The Salk Institute for Biological Studies · Report of Independent Auditors and Financial...

Report of Independent Auditors and Financial Statements for

The Salk Institute for Biological Studies

June 30, 2016 and 2015

CONTENTS PAGEREPORTOFINDEPENDENTAUDITORS 1and2FINANCIALSTATEMENTS StatementsofFinancialPosition 3 StatementofActivities–2016 4 StatementofActivities–2015 5 StatementsofCashFlows 6 NotestoFinancialStatements 7–29

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REPORTOFINDEPENDENTAUDITORSTheBoardofTrusteesTheSalkInstituteforBiologicalStudiesReportonFinancialStatementsWehaveaudited theaccompanying financialstatementsofTheSalk Institute forBiologicalStudies,which comprise the statements of financial position as of June30, 2016 and2015, and the relatedstatementsofactivitiesandcashflowsfortheyearsthenended,andtherelatednotestothefinancialstatements.Management’sResponsibilityfortheFinancialStatementsManagementisresponsibleforthepreparationandfairpresentationofthesefinancialstatementsinaccordance with accounting principles generally accepted in the United States of America; thisincludesthedesign,implementation,andmaintenanceofinternalcontrolrelevanttothepreparationandfairpresentationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.Auditor’sResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits.WeconductedourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreefrommaterialmisstatement.Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentoftherisksofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationofthefinancialstatementsinordertodesignauditproceduresthatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectivenessoftheentity’s internalcontrol.Accordingly,weexpressnosuchopinion.Anauditalsoincludes evaluating the appropriateness of accounting policies used and the reasonableness ofsignificantaccountingestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.Webelieve that theauditevidenceobtained issufficientandappropriate toprovideabasis forourauditopinion.

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OpinionInouropinion,thefinancialstatementsreferredtoabovepresentfairly, inallmaterialrespects,thefinancialpositionofTheSalk Institute forBiologicalStudiesasof June30,2016and2015,and thechanges in net assets and cash flows for the years then ended in accordance with accountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.

SanDiego,CaliforniaSeptember30,2016

Seeaccompanyingnotes. 3

THESALKINSTITUTEFORBIOLOGICALSTUDIESSTATEMENTSOFFINANCIALPOSITION

JUNE30,2016AND2015(INTHOUSANDS)

2016 2015

Cashandcashequivalents 11,957$ 4,073$Receivablesandotherassets,net 12,364 13,022Contributionsreceivable,net 32,365 37,235Fundsheldbytrustees 10,704 26,759Investments 316,337 326,948Property,net 72,684 75,233

Totalassets 456,411$ 483,270$

LiabilitiesAccountspayableandaccruedexpenses 19,672$ 21,412$Unexpendedadvances 25,931 26,593Retirementobligations 7,017 6,594Debt 55,811 51,652

Totalliabilities 108,431 106,251

CommitmentsandContingencies(Note10)

NetAssetsUnrestricted 80,302 100,070Temporarilyrestricted 90,775 104,439Permanentlyrestricted 176,903 172,510

Totalnetassets 347,980 377,019

Totalliabilitiesandnetassets 456,411$ 483,270$

LIABILITIESANDNETASSETS

ASSETS

June30,

4 Seeaccompanyingnotes.

THESALKINSTITUTEFORBIOLOGICALSTUDIESSTATEMENTOFACTIVITIESYEARENDEDJUNE30,2016(INTHOUSANDS)

Temporarily Permanently 2016Unrestricted Restricted Restricted Total

REVENUES,GAINS,ANDOTHERSUPPORTGrants 78,746$ ‐$ ‐$ 78,746$Contributions 2,386 15,300 4,393 22,079Other 3,009 ‐ ‐ 3,009Investmentreturndesignatedfor

currentoperations 5,657 8,397 ‐ 14,054Netassetsreleasedfromrestrictions 20,481 (20,481) ‐ ‐

Totalrevenues,gains,andothersupport 110,279 3,216 4,393 117,888

EXPENSESResearch 99,171 ‐ ‐ 99,171Managementandgeneral 13,163 ‐ ‐ 13,163Fundraising 4,842 ‐ ‐ 4,842

Totalexpenses 117,176 ‐ ‐ 117,176

EXCESS(DEFICIENCY)OFREVENUES,GAINS,ANDOTHERSUPPORTOVEREXPENSES (6,897) 3,216 4,393 712

INVESTMENTLOSSINEXCESSOFAMOUNTDESIGNATEDFORCURRENTOPERATIONSUNDERSPENDINGPOLICY (12,488) (16,880) ‐ (29,368)

POST‐RETIREMENTBENEFITCHANGESOTHERTHANNETPERIODICBENEFITCOST (383) ‐ ‐ (383)

CHANGEINNETASSETS (19,768) (13,664) 4,393 (29,039)

NETASSETSBeginningofyear 100,070 104,439 172,510 377,019

Endofyear 80,302$ 90,775$ 176,903$ 347,980$

Seeaccompanyingnotes. 5

THESALKINSTITUTEFORBIOLOGICALSTUDIESSTATEMENTOFACTIVITIESYEARENDEDJUNE30,2015

(INTHOUSANDS)

Temporarily Permanently 2015Unrestricted Restricted Restricted Total

REVENUES,GAINS,ANDOTHERSUPPORTGrants 76,684$ ‐$ ‐$ 76,684$Contributions 3,159 19,348 5,164 27,671Other 7,769 ‐ ‐ 7,769Investmentreturndesignatedfor

currentoperations 4,996 7,102 ‐ 12,098Netassetsreleasedfromrestrictions 21,194 (21,194) ‐ ‐

Totalrevenues,gains,andothersupport 113,802 5,256 5,164 124,222

EXPENSESResearch 99,178 ‐ ‐ 99,178Managementandgeneral 12,188 ‐ ‐ 12,188Fundraising 4,880 ‐ ‐ 4,880

Totalexpenses 116,246 ‐ ‐ 116,246

EXCESS(DEFICIENCY)OFREVENUES,GAINS,ANDOTHERSUPPORTOVEREXPENSES (2,444) 5,256 5,164 7,976

INVESTMENTLOSSINEXCESSOFAMOUNTDESIGNATEDFORCURRENTOPERATIONSUNDERSPENDINGPOLICY (3,832) (5,559) ‐ (9,391)

POST‐RETIREMENTBENEFITCHANGESOTHERTHANNETPERIODICBENEFITCOST (523) ‐ ‐ (523)

CHANGEINNETASSETS (6,799) (303) 5,164 (1,938)

NETASSETSBeginningofyear 106,869 104,742 167,346 378,957

Endofyear 100,070$ 104,439$ 172,510$ 377,019$

6 Seeaccompanyingnotes.

THESALKINSTITUTEFORBIOLOGICALSTUDIESSTATEMENTSOFCASHFLOWSYEARSENDEDJUNE30,2016AND2015(INTHOUSANDS)

2016 2015OPERATINGACTIVITIES

Changeinnetassets (29,039)$ (1,938)$Adjustmentstoreconcilechangeinnetassetstonetcashprovidedbyoperatingactivities:

Depreciationandamortization 10,846 11,860Allowanceforuncollectiblepledgesreceivable 1,603 ‐Contributionsrestrictedforlong‐termassets (3,918) (3,619)Netlossoninvestmentsandfundsheldbytrustees 18,098 220Changesinassetsandliabilities:

Receivablesandotherassets 658 (265)Contributionsreceivable 566 (3,216)Accountspayableandaccruedexpenses (1,740) 5,730Unexpendedadvances (662) 1,870Retirementobligations 423 695

Netcash(usedin)providedbyoperatingactivities (3,165) 11,337

INVESTINGACTIVITIESPurchasesofproperty (8,257) (9,641)Purchasesofinvestments (110,431) (29,754)Proceedsfromsalesofinvestments 102,801 21,702

Netcashusedininvestingactivities (15,887) (17,693)

FINANCINGACTIVITIESProceedsfromcontributionsrestrictedfor:

Investmentinperpetuity 6,619 9,530Investmentinplant ‐ 800

Debtissuancecosts ‐ (457)Debtproceeds 20,180 1,635Paymentsondebt (16,061) (1,670)Additionstofundsheldbytrustees (2,244) (18,532)Proceedsfromsaleoffundsheldbytrustees 18,442 4,190

Netcashprovidedby(usedin)financingactivities 26,936 (4,504)

NETINCREASE(DECREASE)INCASHANDCASHEQUIVALENTS 7,884 (10,860)

CASHANDCASHEQUIVALENTSBeginningofyear 4,073 14,933

Endofyear 11,957$ 4,073$

Cashpaymentsforinterest 2,421$ 2,487$SUPPLEMENTALDISCLOSUREOFCASHFLOWINFORMATION

YearsEndedJune30,

THESALKINSTITUTEFORBIOLOGICALSTUDIESNOTESTOFINANCIALSTATEMENTS

ASOFANDFORTHEYEARSENDEDJUNE30,2016AND2015(INTHOUSANDS)

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Note1–NatureoftheInstituteTheSalkInstituteforBiologicalStudies,SanDiego,California(the“Institute”)conductsbasicbiomedicalresearchfundedprimarilywithgrantsandcontributionsfromagenciesoftheUnitedStatesgovernment,foundations,andthegeneralpublic.TheInstituteisaCalifornianot‐for‐profitpublicbenefitcorporationexemptfromfederalincometaxesunderSection501(c)(3)oftheInternalRevenueCodeandSection23701(d)oftheCaliforniaRevenueandTaxationCode.Incomedeterminedtobeunrelatedbusinessincomeistaxable,whenpresent.Note2–SignificantAccountingPoliciesGeneral – The financial statements have been prepared on the accrual basis of accounting and inaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(“GAAP”).Netassetsandactivitiesarepresentedasunrestricted, temporarilyrestricted,andpermanentlyrestrictedbased on related donor restrictions or lack of such restrictions. Unrestricted net assets representexpendable funds available for operations, which are not otherwise limited by donor restrictions.Temporarilyrestrictednetassetsconsistofcontributed fundswhoseuse is limitedbydonor‐imposedrestrictions that either expire by passage of time or can be fulfilled and removed by actions of theInstitutepursuanttothestipulations.Permanentlyrestrictednetassetsaresubjecttoirrevocabledonorrestrictions requiring the assets be maintained in perpetuity, usually for the purpose of generatinginvestmentincometofundresearchandotheractivities.Thecostsofprovidingprogramservicesandotheractivitiesare summarizedona functionalexpensebasis in the statements of activities and, accordingly, certain costs have been allocated among theactivitiesbenefited.RevenueRecognition:

Grants–Grantrevenueisrecognizedasunrestrictedrevenuewhentherelatedresearchcostsareincurred,uptothemaximumgrantamount.Unspentgrantfundsreceivedinadvanceoftherelatedexpenditures are reported as unexpended advances. Reimbursement for indirect expenses oncertainresearchgrantsisbasedonspecifiedratesappliedtoallowabledirectexpenses.

Contributions–Contributionsarerecordedasrevenueatfairvaluewhenunconditionallypledgedorwhenreceived,whicheverisearlier.Contributionssubjecttodonor‐imposedrestrictionsforusein a future period or for a specific purpose are reported as either temporarily or permanentlyrestricted,dependingonthenatureofthedonor’srestriction.Whenadonorrestrictionexpiresorisfulfilled,temporarilyrestrictednetassetsarereclassifiedtounrestrictednetassetsandreportedinthestatementsofactivitiesasnetassetsreleasedfromrestrictions.

THESALKINSTITUTEFORBIOLOGICALSTUDIESNOTESTOFINANCIALSTATEMENTSASOFANDFORTHEYEARSENDEDJUNE30,2016AND2015(INTHOUSANDS)

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Note2–SignificantAccountingPolicies(continued)

Contributions(continued)–Contributionsofequipmentorotherlong‐livedassetsarerecognizedwhenpledgedor received,whichever is earlier, and recorded at the fair value of the contributedassetatthetimeofdonation.Ifdonorsstipulatehowlongtheassetsmustbeused,thecontributionsarerecordedasrestrictedsupport.Intheabsenceofsuchstipulations,contributionsofpropertyandequipmentarerecordedasunrestrictedsupport.

CashandCashEquivalents–Cashandcashequivalentsaredefinedascashonhandandinbanks,plushighlyliquidinvestments,whichfundthedailyoperatingactivitiesoftheInstituteandhaveamaturity,atthedateofpurchase,ofthreemonthsorless.CashandcashequivalentsheldwithintheinvestmentportfolioaspartoftheInstitute’sinvestmentstrategyareincludedininvestmentsonthestatementsoffinancialposition.ReceivablesandOtherAssets–Receivablesandotherassetsincludeamountsbilledandunbilledongrants and other agreements through June 30. An allowance for estimated uncollectible accounts isrecordedbasedonpastexperienceandananalysisofcurrentreceivablebalances.Accountsarewrittenoffagainsttheallowancewhendeemeduncollectible.Managementhasdeterminedthatanallowanceof$39and$85isnecessaryatJune30,2016and2015,respectively.Also included in receivables and other assets is the Institute’s beneficial interest in split‐interestagreements which provide for the payment of distributions to the donor or other designatedbeneficiariesoverthesplit‐interestagreement’sterm(usuallythebeneficiary’slifetime).Attheendofasplit‐interest agreement’s term, the remaining assets are available for use by the Institute for thepurpose specified by the donor. The portion of the assets attributable to the fair value of the futurebenefits to be received by the Institute is recorded on the statement of activities as temporarily orpermanentlyrestrictedcontributionrevenueintheyearthesplit‐interestagreementisestablished.ThefairvalueoftheInstitute’sbeneficialinterestinsplit‐interestagreementstotaled$2,323and$2,410atJune30,2016and2015,respectively.Contributions Receivable – Contributions receivable consists of unconditional promises to give.Unconditional promises to give that are expected to be collected in future years are recorded at fairvalue when the promise is made, based on a discounted cash flow model. The discounts on theseamountsare computedusing risk‐free rates establishedat the time thosepromisesare received.Thediscountrates for thecontributionsreceivablerange from0.25percent to2.50percentasof June30,2016.Amortizationof thediscounts is included incontributions.Conditionalpromises togivearenotrecordedasrevenueuntiltheconditionsaresubstantiallymet.Anallowanceforestimateduncollectiblecontributions receivable is recorded based on management’s judgment and analysis of thecreditworthiness of the donors, past collection experience, and other relevant factors. Accounts arewritten off against the allowance when deemed uncollectible. Management has determined that anallowance foruncollectiblecontributionsreceivableof$1,603and$0 isnecessaryasof June30,2016and2015,respectively.



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Note2–SignificantAccountingPolicies(continued)Investments – Investments inmarketable securities are carried at their fair values based on quotedpricesinanactivemarket.Alternativeinvestmentsforwhichquotedmarketpricesarenotavailablearevalued at fair value by third‐party fundmanagers or the general partners of the related investmentpartnerships, basedon factorsdeemed relevantby the general partners including, butnot limited to,marketconditions,purchaseprice,estimatedliquidationvalue,restrictionsontransfer,andmeaningfulthird‐party transactions in the private market. The Institute’s Finance Department, under thesupervisionof theChiefFinancialOfficer, determines the investment fair valuemeasurementpoliciesand procedures in consultation with the Institute’s investment consultant. These policies andprocedures are reassessed at least annually to determine if the current valuation techniques are stillappropriate.At that time, theunobservable inputsused in the fairvaluemeasurementsareevaluatedandadjusted,asnecessary,basedoncurrentmarketconditionsandotherthird‐partyinformation.TheInstitutereviewsandevaluatesthevaluesprovidedbythird‐partyfundmanagersandgeneralpartnersand agrees with the valuation methods and assumptions used in determining the fair value ofalternativeinvestments.Fortheseinvestments,theInstituteusesthenetassetvalue(“NAV”)providedbytheinvestmentfundmanagerstoevaluatethefairvalueoftheinvestments(seeNotes4and9).TheNAV may be adjusted based on liquidity factors or other information about the investments thatmanagementconsiderssignificanttothevaluationoftheinvestments.

Realizedandunrealizedgainsandlossesareincludedininvestmentreturninthechangeinnetassetsontheaccompanyingstatementsofactivities.

Recent Accounting Pronouncement – As of June 30, 2016, the Institute adopted the FinancialAccounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015‐07,Disclosures forInvestments inCertainEntitiesthatCalculateNetAssetValueperShare(or itsEquivalent)whichallowsinvestments valued at net asset value to be excluded from the fair value hierarchy categorizationmeasurements.ThisASUisappliedretrospectivelytoJune30,2015,asrequired.

FundsHeld by Trustees – At June 30, 2016 and 2015, funds held by trustees include $1,367 and$17,087,respectively,requiredtobeheld inaseparateaccountundertheCertificatesofParticipationagreement and revenue bonds (Note6) and are comprised of cash and cash equivalents. In addition,fundsheldbytrusteesinclude$9,337and$9,672atJune30,2016and2015,respectively,heldinmutualfundsinarabbitrusttopaythebenefitsprovidedbytheInstitute’sretireehealthplan(Note8).Fundsheldbytrusteesheldinmutualfundsarecarriedattheirfairvaluebasedonquotedpricesinanactivemarket.

Property – Property, including land, buildings, and equipment, is carried at cost. The Institutecapitalizesacquisitionsofpropertyof$5ormore.Depreciationandamortizationarerecordedusingthestraight‐linemethodoverestimatedusefullivesoftheassetsrangingfrom3to50years.

ImpairmentofLong‐livedAssets–TheInstituteevaluateslong‐livedassetsforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingvalueofanassetmaynotberecoverable.Iftheestimated futurecash flows(undiscountedandwithout interestcharges) fromtheuseofanassetare less than the carrying value, a write‐down will be recorded to reduce the related asset to itsestimatedfairvalue.Todate,nosuchwrite‐downshaveoccurred.


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Note2–SignificantAccountingPolicies(continued)Endowments–TheInstitute’sendowmentconsistsof108individualfundsestablishedforavarietyofpurposes.Theendowment includesbothdonor‐restrictedendowment fundsand fundsdesignatedbytheBoardofTrustees(the“Board”)tofunctionasendowments.Netassetsassociatedwithendowmentfunds,includingfundsdesignatedbytheBoardtofunctionasendowments,areclassifiedandreportedbasedontheexistenceorabsenceofdonor‐imposedrestrictions.TheInstituteclassifiesaspermanentlyrestrictednetassets(a)theoriginalvalueofgiftsdonatedtothepermanentendowment,(b)theoriginalvalueofsubsequentgiftstothepermanentendowment,and(c)accumulations to thepermanentendowmentmade inaccordancewith thedirectionof theapplicabledonorgift instrumentatthetimetheaccumulationisaddedtothefund.Theremainingportionofthedonor‐restrictedendowmentfundthatisnotclassifiedinpermanentlyrestrictednetassetsisclassifiedas temporarily restricted net assets until those amounts are appropriated for expenditure by theInstitute in a manner consistent with the standard of prudence prescribed by California’s enactedversion of the Uniform Prudent Management of Institutional Funds Act of 2006 (“UPMIFA”). Inaccordance with UPMIFA, the Institute considers the following factors inmaking a determination toappropriateoraccumulatedonor‐restrictedendowmentfunds:1) Thedurationandpreservationofthefund;2) ThepurposesoftheInstituteandthedonor‐restrictedendowmentfund;3) Generaleconomicconditions;4) Thepossibleeffectofinflationanddeflation;5) Theexpectedtotalreturnfromincomeandtheappreciationofinvestments;6) OtherresourcesoftheInstitute;and7) TheinvestmentpoliciesoftheInstitute.The Institute has adopted investment and spending policies for endowment assets that attempt toprovideapredictablestreamoffundingtoprogramsandactivitiessupportedbyitsendowmentwhileseeking to maintain the purchasing power of the endowment assets. The Institute’s spending andinvestment policies work together to achieve this objective. The investment policy establishes anachievable return objective through diversification of asset classes. The current long‐term returnobjective is a total return, over rolling ten‐year periods, which exceeds inflation by an average of 5percentperyear.Actualreturnsinanygivenyearmayvaryfromthisamount.Tosatisfyitslong‐termrate‐of‐returnobjectives,theInstitutereliesonatotalreturnstrategyinwhichinvestment returns are achieved through both capital appreciation (realized and unrealized) andcurrentyield(interestanddividends).The Institute targetsadiversifiedassetallocation thatplacesagreateremphasisonequity‐basedinvestmentstoachieveitslong‐termreturnobjectiveswithinprudentriskconstraints.



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Note2–SignificantAccountingPolicies(continued)The Institute has a policy of appropriating for distribution each year a percentage of its endowmentfunds’averagefairvalueovertheprior12quarters.Thepercentagedistributionisdeterminedannuallyby theBoard in thebudget approvalprocessandwas5percent for eachof theyears ended June30,2016and2015.Inestablishingthispolicy,theInstituteconsideredthelong‐termexpectedreturnonitsendowment.Accordingly,overthelongterm,theInstituteexpectsthecurrentspendingpolicytoallowitsendowmenttogrowatanaverageofthebiomedical inflationrateannually.This isconsistentwiththeInstitute’sobjectivetomaintainthepurchasingpoweroftheendowmentassetsheldinperpetuityorforaspecifiedtermwiththegoalofmeetingcurrentandfuturecash flowrequirements,aswellas toprovideadditionalrealgrowththroughnewgifts.Use of Estimates – The preparation of financial statements in accordance with GAAP requiresmanagement to make estimates and assumptions that affect the reported amounts of assets andliabilities,disclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereported amounts of revenues and expenses during the reporting period. Actual results could differfromthoseestimates.RisksandUncertainties – The Institute invests in various types of securitieswhich are exposed tovarious risks such as interest rate, market, and credit risks. Due to the level of risk associatedwithcertaininvestmentsecurities,itisatleastreasonablypossiblethatchangesinthevaluesofinvestmentsecuritieswilloccurinthenear‐termandsuchchangescouldmateriallyaffecttheamountsreportedinthestatementoffinancialposition.In recent years, there has been significant volatility in the domestic and international investmentmarkets.Consequently,thefairvalueoftheInstitute’sinvestmentsisexposedtopricevolatilitywhichcouldresultinasubstantialchangeinthefairvalueofcertaininvestmentsfromtheamountsreportedasofJune30,2016.Reclassifications–Certainreclassificationshavebeenmadetothe2015amountsinordertoconformtothepresentationfortheyearendedJune30,2016,withnoimpacttonetassets.SubsequentEvents –Subsequenteventsareeventsor transactions thatoccurafter the statementoffinancial position date but before the financial statements are issued. The Institute recognizes in thefinancial statements the effects of all significant subsequent events that provide additional evidenceaboutconditionsthatexistedatthedateofthestatementoffinancialposition,includingtheestimatesinherentintheprocessofpreparingthefinancialstatements.TheInstitute’sfinancialstatementsdonotrecognizesubsequenteventsthatprovideevidenceaboutconditionsthatdidnotexistatthedateofthestatementof financialpositionbut aroseafter the statementof financialpositiondate andbefore thefinancialstatementsareavailabletobeissued.The Institute has evaluated subsequent events through September 30, 2016, which is the date thefinancialstatementswereavailabletobeissued.


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Note3–ContributionsReceivableContributionsreceivablearesummarizedasfollowsatJune30:

2016 2015Contributionsreceivabletobepaidin:

Lessthanoneyear 9,735$ 8,410$Onetofiveyears 8,366 13,210Morethanfiveyears 20,100 20,400

38,201 42,020Less:

Unamortizeddiscount (4,233) (4,785)Reserveforuncollectiblepledges (1,603) ‐

Totalcontributionsreceivable,net 32,365$ 37,235$

AtJune30,2016and2015,netcontributionsreceivableof$5,665and$10,110,respectively,arefrommembersoftheBoard.Note4–InvestmentsThe Institute’s portfolio is managed by independent professional investment managers subject todirectionandoversightbyacommitteeoftheBoard.Certainofthesemanagersareauthorizedtoinvesta limited portion of the Institute’s portfolio in alternative investments to increase portfoliodiversificationandreturnandreducevolatility.



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Note4–Investments(continued)InvestmentsaresummarizedasfollowsatJune30:

2016 2015Marketablesecurities:

Cashandcashequivalents 99,207$ 6,634$Equitysecurities 15,844 52,632Mutualfunds:

Globalequity 50,599 82,674Emergingmarkets 12,380 13,165Largecapequity ‐ 40,523Totalmarketablesecurities 178,030 195,628

Alternativeinvestments:Fixedincomefunds 41,310 42,001Distressedsecuritiesfunds 38,779 43,106Globalequityfunds 30,441 29,885Emergingmarketsfunds 24,179 13,534Privateequityfunds 3,428 2,630Long/shortequityfunds 170 164

Totalalternativeinvestments 138,307 131,320

Totalinvestments 316,337$ 326,948$

AlternativeInvestments–Alternative investmentsaregenerally less liquidthantheInstitute’sotherinvestmentsandinvestprimarilyinthefollowing:

Fixed income funds– investment‐gradedebtandfixed incomesecurities, fixed‐andfloating‐ratedebtsecurities,anddebtobligationsofgovernmentsorgovernment‐relatedissuersworldwide.

Distressedsecuritiesfunds–distresseddebtandmortgageinvestments,undervaluedsecurities,private investments, debt and equity securities of companies involved in or affected by the realestateandmortgagecrisis,andfixedincomesecurities,includingcommercialbankloandebt.

Globalequityfunds–sharesofcompanieslistedonstockexchangesaroundtheworld.

Emergingmarketsfunds–financialmarketsofdevelopingcountries.

Privateequityfunds–pooledinvestmentvehiclespurchasedfromexistingownersandnot fromthe issuers of such investments and in the communications, media, and technology sector. Theinvestmentperiodsfortheprivateequityfundshaveended.

Long/shortequityfunds– longandshort investmentsinpubliclytradedequitysecuritiesinU.S.markets.

The fair values of the alternative investments have been estimated using the NAV of the Institute’sownershipinterestinthefundsortheInstitute’sshareofpartners’capital.


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Note4–Investments(continued)ThenatureandrisksofthealternativeinvestmentsasofJune30,2016,aresummarizedasfollows:

Redemption Redemption AdditionalFair Unfunded Frequency Notice RedemptionTermsandValue Commitments (ifeligible) Period Restrictions(ifany)

Fixedincomefunds 41,310$ ‐$ daily,monthly 5‐15days $15,372inafundsubjecttothesuspensionofredemptionrightsifinthebestinterestofthefund,and10%ofredemptionsmaybehelduntilthenextannualaudit.

Distressedsecuritiesfunds:Active 31,979 ‐ bi‐annually,

annually,biennially

60‐180days $4,679noteligibleforredemptionuntilFebruary1,2020.Generally,subjecttothesuspensionofredemptionrightsifinthebestinterestofthefund.Fullredemptionoftheinvestmentsmayoccuroveraperiodofuptothreeyears.Remaininglifeofthefunds‐0to4years.

Non‐redeemable 6,674 1,978 n/a n/a Noteligibleforredemption.Remaininglifeoffund‐7years.

Liquidating 126 ‐ n/a n/a Noteligibleforredemption

Globalequityfunds 30,441 ‐ bi‐monthly 1day None

Emergingmarketsfunds 24,179 ‐ monthly,quarterly

15‐60days Subjecttothesuspensionofredemptionrightsifinthebestinterestofthefund.

Privateequityfunds 3,428 8,737 n/a n/a Noteligibleforredemption.Remaininglifeofthefunds‐8to13years.

Long/shortequityfunds:Liquidating 170 ‐ n/a n/a Noteligibleforredemption

138,307$ 10,715$

The Institute is in the process of restructuring its investment portfolio and entered into alternativeinvestments with additional unfunded commitments of $18,000 at June 30, 2016, and an additional$24,000subsequenttoJune30,2016.Investments includeendowment fundsandgeneral fundsof the Institute.TheBoardhasdesignatedaportion of the Institute’s cumulative investment return on general funds to be used for support ofcurrentoperations.UndertheInstitute’sspendingpolicy,theBoarddeterminesannuallyapercentageoftheaverageofthefairvalueoftheInstitute’sgeneralfundinvestmentbalancesforthepreviousthreeyears for appropriation to support current operations. The spending ratewas5 percent in 2016 and2015.



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Note4–Investments(continued)The composition of investment return includes the following for the years ended June 30, 2016 and2015:

Temporarily PermanentlyUnrestricted Restricted Restricted Total

Interestanddividends 1,300$ 1,475$ ‐$ 2,775$Netloss (8,131) (9,958) ‐ (18,089)Investmentreturn (6,831) (8,483) ‐ (15,314)

Investmentreturndesignatedforcurrentoperations 5,657 8,397 ‐ 14,054

Investmentlossinexcessofamountsdesignatedforcurrentoperations (12,488)$ (16,880)$ ‐$ (29,368)$


Interestanddividends 1,095$ 1,780$ ‐$ 2,875$Netgain(loss) 69 (237) ‐ (168)Investmentreturn 1,164 1,543 ‐ 2,707

Investmentreturndesignatedforcurrentoperations 4,996 7,102 ‐ 12,098

Investmentlossinexcessofamountsdesignatedforcurrentoperations (3,832)$ (5,559)$ ‐$ (9,391)$

2016

2015


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Note5–PropertyPropertyissummarizedasfollowsatJune30:

2016 2015

Land 1,154$ 1,154$Buildingsandimprovements 147,856 145,912Laboratoryequipment 63,380 60,989Otherequipment 13,397 12,859Constructioninprogress 4,116 1,620

229,903 222,534Lessaccumulateddepreciationandamortization (157,219) (147,301)

Totalproperty,net 72,684$ 75,233$

Includedintotalexpensesisdepreciationexpenseof$10,806and$11,815fortheyearsendedJune30,2016and2015,respectively.



17

Note6–DebtTheInstituteissuedtax‐exemptdebtinprioryearstofundtheconstruction,renovation,andequippingofvariousfacilitiesonitscampus.TheoutstandingdebtatJune30iscomprisedofthefollowing:

Total Outstanding OutstandingDebt Balance Balance

DebtIssue Purpose Terms Issue 2016 2015

2010CertificatesofParticipationthroughtheCountyofSanDiego

Constructionandrenovation,includingtherenewalandexpansionofthecentralplantandelectricaldistributioninfrastructure;refinance2000CertificatesofParticipationissuedforconstructionofanewresearchfacility.

$8,595inserialcertificatesduefromJuly1,2011throughJuly1,2025,atinterestratesfrom3.00percentto5.00percent;$7,320in5.25percenttermcertificatesdueonJuly1,2030;and$21,530in5.125percenttermcertificatesdueonJuly1,2040.

$37,445 $35,285 $35,760

2005RevenueBondsthroughtheCaliforniaStatewideCommunitiesDevelopmentAuthority

RefinanceCertificatesofParticipationissuedin1994tofundtheconstructionoftheresearchbuildingsexpansionproject.

SerialbondsduefromJuly1,2007,throughJuly1,2024.

25,135 ‐ 15,375

2014tax‐exemptdirectplacementloanthroughtheCaliforniaStatewideCommunitiesDevelopmentAuthority

Renovation,restoration,improvement,andequippingoftheInstitute'scampusfacilities;refinancethe2005bondsthathadbeenissuedtorefinancethe1994bondsthatfundedtheconstructionoftheresearchbuildingsexpansionproject.

FundstobedrawnmonthlyasneededforloanpurposesthroughDecember31,2017;repaymentatleveldebtservicewiththe2010Certificates,withfinalmaturityonJuly1,2044;3.4percentfixedinterestrate.

31,190 21,544 1,635

Subtotal 56,829 52,770Unamortized(discount)premium (189) 92Unamortizedcostsofissuance (829) (1,210)

Totaldebt 55,811$ 51,652$

InMay2015,theInstituteplaced$14,115inaprepaymentaccountwiththetrusteeofthe2005bondsinordertoredeemtheoutstanding2005bondsonJuly2,2015.Inadditiontoitsoperatingcashandcashfromtheinvestmentportfolio,theInstituteborrowed$3,000onitslineofcredit(Note10)tofundtheprepayment account. The outstanding balance on the line of credit at June 30, 2015, is included inaccountspayableandaccruedexpenses.Issuancecostsrelated to the Institute’sdebtarebeingamortizedover the livesof therespectivedebtinstruments.Amortizationexpenserelatedtothe issuancecostswas$32and$68for theyearsendedJune30,2016and2015,respectively.


18

Note6–Debt(continued)After full fundingof the2014Loan, the futureannualprincipalpaymentsunder the2010Certificatesandthe2014Loanwillbeasfollows:

YearsendingJune30,2017 1,237$2018 1,2792019 1,3272020 1,3752021 1,429Thereafter 59,555

Total 66,202$

TheInstitute’sdebtiscollateralizedbyalloftherevenueoftheInstituteandfurthersecuredbyadeedof trust on the Institute’s main campus. The fair value of the debt as of June 30, 2016 and 2015 isapproximately$61,201and$55,143, respectively,basedoncurrent interest rates forobligationswithsimilarterms.TheInstitutedeterminedthedebttobeaLevel2measurementinthefairvaluehierarchydescribedinNote9.InterestexpenserelatedtotheInstitute’sdebtwas$2,353and$2,456fortheyearsendedJune30,2016and2015,respectively.Under the termsof the Institute’s debt, the Institute is subject to compliancewith certain covenants,includingrestrictionsonadditionalindebtedness.



19

Note7–NetAssetsNetassetsatJune30aresummarizedasfollows:

2016 2015

Unrestricted 80,302$ 100,070$

TemporarilyRestrictedResearch 87,424 98,315Appreciationonunrestricteduseendowments 3,351 6,124

Totaltemporarilyrestricted 90,775 104,439

PermanentlyRestrictedResearch 127,966 122,580Unrestricteduse 48,937 49,930

Totalpermanentlyrestricted 176,903 172,510

Totalnetassets 347,980$ 377,019$

Netassetswere released fromrestrictionsby satisfyingdonor restrictions for the followingpurposesduringtheyearsendedJune30:

2016 2015TemporarilyRestricted

Research 18,962$ 19,864$Unrestricteduse 1,519 1,330

Totalreleasesfromrestriction 20,481$ 21,194$


20

Note7–NetAssets(continued)Thenet asset compositionof the Institute’s donor‐restricted andboard‐designated endowments is asfollowsatJune30:


Donor‐restricted ‐$ 25,257$ 176,903$ 202,160$Board‐designated 3,759 ‐ ‐ 3,759

Totalendowmentnetassets 3,759$ 25,257$ 176,903$ 205,919$

Donor‐restricted ‐$ 42,737$ 172,510$ 215,247$Board‐designated 3,452 ‐ ‐ 3,452

Totalendowmentnetassets 3,452$ 42,737$ 172,510$ 218,699$

2016

2015

ThechangesinendowmentnetassetsfortheyearsendedJune30,2016and2015areasfollows:


EndowmentnetassetsatJuly1,2014 3,354$ 47,930$ 167,346$ 218,630$

Investmentreturn:Interestanddividends 31 1,731 ‐ 1,762Net(losses)gains (48) 178 ‐ 130

Totalinvestmentreturn (17) 1,909 ‐ 1,892Contributions 200 ‐ 5,164 5,364Amountsappropriated

forexpenditure (85) (7,102) ‐ (7,187)

EndowmentnetassetsatJune30,2015 3,452 42,737 172,510 218,699

Investmentreturn:Interestanddividends 27 1,476 ‐ 1,503Netgains(losses) 193 (11,148) ‐ (10,955)

Totalinvestmentreturn 220 (9,672) ‐ (9,452)Contributions 200 ‐ 4,393 4,593Amountsappropriated

forexpenditure (113) (7,808) ‐ (7,921)

EndowmentnetassetsatJune30,2016 3,759$ 25,257$ 176,903$ 205,919$



21

Note7–NetAssets(continued)Fromtimetotime,thefairvalueofassetsassociatedwithindividualdonor‐restrictedendowmentfundsmayfallbelowthelevelthatthedonororUPMIFArequirestheInstitutetoretainasafundofperpetualduration. InaccordancewithGAAP,deficienciesof thisnaturearereported inunrestrictednetassets.Thereweredeficienciesof$394and$0asofJune30,2016and2015,respectively.Note8–EmployeeBenefitPlansRetirementPlan–TheInstitutehasanemployeeretirementplan(the“RetirementPlan”)forcertainofitsemployees.TheRetirementPlanisadefined‐contributionplanunderwhichtheInstitutecontributesa percentage of the participant’s annual compensation. The Institute’s contributions are made inaccordancewithSection403(b)oftheInternalRevenueCode.TotalcontributionsexpenserelatedtotheRetirementPlanwas$3,463and$3,483fortheyearsendedJune30,2016and2015,respectively.RetireeHealthBenefits Plan – The Institute sponsors a defined‐benefit plan (the “Health BenefitsPlan”) thatprovides for retirees’healthandrelatedbenefits.Employeeshiredprior to June30,1993,may become eligible for these post‐retirement benefits upon attainment of age 60 with 10 years ofservice.TheHealthBenefitsPlan includes cost‐sharing features suchasdeductibles, coinsurance, andcontributions,whichcanbeadjustedannually,andtheInstitute’spolicyistopaythesebenefitsthrougharabbitrust.TheInstituteusesaJune30measurementdatefortheHealthBenefitsPlan.The changes in the accumulatedpost‐retirementbenefit obligation at June30 for theHealthBenefitsPlanareasfollows:

2016 2015

Benefitobligation,beginningofyear 6,594$ 5,899$Servicecost 36 37Interestcost 256 251Actuarialloss 347 620Benefitspaid (216) (213)

Benefitobligation,endofyear 7,017$ 6,594$

Fundedstatusofplan,endofyear (7,017)$ (6,594)$

Rabbitrustinvestments,endofyear 9,337$ 9,672$


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Note8–EmployeeBenefitPlans(continued)AtJune30thecomponentsofthenetperiodicpost‐retirementbenefitcostare:

2016 2015

Servicecost 36$ 37$Interestcost 256 251Amortizationoftransitionobligation ‐ 117Amortizationofnetgain (35) (20)

Netperiodicpost‐retirementbenefitcost 257$ 385$

The deferred transition obligation and deferred actuarial gains and losses are not reflected in netperiodicpost‐retirementbenefitcostandareincludedinunrestrictednetassetsatJune30.Thechangesinthedeferredamountsareasfollows:

Deferred Transition Deferred TransitionGain Obligation Gain Obligation

Balance,beginningofyear 923$ ‐$ 1,563$ (117)$

Actuarialloss (347) ‐ (620) ‐Amortization:

Deferredtransitionobligation ‐ ‐ ‐ 117

Deferredactuarialloss (35) ‐ (20) ‐

Balance,endofyear 541$ ‐$ 923$ ‐$

2016 2015

TheamountsofthetransitionobligationandthenetactuarialgainincludedinunrestrictednetassetsatJune30,2016,thatareexpectedtoberecognizedinnetperiodicpost‐retirementbenefitcostduringthefiscalyearendedJune30,2017,areeach$0.



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Note8–EmployeeBenefitPlans(continued)ThebenefitsexpectedtobepaidfromtheHealthBenefitsPlanineachofthenextfiveyearsandintheaggregateforthefollowingfiveyearsareasfollows:

YearsendingJune30,2017 417$2018 4082019 4142020 4152021 4112022‐2026 2,004

Total 4,069$

ContributionstotheHealthBenefitsPlanareexpectedtoequalbenefitpayments.FortheyearsendedJune 30, 2016 and 2015, employer contributions were $216 and $213, respectively, and participantcontributionswere$176and$135,respectively.The Health Benefits Plan’s weighted‐average assumptions used to determine net periodic post‐retirementbenefitcostfortheyearsendedJune30wereasfollows:

2016 2015

Discountrate 4.15% 3.95%Rateofcompensationincrease 5.00% 5.00%

Theamountsreportedareaffectedbythehealthcaretrendassumptions.Theassumedhealthcarecosttrendrateusedinmeasuringtheaccumulatedbenefitobligationwas6.00percentand6.25percentfor2016and2015,respectively,andisassumedtodecreasegraduallyto4.50percentin2077andremainat that level thereafter. If the healthcare cost trend assumptions were increased by 1 percent, theaccumulated post‐retirement benefit obligation at June 30, 2016 and 2015 would be increased byapproximately$94and$66,respectively.Theeffectofthischangewouldincreasetheaggregateoftheserviceandinterestcostcomponentsofthenetperiodicpost‐retirementbenefitcostbyapproximately$4 and $2 for the years ended June 30, 2016 and 2015, respectively. If the healthcare cost trendassumptionsweredecreasedby1percent,theaccumulatedpost‐retirementbenefitobligationasofJune30,2016and2015,wouldbedecreasedbyapproximately$67and$61,respectively.Theeffectofthischangewouldreducetheaggregateoftheserviceandinterestcostcomponentsofthenetperiodicpost‐retirement benefit cost by approximately $3 and $2 for the years ended June 30, 2016 and 2015,respectively.


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Note8–EmployeeBenefitPlans(continued)Self‐InsuredHealthPlan–EffectiveJuly1,2015,theInstitutebegantoself‐insurehospitalizationandmedicalcoverageunderoneofthehealthplansofferedtoitsemployees.TheInstitutelimitsits lossesthroughtheuseofastop‐losspolicywithadeductibleof$150percoveredparticipantandamaximumliabilityof125percentoftheestimatedaggregateclaims.Note9–FairValueofFinancialInstrumentsAuthoritativeguidancedefinesfairvalueastheexchangepricethatwouldbereceivedforanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsonthemeasurementdateandestablishesafairvaluehierarchywhichrequiresanentitytomaximizetheuseofobservableinputsandminimizetheuseofunobservableinputswhenmeasuringfairvalue.Theguidancedescribesthreelevelsofinputsthatmaybeusedtomeasurefairvalue:Level1‐ Quotedpricesinactivemarketsforidenticalassetsorliabilities;Level2‐ Inputs, other than quoted prices, that are observable for the asset or liability, directly or

indirectly,includinginputsinmarketsthatarenotconsideredtobeactive;andLevel3‐ Unobservable inputs that are supported by little or no market activity and that are

significanttothefairvalueoftheassetsorliabilities.Transfers between levels are recognized as of the beginning of the reporting period in which thetransferoccurs.Thecarryingvaluesofcashandcashequivalents,receivables,andaccountspayableapproximatetheirfairvaluesduetotherelativelyshortperiodoftimebetweenoriginationoftheinstrumentsandtheirexpected realization. These assets and liabilities are considered by the Institute to be Level 1measurementsinthefairvaluehierarchy.



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Note9–FairValueofFinancialInstruments(continued)The following tablepresents informationabouteachmajor categoryof the Institute’s financial assetsmeasuredatfairvalueonarecurringbasisatJune30,2016:

Level1 Level2 Level3 TotalMarketablesecurities:

Cashandequivalents 100,783$ ‐$ ‐$ 100,783$Equitysecurities:

Financial 5,714 ‐ ‐ 5,714Industrial 2,880 ‐ ‐ 2,880Consumerproducts 2,005 ‐ ‐ 2,005Energyandutilities 1,462 ‐ ‐ 1,462Other 1,154 ‐ ‐ 1,154Materials 867 ‐ ‐ 867Informationtechnology 738 ‐ ‐ 738Healthcare 681 ‐ ‐ 681Telecommunications 343 ‐ ‐ 343

Totalequitysecurities 15,844 ‐ ‐ 15,844

Mutualfunds:Globalequity 52,206 ‐ ‐ 52,206Emergingmarkets 12,380 ‐ ‐ 12,380Largecapequity 5,494 ‐ ‐ 5,494FixedIncome 2,027 ‐ ‐ 2,027

Totalmutualfunds 72,107 ‐ ‐ 72,107Totalmarketablesecurities 188,734 ‐ ‐ 188,734

Beneficialinterestinsplit‐interestagreements ‐ ‐ 2,323 2,323

188,734$ ‐$ 2,323$ 191,057

Investmentsmeasuredatnetassetvalue:Alternativeinvestments:

Fixedincomefunds 41,310Distressedsecuritiesfunds 38,779Globalequityfunds 30,441Emergingmarketsfunds 24,179Privateequityfunds 3,428Long/shortequityfunds 170

Totalinvestmentsmeasuredatnetassetvalue 138,307

329,364$

FairValueMeasurementatJune30,2016


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Note9–FairValueofFinancialInstruments(continued)The following tablepresents informationabouteachmajor categoryof the Institute’s financial assetsmeasuredatfairvalueonarecurringbasisatJune30,2015:

Level1 Level2 Level3 TotalMarketablesecurities:

Cashandequivalents 23,848$ ‐$ ‐$ 23,848$Equitysecurities:

Consumerproducts 11,633 ‐ ‐ 11,633Energyandutilities 8,896 ‐ ‐ 8,896Healthcare 8,869 ‐ ‐ 8,869Industrial 7,003 ‐ ‐ 7,003Informationtechnology 6,028 ‐ ‐ 6,028Financial 5,244 ‐ ‐ 5,244Materials 1,861 ‐ ‐ 1,861Telecommunications 1,581 ‐ ‐ 1,581Other 1,517 ‐ ‐ 1,517

Totalequitysecurities 52,632 ‐ ‐ 52,632

Mutualfunds:Globalequity 84,455 ‐ ‐ 84,455Largecapequity 46,028 ‐ ‐ 46,028Emergingmarkets 13,166 ‐ ‐ 13,166FixedIncome 2,258 ‐ 2,258

Totalmutualfunds 145,907 ‐ ‐ 145,907Totalmarketablesecurities 222,387 ‐ ‐ 222,387

Beneficialinterestinsplit‐interestagreements ‐ ‐ 2,410 2,410

222,387$ ‐$ 2,410$ 224,797

Investmentsmeasuredatnetassetvalue:Alternativeinvestments:

Distressedsecuritiesfunds 43,104Fixedincomefunds 42,001Globalequityfunds 29,885Emergingmarkets 13,534Privateequityfunds 2,630Long/shortequityfunds 166

Totalinvestmentsmeasuredatnetassetvalue 131,320

356,117$

FairValueMeasurementatJune30,2015



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Note9–FairValueofFinancialInstruments(continued)ThefollowingtablepresentsthesummaryofchangesinthefairvalueoftheInstitute’sLevel3classifiedassetsfor2016and2015:

Balance,July1,2014 1,756$

Changeinvalueofbeneficialinterest 654

Balance,June30,2015 2,410

Changeinvalueofbeneficialinterest (87)

Balance,June30,2016 2,323$

The change in the value of the beneficial interest in split‐interest agreements is included incontributionsonthestatementsofactivities.Thefollowingtablepresents informationaboutsignificantunobservable inputsforLevel3assetsandliabilities,excludinginvestmentsvaluedatNAVasdiscussedinNote4:

FairValueasof Unobservable RangeAsset/Liability June30,2016 ValuationTechnique Input(s) (Wtd.Avg.)

Beneficialinterestinsplit‐interestagreements

$2,323 DiscountedcashflowDiscountrateMortalitytables

1.8%(1.8%)

Increases(decreases)inthediscountrateorlifeexpectancybasedonmortalitytableswouldresult indecreases(increases)inthefairvalueofthebeneficialinterestinsplit‐interestagreements.Anincrease(decrease)inthefairvalueoftheassetsintherelatedtrustortheincreaseintheInstitute’spercentageownershipwill increase(reduce)thefairvalueoftheInstitute’sbeneficialinterestinthesplit‐interestagreement.Indeterminingthereasonablenessofthemethodologyusedtodeterminethefairvalueofthebeneficialinterestinsplit‐interestagreements,theFinanceDepartmentevaluatesavarietyoffactorsincludingareview of existing agreements, economic conditions, and industry andmarket developments at leastannually.Certainunobservableinputsareassessedthroughreviewofcontractterms(e.g.,durationorpayout data), while others are substantiated utilizing availablemarket data (e.g., discount rates andmortalitytables).


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Note10–CommitmentsandContingenciesCommitments–AtJune30,2016,contractualcommitmentsonconstructionandpurchasespendingorinprocessare$10,200.Leases–TheInstitutehasenteredintooperatingleasesforbuildingspaceandequipmentthatexpirethroughDecember2021.Rentexpense totaled$787and$914 for theyearsended June30,2016and2015, respectively. Futureminimumrentalpayments requiredundernon‐cancelableoperating leasesthathaveremainingleasetermsinexcessofoneyearasofJune30,2016,areasfollows:

YearsendingJune30,2017 721$2018 7392019 7092020 7272021 372Thereafter 95

3,363$

LineofCredit–InSeptember2014,theInstituteexecutedanunsecuredlineofcreditloanagreementwith a bank providing up to $5,000 for generalworking capital purposes. The agreement expires onNovember10,2016,andprovidesformonthlyinterestattheprimerate(3.5percentonJune30,2016)on theoutstandingbalance.At June30, 2016, the Institutehadnobalanceoutstandingon the lineofcredit.Grants – The Institute has grants with various organizations and government agencies which aresubjecttoaudit.Managementbelievesthatanyliabilitywhichmayresultfromtheseauditswouldnotbematerial.IncomeTaxes–TheInstitutehasnounrecognizedtaxbenefitsasofJune30,2016and2015.Legal–TheInstituteisapartytocertainlegalactionsarisingintheordinarycourseofbusiness.Intheopinion of management, additional liabilities, if any, under these actions will not result in materialchargesagainstnetassets.



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Note10–CommitmentsandContingencies(continued)GuaranteesandIndemnities–Fromtimetotime,theInstituteenters intocertaintypesofcontractsthatcontingentlyrequiretheInstituteto indemnifypartiesagainstthird‐partyclaims.Thesecontractsprimarilyrelateto:(i)certaintechnologytransfer/licenseagreementsunderwhichtheInstitutemayberequiredtoindemnifylicensees;and(ii)certainagreementswiththeInstitute’sofficers,directors,andemployees,underwhichtheInstitutemayberequiredtoindemnifysuchpersonsforliabilitiesarisingout of their employment relationship. The terms of such obligations vary by contract and, in mostinstances, a specific or maximum dollar amount is not explicitly stated therein. Generally, amountsunderthosecontractscannotbereasonablyestimateduntilaspecificclaimisasserted.Consequently,noliabilitieshavebeenrecordedfortheseobligationsintheInstitute’sstatementsoffinancialpositionfortheyearsendedJune30,2016and2015.Note11–ConcentrationsofCreditRiskCashinbankdepositaccountsandtheinvestmentportfolioexceedsfederally‐insureddepositlimits.Nolosseshavebeenexperiencedrelatedtocashinsuchaccounts.The Institute receives funds under various research grants from federal and non‐federal agencies.FundingfromtheNationalInstitutesofHealthrepresentsapproximately51percentand53percentoftotalgrantrevenuefortheyearsendedJune30,2016and2015,respectively.Note12–RelatedPartyInMay2006,theInstituteandthreeotherresearchinstitutionsformedtheSanDiegoConsortiumforRegenerative Medicine, subsequently renamed Sanford Consortium for Regenerative Medicine(“SCRM”) and joined by a fifth research institution. SCRMwas formed to coordinate the institutions’resources, personnel, and programs for scientific research and education in the field of stem cellresearchandrelatedfields.Thenine‐memberboardofSCRMincludesamemberoftheInstitute’sBoardandtheInstitute’sPresident/ChiefExecutiveOfficer.In October 2009, the consortium members and SCRM executed an agreement (the “CollaboratoryAgreement”) in which SCRM grants themembers a non‐exclusive license to use space for stem cellresearchinSCRM’sresearchfacility,whichwasreadyforoccupancyonJanuary1,2012.TheinitialtermoftheCollaboratoryAgreementis10yearswithoptionstoextend.Undertheagreement,themembersagree to pay a license fee equal to eachmember’s allocable shareof licensed spacedebt service andoperatingexpenses.TheInstitute’slicensefeeandoperatingexpensesfortheuseofthreemodulesinSCRM’sbuildingareexpectedtobe$191and$238peryear,respectively,withincreasesordecreasestotheamountseachyearbasedonactualexpenses.Thefeetolicensespaceinthefacilityis includedinrentexpenseandminimumleasepaymentsinNote10.

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