THE NEIGHBORHOOD MUSIC SCHOOL, INC.

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1 FINANCIAL STATEMENTS JUNE 30, 2014 AND 2013

2 CONTENTS Independent Auditors Report 1-2 Statements of Financial Position - June 30, 2014 and Statements of Activities for the Years Ended June 30, 2014 and Statements of Functional Expenses for the Years Ended June 30, 2014 and Statements of Cash Flows for the Years Ended June 30, 2014 and Notes to Financial Statements 7-17 Independent Auditors Report on Supplementary Information 18 Supplemental Schedule of Unrestricted Support and Revenue by Source for the Year Ended June 30,

3 29 South Main Street P.O. Box West Hartford, CT Tel Fax blumshapiro.com Independent Auditors Report To the Board of Directors The Neighborhood Music School, Inc. We have audited the accompanying financial statements of The Neighborhood Music School, Inc., which comprise the statements of financial position as of June 30, 2014 and 2013, and the related statements of activities, functional expenses and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity s preparation and fair presentation of the 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 the entity 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Blum, Shapiro & Company, P.C. -1- An independent member of Baker Tilly International

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Neighborhood Music School, Inc., as of June 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. West Hartford, Connecticut October 9,

5 STATEMENTS OF FINANCIAL POSITION JUNE 30, 2014 AND Temporarily Permanently Total Temporarily Permanently Total Unrestricted Restricted Restricted Total 2013 Unrestricted Restricted Restricted Total 2013 ASSETS LIABILITIES AND NET ASSETS Current Assets Current Liabilities Cash (Note 1) $ 529,304 $ 6,500 $ - $ 535,804 $ 583,223 Accounts payable and accrued expenses $ 366,734 $ - $ - $ 366,734 $ 360,081 Accounts receivable, net of allowance for doubtful Current maturities of mortgage payable (Note 7) 16, ,620 15,772 accounts of $8,000 in 2013 and , , ,573 Current maturities of capital lease obligation (Note 11) 7, ,795 6,223 Pledges receivable (Note 4, 9) - 15,145-15,145 33,292 Deferred tuition revenue 601, , ,582 Grants receivable - 19,200-19,200 19,200 Total current liabilities 992, , ,658 Prepaid expenses and other current assets 52, ,484 82,587 Total current assets 683,079 40, , ,875 Long-Term Liabilities Mortgage payable, less current maturities (Note 7) 417, , ,715 Property and Equipment Capital lease obligation, less current maturities (Note 11) 2, ,090 10,622 Land 16, ,966 16,966 Total long-term liabilities 419, , ,337 Building and improvements 6,759, ,759,432 6,746,859 Musical instruments 889, , ,463 Total liabilities 1,412, ,412,328 1,419,995 Furniture and equipment 462, , ,250 Website 30, ,269 30,269 Net Assets 8,159, ,159,336 8,159,807 Unrestricted: Less accumulated depreciation 3,385, ,385,044 3,149,782 Undesignated 3,888, ,888,223 4,221,155 Net property and equipment 4,774, ,774,292 5,010,025 Designated to function as endowment (Notes 8 and 10) 413, , ,166 Designated for working capital reserve (Note 8) 393, , ,712 Other Assets Designated for capital improvements (Note 8) 62, ,400 43,200 Charitable remainder trust (Note 1) 4,200 5,800-10,000 10,000 Designated for special use (Note 8) 48, ,099 83,499 Investments (Notes 2, 3 and 10) 53, , ,899 Designated match for endowment (Note 8) 5, ,000 5,000 Agency funds (Note 1) 489,894 59, ,936 1,060, ,333 Designated match for charitable remainder trust (Note 8) 4, ,200 4,200 Grants receivable, net - 33,701-33,701 49,645 Total unrestricted net assets 4,814, ,814,646 5,131,932 Deferred software costs (Note 1) 215, , ,665 Temporarily restricted (Notes 9 and 10) - 140, , ,937 Deferred financing costs (Notes 1 and 5) 7, ,324 8,046 Permanently restricted (Note 10) , , ,624 Total other assets 769,603 99, ,936 1,379,749 1,277,588 Total net assets 4,814, , ,936 5,465,637 5,689,493 Total Assets $ 6,226,974 $ 140,055 $ 510,936 $ 6,877,965 $ 7,109,488 Total Liabilities and Net Assets $ 6,226,974 $ 140,055 $ 510,936 $ 6,877,965 $ 7,109,488 The accompanying notes are an integral part of the financial statements -3-

6 STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED JUNE 30, 2014 AND Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Revenue and Support Tuition and fees $ 3,699,400 $ - $ - $ 3,699,400 $ 3,522,212 $ - $ - $ 3,522,212 Contributions and grants 534,288 20,046 71, , ,858 40,668 5, ,922 Change in value of agency funds (Note 10) 77,185 59, ,894 16, ,783 Trust income 119, , , ,839 Special events 51, ,999 63, ,179 Rent 26, ,036 17, ,190 Agency endowment fund income 13, ,995 25, ,562 Other income 6, ,337 31, ,649 Investment income (Note 2) , ,865 Donated instruments , ,500 Net assets released from restriction (Note 9) 57,637 (57,637) ,795 (86,795) - - Total revenue and support 4,586,958 22,118 71,312 4,680,388 4,469,432 (46,127) 5,396 4,428,701 Expenses Program service - music and dance instruction 3,328, ,328,110 3,297, ,297,791 Supporting services: Management and general 1,103, ,103,627 1,002, ,002,943 Fundraising 224, , , ,406 Total expenses 4,655, ,655,739 4,546, ,546,140 Changes in Net Assets Before Depreciation and Amortization (68,781) 22,118 71,312 24,649 (76,708) (46,127) 5,396 (117,439) Depreciation and Amortization (236,334) - - (236,334) (245,921) - - (245,921) Loss on Disposal of Property and Equipment (12,171) - - (12,171) Changes in Net Assets (317,286) 22,118 71,312 (223,856) (322,629) (46,127) 5,396 (363,360) Net Assets - Beginning of Year 5,131, , ,624 5,689,493 5,454, , ,228 6,052,853 Net Assets - End of Year $ 4,814,646 $ 140,055 $ 510,936 $ 5,465,637 $ 5,131,932 $ 117,937 $ 439,624 $ 5,689,493 The accompanying notes are an integral part of the financial statements -4-

7 STATEMENTS OF FUNCTIONAL EXPENSES FOR THE YEARS ENDED JUNE 30, 2014 AND Program Management Program Management Services and General Fundraising Total Services and General Fundraising Total Salaries and benefits $ 2,652,635 $ 901,314 $ 119,140 $ 3,673,089 $ 2,630,623 $ 842,723 $ 155,154 $ 3,628,500 Occupancy 179,695 21, , ,779 22, ,417 Professional fees and contract services 78,056 98,256 40, ,771 71,203 59,869 37, ,394 Financial aid 185, , , ,916 Office expenses 74,233 45, ,306 40,396 54,391-94,787 Program expenses 104, ,528 93, ,926 Special events ,450 49, ,680 36,303 Miscellaneous expenses 3,461 25,660-29,121 6,136 10,809-16,945 Advertising 27, ,870 34, ,139 Interest expense 23,071 3,503-26,574 23,546 3,598-27,144 Development ,903 11, ,858 14,858 Postage - 7,590 3,050 10,640-7,419 2,392 9,811 Total expense before depreciation and amortization 3,328,110 1,103, ,002 4,655,739 3,297,791 1,002, ,406 4,546,140 Depreciation and amortization 212,701 23, , ,329 24, ,921 Total $ 3,540,811 $ 1,127,260 $ 224,002 $ 4,892,073 $ 3,519,120 $ 1,027,535 $ 245,406 $ 4,792, The accompanying notes are an integral part of the financial statements

8 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2014 AND Cash Flows from Operating Activities Changes in net assets $ (223,856) $ (363,360) Adjustments to reconcile changes in net assets to net cash used in operations: Depreciation and amortization 236, ,921 Loss on disposal of property and equipment 12,171 - Donated instruments - (32,500) Investment gains (336) (19,887) Change in value of agency funds (136,894) (16,783) Contributions restricted for long-term investment - (5,396) (Increase) decrease in operating assets: Accounts receivable 2,282 50,297 Pledges receivable 12,751 18,482 Grants receivable 15,944 16,641 Prepaid expenses and other current assets 30,103 (2,124) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses 6,653 48,611 Deferred revenue 12,402 (113,752) Net cash used in operating activities (32,446) (173,850) Cash Flows from Investing Activities Proceeds from investment sales 107, ,891 Contribution to agency funds (81,312) (578,593) Outlays for deferred software and website costs (7,338) (4,157) Outlays for property and equipment (12,772) (34,747) Net cash provided by (used in) investing activities 5,631 (239,606) Cash Flows from Financing Activities Proceeds from contributions restricted for long term investment 5,396 - Repayment of capital lease obligation (6,960) (6,228) Repayment of mortgage payable (19,040) (14,835) Net cash used in financing activities (20,604) (21,063) Net Decrease in Cash (47,419) (434,519) Cash - Beginning of Year 583,223 1,017,742 Cash - End of Year $ 535,804 $ 583,223 Cash Paid During the Year for Interest $ 26,745 $ 28,863 The accompanying notes are an integral part of the financial statements -6-

9 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - The Neighborhood Music School, Inc. (the School) is a nonprofit, nonstock corporation organized to provide instruction in the performing arts in the greater New Haven community. Revenue and support consists primarily of tuition, fees and contributions. Net Asset Categories - The financial statements of the School have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Accordingly, the accounts of the School are maintained in the following net asset categories: Unrestricted Net Assets - Unrestricted net assets represent available resources other than donor-restricted contributions. These resources may be expended at the discretion of the Board of Directors. The Board of Directors has designated a portion of net assets as discussed in Note 8. Temporarily Restricted Net Assets - Temporarily restricted net assets include contributions that are restricted by the donor either as to purpose or time of expenditure and accumulated gains and investment income on donor-restricted endowment assets. Permanently Restricted Net Assets - Permanently restricted net assets represent contributions received with the donor restriction that the principal be invested in perpetuity and that only the income earned thereon be available for use. Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Cash - Cash represents cash deposits at banks, cash on hand and short-term investments with maturities, when purchased, of three months or less. The School maintains cash balances at several financial institutions, which at times may exceed federally insured limits. The School has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. Investment Valuation and Income Recognition- Investments are reported at fair value. Fair value is 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. See Note 3 for a discussion of fair value measurements. Purchases and sales of securities are recorded on the trade date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date. Investment income includes the School s gains and losses on investments bought and sold as well as held during the year. Accounts Receivable - The School grants credit to its students, substantially all of whom live in the greater New Haven area. The School requires a deposit at the time of enrollment and performs ongoing credit evaluations of its students, but does not require collateral. Receivable balances are considered delinquent if no payment has been made and no payment plan has been established. The -7-

10 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) School does not accrue interest on delinquent balances. The School maintains an allowance for potential collection losses based upon a review of specific delinquent accounts, and such losses have been within management s expectations. Specific accounts are written off after normal collection efforts have been exhausted. Property and Equipment - Property acquisitions and improvements thereon that individually exceed $500 are capitalized at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Repairs and maintenance are charged to expense as incurred. Property acquired under capital lease is amortized over the useful life of the related asset or the lease term, if shorter. Deferred Software Costs - Deferred software costs consist of costs incurred by the School in the development of comprehensive registration/billing and payroll software, which is expected to be placed in service on October 31, Deferred Financing Costs - Deferred financing costs are amortized on a straight-line basis over the term of the related mortgage. Agency Funds - The School maintains agency funds held by The Community Foundation for Greater New Haven (the Foundation). These accounts consist of one account named the Board Designated Endowment Equivalent Fund, which is to hold unrestricted board designated funds, and the other account is named the NMS Endowment Fund, which is for the purpose of holding permanently restricted funds. The agency fund agreement provides that the School receive investment income from the funds, to be determined by the School in its sole discretion in accordance with its spending policy. The School has the ability to access the principal, subject to a 60-day notice period. The agency funds are carried at fair value as discussed in Note 3. Changes in the carrying amount of the agency funds are recognized as increases or decreases in unrestricted net assets and temporarily restricted net assets. The balance of the agency funds as of June 30, 2014 and 2013, was $1,060,539 and $842,333, respectively. Charitable Remainder Trust - The School is the beneficiary of a charitable remainder trust managed by The Jewish Foundation of Greater New Haven. A charitable remainder trust provides for the payment of distributions to the grantor or other designated beneficiaries over the designated beneficiary s lifetime. At the end of the trust s term, the remaining assets will be distributed to the School for its use. The portion of the trust attributable to the present value of the future benefits to be received by the School was recognized in the statement of activities as a temporarily restricted contribution in the period the trust was established. The terms of the charitable remainder trust require that the School designate $4,200 of its unrestricted net assets to match the original gift amount of $5,800, resulting in the total trust amount of $10,000. The balance of this trust as of June 30, 2014 and 2013, was $10,000. Tuition and Fees - Tuition and fees for performing arts instruction are recognized when instruction takes place. Tuition and fees received in advance of instruction are presented as deferred tuition revenue. -8-

11 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Aid - The School extends financial aid and limited scholarships each year to deserving students, which is supported by philanthropic gifts from individuals and foundations. The School accounts for financial aid by recording the subsidized tuition as tuition and fee revenue, with a corresponding amount recognized as program service expense. Financial aid provided by the School totaled $185,121 and $209,916 for the years ended June 30, 2014 and 2013, respectively. Governmental Grants - Governmental grant revenue is recognized to the extent that allowable expenditures have been incurred. Grant receipts in excess of expenditures are recognized as deferred grant revenue. Contributions - Unconditional contributions are recognized when pledged or received, as applicable, and are considered to be available for unrestricted use unless specifically restricted by the donor. Contributions receivable expected to be collected in more than one year are discounted to their present value. The School reports nongovernmental contributions and grants of cash and other assets as temporarily restricted support if they are received with donor stipulations that limit their use. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets released from restrictions. Contributions received whose restrictions are met in the same period are presented with unrestricted net assets. Conditional promises to give are recognized when the conditions on which they depend are substantially met. The School 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 on how the assets are to be used and gifts of cash or other assets that must be used to acquire property and equipment are reported as restricted support. The School reports expirations of donor restrictions in full when the property and equipment is placed in service. Contributed services are recognized in the financial statements if they enhance nonfinancial assets or require specialized skills, are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. General volunteer services do not meet these criteria for recognition. No contributed services have been recognized on the accompanying financial statements. Expenses by Function - The cost of providing the School s program services has been summarized on a functional basis in the accompanying statements of functional expenses. Accordingly, certain costs have been allocated between program services and supporting services. Advertising - Direct-response advertising costs, consisting of course catalog production costs, are capitalized and amortized over the revenue cycle of the catalog, which is generally 12 months. Other advertising costs are expensed as incurred. Income Taxes - The School is a not-for-profit organization and is exempt from federal and state income taxes as a public charity under section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes has been made in the accompanying financial statements. The School s informational returns for the years ended June 30, 2011 through 2014 are subject to examination by the Internal Revenue Service and the State of Connecticut. -9-

12 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Subsequent Events - In preparing these financial statements, management has evaluated subsequent events through October 9, 2014, which represents the date the financial statements were available to be issued. NOTE 2 - INVESTMENTS Investments as of June 30, 2014 and 2013, consisted of $53,182 and $159,899, respectively, of money market funds held by investment brokers. Investments have been presented in the accompanying statements of financial position as noncurrent as the amounts represent funds designated by the Board of Directors and are to be held for a period of time exceeding 90 days. Investment income for the years ended June 30, 2014 and 2013, consisted of the following: Interest and dividends $ 154 $ 13,011 Investment gains ,854 Total Investment Income $ 490 $ 31,865 NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS Generally accepted accounting principles establish a framework for measuring fair value. That framework provides 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 (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the School has the ability to access. Level 2 - Inputs to the valuation methodology include: Quoted prices for similar assets in active markets; Quoted prices for identical or similar assets in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. -10-

13 NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) If the asset has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset s or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. When, as a practical expedient, an investment is measured at fair value on the basis of net asset value, its classification as Level 2 or 3 will be impacted by the ability to redeem the investment at net asset value at the measurement date. If there is uncertainty or the inability to redeem an investment at net asset value in the near term subsequent to the measurement date, the investment is categorized as Level 3. The following is a description of the valuation methodologies used for assets measured at fair value: Money Market Funds - Money market funds are valued at the quoted net asset value of shares reported in the active market in which the funds are traded. Agency Funds - The agency funds are valued at the quoted fair market value of the underlying assets held at year end. There have been no changes in the methodologies used at June 30, 2014 and The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the School believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Assets Measured at Fair Value on a Recurring Basis - The following tables set forth by level, within the fair value hierarchy, the School s assets at fair value as of June 30, 2014 and 2013: June 30, Fair Value Measurements Using Description 2014 Level 1 Level 2 Level 3 Money market funds $ 53,182 $ 53,182 $ - $ - Agency funds 1,060,539-1,060,539 - Total Assets at Fair Value $ 1,113,721 $ 53,182 $ 1,113,721 $

14 NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) June 30, Fair Value Measurements Using Description 2013 Level 1 Level 2 Level 3 Money market funds $ 159,899 $ 159,899 $ - $ - Agency funds 842, ,333 - Total Assets at Fair Value $ 1,002,232 $ 159,899 $ 842,333 $ - There were no transfers between levels of investments during the years ended June 30, 2014 and Gains and losses (realized and unrealized) included in changes in net assets for the years ended June 30, 2014 and 2013, are reported in investment income in the statements of activities. NOTE 4 - PLEDGES RECEIVABLE Pledges receivable as of June 30, 2014 and 2013, represent receivables in the amount of $15,145 and $33,292, respectively, to be received in less than one year. The pledges receivable are from donors who have contributed to the School in the past, and, therefore, management considers the pledges to represent minimal credit risk. Accordingly, management does not consider an allowance for collection losses necessary as of June 30, 2014 and NOTE 5 - DEFERRED FINANCING COSTS Costs related to acquiring financing on the facility are being amortized on a straight-line basis over the term of the related debt, expiring May Amortization expense for the years ended June 30, 2014 and 2013, was $722. Expected amortization for the next five years is as follows: Year Ending June $

15 NOTE 6 - LINE OF CREDIT The School has an available line of credit of $250,000. The line bears interest at the prime rate and is secured by real property. No amounts were outstanding under the line as of June 30, 2014 and NOTE 7 - MORTGAGE PAYABLE The following is a summary of the mortgage payable as of June 30, 2014 and 2013: Mortgage payable, with interest at the Boston Classic Advance rate plus 2% with a floor rate of 5.25%, current monthly principal and interest payment of $3,265, final payment May 2031, secured by property and equipment. $ 434,447 $ 453,487 Less current maturities 16,620 15,772 Principal maturities of the mortgage payable in subsequent years are as follows: Year Ending June $ 16, , , , ,494 Thereafter 341,915 Total $ 434,447 $ 417,827 $ 437,715 Interest expense under the mortgage note totaled $23,656 and $24,767 for the years ended June 30, 2014 and 2013, respectively. -13-

16 NOTE 8 - BOARD DESIGNATIONS The Board of Directors has established the following designations of unrestricted net assets: Designation to function as an endowment $ 413,012 $ 381,166 Designation for working capital reserve 393, ,712 Designation for capital improvements 62,400 43,200 Designation for special use 48,099 83,499 Designation of donor-required match to an endowment gift made to a foundation on the School s behalf 5,000 5,000 Designation of donor-required match to its charitable remainder trust 4,200 4,200 $ 926,423 $ 910,777 NOTE 9 - TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets as of June 30, 2014 and 2013, are subject to the following time or purpose restrictions: Purpose restrictions: Capital Replenishment $ 52,901 $ 68,845 Special Programs 6,500 10,000 Time restrictions: Appropriation of gains and income on donor-restricted endowment assets 59,709 - Pledges receivable 15,145 33,292 Charitable remainder trust (see Note 1) 5,800 5,800 Total Temporarily Restricted Net Assets $ 140,055 $ 117,937 Temporarily restricted net assets were released from restriction during the years ended June 30, 2014 and 2013, by meeting the following restrictions: Purpose restrictions: Capital Replenishment $ 19,345 $ 43,200 Special Programs 5,000 5,500 Time restrictions: Pledges receivable 33,292 33,095 General operating support - 5,000 Total Net Assets Released from Restriction $ 57,637 $ 86,

17 NOTE 10 - ENDOWMENT The School s endowment includes both donor-restricted endowment funds and funds designated by the Board of Directors to function as endowments. The income earned on investments comprising the School s donor-restricted endowment funds is restricted for student financial aid, instrument maintenance and various other purposes. As required by GAAP, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law - The Board of Directors of the School has interpreted the Connecticut Prudent Management of Institutional Funds Act (CTPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds, absent explicit donor stipulations to the contrary. As a result of this interpretation, the School classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the School in a manner consistent with the standard of prudence prescribed by CTPMIFA. In accordance with CTPMIFA, the School considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund The purposes of the organization and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the organization The investment policies of the organization -15-

18 NOTE 10 - ENDOWMENT (Continued) Endowment Net Assets - Changes in endowment net assets for the years ended June 30, 2014 and 2013, are as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets - June 30, 2012 $ 523,592 $ - $ 434,228 $ 957,820 Investment return: Investment income 16, ,692 Investment gains Total investment return 16, ,783 Contributions - - 5,396 5,396 Expenditure of endowment assets (91) - - (91) Change in Board designation (159,118) - - (159,118) Endowment net assets - June 30, , , ,790 Investment return: Investment income 32, ,091 Investment gains 45,094 59, ,803 Total investment return 77,185 59, ,894 Contributions 10,000-71,312 81,312 Expenditure of endowment assets (55,339) - - (55,339) Endowment Net Assets - June 30, 2014 $ 413,012 $ 59,709 $ 510,936 $ 983,657 Funds with Deficiencies - From time to time, the fair value of investments associated with donorrestricted endowment funds may fall below the level that the donor or CTPMIFA requires the School to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets. There were no such deficiencies as of June 30, 2014 or Return Objectives and Risk Parameters - The School has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include donor-restricted assets that the School must hold in perpetuity as well as board-designated funds. Under this policy, as approved by the Board of Directors, endowment assets are invested in a manner that is intended to meet the School s primary objective of preservation of capital and secondary objective of long-term capital appreciation. -16-

19 NOTE 10 - ENDOWMENT (Continued) Strategies Employed for Achieving Objectives - To satisfy its long-term rate-of-return objectives, the School 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). The School targets a diversified asset allocation that places a greater emphasis on fixed income investments to achieve its primary long-term objective of preservation of capital. Spending Policy and How the Investment Objectives Relate to Spending Policy - The School s spending policy limits annual spending to the lesser of (1) 5% of the three-year average of (a) the Schools endowment assets plus, (b) the assets designated by the Board to function as endowment, or (2) the income generated by these asset classes. This is consistent with the School s objective to provide additional real growth through new gifts and investment return. NOTE 11 - LEASE COMMITMENTS The School purchased equipment under capital leases expiring through The following is a schedule by years of future minimum payments under capital leases, together with the present value of minimum lease payments as of June 30, 2014: Year Ending June $ 8, ,130 Total minimum lease payments 10,647 Less amount representing interest 762 Capital Lease Obligation $ 9,885 The equipment was fully amortized in Operating Leases - The School provides instruction at a number of locations other than its headquarters, including schools and churches. The School leases some of these facilities on a month-to-month basis. The School does not pay for the use of certain other facilities, either because its usage is considered incidental or because the School is considered to be providing a service by bringing instruction to the site. Management considers the fair value of the usage of the rent-free sites to be insignificant. Therefore, the School has not recognized these contributions in the accompanying statements of activities. NOTE 12 - EMPLOYEE BENEFIT PLAN The School maintains a defined contribution retirement plan in which employees are eligible to participate. No School contributions were made to the plan for the years ended June 30, 2014 and

20 29 South Main Street P.O. Box West Hartford, CT Tel Fax blumshapiro.com Independent Auditors Report on Supplementary Information To the Board of Directors The Neighborhood Music School, Inc. We have audited the financial statements of The Neighborhood Music School, Inc., as of and for the years ended June 30, 2014 and 2013, and our report thereon dated October 9, 2014, which expressed an unmodified opinion those financial statements, appears on pages 1 and 2. Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The supplemental schedule of unrestricted support and revenue by source is presented for the purposes of additional analysis and is not a required part of the 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 financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 financial statements as a whole. West Hartford, Connecticut October 9, 2014 Blum, Shapiro & Company, P.C An independent member of Baker Tilly International

21 SUPPLEMENTAL SCHEDULE OF UNRESTRICTED SUPPORT AND REVENUE BY SOURCE FOR THE YEAR ENDED JUNE 30, 2014 Special Fundraising Net Assets Contribution Events Released Total Individual $ 299,516 $ 51,999 $ 57,637 $ 409,152 Foundations 154, ,674 Government 57, ,448 Corporations 22, ,650 $ 534,288 $ 51,999 $ 57,637 $ 643,