: The total deficit, according to the accounting rules called GAAP, that reflects our operating deficit, plus prior-year spend-down and our investment losses and pension liabilities, is $887 million. This figure also shows our change in net assets, because if you add last year 9s economic impact on our investments and endowment, plus the federal pension fund requirement, this financial hit boosts the deficit significantly, to the $887 million that appears in our audited financial statements.<br><br> Our combined market losses are around $359 million, but our performance tends to exceed that of other not-for-profits. Our pension fund requirement of $547 million represents our obligation to our employees. Pension fund and investment results are projected to improve significantly for FY10.<br><br> $613 million : Red Cross debt. While we have put the Red Cross on the path to financial sustainability, our large debt is a challenge. Over the past year, we 9ve made great strides in responding to disasters and other emergencies without taking on new debt.<br><br> Our successful $100 million fundraising campaign essentially enabled us to cover the costs of last year 9s devastating hurricanes. We 9ve gone to our bankers and have outlined our financial management strategy. They have responded that our credit is still good and we remain able to borrow additional working capital, should a major disaster strike.<br><br> Largely made up of low-interest lines of credit and bonds, the bulk of Red Cross debt is due after 2011. However, $116 million is current, or due back in 2010. We hope this detail will help place the American Red Cross fiscal year 2009 Audited Financial Statements in proper perspective.<br><br> Brian Rhoa Chief Financial Officer THE AMERICAN NATIONAL RED CROSS Consolidated Financial Statements June 30, 2009 (With Independent Auditors 9 Report Thereon) 23444WDC KPMG LLP 2001 M Street, NW Washington, DC 20036 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.<br><br> Independent Auditors 9 Report The Board of Governors The American National Red Cross: We have audited the accompanying consolidated statement of financial position of the American National Red Cross (the Organization) as of June 30, 2009, and the related consolidated statements of activities, functional expenses and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Organization. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.<br><br> We did not audit the financial statements of certain chapters, which statements reflect total assets constituting 28 percent and total operating revenues and gains constituting 17 percent of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for such chapters, is based solely on the reports of the other auditors. The prior year summarized comparative information has been derived from the Organization 9s 2008 consolidated financial statements and, in our report dated October 13, 2008, we expressed an unqualified opinion on those consolidated financial statements.<br><br> We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organizations 9 internal control over financial reporting.<br><br> Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.<br><br> In our opinion, based on our audit and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the American National Red Cross as of June 30, 2009, and the changes in its net assets, cash flows and its functional expenses for the year then ended in conformity with U.S. generally accepted accounting principles. As discussed in notes 2 and 8 to the consolidated financial statements, the Organization adopted the provisions of FASB Staff Position No.<br><br> FAS 117-1: Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds and FASB Statement No. 157 , Fair Value Measurements , in 2009. October 15, 2009 THE AMERICAN NATIONAL RED CROSS Consolidated Statement of Financial Position June 30, 2009 (with comparative information as of June 30, 2008) (In thousands) Assets 2009 2008 Current assets: Cash and cash equivalents 214,606 $ 220,797 $ Investments (Note 8) 590,759 835,495 Trade receivables, including grants, net of allowance for doubtful accounts of $3,576 in 2009 and $4,828 in 2008 130,969 70,150 Contributions receivable (Note 3) 78,464 95,010 Inventories, net of allowance for obsolescence of $1,922 in 2009 and $2,858 in 2008 149,897 153,347 Other current assets 21,062 21,680 Total current assets 1,185,757 1,396,479 Investments (Note 8) 1,003,962 1,309,734 Contributions receivable (Note 3) 20,438 25,430 Land, buildings, and other property, net (Note 4) 1,143,697 1,163,805 Other assets (Note 9) 164,371 101,832 Total assets 3,518,225 3,997,280 Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses 323,585 341,535 Current portion of debt (Note 5) 115,613 256,489 Postretirement benefits (Note 10) 4,777 6,671 Other current liabilities (Note 9) 28,377 27,591 Total current liabilities 472,352 632,286 Debt (Note 5) 497,681 347,632 Pension and postretirement benefits (Note 10) 724,237 326,528 Other liabilities (Notes 5 and 9) 151,489 131,197 Total liabilities 1,845,759 1,437,643 Net assets (Notes 2 and 7): Unrestricted net assets 459,983 1,035,920 Temporarily restricted net assets 620,214 930,160 Permanently restricted net assets 592,269 593,557 Total net assets 1,672,466 2,559,637 Commitments and contingencies (Notes 5, 6, 10, 11, and 13) Total liabilities and net assets 3,518,225 $ 3,997,280 $ See accompanying notes to the consolidated financial statements.<br><br> 2 THE AMERICAN NATIONAL RED CROSS Consolidated Statement of Activities Year ended June 30, 2009 (with summarized information for the year ended June 30, 2008) (In thousands) Temporarily Permanently Totals Unrestricted Restricted Restricted 2009 2008 Operating revenues and gains: Corporate, foundation and individual giving 195,326 $ 188,239 $ - $ 383,565 $ 411,617 $ 43,130 86,783 - 129,913 141,700 Legacies and bequests 58,880 7,601 25,883 92,364 115,921 Services and materials 21,870 27,913 - 49,783 45,064 Grants 26,342 55,304 - 81,646 68,578 Products and services: Biomedical 2,213,961 - - 2,213,961 2,118,581 Program materials 149,473 135 - 149,608 150,653 Contracts, including federal government 129,778 - - 129,778 51,363 Investment income (Note 8) 42,683 32,818 - 75,501 92,481 Other revenues 14,150 - - 14,150 8,188 Net assets released from restrictions 546,949 (546,949) - - - Total operating revenues and gains 3,442,542 (148,156) 25,883 3,320,269 3,204,146 Operating expenses: Program services: Services to the Armed Forces 56,511 - - 56,511 57,900 Biomedical services (Note 13) 2,216,730 - - 2,216,730 2,204,010 Community services 113,846 - - 113,846 127,450 Domestic disaster services 402,372 - - 402,372 502,216 Health and safety services 215,492 - - 215,492 238,992 International relief and development services 156,042 - - 156,042 191,892 Total program services 3,160,993 - - 3,160,993 3,322,460 Supporting services: Fund raising (Note 12) 126,580 - - 126,580 143,425 Management and general 152,473 - - 152,473 218,477 Total supporting services 279,053 - - 279,053 361,902 Total operating expenses 3,440,046 - - 3,440,046 3,684,362 Change in net assets from operations 2,496 (148,156) 25,883 (119,777) (480,216) (170,103) (161,790) (27,171) (359,064) (107,520) (408,330) - - (408,330) (76,930) Change in net assets (575,937) (309,946) (1,288) (887,171) (664,666) Net assets, beginning of year 1,035,920 930,160 593,557 2,559,637 3,224,303 Net assets, end of year 459,983 $ 620,214 $ 592,269 $ 1,672,466 $ 2,559,637 $ See accompanying notes to the consolidated financial statements. Nonoperating losses, net (Notes 5 and 8) Pension-related changes other than net periodic benefit cost (Note 10) Contributions: United Way and other federated 3 THE AMERICAN NATIONAL RED CROSS Statement of Functional Expenses Year ended June 30, 2009 (with summarized information for the year ended June 30, 2008) (In thousands) Program Services International Domestic Health and Relief and Total Service to Biomedical Community Disaster Safety Development Program Armed Forces Services Services Services Services Services Services Salaries and wages 30,420 $ 966,717 $ 45,187 $ 98,327 $ 101,357 $ 18,419 $ 1,260,427 $ Employee benefits 7,672 253,506 11,416 25,502 24,755 4,892 327,743 Subtotal 38,092 1,220,223 56,603 123,829 126,112 23,311 1,588,170 Travel and maintenance 1,476 31,461 1,890 30,578 2,864 3,441 71,710 Equipment maintenance and rental 1,002 64,562 4,919 19,125 4,382 986 94,976 Supplies and materials 4,102 529,942 14,787 17,069 33,232 851 599,983 Contractual services 8,116 310,428 19,224 76,401 38,218 27,465 479,852 Financial and material assistance 2,263 2,064 12,587 120,758 2,548 99,100 239,320 Depreciation and amortization 1,460 58,050 3,836 14,612 8,136 888 86,982 Total expenses 56,511 $ 2,216,730 $ 113,846 $ 402,372 $ 215,492 $ 156,042 $ 3,160,993 $ Supporting Services Management Total Fund and Supporting Total Expenses Raising General Services 2009 2008 Salaries and wages 51,627 $ 66,847 $ 118,474 $ 1,378,901 $ 1,394,034 $ Employee benefits 12,716 17,203 29,919 357,662 393,111 Subtotal 64,343 84,050 148,393 1,736,563 1,787,145 Travel and maintenance 2,976 2,898 5,874 77,584 84,751 Equipment maintenance and rental 1,334 3,285 4,619 99,595 105,275 Supplies and materials 13,958 2,988 16,946 616,929 607,902 Contractual services 39,206 48,559 87,765 567,617 602,413 Financial and material assistance 1,799 1,765 3,564 242,884 384,841 Depreciation and amortization 2,964 8,928 11,892 98,874 112,035 Total expenses 126,580 $ 152,473 $ 279,053 $ 3,440,046 $ 3,684,362 $ See accompanying notes to the consolidated financial statements. 4 THE AMERICAN NATIONAL RED CROSS Consolidated Statement of Cash Flows Year ended June 30, 2009 (with comparative information for the year ended June 30, 2008) 2009 2008 Cash flows from operating activities: Change in net assets (887,171) $ (664,666) $ Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization 98,874 112,032 Provision for doubtful accounts receivable 4,578 97 Provision for obsolete inventory 574 59 Net (gain)/loss on sales of property (2,330) 299 Net investment and derivative losses 344,173 96,559 Pension related changes other than net periodic benefit cost 408,330 76,930 Permanently restricted contributions (25,883) (39,095) Changes in operating assets and liabilities: Receivables (43,860) 40,689 Inventories 2,876 (740) Other assets (24,184) 5,428 Accounts payable and accrued expenses (17,949) (28,349) Other liabilities 18,710 13,381 Pension and postretirement benefits (12,514) 21,647 (135,776) (365,729) Cash flows from investing activities: Purchases of property (85,318) (76,882) Proceeds from sales of property 9,065 6,956 Purchases of investments (93,788) (424,572) Proceeds from sales of investments 265,339 721,482 95,298 226,984 Cash flows from financing activities: Permanently restricted contributions 25,292 34,231 Proceeds from borrowings 87,504 186,493 Repayments of debt (78,509) (72,422) Net cash provided by financing activities 34,287 148,302 Net (decrease)/increase in cash and cash equivalents (6,191) 9,557 Cash and cash equivalents, beginning of year 220,797 211,240 Cash and cash equivalents, end of year 214,606 $ 220,797 $ Supplemental disclosures of cash flow information: Cash paid during the year for interest 23,233 $ 29,687 $ Noncash investing and financing transactions: Acquisition of equipment under capital lease agreements 178 $ 312 $ See accompanying notes to the consolidated financial statements.<br><br> (In thousands) Net cash used in operating activities Net cash provided by investing activities 5 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 6 (1) Summary of Significant Accounting Policies Organization and Basis of Presentation: The American National Red Cross (the Organization) was established by an Act of the United States Congress on January 5, 1905 for the primary purposes of furnishing volunteer aid to the sick and wounded of the Armed Forces in time of war and to carry on a system of national and international relief in time of peace to mitigate the suffering caused by fire, famine, floods and other great natural calamities. The mission of the Organization has expanded since that time to help people prevent, prepare for, and respond to emergencies. The accompanying consolidated financial statements present the consolidated financial position and changes in net assets and cash flows of the Organization.<br><br> The Organization has national and international programs that are conducted by its headquarters, biomedical services, and chartered local chapters. Also included in the consolidated financial statements are the net assets and operations of Boardman Indemnity Ltd., a 100 percent-owned captive insurance subsidiary, and ARC Receivables Company, LLC, a wholly owned bankruptcy-remote special purpose entity. All significant intra-organizational accounts and transactions have been eliminated.<br><br> Program activities include services to the armed forces, biomedical services, community services, disaster services, health and safety services, and international services. Biomedical services includes activities associated with the collection, processing, testing, and distribution of whole blood and components at 36 local blood services region operations, five national testing laboratories, a biomedical research facility, and related national support functions. Net assets, revenues, gains, and losses are classified based on the existence or absence of donor-imposed restrictions.<br><br> Accordingly, the net assets of the Organization and changes therein are classified and reported as follows: Unrestricted net assets 3 Net assets that are not subject to any donor-imposed stipulations. Temporarily restricted net assets 3 Net assets subject to donor-imposed restrictions on their use that may be met either by actions of the Organization or the passage of time. Permanently restricted net assets 3 Net assets subject to donor-imposed or other legal restrictions requiring that the principal be maintained permanently by the Organization.<br><br> Generally, the donors permit the Organization to use all or part of the income earned for either general or donor-specified purposes. The consolidated financial statements are presented with certain prior year summarized comparative information. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles.<br><br> Accordingly, such information should be read in conjunction with the Organization 9s consolidated financial statements for the year ended June 30, 2008, from which the summarized information was derived. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Estimates and assumptions may also affect THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 7 disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses.<br><br> Actual results could differ from management 9s estimates. Cash Equivalents: The Organization considers all highly liquid investments purchased with an average maturity of three months or less to be cash equivalents. Cash equivalents consisted of money market mutual funds and overnight investments of approximately $84 million and $95 million as of June 30, 2009 and 2008, respectively.<br><br> Investments: Investments are reported at fair value except for certain corporate bonds and notes, common and preferred stocks and alternative funds that are reported at estimated fair value utilizing net asset values. The separately managed endowment fund accumulates realized gains and losses on security transactions which are available to meet current expenses to the extent approved by the Board of Governors. Amounts annually available for expenditure are based on the Board of Governors 9 approved spending rate used under the total-return method.<br><br> Investment income classified as operating revenue consists of interest and dividend income on investments and any gains approved for use in operations (Note 8). All other realized and unrealized gains or losses are classified as nonoperating activity and are available to support operations in future years and to offset potential market declines. Investments classified as current are available for operations in the next fiscal year.<br><br> Derivative Financial Instruments: The Organization makes limited use of derivative financial instruments for the purpose of managing interest rate risk. Derivative financial instruments are recorded at fair value. Fair Values of Financial Instruments: Effective July 1, 2008, the Organization adopted the provisions of FASB Statement No.<br><br> 157, Fair Value Measurements (SFAS No. 157) for fair value measurements of financial assets and financial liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No.<br><br> 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements (Note 8).<br><br> Investments are reported at fair value (Note 8). For fair value disclosure purposes, debt is valued at rates currently available to the Organization for issuances with similar terms and remaining maturities. Interest rate swap agreements are valued at the net present value of future cash flows attributable to the difference between the contractual variable and fixed rates in those agreements adjusted for nonperformance risk of both the counterparty and the Organization.<br><br> The carrying value of all other financial instruments approximates fair value. THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 8 The estimated fair value of the Organization 9s noncurrent debt was as follows at June 30, 2009 and 2008 (in thousands): 2009 2008 Carrying Fair Carrying Fair amount value amount value Noncurrent debt $ 497,681 $ 495,513 $ 347,632 $ 347,999 Endowment Fund: The Organization has maintained a national endowment fund since 1905. Since 1910, as stated in the bylaws of the Organization and because of public declarations as to their intended use, gifts to the American National Red Cross national headquarters under wills, trusts, and similar instruments which do not direct some other use of such funds are recorded as permanently restricted endowment funds to be kept and invested as such in perpetuity.<br><br> Based upon the manner in which the Organization has solicited and continues to solicit such gifts, it has been determined by independent legal counsel that such gifts must be placed in the endowment fund and, accordingly, reported as permanently restricted net assets. Inventories: Inventories of supplies purchased for use in program and supporting services are valued using the average cost method. Whole blood and its components are valued at the lower of average cost or market.<br><br> Land, Buildings, and Other Property: Purchases of land, buildings, and other property having a unit cost per established guidelines and a useful life of three or more years are capitalized at cost. Donated assets are capitalized at the estimated fair value at date of receipt. Interest expense incurred during a period of construction, less related interest income earned on proceeds of tax-exempt borrowings, is capitalized.<br><br> Property under capital leases is amortized over the lease term. Any gain or loss on the sale of land, buildings and other property is reported as other revenues on the consolidated statement of activities. Application development costs incurred to develop internal-use software are capitalized and amortized over the expected useful life of the software application.<br><br> Activities that are considered application development include design of software configuration and interfaces, coding, installation of hardware, and testing. All other expenses incurred to develop internal-use software are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Useful life Class of property in years Buildings 45 Building improvements 10 Equipment and software 3 3 15 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 9 Long-Lived Assets: Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.<br><br> If circumstances require a long-lived asset be tested for possible impairment, the Organization first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.<br><br> Property and Casualty Insurance: The Organization maintains various insurance policies under which it assumes a portion of each insured loss. Assumed losses are retained by the Organization through its wholly owned insurance subsidiary, Boardman Indemnity, Ltd. (Boardman).<br><br> The Organization also purchases insurance to supplement the coverage by Boardman. The liabilities for outstanding losses and incurred but not reported claims have been determined based on actuarial studies and are reported as other liabilities in the consolidated statement of financial position, and were approximately $110 million and $94 million at June 30, 2009 and 2008, respectively. Revenue Recognition: Contributions, which include unconditional promises to give (pledges), are recognized as revenues in the period received or promised.<br><br> Conditional contributions are recorded when the conditions have been substantially met. Contributions are considered to be unrestricted unless specifically restricted by the donor. The Organization reports contributions in the temporarily or permanently restricted net asset class if they are received with donor stipulations as to their use.<br><br> When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are released and reclassified to unrestricted net assets in the consolidated statement of activities. Donor-restricted contributions are initially reported in the temporarily restricted net asset class, even if it is anticipated such restrictions will be met in the current reporting period. Products and services revenue, which arises principally from sales of whole blood and components and health and safety course fees, is generally recognized upon delivery of the product or services to the customer.<br><br> Revenues from federal agencies are generally reported as unrestricted contract revenue as qualifying expenses are incurred under the agreement. Gains and losses on investments and other assets and liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 10 Contributed Services and Materials: Contributed services are reported at fair value in the financial statements for voluntary donations of services when those services (1) create or enhance non-financial assets or (2) require specialized skills provided by individuals possessing those skills and are services which would be typically purchased if not provided by donation.<br><br> The Organization recorded contributed services revenue for the years ended June 30, 2009 and 2008 of approximately $5 million and $12 million, respectively, mostly in support of the disaster services program. Donated materials are recorded at their fair value at the date of the gift. Gifts of long-lived assets are recorded as restricted support.<br><br> This restriction is released ratably over the useful life of the asset. Research and Development Costs: Since 1956, the Organization has engaged in blood research to further enhance the safety of the blood supply. For the years ended June 30, 2009 and 2008, research and development expenses incurred by Biomedical Services was approximately $6 million and $7 million, respectively.<br><br> Income Taxes: The American National Red Cross is a not-for-profit organization incorporated by the U.S. Congress through the issuance of a federal charter. The Organization is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, except on net income derived from unrelated business activities.<br><br> For the year ended June 30, 2009, the Organization has determined that no income taxes are due for its activities. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements. Accounts Receivable Securitization: The Organization has an accounts receivable securitization program whereby the Organization sells receivables in securitization transactions and retains a subordinated interest and servicing rights to those receivables.<br><br> The Organization accounts for the program under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (SFAS No. 140).<br><br> The gain or loss on sales of receivables is determined at the date of transfer based upon the relative fair value of the assets sold and the interests retained. The Organization estimates fair value based on the present value of future expected cash flows using management 9s best estimates of the key assumptions, including collection period and discount rates (Note 11.) Recently Issued Accounting Standards: In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1, Employers 9 Disclosures about Postretirement Benefit Plan Assets . FSP FAS 132(R)-1 provides guidance on an employer 9s disclosures about plan assets of a defined benefit pension or other postretirement plan.<br><br> FSP FAS 132(R)-1 also includes a technical amendment to FASB Statement No. 132(R), effective immediately, which requires nonpublic entities to disclose net periodic benefit cost for each annual period for which a statement of income is presented. The disclosures about plan assets required by FSP FAS 132(R)-1 must be provided for fiscal years ending after December 15, 2009.<br><br> The Organization is currently evaluating the impact of the FSP on its disclosures about plan assets. In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No.<br><br> 140 . SFAS No. 166 eliminates the concept of a cqualifying special-purpose entity d and associated guidance that had been a significant source of complexity.<br><br> SFAS No. 166 creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, provides clarification on other sale-accounting criteria and changes the initial measurement of a transferor 9s interest in transferred financial assets. SFAS No.<br><br> 166 is effective for financial statements whose first reporting period THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 11 begins after November 15, 2009. The Organization is evaluating the impact SFAS No. 166 will have on the financial statements.<br><br> Reclassifications: Certain reclassifications have been made to prior year amounts to conform to the current year presentation. (2) Endowments Effective January 23, 2008, the District of Columbia enacted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the provisions of which apply to endowment funds existing on or established after that date. The Organization is required to act prudently when making decisions to spend or accumulate donor restricted endowment assets and in doing so to consider a number of factors including the duration and preservation of its donor restricted endowment funds.<br><br> The Organization classifies as permanently restricted net assets the original value of gifts donated to the permanent endowment. The remaining portion of the endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Organization in a manner consistent with the standard of prudence prescribed by UPMIFA. The Organization has adopted and the Governing Board has approved the Statement of Investment Policies and Objectives for the Endowment Fund.<br><br> This policy has identified an appropriate risk posture for the fund, stated expectations and objectives for the fund, provides asset allocation guidelines and establishes criteria to monitor and evaluate the performance results of the funds managers. The Organization expects the Endowment Fund to provide an average real rate of return of 5% annually. To satisfy its long term rate of return objectives, the Organization relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends).<br><br> The Organization targets an investment return over a seven year period. The Organization makes distributions from income earned on the endowment fund for current operations using the total return method. In establishing this method, the Organization considered the long-term expected return on its funds.<br><br> Under the total return method, distributions consist of net investment income and may, under certain conditions, include a portion of the cumulative realized and unrealized gains. The Board of Governors approves the spending rate, calculated as a percentage of the five-year calendar trailing average fair value of the endowment fund at the beginning of each fiscal year. A spending rate of approximately 4.7% for 2009 and 4.75% for 2008 of the trailing five-year market value was applied to each unit of the endowment fund and resulted in total distributions of approximately $33 million and $29 million for the years ended June 30, 2009 and 2008, respectively.<br><br> Approximately $17 million and $5 million of the amounts represent utilization of accumulated realized gains, for the years ended June 30, 2009 and 2008, respectively. A spending rate of approximately 3.8% of the trailing five- year market value has been approved for 2010. THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 12 Net asset classification by type of endowment as of June 30, 2009 (in thousands): Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds 4 167,459 477,349 644,808 Changes in endowment net assets for the year ended June 30, 2009 (in thousands): Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 4 $ 325,285 $ 447,292 $ 772,577 Investment return: Investment income 4 32,491 4 32,491 Net depreciation (realized and unrealized gains and losses) 4 (157,690) 4 (157,690) Total investment return 4 (125,199) 4 (125,199) Contributions 4 4 30,057 30,057 Appropriation of assets for expenditure 4 (32,627) 4 (32,627) $ 4 $ 167,459 $ 477,349 $ 644,808 Net asset classification by type of endowment as of June 30, 2008 (in thousands): Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted en owment un s 4 325,285 447,292 772,577 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 13 Changes in endowment net assets for the year ended June 30, 2008 (in thousands): Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 4 $ 359,590 $ 404,369 $ 763,959 Investment return: Investment income 4 28,910 4 28,910 Net depreciation (realized and unrealized gains and losses) 4 (34,305) 4 (34,305) Total investment return 4 (5,395) 4 (5,395) Contributions 4 4 42,923 42,923 Appropriation of assets for expenditure 4 (28,910) 4 (28,910) $ 4 $ 325,285 $ 447,292 $ 772,577 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 14 (3) Contributions Receivable The Organization anticipates collection of outstanding contributions receivable as follows at June 30, 2009 and 2008 (in thousands): 2009 2008 Amount receivable within one year $ 80,212 $ 96,960 Amount receivable in 1 to 5 years (net discount of $3,755 and $4,888 for 2009 and 2008, respectively) 20,439 25,430 Total contributions receivable before allowance for uncollectible amounts 100,651 122,390 Less allowance for uncollectible amounts (1,749) (1,950) Contributions receivable, net 98,902 120,440 Less current portion (78,464) (95,010) Contributions receivable, net, noncurrent $ 20,438 $ 25,430 Amounts presented above have been discounted to present value using rates averaging approximately 4 %.<br><br> The Organization had commitments from donors for conditional contributions approximating $2 million and $3 million at June 30, 2009 and 2008, respectively. These pledges will be accrued in future periods as the conditions are met. (4) Land, Buildings, and Other Property The cost and accumulated depreciation of land, buildings, and other property were as follows at June 30, 2009 and 2008 (in thousands): 2009 2008 Land $ 106,087 $ 104,273 Buildings and improvements 1,119,772 1,100,186 Equipment and software 667,858 806,449 Buildings and equipment under capital lease 7,041 9,150 Total cost of assets placed in service 1,900,758 2,020,058 Less accumulated depreciation and amortization (858,387) (986,699) Construction-in-progress 101,326 130,446 Land, buildings, and other property, net $ 1,143,697 $ 1,163,805 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 15 (5) Debt Debt consists of the following at June 30, 2009 and 2008 (in thousands): 2009 2008 Borrowings on lines of credit, due in 2010 through 2011, bearing interest at an average rate of 2.4% in 2009 and 4.6% in 2008 $ 220,000 $ 235,000 Various notes, mortgages and bonds payable, bearing interest at rates ranging from 0.1% to 5.6% due 2010 through 2035, repayment terms generally require monthly payments of interest and annual principal reductions, and are generally backed only by the full faith and credit of the American National Red Cross 392,041 366,946 Total bonds and notes payable 612,041 601,946 Obligations under capital leases (Note 6) 1,253 2,175 Total debt 613,294 604,121 Less current portion (115,613) (256,489) Debt, noncurrent portion $ 497,681 $ 347,632 Certain bonds are subject to redemption prior to maturity at the option of the Organization.<br><br> Additionally, registered owners of these bonds may demand repurchase of the bonds by the bond agent or the depository for an amount equal to the principal price plus accrued interest. Letters of credit or standby credit facilities have been established with multiple banks in the aggregate amount of $240 million and $271 million as of June 30, 2009 and 2008, respectively, to provide liquidity in the event other funding is not available to repurchase these bonds. The depository and bond agent have the authority to use standby credit facilities for the repurchase of certain bonds.<br><br> Scheduled maturities and sinking fund requirements of the debt and credit agreements as of June 30, 2009 are as follows (in thousands): 2010 $ 115,613 2011 35,130 2012 34,556 2013 39,419 2014 9,588 Thereafter 378,988 Total $ 613,294 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 16 Interest expense was approximately $23 million and $27 million for the years ended June 30, 2009 and 2008, respectively, which is included in contractual services on the statement of functional expenses. Bank Lines of Credit: The Organization maintained numerous committed and uncommitted lines of credit with various banks for its working capital requirements. As of June 30, 2009 and 2008, $220 million and $235 million respectively had been borrowed under lines of credit to support operations.<br><br> The Organization had unused lines of credit outstanding of approximately $455 million at June 30, 2009, which include a $300 million private shelf agreement with Prudential (Note 14). Interest Rate Swap Agreements: The Organization applies the provisions of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities .<br><br> This standard requires certain derivative financial instruments to be recorded at fair value. The Organization held variable rate debt of approximately $461 million and $505 million at June 30, 2009 and 2008, respectively. Interest rate swap agreements are used by the Organization to mitigate the risk of changes in interest rates associated with variable interest rate indebtedness.<br><br> Under such arrangements, a portion of variable rate indebtedness is converted to fixed rates based on a notional principal amount. The interest rate swap agreements are derivative instruments that are required to be marked to market and recorded at fair value on the statement of financial position. At June 30, 2009 and 2008, the aggregate notional principal amount under the interest rate swap agreements, with maturity dates ranging from 2011 through 2013, totaled $60 million and $107 million, respectively.<br><br> At June 30, 2009 and 2008, the estimated fair value of the interest rate swap agreements was a liability of approximately $3.6 million and $1.3 million, respectively, and is included in other liabilities in the accompanying consolidated statement of financial position as of June 30, 2009 and 2008. The following table represents the interest rate swap liability that is measured at fair value on a recurring basis at June 30, 2009 (in thousands): Level 1 Level 2 Level 3 Interest rate swap $ 4 $ 3,641 $ 4 Fair Value Measurements at June 30, 2009: For the valuation of the interest rate swap at June 30, 2009, the Organization used pricing models based on significant other observable inputs as of the valuation date (Level 2), including prices of instruments with similar maturities and characteristics, interest rate yield curves and measures of interest rate volatility. The value was determined and adjusted to reflect nonperformance risk of both the counterparty and the Organization.<br><br> See Note 8 for definitions of Levels 1, 2 and 3. The change in fair value on these interest rate swap agreements was a loss of approximately $2.4 million and $0.6 million for the years ended June 30, 2009 and June 30, 2008, respectively, and is included as nonoperating losses in the consolidated statement of activities. Letters of Credit: The Organization had unused letters of credit outstanding of approximately $57 million at June 30, 2009.<br><br> THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 17 (6) Leases The Organization leases certain buildings and equipment for use in its operations. The following summarizes as of June 30, 2009, minimum future rental payments under capital and noncancelable operating leases for the fiscal years ending June 30 (in thousands): Operating Capital 2010 $ 32,018 $ 564 2011 25,110 460 2012 18,160 239 2013 13,911 76 2014 8,229 28 Thereafter 16,372 16 Total minimum lease payments $ 113,800 $ 1,383 Less amounts representing interest (130) Present value of net minimum lease payments (Note 5) $ 1,253 Total rent expense was approximately $64 million and $69 million for the years ended June 30, 2009 and 2008, respectively and is included in contractual services on the statement of functional expenses. (7) Net Assets Temporarily restricted net assets are available for the following purposes or periods at June 30, 2009 and 2008 (in thousands): 2009 2008 Disaster services $ 122,516 $ 105,498 Hurricanes Katrina, Rita & Wilma Disaster Relief 21,137 69,271 Liberty disaster relief 3 September 11 response 1,459 1,951 Biomedical services 8,431 10,273 Health and safety services 2,908 3,633 International relief and development services 56,430 59,043 Tsunami relief and recovery 88,981 176,118 Community services 11,687 10,764 Buildings and equipment 28,040 31,960 Endowment inflation adjustment reserve 141,000 148,228 Endowment assets available for future appropriation 26,459 177,057 Other specific purposes 28,731 42,101 Time restricted 82,435 94,263 Total temporarily restricted net assets $ 620,214 $ 930,160 THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 18 As a result of Hurricanes Katrina, Rita and Wilma, that hit the gulf coast in August, September, and October 2005, the Organization received monetary donations, in-kind donations, and FEMA reimbursements through the end of fiscal year 2008 totaling approximately $2.6 billion.<br><br> The Organization has provided over $2.5 billion in immediate and long term recovery efforts for these hurricanes. The remaining net asset balance of approximately $21 million will be devoted primarily to long-term recovery needs of the local communities in the wake of these storms. On December 26, 2004, a 9.0 magnitude earthquake hit off the coast of Indonesia causing a large tsunami and unprecedented damage to over 12 countries.<br><br> As a result of the generous support of the American public, the Organization has received over $581 million of donations for the Tsunami Relief and Recovery Fund. As of June 30, 2009 the Organization has provided approximately $492 million towards immediate assistance and recovery efforts. The remaining net asset balance of approximately $89 million will continue to be used for long-term tsunami recovery efforts in the following six service delivery areas: water and sanitation, psychosocial support, health, shelter, livelihoods and disaster preparedness.<br><br> Permanently restricted net assets at June 30, 2009 consist primarily of endowed contributions, the income from which is available principally to fund general operations. (8) Investments The following schedule summarizes the composition of investment return for the years ended June 30, 2009 and 2008 (in thousands): 2009 Temporarily Permanently Unrestricted restricted restricted Total Dividends and interest $ 31,284 $ 33,250 $ 30 $ 64,564 Net operating investment gains/(losses) 11,399 (432) (30) 10,937 Investment income available for operations 42,683 32,818 4 75,501 Net nonoperating investment losses (166,228) (161,790) (27,171) (355,189) Total return on investments $ (123,545) $ (128,972) $ (27,171) $ (279,688) THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 19 2008 Temporarily Permanently Unrestricted restricted restricted Total Dividends and interest $ 54,350 $ 29,992 $ 60 $ 84,402 Net operating investment gains/(losses) 8,265 (126) (60) 8,079 Investment income available for operations 62,615 29,866 4 92,481 Net nonoperating investment gains/(losses) (80,787) (34,950) 11,629 (104,108) Total return on investments $ (18,172) $ (5,084) $ 11,629 $ (11,627) The Organization adopted SFAS No. 157 on July 1, 2008 for fair value measurements of investments that are recognized and disclosed at fair value in the financial statements on a recurring basis.<br><br> SFAS No. 157 establishes 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 measurements involving significant unobservable inputs (Level 3 measurements).<br><br> The three levels of the fair value hierarchy are as follows: " Level 1 inputs are quoted prices (unadjusted) for identical investments in active markets. " Level 2 inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. " Level 3 are model derived valuations in which one or more significant inputs or significant value drivers are unobservable.<br><br> In certain cases, the inputs to measure fair value may result in an asset or liability falling into more than one level of the fair value hierarchy. In such cases, the determination of the classification of an asset or liability within the fair value hierarchy is based on the least determinate in put that is significant to the fair value measurement. The Select Investment Program 9s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.<br><br> THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 20 The following table represents investments that are measured at fair value on a recurring basis at June 30, 2009 and 2008 (in thousands): June 30, June 30, Level 1 Level 2 Level 3 2009 2008 U.S. Government securities $ 56,361 $ 51,059 $ 4 $ 107,420 $ 173,276 Corporate bonds and notes 13,372 204,773 9,003 227,148 264,717 Common and preferred stocks 195,526 113,993 133,054 442,573 676,694 Mortgage and asset backed securities 4 112,662 985 113,647 180,290 Marketable and nonmarketable alternative funds 4 4 323,873 323,873 410,893 Commodities 4 11,078 4 11,078 4 Money market and other 177,510 191,472 4 368,982 439,359 Total investments $ 442,769 $ 685,037 $ 466,915 $ 1,594,721 $ 2,145,229 Less current portion (590,759) (835,495) Investments, noncurrent $ 1,003,962 $ 1,309,734 Fair Value Measurements at June 30, 2009 For the valuation of certain government, corporate, preferred obligation bonds, bond mutual and commingled funds, commodities, common and preferred stock and common stock mutual and commingled funds at June 30, 2009, the Organization used quoted prices in principal active markets for identical assets as of the valuation date (Level 1). For the valuation of certain government, corporate, preferred obligation bonds, bond mutual and commingled funds, commodities, common and preferred stock and common stock mutual and commingled funds at June 30, 2009, the Organization used significant other observable inputs, particularly dealer market prices for comparable investments as of the valuation date (Level 2).<br><br> For the valuation of marketable and nonmarketable alternative funds, certain corporate bonds and notes, common and preferred stocks, mortgage and asset backed securities at June 30, 2009, the Organization used significant unobservable inputs including information from fund managers or general partners based on quoted market prices, if available, or other valuation methods (Level 3). Management reviews and evaluates the values provided by the fund manager and general partners and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. In conjunction with the adoption of SFAS No.<br><br> 157, the Organization elected to early adopt the measurement provisions of Accounting Standards Update No. 2009-12, c Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) d to certain investments in funds that do not THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 21 have readily determinable fair values including private investments, hedge funds, and other funds. This guidance amends SFAS No.<br><br> 157 and allows for the estimation of the fair value of investments in investment companies for which the investment does not have a readily determinable fair value using net asset value per share or its equivalent. Net asset value, in many instances may not equal fair value that would be calculated pursuant to SFAS No. 157.<br><br> Investments in corporate bonds and notes and common and preferred stocks of approximately $437 million and investments in alternative funds of approximately $324 million are reported at estimated fair value utilizing net asset values as of June 30, 2009. The following table presents the Organization 9s activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in SFAS No. 157 for the year ended June 30, 2009 (in thousands): Common Mortgage Corporate and and asset bonds preferred backed Alternative and notes stocks securities Funds Total Beginning balance $ 13,120 $ 166,890 $ 1,839 $ 410,893 $ 592,742 Total realized and unrealized losses (2,117) (29,037) (529) (58,534) (90,217) Purchases, issuance and settlements (net) (2,000) (4,799) (325) (28,486) (35,610) Ending balance $ 9,003 $ 133,054 $ 985 $ 323,873 $ 466,915 Total gains/(losses) for the period included in income attributable to the change in unrealized gains/(losses) at the reporting date $ (1,770) $ (32,165) $ (752) $ (104,776) $ (139,463) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) As of June 30, 2009 and 2008, respectively, the Organization held approximately $324 million and $411 million of alternative investments that include absolute return or hedge funds, limited partnership funds, and common and collective trust funds.<br><br> Investment securities are exposed to various risks, such as interest rate, market and credit. Due to the level of uncertainty related to changes in interest rates, market volatility and credit risks, it is at least reasonably possible that changes in these risks could materially affect the fair value of investments reported in the statement of financial position as of June 30, 2009. However, the diversification of the Organization 9s invested assets among these various asset classes should mitigate the impact of any dramatic change on any one asset class.<br><br> THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 22 (9) Split Interest Agreements The Organization is a beneficiary of split interest agreements in the form of charitable gift annuities, perpetual trusts held by third parties, charitable remainder trusts and pooled income funds. The value of split interest agreements is measured as the Organization 9s share of fair value of the assets. Of the $152 million in assets under these agreements, which are included in other assets on the consolidated statement of financial position, $36 million are charitable gift annuities and the remainder are assets for which the Organization is not the trustee.<br><br> Liabilities associated with these agreements are $22 million, of which $4 million is included with other current liabilities and $18 million is included with other noncurrent liabilities on the consolidated statement of financial position. (10) Benefit Plans Pension and Postretirement Plans: Employees of the American Red Cross, including participating local chapters, are covered by the Retirement System of the American National Red Cross (the Plan) after one year of employment and completion of 1,000 hours of service during any consecutive 12 month period. For funding purposes under the Plan, normal pension costs are determined by the projected unit credit method and are funded currently.<br><br> The Plan provides a pension, funded entirely by the employer. Prior to July 1, 2005, voluntary contributions could be made by active members to fund an optional annuity benefit. Defined benefits are based on years of service and the employees 9 final average compensation, which is calculated using the highest consecutive 48 months of the last 120 months of service before retirement.<br><br> The Organization 9s funding policy was to set the employer contribution rate at a percentage of covered payroll that is intended to fund toward a target range of not less than 115 percent and no more than 120 percent of the projected unit credit accrued liability. To the extent that the current funding is more or less than the target 9s upper bound, the difference is amortized over ten years in calculating the contribution rate. During fiscal years 2009 and 2008, the Organization contributed 4.25 percent of covered payroll to the Retirement System.<br><br> THE AMERICAN NATIONAL RED CROSS Notes to Consolidated Financial Statements June 30, 2009 (With summarized information for the year ended June 30, 2008) (Continued) 23 The Organization has investment guidelines for Plan assets. The overall objective of the guidelines is to ensure the Plan assets provide capital growth over an extended period of time, while also considering market risks and ensuring that the portfolio income and liquidity are appropriate to meet the Plan benefit payments and other expenses. The Plan investments are required to be diversified by asset class and within each asset class, in order to ensure that no single investment will have a disproportionate impact on the total portfolio.<br><br> The Plan asset allocation is reviewed each year with current market assumptions to ensure the asset mix will achieve the long-term goals of the Plan. The Plan assets were invested in the following categories at June 30, 2009 and 2008: Pension Assets 2009 2008 Cash and short-term investments 8% 5% Domestic equity 16% 25% International equity 16% 18% Fixed income deflation hedge 33% 20% Commodities 2% 4 Inflation hedge 4 12% Marketable and nonmarketable alternative funds 25% 20% 100% 100% The Plan assets were within authorized asset allocation ranges at June 30, 2009 and 2008. The Organization also provides medical and dental benefits to eligible retirees and their eligible dependents.<br><br> Generally, retirees and the Organization each pay a portion of the premium costs. The medical and dental plans pay a stated percentage of expenses reduced by deductibles and other coverages. The Organization has the right to modify cost-sharing provisions at any time.<br><br> In addition, life insurance benefits of $5,000 are provided with no contributions required from the retirees. The Organization 9s postretirement benefit plans are unfunded. However, the Board of Governors has designated $91 million of unrestricted net assets to fund a portion of premiums for retirees 9 postretirement medical benefits.<br><br> Effective January 1, 2009, the Organization eliminated plan coverage (retiree medical and life benefits) for all future retirees that did not currently meet certain eligibility conditions. In addition, the plan was amended to transition Medicare eligible retirees to a private fee-for-service plan and to change the premium supplement tables and indexing effective July 1, 2009. These events triggered a remeasurement of the postretirement benefit plan obligations as of December 31, 2008 to reflect the plan curtailment and plan changes.<br><br> A curtailment gain of $10 million was recognized and is included in pension-related changes other than net periodic benefit cost in the accompanying consolidated statement of activities

less