THE HARLEM SCHOOL OF THE ARTS, INC. Audited Financial Statements. June 30, 2011

Transcription

1 THE HARLEM SCHOOL OF THE ARTS, INC. Audited Financial Statements June 30, 2011

2 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of The Harlem School of the Arts, Inc. We have audited the accompanying statements of financial position of The Harlem School of the Arts, Inc. ( HSA ) as of June 30, 2011, and the related statements of activities, functional expenses, and cash flows for the year then ended. These financial statements are the responsibility of HSA s management. Our responsibility is to express an opinion on these financial statements based on our audit. The prioryear summarized comparative information has been derived from HAS s June 30, 2010 financial statements and in our report dated March 16, 2011 we expressed an unqualified opinion on those financial statements. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Harlem School of the Arts, Inc. as of June 30, 2011, and the change in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming HSA will continue as a going concern. As discussed in Note 12 to the financial statements, HSA has a large net asset deficit that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. January 18, 2012 Schall & Ashenfarb Certified Public Accountants, LLC

3 THE HARLEM SCHOOL OF THE ARTS, INC. STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2011 (With comparative totals for June 30, 2010) 6/30/11 6/30/10 Assets: Cash and cash equivalents (Notes 2d and 2e) $123,818 $668,597 Tuition receivable (net of allowance for doubtful accounts) (Note 2f) 6,819 8,648 Government grants and other receivables (Note 2f) 256,134 40,565 Contributions and bequests receivable (Note 3) 455,040 30,000 Prepaid expenses and other current assets 73,632 11,672 Property and equipment (net of accumulated depreciation) (Notes 2h and 4) 1,347,464 1,393,890 Total assets $2,262,907 $2,153,372 Liabilities: Accounts payable and accrued expenses $114,646 $83,796 Accrued salaries 62,273 87,875 Payroll taxes payable and penalties (Note 5) 1,003,954 1,282,161 Deferred tuition (Note 2i) 196, ,178 Government grant advances (Note 2j) 43,233 43,233 Loans payable (Note 6) 0 152,675 Mortgage payable (Note 7) 897, ,713 Total liabilities 2,317,687 2,753,631 Net assets: (Note 2b) Unrestricted: Operations (3,096,088) (3,423,212) Cash reserve fund 500, ,000 Capital fund 1,347,464 1,393,890 Total unrestricted (1,248,624) (1,529,322) Temporarily restricted (Note 8) 341,419 76,638 Permanently restricted (Note 9) 852, ,425 Total net assets (54,780) (600,259) Total liabilities and net assets $2,262,907 $2,153,372 The attached notes and auditors' report are an integral part of these financial statements. 2

4 THE HARLEM SCHOOL OF THE ARTS, INC. STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2011 (With comparative totals for the year ended June 30, 2010) Unrestricted Cash Temporarily Permanently Total Total Operations Reserve Capital Total Restricted Restricted 6/30/11 6/30/10 Public support: Contributions (Notes 2c) $2,109,428 $2,109,428 $331,000 $2,440,428 $1,744,042 Government grants (Note 2c) 393, , , ,025 Total public support 2,502, ,502, , ,833,528 2,026,067 Revenue: Tuition and registration fees (net of scholarships) 807, , , ,800 Program income 124, , , ,675 Rental income 82,732 82,732 82,732 54,487 Admission income 4,738 4,738 4,738 21,970 Investment income ,382 In kind services (Notes 2k) 382, , ,269 0 Other income 13,543 13,543 13,543 15,046 Total revenue 1,415, ,415, ,415,776 1,199,360 Net assets released from restrictions: Program 56,219 56,219 (56,219) 0 0 Time 10,000 10,000 (10,000) 0 0 Total net assets released from restrictions 66, ,219 (66,219) Total public support and revenue 3,984, ,984, , ,249,304 3,225,427 Expenses: Program services: Instruction 2,230, ,243 2,340,896 2,340,896 2,149,523 Total program services 2,230, ,243 2,340, ,340,896 2,149,523 Supporting services: Management and general 1,074,338 8,973 1,083,311 1,083, ,556 Fundraising 295,876 8, , , ,765 Total supporting services 1,370, ,946 1,388, ,388,160 1,441,321 Total expenses 3,600, ,189 3,729, ,729,056 3,590,844 Change in net assets from operations 383,656 0 (128,189) 255, , ,248 (365,417) Non operating activity: In kind capital contribution (Notes 2k) 25,231 25,231 25, ,068 Realized gain on investments ,671 Total non operating activity ,231 25, , ,739 Change in net assets 383,656 0 (102,958) 280, , ,479 70,322 Transfer (56,532) 56, Net assets beginning (3,423,212) 500,000 1,393,890 (1,529,322) 76, ,425 (600,259) (670,581) Net assets ending ($3,096,088) $500,000 $1,347,464 ($1,248,624) $341,419 $852,425 ($54,780) ($600,259) The attached notes and auditors' report are an integral part of these financial statements. 3

5 THE HARLEM SCHOOL OF THE ARTS, INC. STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED JUNE 30, 2011 (With comparative totals for the year ended June 30, 2010) Program Services Supporting Services Management Total Total and Expenses Expenses Instruction General Fundraising Total 6/30/11 6/30/10 Salaries $1,468,759 $174,363 $137,721 $312,084 $1,780,843 $2,128,861 Payroll taxes and employee benefits 265,678 31,330 24,747 56, , ,556 1,734, , , ,161 2,102,598 2,478,417 Insurance 54,089 4,402 4,403 8,805 62,894 55,285 Consultant and professional fees 172, ,094 62, , , ,160 Repairs and maintenance 30,614 2,492 2,492 4,984 35,598 25,025 Utilities 63,375 5,159 5,158 10,317 73, ,015 Outside facility rental 9, ,383 14,469 Music supplies and concert expenses 25,198 3, ,218 28,416 43,344 Stationery and printing 5,651 3,954 11,728 15,682 21,333 32,129 Advertising and public relations 17,329 1,978 26,530 28,508 45,837 4,766 Equipment rental 64,296 13,772 10,972 24,744 89,040 87,513 Telephone 15,067 1,226 1,226 2,452 17,519 14,401 Travel and conferences 10, ,895 4,671 Payroll processing 7, ,246 8,904 5,351 Bad debt expense 16,150 16,150 16,150 0 Postage 100 4,233 3,334 7,567 7,667 4,375 Food 2,352 3, ,244 6,596 6,863 Bank charges/credit card fees 12, ,980 14,149 13,319 Other expenses 3,834 16, ,008 20,842 32,954 Dues and subscriptions 2,403 2,230 1,759 3,989 6,392 9,384 Payroll tax penalties ,906 Interest expense/mortgage 68,793 68,793 68,793 72,958 Depreciation 110,243 8,973 8,973 17, ,189 88,539 Total expenses before in kind 2,340, , ,849 1,005,891 3,346,787 3,590,844 In kind professional fees (Note 2k) 382, , ,269 0 Total expenses $2,340,896 $1,083,311 $304,849 $1,388,160 $3,729,056 $3,590,844 The attached notes and auditors' report are an integral part of these financial statements. 4

6 THE HARLEM SCHOOL OF THE ARTS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2011 (With comparative totals for the year ended June 30, 2010) 6/30/11 6/30/10 Cash flows from operating activities: Change in net assets $545,479 $70,322 Adjustments to reconcile change in net assets to net cash provided by/(used for) operating activities: Depreciation 128,189 88,539 Realized gain on investments 0 (45,671) Donated building improvements (25,231) (390,068) (Increase)/decrease in assets: Tuition receivable 1,829 (6,792) Government grants and other receivables (215,569) (18,345) Contributions and bequests receivable (425,040) 135,000 Prepaid expenses and other current assets (61,960) (2,751) Increase/(decrease) in liabilities: Accounts payable and accrued expenses 30,850 (155,366) Accrued salaries (25,602) (26,283) Payroll taxes payable and penalties (278,207) 114,941 Deferred tuition 17,848 (60,632) Total adjustments (852,893) (367,428) Net cash used for operating activities (307,414) (297,106) Cash flows from investing activities: Transfers to operations 0 544,838 Purchase of investments 0 (3,375) Additions of property and equipment (56,532) (2,965) Net cash (used for)/provided by investing activities (56,532) 538,498 Cash flows from financing activities: Proceeds from loans payable 205, ,675 Repayment of loans payable (357,675) 0 Repayment of mortgage payable (28,158) (26,115) Net cash (used for)/provided by financing activities (180,833) 126,560 Net (decrease)/increase in cash and cash equivalents (544,779) 367,952 Cash and cash equivalents beginning of year 668, ,645 Cash and cash equivalents end of year $123,818 $668,597 Supplemental Information: Interest paid $69,000 $71,000 The attached notes and auditors' report are an integral part of these financial statements. 5

7 THE HARLEM SCHOOL OF THE ARTS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2011 Note 1 Organization The Harlem School of the Arts, Inc. ( HSA ) is a community based, not for profit corporation founded in 1964 by acclaimed soprano, Dorothy Maynor. Its mission is to enrich the lives of the students and their families, from the Harlem Community and beyond, through training in and exposure to the arts. HSA operates out of its owned facility, constructed in 1977, at 645 St. Nicholas Avenue, New York City. The educational and cultural programs of HSA not only provide quality training in dance, music, theatre, and visual arts but also focus on celebrating the global influences on art and culture while preserving the uniqueness of the Harlem community. HSA is exempt from Federal income taxes under Section 501(c)(3) of the U.S. Internal Revenue Code and from state and local taxes under comparable laws. HSA has not been designated as a private foundation. In the second quarter of calendar year 2010, HSA underwent a reorganization, whereby all of the members of the Board of Directors that existed at the beginning of the fiscal year resigned and a new Board was constituted to replace them effective April The fiscal year 2011 financial statements presented represents the first full year of operations under the new board. Note 2 Summary of Significant Accounting Policies a. Basis of Accounting The accompanying financial statements of HSA have been prepared using the accrual basis of accounting and conform to accounting principles generally accepted in the United States of America as applicable to not for profit organizations. b. Net Asset Presentation HSA reports information regarding its financial position and activities according to three classes of net assets, as follows: Unrestricted represent those resources for which there are no restrictions by donors as to their use. The following sub categories have been presented to provide greater transparency: o o Cash reserve fund reflects donor contributions that have been set aside as a cash reserve. Subsequent to year end, the board designated the use of these funds to be spent during fiscal Capital fund reflects non liquid assets held in building, improvements, furniture and fixtures, net of related depreciation. 6

8 Temporarily restricted represent those resources, the use of which have been restricted by donors to specific purposes or the passage of time. The release from restrictions results from the satisfaction of the restricted purposes specified by the donor. Temporarily restricted contributions and grants, the requirements of which are met in the year of donation, are reported as unrestricted. (See Note 8) Permanently restricted accounts for activity restricted by donors that must remain intact in perpetuity. (See Note 9) c. Revenue Recognition Contributions are recorded as revenue upon receipt of cash or an unconditional pledge and unless specifically restricted by the donor, are considered available for unrestricted use. Those donations that contain restrictions for specific programs or time periods are recorded as temporarily or permanently restricted, depending on the nature of the restriction. Contributions expected to be received within one year are recorded at their net realizable value. Long term pledges are recorded at present value using a risk adjusted rate of return when deemed material. Conditional contributions received are recorded as liabilities and are recognized as income when the conditions have been substantially met. Government grants that have traits more similar to contracts for service are treated as exchange transactions and are recorded as income when earned. When HSA is notified of an irrevocable trust where they are the beneficiary, a contribution and related receivable is recognized at fair value. Risk adjusted present value techniques of the estimated benefits HSA will receive at the time the trust will be distributed are used to determine fair value. Each subsequent year, receivables are adjusted to account for changes in the value of assets within the trust. These adjustments are reported as part of contribution revenue in the accompanying statement of activities. d. Cash and Cash Equivalents Checking and money market accounts with local banks and highly liquid debt instruments purchased with an initial maturity of three months or less (excluding accounts held with investment advisors) are considered to be cash equivalents for purposes of the accompanying statement of cash flows. e. Concentration of Credit Risk Financial instruments which potentially subject HSA to concentration of credit risk consist of cash, money market accounts and investment securities. HSA places its temporary cash and money market accounts with financial institutions that management deems to be creditworthy. At times, balances may exceed federally insured limits. At year end, there were no significant uninsured balances. f. Tuition and Grants Receivable At June 30, 2011, HSA s tuition, government grants and other receivables are all due within twelve months. HSA reviews subsequent collections to determine the appropriateness of its receivables and writes off any amounts to expense that are not 7

9 considered collectable. Based on this process, there is no allowance for doubtful accounts as of June 30, Bad debt recognized during 2011 was $16,150. g. Contributions and Bequests Receivable Included in contributions and bequests receivable is $45,000 which represents the fair value of an irrevocable remainder trust held by an outside trustee whereby HSA is the ultimate beneficiary. h. Property and Equipment Property and equipment (including musical instruments) that exceed predetermined thresholds and have a useful life greater than one year are capitalized at cost or at their fair market values at the dates of donation. Furniture, office equipment and musical instruments are depreciated using the straight line method over estimated useful lives of three to ten years. Building and building improvements are amortized using the straight line method over the estimated useful life of fifteen to twenty five years. i. Deferred Tuition Tuition collected that relates to future periods is deferred and recognized as income in the period earned. j. Government Grant Advances Advances from government agencies under grant agreements are classified as advances until expended. k. In kind Donations Donated services are recognized in circumstances where those services either create or enhance non financial assets or require specialized skills, are provided by individuals possessing those skills and would typically need to be purchased if not provided inkind. Donations of goods are recorded as contributions at their fair market value. During the year ended June 30, 2011, HSA received $25,231 of in kind capital, consisting of donated furniture and in kind legal services of $382,269, which was allocated to management and general expenses. Board members and other individuals volunteer their time and perform a variety of tasks that assist HSA. These services have not been recorded in the financial statements, as they do not meet the criteria outlined above. l. Functional Allocation of Expenses/Management Estimates The costs of providing HSA s various programs and supporting services have been summarized on a functional basis in the accompanying statement of activities. Accordingly, certain costs have been allocated among the programs and supporting services in reasonable ratios determined by management. The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 8

10 m. Summarized Comparative Information The financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America and should be read in conjunction with HSA s financial statements for the year ended June 30, 2010, from which the summarized information was derived. n. Accounting for Uncertainty of Income Taxes HSA has adopted the provisions of FASB ASC 740, Income Taxes, which applies to positions taken or expected to be taken in a tax return. Organizations are required to recognize the effects of tax positions if they are more likely than not of being sustained. HSA does not believe its financial statements include any uncertain tax positions. o. Subsequent Events Management has evaluated for potential recognition and disclosure events subsequent to the date of the statement of financial position through January 18, 2012, the date the financial statements were available to be issued. Note 3 Contributions and Bequests Receivable At June 30, 2011, HSA had contributions and bequests receivables of $455,040, which are due as follows: Year ended: June 30, 2012 $400,040 June 30, ,000 Greater than 5 years 45,000 Total $455,040 HSA has also received conditional promises to give of $100,000, which will be recognized when the conditions are substantially met. Note 4 Property and Equipment At June 30, 2011, property and equipment consisted of the following: Building and building improvements (1) $1,803,328 Equipment, furniture, and fixtures 158,883 Musical instruments 27,700 1,989,911 Less: accumulated depreciation (805,663) Subtotal 1,184,248 Land 163,216 Total $1,347,464 9

11 (1) The title to HSA s main building and air rights over the building are subject to a restrictive covenant in favor of the City of New York, which essentially requires the building to be used as a community based cultural organization or for such other cultural or educational uses for the benefit of the people of New York City as the Mayor of the City of New York may determine. Note 5 Payroll Taxes Payable and Penalties HSA failed to remit Federal and State payroll taxes that had been withheld from its employees for the period from July 1, 2008 through December 31, On February 9, 2010, HSA entered into an installment payment agreement with the State tax authority which provided for 33 monthly payments of $2,500, or a total liability inclusive of interest through the payment period of $81,431. On May 12, 2010, HSA entered into a separate installment payment agreement with the IRS which provided for four monthly payments of $7,500 starting May 28, 2010 through August 28, Thereafter, the monthly payments to the IRS increased to $22,500, until the full amount has been paid off. The pay off date is uncertain due to several factors such as the rate of interest charged and the possibility of reductions of penalties assessed. As of June 30, 2011, the total liability for unremitted payroll taxes, penalties, and interest was $1,003,954. Note 6 Loans Payable During the year ended June 30, 2011, HSA repaid several loans from the Fund for the City of New York, a nonprofit organization, and there were no outstanding balances at year end. In addition, during the year, three board members provided interest free loans to HSA totaling $170,000. These loans were re paid in full prior to June 30, Note 7 Mortgage Payable On May 1, 2007, HSA obtained a 10 year $1,000,000 commercial mortgage from TD Bank. This mortgage is payable in 119 monthly installments of principal and interest, with a balloon payment due at maturity. This mortgage is secured by the land and building located at 645 St. Nicholas Avenue, and is subject to the restrictive covenants described in Note 4 above. At June 30, 2011, the mortgage payable balance was $897,555. HSA has failed to comply with the financial reporting covenant and a debt service coverage ratio under the mortgage loan from TD Bank. The lender has given notice to HSA of default, which permits it to call the loan immediately. The lender has not taken any action to accelerate the loan. 10

12 Note 8 Temporarily Restricted Net Assets The following schedule summarizes temporarily restricted net assets: Released Balance from Balance 6/30/10 Contributions Restrictions 6/30/11 Program restriction: Capital grants $10,000 $0 $0 $10,000 Enrollment and community Partnership initiative 0 100, ,000 Technology upgrades 0 150,000 (19,581) 130,419 Teacher background checks 0 6, ,000 HSA prep program 0 75, ,000 Tuition assistance 36,638 0 (36,638) 0 Total program restrictions 46, ,000 (56,219) 321,419 Time restrictions 30,000 0 (10,000) 20,000 Total $ 76,638 $331,000 ($66,219) $341,419 Note 9 Permanently Restricted Net Assets Over the years, HSA received donations totaling $852,425 that were restricted by the donors to be held in perpetuity for three endowment funds. HSA originally pooled all permanently restricted investments, which consisted of the Mary Flagler Cary Trust Scholarship Fund, the McCrindle Music Program Fund, and a general HSA endowment fund made up from several donors who could not be fully identified. However, due to cash flow issues, HSA liquidated the investment account to support operations in years prior to the replacement of the Board of Directors and management in All endowment funds remain underwater in their entirety. At June 30, 2011, the composition of HSA s permanently restricted net assets was: Permanently Unrestricted Restricted Total HSA Endowment ($334,628) $334,628 $0 Mary Flagler Cary Trust Scholarship Fund (including match) (250,000) 250,000 0 McCrindle Music Program Fund (267,797) 267,797 0 ($852,425) $852,425 $0 Note 10 Contingency Government grants are subject to audit by the applicable government granting agencies. Management does not believe that there will be any material disallowances and thus has not established an allowance for this. Any disallowances that are to result from any potential future audits will be charged to operations in the year the disallowance becomes known. 11

13 Note 11 Retirement Plan HSA offers employees the option of participating in a voluntary 403(b) retirement plan whereby the employee can contribute pre tax dollars up to statutory limits. The plan covers all employees that are at least 18 years of age. Under terms of the plan, HSA is not required to provide matching funds, and has not incurred any expenses during Note 12 Going Concern/Subsequent Events At June 30, 2011, the net asset deficit in the operational portion of unrestricted net assets is ($3,096,088). Total liabilities of $2,317,687 exceed total assets of $2,262,907. This raises doubt as of June 30, 2011 about whether HSA could continue to remain a going concern in its current form. In response to this concern, HSA continues to focus on improving its financial position by focusing on generating revenue and reducing expenses. Management's priority has been to increase revenues through greater marketing efforts, thus attracting new families, improve enrollment and increase tuition. HSA has expanded its educational outreach program by establishing key partnerships with NYC schools and networks to provide arts instruction to more than 2,000 young people. In the summer 2011, HSA's summer camp "ArtScape" signed up over 250 campers. The camp's revenue helped sustain the school through the summer and bring new students to enroll in the Fall 2011 semester. In September 2011, HSA offered additional adult classes, and developed a studio and theater rentals program that will increase earned revenue in FY12. The board and the leadership have been focused on implementing a robust fundraising strategy and rebuilding HSA's donor base through end of year mail and appeals, cultivation events, and developing new funding opportunities for donors. In June 2011, HSA recruited and hired a new Director of Development and an Institutional Giving Manager. These efforts have helped HSA to re establish connections to major donors and foundations. Intense attention was focused on budgeting and staff evaluations during FY11. In June 2011, the board approved a realistic FY12 budget based on actuals from FY11 including cash flow projections for each department. Installation, training and implementation in January 2011 of the new financial software system has created greater efficiency in registration. In order to reduce expenses, under enrolled classes for the Spring 2011 term were eliminated. By the end of FY11, management had reduced overall operating expenses by 30%. HSA will operate at these reduced expense levels moving forward, and HSA's projected cash flow for FY12 is budgeted at a surplus. Management is confident that these continued efforts to sustain a well managed business environment will improve HSA's position as a going concern and restore its rightful place as a distinctively unique and indispensable institution for the young people and families that are served. 12