MEMORANDUM

DATE: October 3, 2007

TO: Ronald A. Pizzuti, Chairperson Julie T. Kunkel

Barbara S. Robinson, Vice Chairperson Harry J. Lehman
George R. Oberer, Sr., Secretary-Treasurer Cynthia B. Thompson
Adam K. Brandt Sen. David Goodman
Otto M. Budig, Jr. Julie S. Henahan
William A. Erdos Rep. Shawn N. Webster

FROM: Tony Capaci

SUBJECT: National Underground Railroad Freedom Center Revised Business Plan Analysis

Management of the Freedom Center has undertaken a complete revision of their original
business plan. They have set goals to re-structure aspects of the organization to enable the
organization to operate on an ongoing basis at pre-depreciation surplus. Management’s
strategy to achieve sustainability includes increasing revenues through programming
improvements and fundraising, and reducing operating expenses through staff reduction and
other cost savings.

Programming Plan:

Over the past couple of years The Freedom Center engaged three organizations to consult on
market research pertaining to the programming needs. Proctor & Gamble, GFK Custom
Research North America and Northern Kentucky University each conducted marketing analysis
and research with the objective of:
1) gaugeing awareness of the museum attendance and of museum repeat attendance
2) gaining an understanding as to the attendees experience and
3) gaining an understanding as to why some potential visitors are choosing not to attend.

The results of the North Kentucky University Cincinnati Area Entertainment Study in 2005
ranked the National Underground Railroad Museum as #1 in overall satisfaction and #1 in value
of the top 10 entertainment attractions in the Greater Cincinnati Area.

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Improvements made to programming include:
1) An Ohio Department of Education sponsored program offering free admission to 5th and
8th graders, which resulted in $1.4M from the state each year for a two year period.
2) A space dedicated to changing exhibits opened in September 2006 and has new
exhibits scheduled through 2009.
3) Audio tours for adults and audio tours for children are scheduled to be added in October
2007.
4) The addition of one-hour audio tours as well as weekend and family programming, which
are being marketed aggressively.

Earned Revenues

Earned revenues reported in the pro-forma are annualized based on actual results during 2007.
Future years in the pro-forma are estimated to continue at the 2007 level.

Private Support

Through an assertive fundraising strategy, the Freedom Center raised $11M during 2006 and
the first half of 2007 with the Bridge To The Future Campaign. Management has entered into
the quiet phase of initiating an operating endowment campaign, which, once established will
better enable the Freedom Center to meet operating costs without relying too heavily on
fundraising. A goal of $5M has been set for the operating endowment. Private support is
estimated to rise from $1.4M in 2007 to $2.8M in 2009 and 2010.

Government Support

Projected Investment Income and Projected Rate of Return:

Original cost of investments is $22,210,840 which has a market value of $21,775,879 resulting
in an unrealized loss of $434,961.

Year 2007 2008 2009 2010

Projected
investment
income $1,475,000 $1,930,000 $2,138,000 $2,358,000
Projected rate of
return 6.64% 8.14% 8.34% 8.49%

The historic average rate of return since inception in 2003 is 3.46%

Operating Costs:

As part of the business plan management has established a goal to reduce operating expenses
from $10.6 M in 2005 to $7.5 M in 2008. Currently, operating costs have been successfully
reduced to an annualized rate of $8.7M.

Year 2005 2006 2007 2008

Net Base
Operating Cost $10,600,000 $8,900,000 $8,800,000 $7,500,000

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Risk Analysis :

Considering the success of the Bridge To The Future (BTTF) campaign, management has
demonstrated an ability to effectively raise funds however, projected pre-depreciation surpluses
depend on doubling private support from $1.4M per year to $2.8M. The issue that remains is
whether management can successfully double private support while simultaneously raising $5M
for the operating endowment in the wake of an $11M BTTF campaign.

Management has successfully demonstrated an ability to reduce operating costs, and the
operating cost projection of $7.5M in 2008 is a realistic one.

Management has projected surpluses of $980,000 in 2007, $700,000 in 2008, and $400,000
each year in 2009 and 2010. When depreciation of $4M/year is factored in, projected losses rise
astronomically and the organization’s position changes to one of not being sustainable. In the
short term management intends to limit capital expenditures to $100,000/year. Funding on an
on going basis for future replacement value of depreciable assets is not addressed.

The Freedom Center has placed new management in key positions and the new team has
formulated a business plan to proactively focus on sustainability.

Currently, the Freedom Center has a ten year lease with the Commission as lessee which
expires March 25, 2003. The state has currently invested $15M. Management proposes the
state enter into a lease extension

Conclusion

The new management has effectively demonstrated an ability to incorporate meaningful

programming, as evidenced by the results of the market research, raise funds, as evidenced by
the results of the Bridge to the Future Campaign, manage operating costs, and negotiate an
advantageous position whereby the banks will take a second position on the real property
interest for an additional nine years, allowing the Commission to retain a first position for the
same time period. However, while the Freedom Center has made some impressive financial
strides, their projections regarding government funding, investment income, and accordingly,
the pre-depreciation surplus may prove to be overstated. The decision not to address
replacement of depreciating assets may be a detrimental one. Yet, the prospect of the State
extending a first position on the real property interest for an additional nine years, thereby
securing a stronger position for the original $15M at the cost of an additional $2M, is an
attractive one.

Recommendation

Staff will recommend the Commission approve the project to fund the Freedom Center the
appropriated $2M, extend the lease for an additional nine years, and gain a stronger position
safeguarding the original $15M investment.

Note: Items highlighted in yellow are being verified via e-mails to sponsor

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