757 | ||||
| State and Municipal | — | 553,008 | — | 553,008 | ||||
| Foreign | — | 109,932 | — | 109,932 | ||||
| Limited Partnerships | — | — | 59,699,645 | 59,699,645 | ||||
| Limited Partnerships – Mutual Funds | — | 155,771,641 | — | 155,771,641 | ||||
| Other Investments | ||||||||
| Program Related Compensating Balances | — | 500,000 | — | 500,000 | ||||
| Program Related Interest in Limited Partnership | — | — | 177,436 | 177,436 | ||||
| Program Related Loans | — | — | 11,460,513 | 11,460,513 | ||||
| Total Investments | 191,329,985 | 170,982,326 | 71,337,694 | 433,650,005 | ||||
| Common Trust Fund (included in cash and cash equivalents) |
— | 9,723,055 | — | 9,723,055 | ||||
| Total Fair Value Assets | $ | 191,329,985 | $ | 180,705,381 | $ | 71,337,694 | $ | 443,373,060 |
The following table provides a reconciliation of changes in Level 3, unobservable assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2011:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Limited Partnerships |
Other Investments |
Common Stock |
Total | |||||
| Beginning balance – January 1, 2011 |
$ | 59,699,645 | $ | 11,637,949 | $ | 100 | $ | 71,337,694 |
| Total gains or losses (realized/unrealized) Included in changes in net assets |
(4,710,867) | (8,080) | — | (4,718,947) | ||||
| Purchases | 1,781,138 | — | — | 1,781,138 | ||||
| Sale proceeds | (1,639,018) | (895,986) | — | (2,535,004) | ||||
| Transfers in-out of Level 3 | — | (750,000) | — | (750,000) | ||||
| Ending balance – December 31, 2011 |
$ | 55,130,898 | $ | 9,983,883 | $ | 100 | $ | 65,114,881 |
| The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to assets still held at the reporting date | $ | (5,433,722) | $ | (8,080) | $ | — | $ | (5,441,802) |
The following table provides a reconciliation of changes in Level 3, unobservable assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2010:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Limited Partnerships |
Other Investments |
Common Stock |
Total | |||||
| Beginning balance – January 1, 2010 |
$ | 53,091,472 | $ | 7,675,174 | $ | 100 | $ | 60,766,746 |
| Total gains or losses (realized/unrealized) Included in changes in net assets |
7,768,308 | 12,752 | — | 7,781,060 | ||||
| Purchases | 1,559,515 | 4,000,000 | — | 5,559,515 | ||||
| Sale proceeds | (2,719,650) | (49,977) | — | (2,769,627) | ||||
| Ending balance – December 31, 2010 |
$ | 59,699,645 | $ | 11,637,949 | $ | 100 | $ | 71,337,694 |
| The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to assets still held at the reporting date | $ | 6,445,353 | $ | 12,752 | $ | — | $ | 6,458,105 |
Gains and losses (realized and unrealized) from Level 3 investments included in changes in net assets include net investment gains of $722,855 and $1,322,955 for the periods ended December 31, 2011 and 2010, respectively, and net unrealized investment gains (losses) of $(5,441,802) and $6,458,105 for the periods ended December 31, 2011 and 2010, respectively.
Note 4 – Credit Concentration
Aside from its holdings in the Kellogg Company, the Foundation’s portfolio of investments is highly diversified; however, at December 31, 2011 and 2010, 27% and 26% of the total market value of securities and 82% and 85% respectively, of dividend income in each year are attributable to ownership of Kellogg Company stock.
Note 5 – Grants
Grants are expensed upon approval by the Board of Trustees, payable upon the performance of specified conditions and paid when the specified conditions are satisfied. Discretionary grants in amounts up to $10,000 and cumulative for the year up to $700,000 are recommended by the program officers and approved by the executive director, expensed upon approval and ratified by the Board of Trustees at the following board meeting. Grants that are cancelled or in excess of needed amounts are included as a reduction of grant expense in the year they are cancelled or returned.
Note 6 – Leases
The Foundation occupies office space in the Landmark Office Towers under a lease that terminates on December 31, 2018. Base annual rentals are $120,080 for the remaining term of the lease, with escalation charges from these base rentals. There are renewal options for additional periods. Rental expense for the years ended December 31, 2011 and 2010 amounted to $130,824 and $129,146, respectively.
The future minimum lease commitments for the next five years under leases with terms in excess of one year are as follows:
| 2012 | $ | 123,833 |
| 2013 | 123,833 | |
| 2014 | 127,585 | |
| 2015 | 127,585 | |
| 2016 | 129,461 | |
| Thereafter | 262,676 | |
| $ | 894,973 |
Note 7 – Net Assets
Net assets include two board-designated funds (principal and income) both of which consist entirely of unrestricted net assets. The principal fund consists of investments in securities and receives the realized and unrealized gains or losses on those assets. The income fund receives interest and dividends on the principal fund investments which are used for grants and administrative expenses. The statements of financial position included the following income fund accounts:
| 2011 | 2010 | |||
|---|---|---|---|---|
| Cash | $ | 1,628,116 | $ | 1,737,983 |
| Receivables | 657,386 | 585,012 | ||
| Other assets | 38,588 | 43,960 | ||
| Due to principal fund | (1,637,922) | (129,029) | ||
| Accounts payable | (473,388) | (466,875) | ||
| Grants payable | (5,721,094) | (9,723,166) | ||
| Deferred federal excise tax | 2,352 | 2,142 | ||
| $ | (5,505,962) | $ | (7,949,973) |
The following is a summary of the changes in total net assets:
| 2011 | 2010 | |||
|---|---|---|---|---|
| Income fund | $ | 2,444,011 | $ | (10,782,606) |
| Principal fund | (21,752,530) | 29,400,646 | ||
| Increase (decrease) in net assets | (19,308,519) | 18,618,040 | ||
| Net assets – beginning | 434,055,463 | 415,437,423 | ||
| Net assets – ending | $ | 414,746,944 | $ | 434,055,463 |
The change in individual funds includes transfers by the Foundation of $18,593,560 in 2011 and $13,158,999 in 2010 from the principal fund to the income fund.
Note 8 – Employee Benefit Plan
The Foundation has an employee’s tax-sheltered annuity plan for all eligible employees. Such a plan is intended to comply with the requirements of Section 403(b) of the Internal Revenue Code (IRC). Employer contributions are required at 9% of the participants’ compensation up to the social security wage base for the year and 14.7% of the participant’s compensation in excess of this wage base, with a limit of $245,000 of compensation for the years ended December 31, 2011 and 2010. Employer contributions to the plan for the years ended December 31, 2011 and 2010 amounted to $124,110 and $118,719, respectively. Participants are also permitted to make salary reduction contributions to the plan.
Note 9 – Excise Taxes
The Foundation is exempt from federal income taxes under Section 501(c)(3) of the IRC, but is subject to a 2% (1% if certain criteria are met) federal excise tax on net investment income, including net realized gains, as defined by the IRC.
Deferred federal excise taxes are provided on the unrealized appreciation or depreciation of investments and interest and dividend income and certain expenses being reported for financial statement purposes in different periods than for tax purposes.
Current excise taxes were provided at 2% and 1% for 2011 and 2010, respectively, and deferred excise taxes were provided at 2% for 2011 and 2010. The current and deferred portions of the excise tax provisions were $506,692 and $(622,737), respectively, netting to $(116,045) in 2011. The current and deferred portions of the excise tax provisions were $198,760 and $542,951, respectively, netting to $741,711 in 2010.
The Organization adopted the provisions of FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes,” which provides guidance on the recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the accompanying financial statements.
Accrued interest relating to uncertain tax positions would be recorded as a component of interest expense and penalties relating to uncertain tax positions would be recorded as a component of general and administrative expenses.
The federal income tax returns of the organization for 2009, 2010 and 2011 are subject to examination by the IRS, generally for three years after they were filed.
Note 10 – Subsequent Events
The Organization has evaluated subsequent events from the statement of financial position date through April 10, 2012.
Independent Auditors’ Report
To the Board of Trustees, The George Gund Foundation
We have audited the accompanying statements of financial position of The George Gund Foundation as of December 31, 2011 and 2010, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the Foundation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The George Gund Foundation at December 31, 2011 and 2010, and the results of its activities and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Certified Public Accountants
Cleveland, Ohio
April 10, 2012