SER Jobs for Progress of. and Subsidiaries

Transcription

1 SER Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS August 31, 2016 AND 2015

2 SER-Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries Table of Contents August 31, 2016 and 2015 REPORT Independent Auditor s Report 1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position as of August 31, 2016 and Consolidated Statements of Activities and Changes in Net Assets for the years ended August 31, 2016 and Consolidated Statements of Functional Expenses for the years ended August 31, 2016 and Consolidated Statements of Cash Flows for the years ended August 31, 2016 and Notes to Consolidated Financial Statements 8 SINGLE AUDIT REPORTS Schedule of Expenditures of Federal Awards for the year ended August 31, Notes to Schedule of Expenditures of Federal Awards 17 Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 18 Independent Auditor s Report on Compliance for Each Major Federal Program and on Internal Controls over Compliance Required by the Uniform Guidance 20 Schedule of Findings and Questioned Costs 22

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors SER-Jobs for Progress of the Texas Gulf Coast, Inc. Houston, Texas Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of SER-Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries (collectively SER ), which comprise the consolidated statements of financial position as of August 31, 2016 and 2015, and the related consolidated statements of activities and changes in net assets, functional expenses, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to SER's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of SER's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SER-Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries, as of August 31, 2016 and 2015, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

4 Other Matters Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 20, 2017, on our consideration of SER s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering SER s internal control over financial reporting and compliance. Houston, Texas January 20,

5 SER-JOBS FOR PROGRS OF THE Consolidated Statements of Financial Position August 31, 2016 and 2015 ASSETS Current Assets Cash and cash equivalents $ 420,165 $ 484,688 Grants receivable 586,246 1,075,456 Contributions receivable 495, ,500 Capital campaign receivable 18,700 - Unbilled grant revenue 365,752 - Other receivable 35,776 - Prepaid expenses 80, ,873 Total Current Assets 2,002,413 2,239,517 Property and Equipment, Net 3,095,330 2,672,871 Other Assets Long-term portion of capital campaign receivable 27,720 - Certificate of deposit 100, ,000 Total Other Assets 128, ,000 Total Assets $ 5,226,301 $ 5,012,388 LIABILITIES AND NET ASSETS Current Liabilities Accounts payable and accrued liabilities $ 214,003 $ 11,539 Line of credit 185,749 - Accrued salaries and personnel costs 124, ,280 Deferred revenues - 145,025 Current portion of notes payable 20,305 19,462 Total Current Liabilities 544, ,306 Long-term Liabilities Line of credit - 265,205 Long term notes payable, excluding current portion 277,676 1,765,992 Total Long-term Liabilities 277,676 2,031,197 Total Liabilities 822,445 2,662,503 Commitments and Contingencies Net Assets Unrestricted Land, building and improvements 2,166,837 - Undesignated 1,421,101 1,599,584 3,587,938 1,599,584 Temporarily restricted 815, ,301 Total Net Assets 4,403,856 2,349,885 Total Liabilities and Net Assets $ 5,226,301 $ 5,012,388 The accompanying notes are an integral part of these consolidated financial statements. -3-

6 Consolidated Statements of Activities and Changes in Net Assets For the Years Ended August 31, 2016 and Temporarily Restricted Total Unrestricted Temporarily Restricted Unrestricted Total Revenues Federal grant revenue $ 3,600,703 $ - $ 3,600,703 $ 1,775,413 $ - $ 1,775,413 State grant revenue 230, , , ,266 Other grant revenue 1,424, ,574 2,283,277 1,445, ,200 1,972,765 United Way revenue - 565, , , ,000 Fundraising 354, ,967 94,300-94,300 Contributions and donations 111, , ,970 91,507 5,597 97,104 Rental income 237, , , ,969 Investment income Other income 28,719-28,719 57,491-57,491 Net assets released from restrictions 1,504,377 (1,504,377) - 1,044,702 (1,044,702) - Total Revenues 7,493,697 65,617 7,559,314 5,189,318 84,095 5,273,413 Expenses Program Expenses Employer, Education and Training: Adult programs 1,154,002-1,154,002 1,299,469-1,299,469 Senior programs 150, , , ,559 Youth programs 2,704,327-2,704,327 2,953,741-2,953,741 Veteran programs 99,545-99,545 95,571-95,571 Other programs 300, , , ,003 Total Program Expenses 4,409,233-4,409,233 4,699,343-4,699,343 Management and General 120, , , ,865 Fundraising 518, , , ,694 SERCORP/SER CDC 457, , , ,266 Total Expenses 5,505,343-5,505,343 5,296,168-5,296,168 Change in net assets 1,988,354 65,617 2,053,971 (106,850) 84,095 (22,755) Net assets, beginning of year 1,599, ,301 2,349,885 1,706, ,206 2,372,640 Net assets, end of year $ 3,587,938 $ 815,918 $ 4,403,856 $ 1,599,584 $ 750,301 $ 2,349,885 The accompanying notes are an integral part of these consolidated financial statements. -4-

7 Consolidated Statement of Functional Expenses For the Year Ended August 31, 2016 Employer, Education and Training Services Other Adult Senior Youth Veterans Programs Total Program Expenses Management and General Fundraising SERCORP/ SERCDC Total Expenses Salaries and benefits $ 928,224 $ 130,893 $ 956,274 $ 88,823 $ 107,357 $ 2,211,571 $ 26,248 $ 263,176 $ 98,400 $ 2,599,395 Communications 17,601 3,396 23,590 2,116 2,860 49,564 1,713 3,081 1,385 55,743 Equipment 18,319 1,486 24,610 1,717 3,364 49,495 3,509 2, ,785 Facilities 8,997 1,209 19,861 1,181 29,795 61,044 2,612 1,440 74, ,359 Insurance 11,058 1,512 11,042 1,477 32,547 57, ,814 42, ,105 Interest Expense ,804 9, ,982 68,786 Outreach 13,216 1,143 19, ,670 12,905 1,081 3,339 51,994 Office Expense 16,531 3,543 16, ,228 39,707 6,870 8, ,683 Professional 4, , ,694 58,243 33, ,299 35, ,044 expenses Participant training 103, ,572, ,352 1,739,318 3, ,743,682 Taxes ,104 66,104 Travel 23,955 6,066 37,313 2, ,505 5,812 5,223 3,091 84,632 Fundraising , ,081 Depreciation 1, , , ,340 63,460 Contributions ,750 7,750 Miscellaneous 5, , ,426 21,583 22,277 5,649 9,231 58,739 Total Expenses $ 1,154,002 $ 150,850 $ 2,704,327 $ 99,545 $ 300,509 $ 4,409,233 $ 120,241 $ 518,136 $ 457,733 $ 5,505,343 The accompanying notes are an integral part of these consolidated financial statements. -5-

8 Consolidated Statement of Functional Expenses For the Year Ended August 31, 2015 Employer, Education and Training Services Other Adult Senior Youth Veterans Programs Total Program Expenses Management and General Fundraising SER CORP Total Expenses Salaries and benefits $ 1,133,483 $ 150,002 $ 1,099,244 $ 74,076 $ 94,092 $ 2,550,897 $ 67,045 $ 78,636 $ 36,132 $ 2,732,710 Communications 14,860 2,586 19,519 1,092 1,183 39, ,148 Equipment 29,931 2,728 37,408 1,474 6,513 78,054 9,364 1,876-89,294 Facilities 22,965 3,360 37,073 1,814 14,629 79,841 2,006 1,209 42, ,466 Insurance 12,457 1,820 10,957 1,003 1,291 27, ,720 43,597 Interest Expense ,156 14,970 Outreach 4, , ,310 7,107 1,803 5,300 27,520 Office Expense 10,145 4,554 19, ,077 37,074 14,746 5,801-57,621 Professional 6, , ,518 19,043 42,384 22,244 25, ,778 expenses Participant training 33,942 9,845 1,652,849 12,200 40,615 1,749,451 2, ,751,881 Taxes ,665 64,665 Travel 24,237 5,290 50,151 2, ,704 8,734 1, ,153 Fundraising ,102 24,136-32,238 Depreciation 1, , , ,751 39,287 Contributions ,800 18,800 Miscellaneous 5,833 1,310 9, ,509 17,968 35, ,040 Total Expenses $ 1,299,469 $ 182,559 $ 2,953,741 $ 95,571 $ 168,003 $ 4,699,343 $ 199,865 $ 139,694 $ 257,266 $ 5,296,168 The accompanying notes are an integral part of these consolidated financial statements. -6-

9 Consolidated Statements of Cash Flows For the Years Ended August 31, 2016 and Cash flows from operating activities Change in net assets $ 2,053,971 $ (22,755) Adjustments to reconcile change in net assets to net cash provided by operating activities Repayment of note payable from grant revenue (1,488,000) - Contributions restricted to capital projects (146,420) - Depreciation and amortization 63,460 39,287 Changes in operating assets and liabilities Grants receivable Contributions receivable 489,210 76,500 (83,023) (15,250) Unbilled grant revenue (365,752) - Other receivable (35,776) - Prepaid expenses 27,099 (94,070) Accounts payable and accrued liabilities (97,536) 138,111 Accrued salaries and personnel costs (30,568) (52,663) Income tax payable - (1,013) Deferred revenue (145,025) 119,322 Net cash provided by operating activities 401,163 27,946 Cash flows from investing activities Reinvestment of interest income (838) - Purchase of certificate of deposit - (100,000) Purchases of property and equipment (485,919) (357,961) Net cash used in investing activities (486,757) (457,961) Cash flows from financing activities Proceeds from contributions restricted to capital projects 100,000 - Repayments on notes payable (19,469) (17,572) Net (repayments) borrowings on line of credit (79,456) 265,205 Borrowings on note payable 19,996 - Net cash provided by financing activities 21, ,633 Net decrease in cash and cash equivalents (64,523) (182,382) Cash and cash equivalents, beginning of year 484, ,070 Cash and cash equivalents, end of year $ 420,165 $ 484,688 Supplemental noncash investing and financing activities Property and equipment acquired under notes payable $ - $ 1,488,000 Repayment of note payable from grant revenue $ 1,488,000 $ - Supplemental disclosures of cash flow information Cash paid during the year for taxes $ - $ 12,030 Cash paid during the year for interest $ 68,786 $ 14,970 The accompanying notes are an integral part of these consolidated financial statements. -7-

10 Notes to Consolidated Financial Statements Note 1 - Organization SER-Jobs for Progress of the Texas Gulf Coast, Inc. (SER-Jobs) is a Texas nonprofit corporation. SER-Jobs provides career counseling and job placement services for economically disadvantaged residents of Harris and surrounding counties. Primary funding is received from participation in Federal grant programs, a City of Houston grant and United Way grants. Federal grants, a City of Houston grant and United Way funds amounted to approximately 74% of SER- Jobs revenues for the year ended August 31, Federal grants, State of Texas grant, a City of Houston grant and United Way funds amounted to approximately 71% of SER-Jobs revenues for the year ended August 31, Additionally, these sources represented 90% and 82% of the total receivable balance, including unbilled revenue, at August 31, 2016 and 2015, respectively. Additional funding is received from contributions and State of Texas funding sources. SERCORP of Houston, Inc. (SERCORP) was organized in February 1992 as a for-profit Texas corporation and is a 100% owned subsidiary of SER-Jobs. SERCORP owns land and several buildings and leases office space to SER-Jobs and one other unrelated entity. SERCORP does not receive Federal grant revenues. On July 25, 2016, SERCORP was converted into a not-for-profit entity, SER Community Development Corporation (SERCDC). SER-Jobs is the sole member of SERCDC. All of the assets and liabilities of SERCORP were transferred to the new corporation at carrying amounts on the date of conversion. SERCORP s management believes the transfer did not result in the recognition of gain or loss under the Internal Revenue Code. Note 2 - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of SER-Jobs and its wholly-owned subsidiaries SERCORP and SERCDC (collectively, SER). All significant intercompany accounts and transactions have been eliminated. Basis of Presentation The consolidated financial statements of SER have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Under accounting principles generally accepted in the United States of America, SER is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. Accordingly, net assets of SER and changes therein are classified and reported as follows: o o o Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations and that may be designated for a specific purpose by action of the Board of Directors. Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met either by actions of SER and/or passage of time. This classification includes contributions and unconditional promises to give for which the ultimate purpose of the proceeds is not permanently restricted. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that they be maintained in perpetuity by SER. SER has no permanently restricted net assets. -8-

11 Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, SER considers all highly liquid investments with maturity at date of purchase of three months or less to be cash equivalents. SER held no cash equivalents at August 31, 2016 and SER maintains cash accounts at various banks, which at times, may exceed the Federal Deposit Insurance Corporation s limit. SER has not experienced any losses from maintaining cash accounts in excess of the federally insured limit. Management reviews the credit ratings of the financial institutions with which it conducts business on an annual basis and believes any credit risk is low due to the overall financial strength of the financial institutions. Grants Receivable Grants receivable consist of private and government grants and are considered to be fully collectible; accordingly, no allowance for doubtful accounts has been established. If amounts become uncollectible, they will be charged to operations when the determination is made. Unbilled grant revenue represents recorded revenue that has not yet been billed on the grant (see Note 13). Certificate of Deposit SER has one certificate of deposit totaling $100,838 and $100,000 as of August 31, 2016 and 2015, respectively, maturing December 8, Accordingly it has been classified as noncurrent in these consolidated financial statements. Property and Equipment Property and equipment are recorded at cost if purchased or at fair market value at the time of donation. Depreciation is calculated on a tax basis of depreciation over the estimated useful life of the respective asset. Management has determined that the impact of using tax basis over the straight-line basis of depreciation is not material. The estimated useful lives of the assets are 39 years for the buildings and 5 years for furniture, fixtures and equipment. Property and equipment expenditures greater than $5,000 are capitalized. Maintenance and repairs are charged to expense when incurred. Equipment purchases made from Federal grant funds, where SER does not have title to the equipment and is legally obligated to return it to the funding source at the end of the grant period, are accounted for as expenses at the time of acquisition. SER evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized. No asset impairment was recognized during the years ended August 31, 2016 and 2015, respectively. Deferred Revenue Deferred revenue represents prepaid government grants that were not earned by fiscal year-end and paid contributions for fundraising events. Fundraising income is recognized in the period the event occurs. -9-

12 Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Vacation and Sick Leave Benefits SER-Jobs provides vacation and sick leave benefits to its employees. The cost of vacation benefits is recorded when such benefits are earned and are payable upon employee termination. The cost of sick leave benefits, which are not payable upon employee termination, is recorded when such benefits are taken. Accrued vacation benefits approximated $64,000 and $82,000 as of August 31, 2016 and 2015, respectively, and are included in accrued salaries and personnel costs in the consolidated statements of financial position. Revenue and Contributions Receivable SER accounts for contributions in accordance with accounting principles generally accepted in the United States of America. Contributions are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Contributions receivable that are expected to be collected within one year are recorded at net realizable value. Amounts that are expected to be collected in future years are discounted to estimate the present value of future cash flows, if material. Management of SER considers the contributions and accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been recorded. If amounts become uncollectible, they will be charged to operations when that determination is made. The long-term portion of the capital campaign pledges of $27,720 will be collected over the next 5 years. Support that is restricted by the donor is reported as an increase in temporarily restricted or permanently restricted net assets in the reporting period in which the support is recognized. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities and changes in net assets as net assets released from restrictions. SER reports gifts of property and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as temporarily restricted support. Absent explicit donor stipulations about how long those assets must be maintained, SER reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Rental income from operating leases is recorded on a straight-line basis over the term of the lease. Government Grants Support funded by grants is recognized as SER-Jobs performs the contracted services or incurs outlays eligible for reimbursement under the grant agreements. Grant activities and outlays are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Functional Expenses The costs of providing the various programs and other activities have been summarized on a functional basis in the consolidated statements of activities and changes in net assets. Expenses that cannot be directly identified with a specific program are charged to the various programs based upon salaries, square footage, or other reasonable methods for allocating multiple program expenditures. The lease of office space by SER-Jobs from SERCORP and SERCDC has been allocated to the applicable programs with the intercompany elimination being reflected in SERCORP s and SERCDC s allocated expenses. -10-

13 Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Income Taxes SER-Jobs and SERCDC are exempt from federal income tax under Section 501(a) of the Internal Revenue Code (the Code) as an organization described in Section 501(c)(3) and comparable state law. Contributions to SER-Jobs are tax deductible within the limitations prescribed by the Code. SERCORP is not tax exempt and is subject to federal income tax based on its net income. SERCORP accounts for income taxes under the provisions of accounting principles generally accepted in the United States of America. As such, deferred tax assets and liabilities were determined based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. At August 31, 2016 and 2015, there were no differences between the financial statements and tax basis of assets and liabilities. The accounting standard on accounting for uncertainty in income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under that guidance, SER may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. SER accounts for uncertain tax positions, when it is more likely than not, that such an asset or a liability will be realized. As of August 31, 2016, management of SER believes there were no uncertain tax positions to be recognized or recorded. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, the amounts of reported revenues and expenses, and the allocation of expenses among various functions. Actual results could vary from the estimates that were used. Estimates that have the most impact on consolidated financial position and results of operations primarily relate to the collectability of receivables, the useful lives and recoverability of property and equipment, and allocation of expenses by function. Management believes these estimates and assumptions provide a reasonable basis for the fair presentation of the consolidated financial statements. Fair Value Considerations SER uses fair value to measure financial and certain nonmonetary financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability. SER s financial instruments (primarily cash and cash equivalents, certificate of deposit, receivables, payables, and debt) are carried in the accompanying consolidated financial statements at amounts, which reasonably approximate fair value. Note 3 - Related Party Transactions A SER-Jobs Board of Director is a Regional Vice President of a bank with whom SER-Jobs and SERCDC has financed term notes (Note 5) and SER-Jobs has obtained the line of credit facility (Note 6). -11-

14 Notes to Consolidated Financial Statements Note 4 - Property and Equipment Property and equipment are comprised as follows at August 31: Building $ 2,579,089 $ 2,687,549 Land 475, ,738 Building improvements 453,669 45,854 Furniture, fixtures and equipment 167,917 45,177 Total property and equipment 3,676,237 3,190,318 Less accumulated depreciation and amortization (580,907) (517,447) Property and equipment, net $ 3,095,330 $ 2,672,871 The depreciation and amortization expense was $63,460 and $39,287 for the years ended August 31, 2016 and 2015, respectively. Note 5 - Notes Payable Notes payable consisted of the following at August 31: Note payable by SERCORP: Term note due to a bank with the principal amount of $1,488,000, bearing interest at the fixed rate of 4.25% for the first five years and then floating rate equal to the Wall Street Journal prime rate plus 1% with a floor of 4.25%. Interest on the note shall be due and payable monthly as it accrues until August 7, 2016, then the note shall be due and payable in monthly installments of $9,263, including interest, until maturity on August 7, This note is secured by buildings, guaranteed by SER-Jobs, and is cross collaterized with the SER-Jobs line of credit facility. This note was paid off from the Community Development Block Grant (CDBG) in April $ - $ 1,488,000 Note payable by SERCDC (transferred from SERCORP): Term note due to a bank with the principal amount of $350,000, bearing interest at the fixed rate of 4.25%. The principal and interest of the note shall be due and payable in monthly installments of $2,644. This note is secured by a building and guaranteed by SER-Jobs and is scheduled to mature in August The note contains reporting covenants, and a financial covenant to maintain debt service coverage ratio. SERCDC is in compliance with these requirements at August 31, 2016 and , ,

15 Notes to Consolidated Financial Statements Note 5 - Notes Payable (Continued) Note payable by SER-Jobs: Term note due to a bank allowing SER-Jobs option to request periodic advancements in various increments, subject to a maximum of $1,488,000, bearing interest at the fixed rate of 4.5%. Interest on the note shall be due and payable monthly as it accrues until June 7, 2017, then the note shall be due and payable in monthly installments of $9,467, including interest, until maturity on June 7, This note is secured by a building and guaranteed by SERCDC. The note contains reporting covenants, and a financial covenant to maintain debt service coverage ratio. SER-Jobs is in compliance with these requirements at August 31, $ 19,996 $ - Total notes payable 297,981 1,785,454 Less current portion (20,305) (19,462) Long-term notes payable $ 277,676 $ 1,765,992 Future principal payments under these notes are summarized below: Years Ending August 31, 2017 $ 20, ,676 $ 297,981 Note 6 - Line of Credit SER-Jobs has a $600,000 bank line of credit which matures on August 5, Amounts borrowed under this agreement bear interest at 4.25% per annum. At August 31, 2016, SER-Jobs had borrowings on this line of credit of $185,749. The line is secured by a building and guaranteed by SERCDC. The line of credit facility agreement contains reporting covenants, and a financial covenant to maintain debt service coverage ratio. SER-Jobs is in compliance with these requirements at August 31, 2016 and Note 7 - Retirement Plan SER-Jobs has a voluntary, defined contribution plan which provides retirement benefits to participating employees. Originally, employees were eligible to participate upon completion of one year of continuous service. Effective January 1, 2015, a Safe Harbor election was made that allowed participants to begin contributing immediately. Participants may make salary deferral contributions subject to Internal Revenue Service limitations. SER-Jobs contributes up to 5% of the participant s salary. SER-Jobs contributions to the defined contribution plan approximated $61,000 and $56,000 for the years ended August 31, 2016 and 2015, respectively. -13-

16 Notes to Consolidated Financial Statements Note 8 - Temporarily Restricted Net Assets As of August 31, 2016 and 2015, $306,618 and $269,329, respectively, in net assets are temporarily restricted for capital campaign or for a specific purpose. Restricted contributions are primarily for programs that provide training to those individuals that live or work in the Greater East End Management District (the District) or for job training programs with businesses within the District, as well as programs that subsidize job coaching and training for adults. As of August 31, 2016 and 2015, $509,300 and $480,972, respectively, in net assets are temporarily restricted United Way funds due to timing for the completion of programs within a certain time frame. Note 9 - Net Assets Released From Restrictions Net assets of $1,504,377 and $1,044,702 were released from donor restrictions during the years ended August 31, 2016 and 2015, respectively, by incurring expenses related to capital campaign or by satisfying grant or time restrictions specified by donors. Note 10 - Commitments and Contingencies Amounts received from the government and other grant agencies require fulfillment of certain conditions as set forth in the grant contracts. SER-Jobs intends to fulfill the conditions of all grants, recognizing that failure to fulfill the conditions could result in the return of funds to grantors. Amounts received or receivable from grantor agencies are subject to audit and adjustment by the grantor agencies. Any disallowed claims, including amounts already collected, could become a liability of SER-Jobs. In management s opinion, disallowed claims, if any, would not have a material adverse effect on SER-Jobs financial position or results of operations. Note 11 - Leased Facilities During fiscal years 2016 and 2015, SERCORP and SERCDC leased building space to SER-Jobs and one other unrelated entity under operating lease agreements, expiring through June Cost of land and buildings under the operating lease to the unrelated entity was $66,440 and $468,031, respectively for both years. Accumulated depreciation on buildings under operating lease was $357,188 and $344,431 at August 31, 2016 and 2015, respectively. Minimum lease payments due to SERCDC under this operating lease from the unrelated entity are as follows as of August 31, 2016: Years Ending August 31, 2017 $ 198, , , ,832 $ 766,

17 Notes to Consolidated Financial Statements Note 12 - Leases SER-Jobs presently leases equipment and office space under various operating lease agreements, expiring through February Rental expense under these agreements approximated $21,000 and $36,000 for the years ended August 31, 2016 and 2015, respectively. The future obligations under SER-Jobs operating leases as of August 31, 2016 are as follows: Years Ending August 31, 2017 $ 5, $ 8,040 Note 13 - Community Development Block Grants In March 2016, SER-Jobs was awarded a Community Development Block Grant, pass through from Harris County, in the amount of $2 million for the workforce training site renovation project located at Harris County. No funds have been spent under this grant as of August 31, In April 2016, SER-Jobs was awarded a Community Development Block Grant, pass through from the City of Houston, in the amount of $5.3 million to cover the cost of the acquisition of the land and existing improvements, and the renovation of the Telephone Road facility (facility). The grant is structured as a performance-based loan requiring that the facility be used as a Workforce Opportunity Center benefitting persons at least 51% of whom must be members of low-income families. No interest or principal is repayable under the grant provided that SER-Jobs uses the facility for the assigned purpose for at least 5 years after the facility is put into service. SER-Jobs intends to meet the requirements as listed in the grant agreement. During 2016, $1,786,860 was awarded to SER-Jobs as reimbursement for the prior purchase of the Telephone Road land and building during 2016 and to pay-off the loan obtained to finance the related purchase. SER-Jobs is currently working with the grantor on a final budget. Once the budget is approved, SER-Jobs will begin renovation on the facility and bill the grantor $365,752 for architectural and engineering costs incurred in 2016 in relation to the renovation. These costs are currently appearing as unbilled revenue at August 31, 2016 in the consolidated statements of financial position. Note 14 - Subsequent Events In January 2017, Local Initiatives Support Corporation (LISC) approved an allocation of $8million in New Market Tax Credits for SER s Workforce Opportunity Center. SER is currently working with LISC to assess the most strategic approach to the project scope. Management has evaluated subsequent events through the date the consolidated financial statements were available for issuance on January 20, No other matters were identified affecting the accompanying consolidated financial statements or related disclosures. -15-

18 SINGLE AUDIT REPORTS

19 Schedule of Expenditures of Federal Awards For the year ended August 31, 2016 FEDERAL GRANTOR/ PASS-THROUGH GRANTOR/ PROGRAM TITLE CATALOG OF FEDERAL DOMESTIC ASSISTANCE NUMBER PASS-THROUGH GRANTOR S NUMBER EXPENDITURES U S. Department of Labor Direct program - Reintegration of Ex-Offenders-Training to Work PE A-48 $ 2,404 Youth Build YB A ,253 Youth Build YB A ,793 Pass Through from National Agencies - SER-Jobs for Progress National, Inc. - Senior Community Service Employment Program ,597 Pass Through from State Agencies - Texas Workforce Commission - Pass Through from Local Agencies - Houston Galveston Area Council - WIA Youth Activities / ,732 Total U.S. Department of Labor 1,205,779 U S. Department of Housing and Urban Development Pass Through from National Agencies - Local Initiatives Support Corporation - Building Sustainable Communities ,110 Community Development Block Grant ,253 Pass Through from the City of Houston Community Development Block Grant ,166,837 Total U.S. Department of Housing and Urban Development 2,174,200 U S. Department of Health and Human Services Pass Through from Local Agencies - AVANCE - Healthy Marriages FM ,100 Corporation for National and Community Service Pass Through from National Agencies - Local Initiatives Support Corporation - Social Innovation Fund / ,129 Youth Build USA AMERICORP NDHMA ,495 Total Corporation for National and Community Service 203,624 Total Expenditures of Federal Awards $ 3,600,703 See Independent Auditor s Report and accompanying notes to Schedule of Expenditures of Federal Awards -16-

20 Notes to Schedule of Expenditures of Federal Awards Note 1 - General The accompanying schedule of expenditures of federal awards presents the activity of all federal award programs of SER-Jobs for Progress of the Texas Gulf Coast, Inc. (SER-Jobs) during the year ended August 31, SER-Jobs accounting policies and procedures are defined in note 2 to the consolidated financial statements. All awards received directly from federal agencies, as well as federal awards passed through other government or local agencies have been included in the schedule. Note 2 - Basis of Accounting The schedule is presented using the accrual basis of accounting whereby grant revenues are recognized as expenditures are incurred. Separate accounts are maintained for the different awards to aid in the observance of limitations and restrictions imposed by the funding agencies. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). SER-Jobs has elected not to use the 10 percent de minimus indirect cost rate as allowed under the Uniform Guidance. Note 3 - Relationship to Federal Financial Reports Amounts reported in the schedule may not agree with the amounts reported in the related federal financial reports filed with grantor agencies because of different program year-ends and accruals that will be reflected in the next report filed with the agencies. Note 4 - Insurance Coverage During the year ended August 31, 2016, SER-Jobs maintained the following types of insurance: Commercial general liability including professional liability, errors and omission, and property coverage - $1,000,000 each occurrence, $2,000,000 general aggregate, plus umbrella liability of $1,000,000 each occurrence and aggregate. Automobile liability - $1,000,000 per accident Directors and officer liability (including employment practices) - $2,000,000 aggregate Fiduciary liability and crime policy - $550,000 each loss Cyber Security liability - $1,000,000 general aggregate Workers compensation- $1,000,000 each accident -17-

21 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors SER-Jobs for Progress of the Texas Gulf Coast, Inc. Houston, Texas We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of SER-Jobs for Progress of the Texas Gulf Coast, Inc. and Subsidiaries (collectively SER ), which comprise the consolidated statement of financial position as of August 31, 2016, and the related consolidated statements of activities and changes in net assets, functional expenses, and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated January 20, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered SER s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of SER s internal control. Accordingly, we do not express an opinion on the effectiveness of SER s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of SER's consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether SER s consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of consolidated financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

22 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of SER's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering SER's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Houston, Texas January 20, 2017

23 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Directors SER-Jobs for Progress of the Texas Gulf Coast, Inc. Houston, Texas Report on Compliance for Each Major Federal Program We have audited SER-Jobs for Progress of the Texas Gulf Coast, Inc. ( SER-Jobs ) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of SER-Jobs major federal programs for the year ended June 30, SER-Jobs major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of SER-Jobs s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about SER-Jobs compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of SER-Jobs s compliance. Opinion on Each Major Federal Program In our opinion, SER-Jobs complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended August 31, 2016.

24 Report on Internal Control Over Compliance Management of SER-Jobs is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered SER-Jobs s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of SER-Jobs s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Houston, Texas January 20, 2017