THE SOCIETY Asheville, North Carolina

Audited Financial Statements

For the Years Ended June 30, 2012 and 2011

THE NORTH CAROLINA ARBORETUM SOCIETY

Asheville, North Carolina

For the Years Ended June 30, 2012 and 2011

TABLE OF CONTENTS

Page(s)

Independent Auditors’ Report 11

Financial Statements:

Statements of Financial Position 2

Statements of Activities 3

Statements of Cash Flows 4

Notes to Financial Statements 5-16

Supplementary Information:

Statements of Functional Expenses – Summary 17

Statements of Functional Expenses 18-19

THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 1 – Description of Activities and Summary of Significant Accounting Policies

Description of Activities

The North Carolina Arboretum Society (the “Society”) is a certified affiliate of the North Carolina Arboretum (the “Arboretum”), within the University of North Carolina system. The Society was incorporated in the State of North Carolina in 1990 as a 501(c)(3) non-profit organization. The Society is collocated with and is organized to support the Arboretum, located in Asheville, North Carolina. In particular, the Society provides financial assistance, volunteer assistance, and promotion of the North Carolina Arboretum. The Society acts as the financial pass-through agent for programmatic and facility usage, expenses and revenues, acts as the fund-raising agent for the Arboretum, conducts various retail and for-fee events, coordinates and supports the volunteer program, and generally provides leadership and assistance for all facets of the Arboretum operations.

Basis of Accounting

The financial statements of The North Carolina Arboretum Society have been prepared on the accrual basis of accounting.

Financial Statement Presentation

The Society has presented its financial statements in accordance with generally accepted accounting principles for not-for-profit organizations. Under this guidance, the Society is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. In addition, the Society is required to present a statement of cash flows.

Cash Equivalents

The Society considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash and money market funds, which are reported as “Temporarily restricted or Permanently restricted endowment funds” are not included in cash for purposes of the Statements of Cash Flow.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 may differ from those estimates.

5 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 1 – Description of Activities and Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments

The Society discloses for each class of financial instruments the methods, and when a valuation technique is used, the significant assumptions applied in determining the fair values of financial assets and liabilities. If there is a change in the valuation technique, then the Society discloses both the change and the reasons for the change.

The Society estimates that the fair value of all financial instruments does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying statements of financial position. The estimated fair value amounts have been determined by the Society using available market information and appropriate valuation methodologies. The Society’s financial instruments consist primarily of cash and cash equivalents, accounts and note receivable, promises to give, inventory, accounts payable, accrued expenses, unearned revenues and long-term debt.

Accounts Receivable

Accounts receivable represents amounts from program services and salary advances. Management deems all accounts receivable collectible within the next twelve months; accordingly, no allowance for doubtful accounts is considered necessary.

Inventory

Inventories are determined under the first-in, first-out basis and consist of retail merchandise recorded at cost. Inventories totaled $34,907 and $42,561 for the years ended June 30, 2012 and 2011, respectively.

Property and Equipment

Expenditures for major renewals, betterment, and additions are capitalized. Repairs, maintenance and minor renewals and expenditures of less than $500 are expensed in the year incurred. Depreciation is computed using the straight-line method, based on the estimated useful lives of the assets.

Donations of property and equipment are recorded as support at their estimated fair value at the date of donation. Such donations are reported as unrestricted support unless the donor has restricted their use. Contributions of cash that are designated to be used to acquire property and equipment are reported as restricted support. Unless the donor has stipulated how long donated assets must be maintained, the Society reports the expiration of donor restrictions when the donated or acquired assets are placed in service; at that time, the assets are transferred from restricted net assets to unrestricted net assets. The Society reclassifies temporarily restricted net assets to unrestricted net assets at that time.

6 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 1 – Description of Activities and Summary of Significant Accounting Policies (continued)

Public Support and Revenue

Unconditional promises to give are recorded as received. Unconditional promises to give, due in the next year, are reflected as current promises to give and are recorded at their net realizable value. Unconditional promises to give, due in subsequent years, are reflected as long-term promises to give and are recorded at the present value of their net realizable value, using risk-free interest rates applicable to the years in which the promises are received to discount the amounts. The majority of promises to give are received as a result of an ongoing campaign drive. Amounts deemed uncollectible are charged to bad debt expense as they are deemed uncollectible (the “direct write-off” method). Generally accepted accounting principles require that the allowance method be used to reflect bad debt expense. However, the effect of using this method is not materially different than that of the method currently used. For the years ended June 30, 2012 and 2011, uncollectible promises to give totaled $0 and $5,946, respectively.

Grants and other contributions of cash and other assets are reported as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions

Contributions and investments established as an endowment by the donor under whom the principal is retained in perpetuity are permanently restricted. Investment earnings, unless otherwise restricted, are available to support current program services.

Unearned revenues

Unearned revenues include certain contract advances received that are recognized when earned.

Functional Expenses

The Society allocates its expenses on a functional basis between its program and supporting services.

Expenses that can be identified specifically with program or support services are allocated directly according to their nature and expenditure classification. Other expenses that are common to both functions are allocated between support or program services based on evaluations of the related benefits. Management and general expenses include those expenses that are not directly identifiable with any specific function but provide for overall support and direction of the Society.

7 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 1 – Description of Activities and Summary of Significant Accounting Policies (continued)

Donated Services and Materials

A substantial number of volunteers have donated a significant amount of time to the Society’s operations and program services. Contributed services that create or enhance non-financial assets or require specialized skills and are provided by individuals possessing those skills have been recognized as support unless documentation with respect to the value of those services has not been provided. Donated materials and equipment are reflected as contributions in the accompanying financial statements at their estimated fair market value at the date of receipt. Management requires sufficient documentation to support the value of donated materials or equipment before these amounts are recorded in the financial statements.

Marketing and Advertising Costs

Marketing and advertising costs are charged to operations in the year incurred, and totaled $71,351 and $28,383 for the years ended June 30, 2012 and 2011, respectively.

Income Taxes

The Society is established as a not-for-profit entity and has been recognized as an organization exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code.

FASB ASC 740, “Accounting for Uncertainty in Income Taxes”, clarifies the accounting for the recognition and measurement of uncertainties in income taxes recognized in an entity’s financial statements and prescribes a threshold of more-likely-than-not for recognition of tax positions taken or expected to be taken in a tax return. The Society’s policy is to evaluate the likelihood that its uncertain tax positions will prevail upon examination based on the extent to which those positions have substantial support within the Internal Revenue Code and Regulations, Revenue Rulings, court decisions and other evidence.

As of and for the years ended June 30, 2012 and 2011, the Society had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

The Society’s income tax returns are subject to examination by taxing authorities for a period of three years from the date they are filed. As of the date of these financial statements, the current year Form 990 had not yet been filed, as a result, years subject to examination include 2008, 2009, and 2010.

8 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 2 – Related Party Activities

The Society has no employees. Society operations are performed by State of North Carolina employees, who are a part of the UNC and its affiliate, the North Carolina Arboretum.

The Society reimburses the State for portions of the salaries and related benefits of employees conducting administrative and fund-raising activities, and provides additional gifts to the Arboretum for the salaries of key programmatic, retail and leadership personnel. For the years ended June 30, 2012 and 2011, the Society reimbursed the State $525,520 and $350,108, respectively, for those applicable portions of salaries and related benefits. The State maintains the responsibility for the employer- employee relationship, and financial recording and reporting. The Society occupies space within the Arboretum’s facility for administrative, retail, program and event activities. The Society paid $18,000 and $31,227 to the State in allocated facility usage costs for the years ended June 30, 2012 and 2011, respectively. The Society supports the Arboretum’s capital projects through the capital campaign. Once sufficient funds have been raised or pledged to cover the design and construction of a selected capital project, the Society formally pledges total support for the project. A fiduciary arrangement for the project between Western Carolina University, The Arboretum, and The Society as set forth by NCGS 116-242. The Arboretum proceeds with the design and construction under the State guidelines and inspection requirements. The payments are processed through the Western Carolina University.

The Society retains ownership to minimal capital assets. Capital assets acquired by the Society are typically gifted upon receipt to the Arboretum to include furnishings, equipment, statuary, landscape features, and arts and craft items. Capital assets retained include equipment and furnishings supporting retail operations, and the Wachovia Garden, a plot of 2.4 acres owned by the Society that is adjacent to the Arboretum property.

The Arboretum leases the 1.85 acre Wachovia Garden property from the Society for $3,000 annually. The lease dated September 9, 2001, continues a previously informal agreement for the Arboretum’s utilization of the property for performance of its various mission activities. The lease expires July 1, 2017, and provides for an extension, as mutually agreed upon, of an additional thirty years.

The following is a schedule by years of future minimum rentals to be received under this lease at June 30, 2012:

9 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 2 – Related Party Activities (continued)

Year Ending June 30: 2013 $ 3,000 2014 3,000 2015 3,000 2016 3,000 2017 3,000 $15,000

Parking fees that are remitted daily upon entry to the Arboretum are maintained by the State. The employees that reconcile and deposit these funds into State accounts are the same employees that perform accounts payable and accounts receivable functions for the Society. There are two transactions between Society and State regarding parking fees. First, when a guest who has paid the parking fee wishes to join the Society, the parking fee can be applied against the membership. The parking fee is then transferred from parking (State) to membership (Society). Second, the Society frequently includes the parking fee in program fees for the convenience of the non-member guest. In such instances, the Society pays $3 to the parking program for the lost parking fee. In practice, these fee transfers are periodically computed by accounting based on the membership and program records, and a net transfer of funds occurs.

Note 3 – Promises to Give

Unconditional promises to give are for funding of current and subsequent period programs and capital campaigns. The promises to give are considered current and are due within the next fiscal year. The remaining promises to give are considered by management to be fully collectible, therefore no allowance for uncollectible pledges is considered necessary. The balance of promises to give at June 30, 2012 and 2011 were $17,028 and $27,028, respectively.

Note 4 – Note Receivable

During the year, the Society loaned Bent Creek Institute, Inc. $30,000 for working capital purposes. The note includes accrued interest at the rate of five percent per annum. The note calls for quarterly principal and interest payments of $2,708 beginning April 2012 and matures January 1, 2015. As of June 30, 2012 the amount receivable was 30,378.

Note 5 – Endowment Funds

The Society’s endowment funds consist of donor-restricted endowment funds invested in perpetuity with investment earnings allocated to unrestricted and temporarily restricted net assets in accordance with the endowment fund agreements.

10 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 5 – Endowment Funds (continued)

Management has interpreted the State of North Carolina’s enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as allowing the Society to appropriate for expenditure or accumulate so much of an endowment fund as management determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established, subject to the intent of the donor as expressed in the gift instrument. As a result, the Society classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of the subsequent contributions to the permanent endowment, and (c) other accumulation to the permanent endowment as required by donor gift instruments. The remaining portion of donor restricted endowment funds that is not classified as permanently restricted is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Society consistent with the donor wishes.

The Society utilizes a FDIC insured accounts at local banks and a brokerage firm for the management and safekeeping of endowment invested funds. Endowment funds are comprised of the Bonsai and the Arboretum endowments and have a balance at June 30, 2012 and 2011 of $391,493 and $391,493, respectively.

Financial activity pertaining to Interest in Assets Held in Trust is comprised of the following at September 30:

2012 2011

Fund balance, beginning of year $ 391,493 $ 360,793

Investment return: Fund earnings 1,407 2,024 Earnings transferred to unrestricted (1,407) (2,024) Contributions - 30,700 Increase in fund balance - 30,700

Fund balance, end of year $ 391,493 $ 391,493

Note 6 – Property and Equipment

Property and equipment is comprised of the following at June 30:

2012 2011 Land $ 26,000 $ 26,000 Equipment and leasehold improvements 486,189 217,607 512,189 243,607 Less: accumulated depreciation (135,340) (103,194) Property and equipment, net $ 376,849 $ 140,413

11 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 6 – Property and Equipment (continued)

Depreciation expense for the years ended June 30, 2012 and 2011 totaled $32,146 and $18,658, respectively.

Note 7 – Fair Value Measurements

The Financial Accounting Standards Board (“FASB”) issued a statement that defines fair value and establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Organization has the ability to access.

Level 2 - Inputs to the valuation methodology include: • quoted prices for similar assets or liabilities in active markets; • quoted prices for identical or similar assets or liabilities in inactive markets; • inputs that are derived principally from or corroborated by observable market data

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at June 30, 2011:

Money Market Funds These investments are public investment vehicles valued using $1 for the NAV. The money market funds are classified within Level 1 of the valuation hierarchy.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, although management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the

12 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 7 – Fair Value Measurements (continued)

fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth by level, within the fair value hierarchy, the Society's assets at fair value as of June 30, 2012:

Level 1 Level 2 Level 3 Fair Value Prime money fund$ 24,822 $ - $ - $ 24,822

Total assets$ 24,822 $ - $ - $ 24,822

The following table sets forth by level, within the fair value hierarchy, the Society's assets at fair value as of June 30, 2011:

Level 1 Level 2 Level 3 Fair Value Prime money fund$ 23,956 $ - $ - $ 23,956

Total assets$ 23,956 $ - $ - $ 23,956

Note 8 – Capital Campaign

The Society and the Arboretum were involved in a capital campaign to raise funds for projects designed to cultivate connections between people and plants through education, demonstration and economic development. The campaign is divided into three projects:

Education: to include distance learning technology, outdoor classrooms, interpretive signs and enhanced exhibits;

Outdoor events garden: for live and broadcast performances and programs, to include an expanded amphitheater and stage;

Bonsai exhibition garden: to showcase the bonsai collection, and for demonstrations and classroom events.

As of June 30, 2012 and 2011, temporarily restricted cash associated with the capital campaign totaled $42,735 and $251,769, respectively.

13 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 9 – Restrictions on Net Assets and Grant Revenue

Net assets were released from donor restrictions by meeting the time restrictions or by incurring expenses satisfying the purpose restrictions specified by donors.

Temporarily restricted net asset activity for the year ended June 30, 2012, and amounts available at June 30, 2012 for the following purposes or periods, are as follows:

Funds Available Funds Funds Funds Available June 30, 2011 Received Disbursed June 30, 2012 Capital Campaign $ 251,769 $ 157 $ 51,470 $ 200,456 Securing A Vision 3,039 - - 3,039 254,808 157 51,470 203,495

Other Restricted: Azalea Repository Fund 2,278 - - 2,278 Baker Center Rain Garden Project Funds 8,768 - 8,768 - Ben Long Fresco Fund 2,641 - - 2,641 Bent creek institute 154,017 60,637 214,654 - Bonsai garden support 28,326 6,739 31,412 3,653 Creel – Harrison Funds 9,840 - 8,218 1,622 Education funds - 22,914 19,521 3,393 Green shed exhibit 9,090 - 9,090 - Horticultural Equipment 1,159 5,809 6,138 830 Memorials and tributes 12,636 18,434 14,501 16,569 Olmsted internship grant - 100,000 17,300 82,700 Plant Collection Database 1,685 - - 1,685 Rhododendron collection 12,860 - - 12,860 Staff Enrichment 2,170 3,546 1,909 3,807 245,470 218,079 331,511 132,038 Total temporarily restricted net assets $ 500,278 $ 218,236 $ 382,981 $ 335,533

Temporarily restricted net asset activity for the year ended June 30, 2011, and amounts available at June 30, 2011 for the following purposes or periods, are as follows:

Funds Available Funds Funds Funds Available June 30, 2010 Received Disbursed June 30, 2011 Capital Campaign $ 268,740 $ 12,000 $ 28,971 $ 251,769 Securing A Vision 299,539 1,000 297,500 3,039 568,279 13,000 326,471 254,808

Other Restricted: Azalea Repository Fund 2,278 - - 2,278 Baker Center Rain Garden Project Funds 8,768 - - 8,768 Ben Long Fresco Fund 2,641 - - 2,641

14 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 9 – Restrictions on Net Assets and Grant Revenue (continued)

Bent creek institute 88,358 505,091 439,432 154,017 Bonsai garden support 28,131 22,244 22,049 28,326 Creel – Harrison Funds 3,761 15,000 8,921 9,840 Green shed exhibit 9,090 - - 9,090 Horticultural Equipment 632 2,702 2,175 1,159 Memorials and tributes 2,329 4,140 683 5,786 Plant Collection Database 1,685 - - 1,685 Rhododendron collection 12,860 - - 12,860 Staff Enrichment 681 3,000 1,511 2,170 Cliffs/Walnut 111 - 111 - 164,782 574,145 493,675 245,470 Total temporarily restricted net assets $ 733,061 $ 587,145 $ 820,146 $ 500,278

Note 10 – Line of Credit

The Society maintains a revolving line of credit with Wells Fargo Bank, N.A. In November 2011, the Society borrowed $50,000 from the bank (see Note 11) and used the funds to reduce its available line of credit from $150,000 to $100,000. Advances bear interest at the bank’s prime rate plus 1.2% with a 5% floor, currently at 5%. At June 30, 2012 and 2011, the balance outstanding on this line of credit was $40,150 and $100,150, respectively. The line of credit is collateralized by the Society’s deposit accounts held with the Bank. Interest expense on the line of credit for the years ended June 30, 2012 and 2011 was $4,035 and $5,963, respectively.

Note 11 – Notes Payable

In November 2011, the Society borrowed $50,000 from Wells Fargo Bank, N.A., in order to pay down a portion of the outstanding balance on its line of credit (see Note 10). Repayment terms for the note require monthly principal and interest payments of $1,155 beginning in December 2011, with maturity in November 2015. Interest on the note accrues at the rate of 5.1%. At June 30, 2012, the amount outstanding on the loan was $43,288. Total interest expense for the year ended June 30, 2012 and was $1,403. The scheduled principal repayments on notes payable is as follows:

Years Ending June 30: 2013 $ 11,932 2014 12,555 2015 13,210 2016 5,591 Total $ 43,288

15 THE NORTH CAROLINA ARBORETUM SOCIETY Notes to the Financial Statements For the Years Ended June 30, 2012 and 2011

Note 12 – Concentration of Credit Risk

Concentrations of credit risk with respect to promises to give are limited due to the large number of contributors comprising the Society’s donor base and their dispersion across different geographic areas.

Note 13 – Subsequent Events

Management has evaluated the effect that all subsequent events would have on the financial statements through November 15, 2012, which is the date the financial statements were available to be issued.

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SUPPLEMENTARY INFORMATION