FY 2010 Audited Financial Statements

8/7/2019 FY 2010 Audited Financial Statements

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MONTALVO ASSOCIATION(A California Nonprofit Public Benefit Corporation)

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FINANCIAL STATEMENTS

Year Ended September 30, 2010 with Comparative Totalsfor the Year Ended September 30, 2009


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TABLE OF CONTENTS

Pages

INDEPENDENT AUDITOR'S REPORT 1

FINANCIAL STATEMENTS:

Statement of Financial Position 2

Statement of Activities 3

Statement of Functional Expenses 4

Statement of Cash Flows 5

Notes to Financial Statements 6-20


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STATEMENT OF FINANCIAL POSITION

September 30, 2010 with Comparative Totals as of September 30, 2009

ASSETS

2010 2009CURRENT ASSETS:

Cash and Cash Equivalents $ 740,999 $ 829,792Accounts Receivable 1,020 10,963Current Portion of Pledges Receivable, Less Allowance for Doubtful

Accounts 520,000 280,982Current Portion of Grants Receivable 325,000 137,516Prepaid Expenses 35,108 36,739

Total Current Assets 1,622,127 1,295,992

PROPERTY AND EQUIPMENT, NET 9,259,044 9,764,885

OTHER ASSETS:

Investments 1,423,878 1,153,625Pledges Receivable, Net of Current Portion 1,037,352 880,604Grants Receivable, Net of Current Portion 100,962 48,077

Total Other Assets, Net 2,562,192 2,082,306

TOTAL ASSETS $ 13,443,363 $ 13,143,183

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES:

Accounts Payable $ 58,976 $ 97,255

Accrued Expenses 166,735 123,815Deposits 10,000 13,000Deferred Revenue 234,268 202,038Note Payable - 170,300

Total Current Liabilities 469,979 606,408

NET ASSETS:

Unrestricted Net Assets:Montalvo Service Group 112,999 124,833Board-Designated Operating Reserve 720,218 501,135Emergency Fund 250,000 250,000Property and Equipment Fund 9,259,044 9,764,885

Total Unrestricted Net Assets 10,342,261 10,640,853

Temporarily Restricted Net Assets 1,979,866 1,340,926Permanently Restricted Net Assets 651,257 554,996

Total Net Assets 12,973,384 12,536,775

TOTAL LIABILITIES AND NET ASSETS $ 13,443,363 $ 13,143,183

The Accompanying Notes are an Integral Part of these Financial Statements.

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STATEMENT OF ACTIVITIES

Year Ended September 30, 2010 with Comparative Totals for the Year Ended September 30, 2009

2010 2009

UnrestrictedTemporarilyRestricted

PermanentlyRestricted TOTAL TOTAL

SUPPORT AND REVENUE:

Support:Individuals $ 851,075 $ 1,188,748 $ - $ 2,039,823 $ 2,386,292Grants and Contributions 523,264 492,500 96,261 1,112,025 511,702Contributions In-Kind 62,788 - - 62,788 49,939Special Events 292,214 - - 292,214 456,948

Less: Direct Expenses (IncludesIn-Kind Expenses of $60,493and $51,780) (146,296) - - (146,296) (166,500

Corporate Sponsorships - - - - 16,935

Total Support 1,583,045 1,681,248 96,261 3,360,554 3,255,316

Revenue:Rentals 581,423 - - 581,423 531,018Arts Programs 462,237 - - 462,237 251,489Dividends and Interest 30,254 7,039 - 37,293 42,217Concessions and Merchandise 73,895 - - 73,895 10,054Net Realized and Unrealized Gain

(Loss) on Investments 71,440 14,209 - 85,649 (51,996Gain on Sale of Property and

Equipment 189 - - 189 -

Total Revenue 1,219,438 21,248 - 1,240,686 782,782

Total Support and Revenue 2,802,483 1,702,496 96,261 4,601,240 4,038,098

Net Assets Released from Restrictions 1,063,556 (1,063,556) - - -

Total Support, Revenue and NetAssets Released fromRestrictions 3,866,039 638,940 96,261 4,601,240 4,038,098

EXPENSES:

Program Services 3,247,473 - - 3,247,473 3,062,563

Supporting Services:Management and General 541,475 - - 541,475 580,210Fundraising 375,683 - - 375,683 463,411

Total Supporting Services 917,158 - - 917,158 1,043,621

Total Expenses 4,164,631 - - 4,164,631 4,106,184

CHANGE IN NET ASSETS (Note 3) (298,592) 638,940 96,261 436,609 (68,086

NET ASSETS, Beginning of Year 10,640,853 1,340,926 554,996 12,536,775 12,604,861

NET ASSETS, End of Year $ 10,342,261 $ 1,979,866 $ 651,257 $ 12,973,384 $ 12,536,775


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STATEMENT OF FUNCTIONAL EXPENSES


PROGRAM

SERVICES SUPPORTING SERVICES TOTALManagement and

General Fundraising Total 2010 2009

EXPENSES:

Salaries and Wages $ 1,195,854 $ 284,395 $ 238,517 $ 522,912 $ 1,718,766 $ 1,562Payroll Taxes and

Employee Benefits 256,344 53,607 39,223 92,830 349,174 295

Total Salaries andRelated Expenses 1,452,198 338,002 277,740 615,742 2,067,940 1,858

Artist Fees / Hospitality 424,967 - - - 424,967 369Maintenance 134,413 6,340 6,340 12,680 147,093 114Consultants 55,187 41,053 25,204 66,257 121,444 356Advertising and Publicity 115,811 - - - 115,811 74Utilities 83,606 3,943 3,943 7,886 91,492 116Insurance 79,159 3,734 3,734 7,468 86,627 106Professional Fees 7,237 55,638 2,100 57,738 64,975 87Printing and Publication 43,686 2,621 5,170 7,791 51,477 41Donated Goods / Services 32,113 13,445 30 13,475 45,588 43Supplies 42,151 1,319 758 2,077 44,228 39Production 41,310 - - - 41,310 32Costs of Sales 23,941 16,861 - 16,861 40,802 39Postage and Shipping 25,586 1,948 7,465 9,413 34,999 21Cultivation / Hospitality 10,680 16,375 4,828 21,203 31,883 22Telephone 19,710 4,978 4,332 9,310 29,020 62Property Tax 20,265 956 956 1,912 22,177 13Conferences / Training /

Dues / Subscriptions 14,384 3,530 1,792 5,322 19,706 12

Transportation / Vehicles 13,503 - - - 13,503 18Repairs 10,948 516 516 1,032 11,980 4Office Supplies 8,072 2,085 1,815 3,900 11,972 4Travel 5,234 619 1,448 2,067 7,301 16Public Relations - - - - - 1

Total Expenses BeforeDepreciation 2,664,161 513,963 348,171 862,134 3,526,295 3,456

Depreciation 583,312 27,512 27,512 55,024 638,336 649

Total FunctionalExpenses $ 3,247,473 $ 541,475 $ 375,683 $ 917,158 $ 4,164,631 $ 4,106

Percentage of Total %78.0 %13.0 %9.0 %22.0 %100.0


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STATEMENT OF CASH FLOWS


2010 2009

CASH FLOWS FROM OPERATING ACTIVITIES:

Change in Net Assets $ 436,609 $ (68,086)Adjustments to Reconcile Change in Net Assets to Net Cash

Provided by Operating Activities:Depreciation 638,336 649,749Net Realized and Unrealized (Gain) Loss on Investments (85,649) 51,996Gain on Sale of Property and Equipment (189) -Donated Property and Equipment (17,200) (6,140)Forgiveness of Loan (Silicon Valley Arts Fund

Contribution, see Notes 8 and 13) (170,300) -Permanent Endowment Contribution (96,261) -

(Increase) Decrease in Assets:Accounts Receivable 9,943 22,731

Pledges Receivable (395,767) (87,750)Grants Receivable (240,369) 316,907Prepaid Expenses 1,629 3,781

Increase (Decrease) in Liabilities:Accounts Payable (38,279) (106,616)Accrued Expenses 42,920 (123,438)Deposits (3,000) -Deferred Revenue 32,420 19,865

Net Cash Provided by Operating Activities 114,843 672,999

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of Property and Equipment (115,295) (326,700)

Purchases of Investments (516,595) (506,484)Sales of Investments 331,993 483,386

Net Cash Used by Investing Activities (299,897) (349,798)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Note Payable - 170,300Repayment of Note Payable - (170,300)Permanent Endowment Contribution 96,261 -

Net Cash Provided by Financing Activities 96,261 -

NET INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS (88,793) 323,201

CASH AND CASH EQUIVALENTS, Beginning of Year 829,792 506,591

CASH AND CASH EQUIVALENTS, End of Year $ 740,999 $ 829,792


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NOTES TO FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION:

Historically known as Villa Montalvo, Montalvo Arts Center, ("Montalvo Association", "Montalvo",

or the "Association"), is located on the 175-acre summer estate built in 1912 by James Duval Phelan(1861-1930). Phelan, a passionate Californian who had been a three-term progressive mayor of SanFrancisco, went on to become California's first popularly-elected U.S. Senator. Villa Montalvo wasSenator Phelan's favorite home and a center of artistic, political and social life in Northern California.He invited leading writers and artists to Villa Montalvo to work on individual artistic projects in anenvironment rich in dialogue and fellowship. At his death, Senator Phelan bequeathed Montalvo tothe people of California to serve as a site for the advancement of art, music, literature andarchitecture, a legacy that continues to this day.

For nearly 100 years, Montalvo Arts Center has served the Silicon Valley as a center of creativity andhas offered a wide range of exceptional opportunities for involvement with the arts to diverseaudiences. Through the architecturally distinguished Sally and Don Lucas Artists Residency

program, the performing arts series, visual arts, public programming and exhibitions program, literaryarts events, and education and outreach programs, Montalvo successfully connects the larger nationaland international arena of exemplary artistic talent with the Silicon Valley community. In its role as acontemporary arts center, Montalvo fosters creativity, nurtures new talent and spurs activeengagement with the arts through commissions of new work, presentation of acclaimed and emergingartistic talent, and implementation of its arts education and outreach initiative. Relevance to thecommunity is key.

At the heart of Montalvo Arts Center is the Sally and Don Lucas Artists Residency Program. Thisinternationally recognized program sets Montalvo apart by enhancing its ability to contribute to thefield through the creation of new work by accomplished artists and creative thinkers, serving as thedriving force behind its community-based outreach programs, and giving California artists theopportunity to work in close collaboration with peers from around the globe.

NOTE 2 - PROGRAM SERVICES:

Sally and Don Lucas Artists Residency Program - The Lucas Artists Residency Program offersselected artists private housing, a professional staff that is supportive of the creative process, state-of-the-art technology, and an environment conducive to both individual practice, community engagementand the energetic exchange of ideas among international and culturally diverse Fellows.

Performing Arts Series - The lively performing arts program consists of more than 50 music concertsand theatrical performances presented in the 1200-seat Garden Theatre and the intimate, 300-seatCarriage House Theatre. In 2009, a Villa Chamber Music Series was begun in the Grand Hall of the

Villa. Montalvo also presents childrens performing arts programs in the Carriage House Theatre.And, through the artists residency program, Montalvo commissions composers to create new works ofcontemporary classical music.

Visual Arts Public Programming and Exhibition - The visual arts program encompasses a year-roundseries of exhibitions exploring all media mounted in the Project Space gallery, arts related communityprograms, and Sculpture on the Grounds, which includes both existing and commissioned works of artinstalled throughout the property.

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NOTES TO FINANCIAL STATEMENTS(Continued)

NOTE 2 - PROGRAM SERVICES (Continued):

Education and Outreach - The education programs serve 20,000 students annually and consist of abroad range of arts-related programs, classes and special events for all ages. Education programmingincludes the Family Performing Arts Series, Master Class series taught by resident artists andexhibiting artists, professional development for teachers, student school programs, visual andperforming arts camps, a Teen Council, Teaching Artist Fellowships, and the Wells Fargo PerformingArts Series for Students.

Historic Villa and Extant Buildings - Anchored by the historic Villa Montalvo and the Sally and DonLucas Artists Residency Program compound of studios, the complex also includes new and historicbuildings on the Montalvo grounds. Docent-led tours of the Villa and grounds are available to thepublic.

Gardens and Grounds - The formal Italianate gardens, historic Cactus Garden, the Oval Garden, theLove Temple, and multiple hiking trails comprise the estates 175-acre grounds.

NOTE 3 - CHANGE IN NET ASSETS:


PermanentlyRestricted Total

Change in Net Assets $ (298,592) $ 638,940 $ 96,261 $ 436,609Add Depreciation Expense 638,336 - - 638,336

Change in Net Assets Excluding

Depreciation $ 339,744 $ 638,940 $ 96,261 $ 1,074,945

Change in Net Assets - Excluding depreciation for the year ended September 30, 2010, theAssociation posted a net operating (unrestricted) surplus of $339,774 and a net total surplus of$1,074,945. After including $638,336 in non-cash depreciation expense, total net assets increased by$436,609.

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Accounting - The financial statements of Montalvo Association have been prepared on the

accrual basis of accounting.

Basis of Presentation - The Association follows standards of accounting and financial reporting asprescribed by the American Institute of Certified Public Accountants. In accordance with generallyaccepted accounting principles, the Association reports its financial position and activities in threeclasses of net assets: unrestricted net assets, temporarily restricted net assets, and permanentlyrestricted net assets.

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NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Unrestricted net assets include those assets over which the Board of Trustees hasdiscretionary control in carrying out the operations of the Association. Under thiscategory, the Association maintains an operating fund, property and equipment fundplus any net assets designated by the Board for specific purposes.

Temporarily restricted net assets include those assets which are subject to donorrestriction and for which the applicable restriction was not met as of the year end ofthe current reporting period.

Permanently restricted net assets include those assets which are subject to a non-expiring donor restriction, such as endowments.

Comparative Financial Information - The financial statements include certain prior-year summarized

comparative information in total but not by net asset class or functional expense categories. Suchinformation does not include sufficient detail to constitute a presentation in conformity with generallyaccepted accounting principles. Accordingly, such information should be read in conjunction with theAssociation's financial statements for the year ended September 30, 2009, from which the summarizedinformation was derived.

Use of Estimates - The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of support, revenue and expenses during the period.Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents - Cash and cash equivalents include highly liquid investments andinvestments with a maturity of three months or less, and exclude donor restricted receipts andamounts designated for long-term purposes. The Association maintains its cash in bank depositaccounts which, at times, may exceed Federally insured limits. The Association has not experiencedany losses in such accounts. Management believes it is not exposed to any significant risk on cashaccounts.

Pledges Receivables (Promises to Give) - Unconditional promises to give, less an allowance foruncollectible amounts, are recognized as support in the period received and as assets, decreases ofliabilities, or expenses depending on the form of the benefits received. Promises are recorded at netrealizable value if expected to be collected in one year and at fair value if expected to be collected inmore than one year. Conditional promises to give, if any, are recognized only when the conditions onwhich they depend are substantially met and the promises become unconditional.

Pledges and Grants Receivable - Allowance for Doubtful Accounts - The Association uses theallowance method to reserve for uncollectible receivables. The allowance is based on prior years'experience and management's analysis of specific promises made by the donors. As of September 30,2010 and 2009, the Association has an allowance for doubtful accounts of $0 and $9,780,respectively.

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Investments - Investments in marketable securities with readily determinable fair values and allinvestments in debt securities are reported at their fair values in the statement of financial position.Unrealized gains and losses are included in the change in net assets. Investment income and gainsrestricted by a donor are reported as increases in restricted net assets.

Fair Value Measurements - Fair value is defined as "the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between market participants at the measurementdate."

A hierarchy has been established to prioritize the inputs to valuation techniques used to measure fairvalue. The hierarchy gives the highest ranking to fair values determined using unadjusted quotedprices in active markets for identical assets (Level 1) and the lowest ranking to fair values determinedusing methodologies and models with unobservable inputs (Level 3). Observable inputs are those thatmarket participants would use in pricing the asset based on market data obtained from sourcesindependent of the Association. Unobservable inputs reflect the Associations assumption about theinputs market participants would use in pricing the asset or liability developed based on the bestinformation available in the circumstances.

The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 - Values are unadjusted quoted prices for identical assets and liabilities inactive markets accessible at the measurement date.

Level 2 - Inputs include quoted prices for similar assets or liabilities in activemarkets, quoted prices from those willing to trade in markets that are not active, or

other inputs that are observable or can be corroborated by market data for the term ofthe instrument. Such inputs include market interest rates and volatilities, spreads andyield curves.

Level 3 - Certain inputs are unobservable (supported by little or no market activity)and significant to the fair value measurement. Unobservable inputs reflect theAssociations best estimate of what hypothetical market participants would use todetermine a transaction price for the asset or liability at the reporting date.

Property and Equipment - Property and equipment are recorded at cost or estimated fair value fordonated items. Equipment purchases over $5,000 are capitalized. The cost of repairs andmaintenance which do not improve or extend the lives of the respective assets are expensed currently.Depreciation is computed on the straight-line method based on the estimated useful lives of the assets,

which range from 3 to 30 years. Depreciation is charged to the activity benefiting from the use of theproperty or equipment.

Accrued Vacation - Accrued vacation represents vacation earned, but not taken as of September 30,2010 and 2009. The accrued vacation balance as of September 30, 2010 and 2009 was$90,445 and $70,750, respectively.

Revenue Recognition - The Association recognizes support and revenue on the accrual basis ofaccounting. Revenue from grants which have been classified as "exchange transactions" and programfees are recognized as revenue in the period in which the service is provided.

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Deferred Revenue - The Association receives payments during the year in advance for variousperformances. As of September 30, 2010 and 2009, $234,268 and $202,038 had not been earned andhas been recorded as deferred revenue.

Contributions - Contributions are recognized when the donor makes a pledge to give that is, insubstance, an unconditional promise. Contributions are recorded as unrestricted, temporarilyrestricted, or permanently restricted depending on the nature of donor restrictions. Temporarilyrestricted contributions are reported as increases in restricted net assets. When the restriction is metthe amount is shown as a reclassification of restricted net assets to unrestricted net assets.

Contributions In-Kind - Donated equipment and other donated goods are recorded at their estimatedfair value as of the date of the donation. Contributed services, which require a specialized skill andwhich the Association would have paid for if not donated, are recorded at the estimated fair value atthe time the services are rendered. The Association also receives donated services that do not requirespecific expertise but which are nonetheless central to the Association's operations. While thesecontributed services are not reflected in the financial statements the estimated value of these servicesis disclosed in Note 15.

Expense Allocation - The costs of providing the various programs and other activities have beensummarized on a functional basis in the statement of activities and in the statement of functionalexpenses. Accordingly, certain costs have been allocated among the programs and supportingservices benefited. Indirect expenses are allocated based upon estimated functional usage by time orother appropriate means.

Income Taxes - Montalvo Association is exempt from federal income taxes under Section 501(c)(3) of

the Internal Revenue Code and state income taxes under Section 23701(d) of the California RevenueTaxation Code. Accordingly, no provision for income taxes has been made in the accompanyingstatements. In addition, the Association qualifies for the charitable contribution deduction underSection 170(b)(1)(A) of the Internal Revenue Code and has been classified as an organization that isnot a private foundation under Section 509(a)(1) of the Internal Revenue Code.

Uncertainty in Income Taxes - Effective October 1, 2009 the Association implemented the newaccounting requirements associated with uncertainty in income taxes. Accordingly, an entity shallinitially recognize the financial statement effects of a tax position when it is more likely than not,based on the technical merits, that the position will be sustained upon examination. It also providesguidance for derecognition, classification, interest and penalties, accounting in interim periods,disclosure and transition. The Association believes that it has appropriate support for any taxpositions taken, and as such, does not have any uncertain tax positions that are material to thefinancial statements.

Advertising - The Association's policy is to expense advertising costs as the costs are incurred.Advertising expense for the years ended September 30, 2010 and 2009 was $115,811 and $74,020,respectively.

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Subsequent Events - Management of the Association has evaluated events and transactionssubsequent to September 30, 2010 for potential recognition or disclosure in the financial statements.The Association did not have subsequent events that required recognition or disclosure in thefinancial statements for the fiscal year ended September 30, 2010. Subsequent events have beenevaluated through the date the financial statements became available to be issued, December 13, 2010.

NOTE 5 - INVESTMENTS:

Montalvo Association's investments are recorded at fair value and have been categorized based upon afair value hierarchy. Investments held at September 30, 2010 are considered Level 1 or Level 2 (seeNote 4), and were as follows:

Fair Value

Quoted Pricesin Active

Markets forIdentical Assets

(Level 1)

SignificantOther

ObservableInputs (Level 2)

Common Stock $ 501,737 $ 501,737 $ -Domestic Equity Fund 38,807 38,807 -International Equity Funds 189,080 189,080 -Government Obligations 168,493 168,493 -Treasury Inflation Protected Securities 231,582 231,582 -

Government National Mortgage Association 1,472 - 1,472Domestic Bond Funds 292,707 292,707 -

Total Investments $ 1,423,878 $ 1,422,406 $ 1,472

Investments held at September 30, 2009 are considered Level 1 or Level 2 (see Note 4), and were asfollows:

Fair Value

Quoted Pricesin Active

Markets forIdentical Assets

(Level 1)

SignificantOther

Observable

Inputs (Level 2)

Common Stock $ 382,412 $ 382,412 $ -International Equity Funds 82,121 82,121 -Government Obligations 165,980 165,980 -Treasury Inflation Protected Securities 235,334 235,334 -Government National Mortgage Association 1,514 - 1,514Domestic Bond Funds 286,264 286,264 -

Total Investments $ 1,153,625 $ 1,152,111 $ 1,514

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NOTE 5 - INVESTMENTS (Continued):

Investment income (loss) included in the statement of activities for the years ended September 30,consisted of the following:

2010 2009

Dividends and Interest $ 37,293 $ 42,217Net Realized and Unrealized Gain (Loss) on Investments 85,649 (51,996)

Total Investment Income (Loss) $ 122,942 $ (9,779)

NOTE 6 - PLEDGES AND GRANTS RECEIVABLE:

Pledges and grants receivable consisted of the following at September 30, 2010:

PledgesReceivable

GrantsReceivable Total

Amounts Due in:Less than One Year $ 520,000 $ 325,000 $ 845,000One to Five Years 1,100,000 105,000 1,205,000

Pledges and Grants Receivable 1,620,000 430,000 2,050,000

Less: Allowance for Doubtful Accounts - - -Less: Present Value Discount (62,648) (4,038) (66,686)

Pledges and Grants Receivable, Net 1,557,352 425,962 1,983,314Less: Current Portion (520,000) (325,000) (845,000)

Pledges and Grants Receivable, Net ofCurrent Portion $ 1,037,352 $ 100,962 $ 1,138,314

Pledges and grants receivable consisted of the following at September 30, 2009:

PledgesReceivable

GrantsReceivable Total

Amounts Due in:Less than One Year $ 290,762 $ 137,516 $ 428,278

One to Five Years 950,000 50,000 1,000,000

Pledges and Grants Receivable 1,240,762 187,516 1,428,278

Less: Allowance for Doubtful Accounts (9,780) - (9,780)Less: Present Value Discount (69,396) (1,923) (71,319)

Pledges and Grants Receivable, Net 1,161,586 185,593 1,347,179Less: Current Portion (280,982) (137,516) (418,498)

Pledges and Grants Receivable, Net ofCurrent Portion $ 880,604 $ 48,077 $ 928,681

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NOTE 7 - PROPERTY AND EQUIPMENT:

The cost and related accumulated depreciation of the property and equipment at September 30,consisted of the following:

2010 2009

Artists Residency $ 8,556,990 $ 8,564,164Building Improvements 4,204,505 4,194,745Carriage House 1,254,535 1,254,535Office Equipment 584,712 547,915Building Improvements - East Wing 534,755 534,755Gallery 455,873 455,873Furniture and Fixtures 284,332 250,026Land Improvements 253,242 230,310

Vehicles 75,966 75,966Land 53,000 53,000Construction in Progress 28,700 -

16,286,610 16,161,289Less: Accumulated Depreciation (7,027,566) (6,396,404)

Property and Equipment, Net $ 9,259,044 $ 9,764,885

Property and equipment have been recorded at cost, or fair value if donated, together with relateddepreciation expense. The Association's policy is to remove property and equipment from theaccounts once they have been fully depreciated. Depreciation expense for the years ended September

30, 2010 and 2009 was $638,336 and $649,749, respectively.

NOTE 8 - NOTE PAYABLE:

The Association has borrowed funds from the Silicon Valley Arts Fund, due June 30 of every year,renewable annually, with no interest. This loan was made from the Association's allocation ofundisbursed funds held in trust for Montalvo by the Silicon Valley Arts Fund, as described in Note13. The balance due at September 30, 2009 was $170,300. The Silicon Valley Arts Fund wasdissolved in August 2010, and all assets held by the Silicon Valley Arts Fund on behalf of theAssociation were transferred to the Association.

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NOTE 9 - UNRESTRICTED NET ASSETS:

Board-Designated Funds - Board-designated funds represent resources currently available for use, butexpendable only for those operating purposes specified by the Board of Trustees. Board-designatedfunds consisted of the following at September 30:

2010 2009

Montalvo Service Group $ 112,999 $ 124,833Board-Designated Operating Reserve 720,218 501,135Emergency Fund 250,000 250,000

Total Board-Designated Net Assets $ 1,083,217 $ 875,968

Property and Equipment Fund (Expended Funds) - The following unrestricted net assets wereexpended at September 30,:

2010 2009

Purchased and Donated Property and Equipment, Net ofAccumulated Depreciation

$ 9,259,044 $ 9,764,885

NOTE 10 - TEMPORARILY RESTRICTED NET ASSETS:

During 1995, the Association began a Capital Campaign to raise funds to make significantrenovations to the Carriage House Theater and to build new cottages for the Artists ResidencyProgram. In 2006 the campaign was completed and at September 30, 2010 and 2009 there were$0 and $214,780, in pledges receivable.

The Association's temporarily restricted net assets at September 30, consisted of the following:

2010 2009

Charmaine and Dan Warmenhoven - Time Restriction $ 750,000 $ -Five Year Individual Gift - Lucas Arts Program (LAP) and

Education 693,047 943,773Hewlett Foundation - Time Restriction 288,462 -Packard Foundation - Time Restriction 100,000 -

Packard Foundation - Teaching Garden 39,305 -Wells Fargo Grant - Education Outreach 25,000 25,000Interest Earned 21,248 -Four Year Individual Gift - Time Restriction - 80,000Hewlett Foundation - Performing Arts - 80,000James Irvine Grant - LAP Residencies 166,410Others (Individually Less Than $20,000) 62,804 45,743

Total Temporarily Restricted Net Assets $ 1,979,866 $ 1,340,926

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NOTE 11 - NET ASSETS RELEASED FROM RESTRICTIONS:

Net assets were released from restrictions during the year by incurring expenses satisfying therestricted purpose or the occurrence of other events specified by donors during the year endedSeptember 30, 2010 as follows:

2010

Five Year Individual Gift - Lucas Art Program (LAP) and Education $ 250,726Charmaine and Dan Warmenhoven - Time Restriction 250,000James Irvine Grant - LAP Residencies 166,410Hewlett Foundation - Time Restriction 91,538Hewlett Foundation - Performing Arts 80,000Four Year Individual Gift - Time Restriction 80,000James Irvine Grant - LAP Residencies 25,000

Comerica Grant - Education Outreach 20,000Others (Individually Less Than $20,000) 99,882

Total Net Assets Released from Restrictions $ 1,063,556

NOTE 12 - PERMANENTLY RESTRICTED NET ASSETS:

Permanently restricted net assets consist of endowment fund investments that represent the principalamount of gifts and bequests accepted with the donor stipulation that the principal be maintainedintact in perpetuity or for a specified period, with only the income to be utilized for operations. Theendowment funds were made up of the following at September 30:

2010 2009

Phelan Trust $ 268,653 $ 268,653Taylor 104,996 104,996Doyle 100,000 100,000Silicon Valley Arts Fund 96,261 -Residency Scholarship 48,615 48,615Hinman 11,758 11,758Gilbert 10,974 10,974Burbank 10,000 10,000

Total Permanently Restricted Net Assets $ 651,257 $ 554,996

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NOTE 13 - SILICON VALLEY ARTS FUND - VILLA MONTALVO:

The Association was the recipient of endowment fund earnings from the Silicon Valley Arts Fundheld in trust by the Silicon Valley Community Foundation (the "Foundation"). The trust wasestablished with funds from the David and Lucille Packard Foundation, the William and FloraHewlett Foundation, the City of San Jose and other foundations, individuals, corporations and publicagencies.

The Silicon Valley Arts Fund (SVAF) held approximately $19,000 of undisbursed funds for theAssociation as of September 30, 2009, not including the loan of $170,300 to the Association asdescribed in Note 8. Distributions of approximately $1,300 were received from the Silicon ValleyArts Fund for the year ended September 30, 2009.

During the year ended September 30, 2010, the Silicon Valley Community Foundation terminated theSVAF agreement and distributed all assets to the Association. A $96,261 payout of the SVAF wastransferred to permanently restricted endowment funds. As part of the SVAF termination agreement,the Foundation accepted repayment of the Associations reserve fund note payable from availablereserve fund assets held at the Foundation. As such, the Association recognized the repayment of theSVAF note payable as contribution income as $170,300 in the accompanying statement of activities.In addition, as part of the termination agreement, the Association received $4,214 in reserve fundswhich was recognized as contribution income.

NOTE 14 - ENDOWMENT:

The Montalvo Endowment Fund - The Montalvo Endowment Fund consists of its donor-restricted

endowment fund. As required by Generally Accepted Accounting Principles (GAAP), net assetsassociated with endowment funds are classified and reported based on the existence or absence ofdonor-imposed restrictions.

Interpretation of Relevant Law - The Board of Trustees of Montalvo Association has interpreted theCalifornia version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) asrequiring the preservation of the fair value of the original gift as of the gift date of the donor-restrictedendowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation,Montalvo Association classifies as permanently restricted net assets (a) the original value of giftsdonated to the permanent endowment, (b) the original value of subsequent gifts to the permanentendowment, and (c) accumulations to the permanent endowment made in accordance with thedirection of the applicable donor gift instrument at the time the accumulation is added to the fund.The remaining portion of the donor-restricted endowment fund that is not classified in permanently

restricted net assets is classified as temporarily restricted net assets until those amounts areappropriated for expenditure by the Association in a manner consistent with the standard of prudenceprescribed by the California version of UPMIFA. In accordance with the California version ofUPMIFA, the Association considers the following factors in making a determination to appropriate oraccumulate donor-restricted endowment funds:

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NOTE 14 - ENDOWMENT (Continued):

(1) The duration and preservation of the fund(2) The purposes of Montalvo Association and the donor-restricted endowment fund(3) General economic conditions(4) The possible effect of inflation and deflation(5) The expected total return from income and the appreciation of investments(6) Other resources of Montalvo Association(7) The investment policies of Montalvo Association

Funds with Deficiencies - From time to time, the fair value of assets associated with donor-restrictedendowment funds may fall below the permanently restricted net assets balance. In accordance withGenerally Accepted Accounting Principles (GAAP), deficiencies of this nature that are reported inunrestricted net assets totaled $(15,175) and $(31,936) as of September 30, 2010 and 2009,

respectively. These deficiencies resulted from unfavorable market fluctuations that occurred duringthe year ended September 30, 2009.

Investment Return Objectives, Risk Parameters and Strategies - The primary objective for MontalvoAssociation's investment policy has been to employ a total return approach to achieve long-termgrowth with meaningful exposure to equities, placing current income as a secondary consideration.This is consistent with the original investment goals of preservation of the purchasing power ofcapital and the construction of a well-diversified, high-quality investment portfolio. Currently thetarget asset allocation is 50% equities. The minimum total return objective over a market cycle (3-5years) has been to exceed the inflation rate by 3% net of fees. The investment time horizon for theFund is long, although in recent years it has been shortened somewhat due to the need for principaldraws. Historically, the Fund has possessed an above average tolerance for risk as defined by theability to withstand moderate fluctuations in account value over a market cycle. This is in keepingwith the objective of growth with long time horizons, although recent year's withdrawal rates havesomewhat reduced this tolerance level.

Montalvo Endowment Fund Distribution Guidelines - In accordance with, and subject to, the principalrequisite UPMIFA factors set forth above, Montalvo Association's distribution guidelines shall be asfollows:

Montalvo Association's Finance Committee may authorize disbursement each year, for the generalbudgetary purposes of Montalvo Association, up to four percent (4%) of the fair market value(determined on the average fair market value of the prior 12 quarters through the fiscal year precedingthe fiscal year in which the distribution is planned) from the Donor-Restricted Endowment Fund. Inthe event that income from the Donor-Restricted Endowment Fund exceeds four percent (4%) in any

given year, the Montalvo Association Board of Trustees shall have the discretion whether to disbursesuch excess up to an amount not to exceed seven percent (7%) of the Donor-Restricted EndowmentFund's average fair market value of the prior 12 quarters as described above. For the purposes of thisparagraph the term "income" shall include, but not be limited to interest, dividends and appreciationof assets within the Donor-Restricted Endowment Fund. In addition, no borrowing from the Donor-Restricted Endowment Fund may be allowed at any time.

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Except for the UPMIFA requirements and the guidelines regarding distribution of principal orborrowing from the Donor-Restricted Endowment Fund as set forth in detail above, MontalvoAssociation's distribution guidelines may be modified at the sole discretion of the Board of Trusteesas may be necessary to meet the needs of Montalvo Association.

Endowment Net Asset Composition by Type of Fund as of September 30, 2010:



Donor-RestrictedEndowment Funds $ (15,175) $ - $ 651,257 $ 636,082

Endowment Net Asset Composition by Type of Fund as of September 30, 2009:



Donor-RestrictedEndowment Funds $ (31,936) $ - $ 554,996 $ 523,060

Changes in Endowment Net Assets for the Fiscal Year Ended September 30, 2010:

Unrestricted TemporarilyRestricted PermanentlyRestricted TotalEndowment Net Assets,

Beginning of Year $ (31,936) $ - $ 554,996 $ 523,060

Contributions - - 96,261 96,261Dividends and Interest 7,039 - - 7,039Net Realized and

Unrealized Gain 14,209 - - 14,209Investment Fees (4,487) - - (4,487)

Endowment NetAssets, End of

Year $ (15,175) $ - $ 651,257 $ 636,082

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Changes in Endowment Net Assets for the Fiscal Year Ended September 30, 2009:



Endowment Net Assets,Beginning of Year $ - $ - $ 554,996 $ 554,996

Dividends and Interest 17,452 - - 17,452Net Realized and

Unrealized Loss (22,396) - - (22,396)Investment Fees (4,932) - - (4,932)Amounts Appropriated

for Expenditure (22,060) - - (22,060)

Endowment NetAssets, End ofYear $ (31,936) $ - $ 554,996 $ 523,060

NOTE 15 - CONTRIBUTIONS IN-KIND:

The estimated fair value of donated supplies, furniture, equipment, expert services and facilities arerecorded as contributions. During the fiscal years ended September 30, the following in-kindcontributions were received by the Association:

2010 2009

Piano $ 17,200 $ -Furniture Expense 15,799 4,805Hotel Room Nights for Artists 15,675 -Professional Services 7,016 1,896Artwork 3,500 -Building Maintenance 2,488 1,002Plants 1,110 -Renovation of Italianate Garden - 28,787Building Improvements - 6,140

Montalvo Donated Sponsor Tickets - 3,250Software - 2,394Advertising - 1,665

In-Kind Contributions for Operations 62,788 49,939

Special Event Contributions 60,493 51,780

Total Contributions In-Kind $ 123,281 $ 101,719

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NOTE 15 - CONTRIBUTIONS IN-KIND (Continued):

During the years ended September 30, 2010 and 2009, the Association also received donated servicesfrom volunteers that do not require specific expertise but which are nonetheless central to theAssociation's operations. During the years ended September 30, 2010 and 2009, volunteers and theMontalvo Service Group contributed 12,930 and 12,135 hours of services in support of cultural artsactivities. The estimated value of volunteer hours based on the nature of the service and the amountof time donated is estimated to be $269,591 and $245,734, respectively. In accordance with generallyaccepted accounting principles the value of these services is not reflected in the financial statements.

NOTE 16 - RELATED PARTY TRANSACTIONS:

The Association's volunteer executive board members are active in both the oversight of the

fundraising events, activities and making private contributions. Contributions received from theboard members were approximately $1,921,325 and $2,400,000 for the years ended September 30,2010 and 2009, respectively.

NOTE 17 - EMPLOYEE BENEFIT PLANS:

During 2000, the Association established a defined contribution plan for all eligible employees whoare 18 years or above and have completed three months of service. The Association is allowed tomake a discretionary contribution equal to 3% of all eligible employees' compensation. Nocontribution was made to this plan for the years ended September 30, 2010 and 2009.

During 2006, the Association established a nonqualified deferred compensation plan for certainemployees. The Association is allowed to make a discretionary employer contribution to the Plan.As of September 30, 2009 there were no employees in this plan, and no contribution was made to thisplan for the year ended September 30, 2009. The plan was terminated during the year endedSeptember 30, 2010.

NOTE 18 - MONTALVO SERVICE GROUP:

The Montalvo Service Group (the Group) was established in 1954. Its primary purpose is to providefinancial assistance to the Association. The Group is an internal part of the Association, but operatedunder separate bylaws as a committee of the Association. During the years endedSeptember 30, 2010 and 2009, cash of $29,655 and $25,000 was transferred by the Group to theAssociation, respectively. Additionally, the Group paid for $37,300 in repair and upgrade costs forthe Villa HVAC system during the year ended September 30, 2010 and paid for $11,000 in repair andrestoration costs for the Villa furnishings and formal gardens during the year ended September 30,2009.

FY 2010 Audited Financial Statements

Documents