THE KENNEDY CENTER, INC. AND AFFILIATES

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1 FINANCIAL STATEMENTS JUNE 30, 2015

2 CONTENTS Independent Auditor s Report 1-2 Consolidated Statement of Financial Position - June 30, 2015 (With Comparative Totals for June 30, 2014) 3 Consolidated Statement of Activities for the Year Ended June 30, 2015 (With Comparative Totals for June 30, 2014) 4 Consolidated Statement of Cash Flows for the Year Ended June 30, 2015 (With Comparative Totals for June 30, 2014) 5 Consolidated Statement of Functional Expenses for the Year Ended June 30, 2015 (With Comparative Totals for June 30, 2014) 6 Notes to Consolidated Financial Statements 7-22

3 29 South Main Street P.O. Box West Hartford, CT Tel Fax blumshapiro.com Independent Auditors Report To the Board of Directors The Kennedy Center, Inc. and Affiliates Report on the Financial Statements We have audited the accompanying consolidated financial statements of The Kennedy Center, Inc. and Affiliates, which comprise the statement of financial position as of June 30, 2015 and the related consolidated statements of activities, cash flows and functional expenses for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the 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. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 auditors 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 auditors consider internal control relevant to the entity 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Kennedy Center, Inc. and Affiliates as of June 30, 2015 and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter - Change in Accounting Principle As discussed in Note 2, during the year ended June 30, 2015, the Center elected early adoption of Accounting Standards Update No , Interest - Imputation of Interest. The amendments require retrospective application. As a result, certain amounts related to debt issuance costs have been reclassified as of and for the year ended June 30, Our opinion is not modified with respect to this matter. Report on Summarized Comparative Information We have previously audited The Kennedy Center, Inc. and Affiliates 2014 consolidated financial statements, and we expressed an unmodified opinion on those consolidated financial statements in our report dated December 12, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2014 is consistent, in all material respects, with the audited financial statements from which it has been derived. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated December 1, 2015 on our consideration of The Kennedy Center, Inc. and Affiliates internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, 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 the 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 The Kennedy Center, Inc. and Affiliates internal control over financial reporting and compliance. West Hartford, Connecticut December 1,

5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION JUNE 30, 2015 (With Comparative Totals for 2014) ASSETS Cash and cash equivalents $ 274,467 $ 422,575 Investments 4,865,938 4,731,454 Investments - other 285, ,189 Accounts and grants receivable, net 2,230,927 1,840,736 Prepaid expenses and other assets 701, ,528 Restricted cash 26,026 22,551 Beneficial interest in net assets of Auxiliary 69,697 72,984 Property, buildings and equipment, net 8,731,610 8,685,437 Total Assets $ 17,185,310 $ 16,990,454 LIABILITIES AND NET ASSETS Liabilities Accounts payable and accrued expenses $ 3,584,374 $ 3,348,485 Line of credit 1,100, ,000 Mortgages payable, net 4,455,397 4,699,757 Note payable 3,139 4,405 Other liabilities 287, ,125 Refundable advances 484, ,117 Annuities payable 51,672 65,507 Total liabilities 9,966,522 9,250,396 Net Assets Unrestricted 3,325,558 3,760,260 Temporarily restricted 1,891,438 2,020,272 Permanently restricted 2,001,792 1,959,526 Total net assets 7,218,788 7,740,058 Total Liabilities and Net Assets $ 17,185,310 $ 16,990,454 The accompanying notes are an integral part of the consolidated financial statements -3-

6 CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 (With Comparative Totals for 2014) 2015 Temporarily Permanently Unrestricted Restricted Restricted Total 2014 Revenues and Support Federal and state grants $ 24,127,133 $ - $ - $ 24,127,133 $ 23,233,652 Program revenue 6,939, ,939,134 7,508,683 Contributions 621,213 89,826 42, , ,782 Special fund-raising activities 170, , , ,848 Foundation and other grants 53,959 10,000-63,959 72,604 Rental income 65, ,722 61,175 Change in value of annuities payable (9,952) - - (9,952) 5,299 Net assets released from restrictions 424,960 (424,960) Total revenues and support 32,392,591 (181,955) 42,266 32,252,902 32,269,043 Expenses Program services 28,481, ,481,952 28,082,619 Management and general 3,180, ,180,591 3,137,403 Development and fundraising 565, , ,932 Total expenses 32,228, ,228,216 31,829,954 Income (Loss) from Operations before Depreciation 164,375 (181,955) 42,266 24, ,089 Depreciation Expense (682,650) - - (682,650) (663,237) Income (Loss) from Operations (518,275) (181,955) 42,266 (657,964) (224,148) Other Changes in Net Assets Investment gains 83,573 53, , ,422 Increase (Decrease) in Net Assets (434,702) (128,834) 42,266 (521,270) 605,274 Net Assets - Beginning of Year 3,760,260 2,020,272 1,959,526 7,740,058 7,134,784 Net Assets - End of Year $ 3,325,558 $ 1,891,438 $ 2,001,792 $ 7,218,788 $ 7,740,058 The accompanying notes are an integral part of the consolidated financial statements -4-

7 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2015 (With Comparative Totals for 2014) Cash Flows from Operating Activities Increase (decrease) in net assets $ (521,270) $ 605,274 Adjustments to reconcile increase (decrease) in net assets to net cash used in operating activities: Depreciation and noncash interest expense 696, ,975 (Gain) loss on sale of property and equipment 11,018 (170,967) Donated property and equipment (75,000) (245,166) Bad debts 49, ,762 Change in beneficial interest in net assets of Auxiliary 3,287 4,625 (Gain) loss on investments, net 114,525 (691,200) Change in value of annuities payable (898) (5,299) (Increase) decrease in operating assets: Accounts and grants receivable (439,558) 14,177 Prepaid expenses and other assets (163,644) 96,262 Restricted cash (3,475) (18,242) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses 235,889 (490,112) Other liabilities (39,212) (40,336) Refundable advances (121,090) 54,127 Net cash used in operating activities (253,310) (108,120) Cash Flows from Investing Activities Purchase of investments (1,493,152) (3,179,498) Proceeds from sale of investments 1,593,593 3,919,483 Proceeds from sale of property and equipment 125, ,130 Acquisition of property, buildings and equipment (544,909) (319,590) Deposits for property, buildings and equipment (245,783) - Net cash provided by (used in) investing activities (564,400) 607,525 Cash Flows from Financing Activities Proceeds of mortgages 1,200,000 - Borrowings (repayments) on line of credit 900,000 (30,245) Principal payments on mortgages and notes payable (1,404,719) (197,043) Payments for debt issuance costs (55,008) - Contributions restricted for long-term investment 42,266 27,004 Payment of annuities payable (12,937) (12,937) Net cash provided by (used in) financing activities 669,602 (213,221) Net Increase (Decrease) in Cash and Cash Equivalents (148,108) 286,184 Cash and Cash Equivalents - Beginning of Year 422, ,391 Cash and Cash Equivalents - End of Year $ 274,467 $ 422,575 The accompanying notes are an integral part of the consolidated financial statements -5-

8 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED JUNE 30, 2015 (With Comparative Totals for 2014) 2015 Development Program Management and Services and General Fundraising Total 2014 Personnel costs $ 21,539,033 $ 2,393, ,369 $ 24,215,628 $ 23,719,337 Transportation 1,093, ,280 24,856 1,242,801 1,387,414 Insurance 902, ,594 20,519 1,025, ,817 Workshops and other subcontract costs 769,428 87,435 17, , ,627 Repairs and maintenance 565,300 64,239 12, , ,982 Professional fees 633,929 72,037 14, , ,647 Rent 446,960 50,791 10, , ,702 Utilities 415,169 47,178 9, , ,981 Travel and conferences 377,790 42,931 8, , ,714 Interest 311,694 33,817 6, , ,751 Food 287,566 32,678 6, , ,678 Supplies 311,708 35,421 7, , ,663 Office supplies 184,725 20,991 4, , ,445 Fundraising events , , ,673 Telephone 156,254 17,756 3, , ,954 Program 112,186 12,749 2, , ,880 Bad debts 43,443 4, , ,762 Miscellaneous 111,141 12,630 2, , ,731 Property taxes 105,241 11,959 2, , ,789 Postage 48,320 5,491 1,098 54,909 63,733 Licenses and permits 49,015 5,570 1,114 55,699 36,234 Dues 16,555 1, ,812 17,440 Total expenses before depreciation 28,481,952 3,180, ,673 32,228,216 31,829,954 Depreciation expense 599,040 69,675 13, , ,237 Total Expenses $ 29,080,992 $ 3,250,266 $ 579,608 $ 32,910,866 $ 32,493,191 The accompanying notes are an integral part of the consolidated financial statements -6-

9 NOTE 1 - ORGANIZATION The Kennedy Center, Inc. (the Center) is a Connecticut nonstock corporation whose primary purposes are the rehabilitation of children and adults with disabilities with vocational, residential, educational, therapeutic, social and recreational programs throughout the State of Connecticut and to promote the empowerment of consumers with diverse abilities, disabilities and experiences toward optimal participation and inclusion in the community. The Kennedy Center Auxiliary, Inc. (the Auxiliary) was established for the sole purpose of raising funds to provide support for the Center and its consumers. Since the Center and the Auxiliary have a financial interrelationship, the Center is required to reflect its beneficial interest in the net assets of the Auxiliary on the Center s consolidated financial statements. Legally, the Center and the Auxiliary are separate entities and the Center can only draw on the net assets of the Auxiliary with the Auxiliary Board s approval. The Center s beneficial interest in the net assets of the Auxiliary has been reflected on the accompanying consolidated statement of financial position. The Center s change in the beneficial interest in the net assets of the Auxiliary is reflected on the accompanying consolidated statement of activities. The Center is the sole member of Kenn Homes, Inc. (Kenn) which was formed to take title to the Center s two residences financed by the U.S. Department of Housing and Urban Development (HUD). Prior Year Summarized Financial Information The consolidated financial statements include prior year summarized financial information in total but not by 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. Accordingly, such information should be read in conjunction with Center s audited consolidated financial statements as of and for the year ended June 30, 2014, from which the summarized information was derived. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting and Presentation The financial statements are presented on a consolidated basis to include the transactions of the Center and its affiliates, the Auxiliary and Kenn. All material intercompany balances and transactions have been eliminated from the financial statements. The consolidated financial statements of the Center and its affiliates have been prepared on the accrual basis in accordance with accounting principles generally accepted in the United States of America. Accordingly, the accounts of the Center and its affiliates are reported 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. Designated net assets represent partitioning of unrestricted net assets for purposes established by the Board of Directors. The Center and its affiliates have identified four designations of unrestricted net assets: funds functioning as endowment, investment in property, buildings and equipment, future program expansion and a reserve, residual and mortgage escrow, as more fully described in Note

10 Temporarily Restricted Net Assets Temporarily restricted net assets represent contributions that are restricted by the donor as to purpose or time of expenditure and accumulated investment gains and income on donor-restricted endowment assets. Permanently Restricted Net Assets Permanently restricted net assets represent resources that have donor-imposed restrictions that require that the principal be maintained in perpetuity but permit the Center and its affiliates to expend the income earned thereon. Change in Accounting Principle In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update No , Interest - Imputation of Interest, which simplifies the presentation of debt issuance costs. The amendments change the presentation of debt issuance costs from an asset to a direct deduction of the debt on the accompanying consolidated statement of financial position. In addition, the amortization of debt issuance costs is now included in interest expense rather than amortization expense in the accompanying consolidated statement of activities. This ASU is effective for annual periods beginning after December 15, The Center has elected early adoption of the amendments for the year ended June 30, The amendments have been retrospectively applied. As a result, debt issuance costs of $75,366 have been reclassified from assets to a direct deduction of the debt in the consolidated statement of financial position as of June 30, 2014, and $4,738 of amortization expense has been reclassified to interest expense in the consolidated statement of activities for the year ended June 30, Measure of Operations The Center s measure of operations includes all changes in net assets except for investment gains. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures in the financial statements. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash in banks and certain highly liquid investments with original maturities of 90 days or less, exclusive of amounts held by brokers, which are considered to be investments. Accounts and Grants Receivable, Net The Center has accounts receivable related to grants and third-party reimbursements. Uncollectible account balances are written off when management determines the probability of collection is remote. Management maintains an allowance for doubtful accounts based on a review of specific accounts and general historical experience. Management has provided an allowance for doubtful accounts of $48,249 as of June 30,

11 Inventories Inventories consist of materials used for production under various workshop subcontracts, food products utilized in the cafeteria and food service sites, and products that are held for resale. The inventories are stated at the lower of cost or market on the first-in first-out (FIFO) basis. Prepaid Expenses and Other Assets Other assets consist of the cash surrender values of life insurance policies, mortgage escrow balances, inventories and deposits. Debt Issuance Costs Debt issuance costs represent costs incurred in connection with obtaining mortgages and are being amortized on a straight-line basis over the term of the mortgage. Debt issuance costs are presented as a direct deduction of the carrying amount of debt. Amortization of debt issuance costs is included in interest expense. Restricted Cash Restricted cash consists of HUD related properties tenant security deposits that are held in trust. 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 4 for a discussion of fair value measurements. Purchases and sales of securities are recorded on the trade date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Realized and unrealized gains include the Center s gains and losses on investments bought and sold as well as held during the year. Realized and unrealized gains and losses on these investments are reported in the consolidated statement of activities as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or by law. Investment - Other The Center s certificates of deposit held for investment with maturities greater than 90 days are classified as Investments - other. These investments do not qualify as securities as defined within generally accepted accounting principles and, therefore, are not included within the fair value disclosures in Note 4. Property, Buildings and Equipment Property and equipment acquisitions and improvements thereon that exceed $4,999 are capitalized at cost and depreciated on a straight-line basis over their estimated useful lives. Property acquired for DDS homes that exceed $2,500 are capitalized at cost and depreciated on a straight-line basis over their estimated useful lives. Repairs and maintenance are charged to expense as incurred. -9-

12 Certain furniture and equipment was acquired with grant funds. Although in some instances the grantors retain a reversionary right to such assets in the event they are not used for the respective programs for which they were funded, it is the policy of the Center to capitalize such assets when it considers it probable that it will be permitted to retain the assets when the grant agreements terminate. Other Liabilities Other liabilities consists primarily of an obligation to disburse annually, upon request, a portion of the funds transferred by a donor organization for the benefit of a supporting organization over a period of 10 years commencing July 1, Any amounts not disbursed will be recognized as income by the Center at the end of the disbursement period of June 30, Refundable Advances Amounts of grants and contracts that are received but unearned are reflected as refundable advances in the accompanying consolidated statement of financial position and are subsequently reflected in the accompanying consolidated statement of activities during the period to which they apply as the funds are expended. Charitable Gift Annuities The Center has received charitable gift annuities in which a donor makes an initial contribution to the Center, which provides for annuity payments to the donor for life or a defined period of time. The asset received is reflected as a contribution at its fair value at the date of the contribution, net of a liability for the portion of the contribution representing the present value of the expected payments to the donor. During the term of the agreement, changes in the Center s obligation under the agreement will occur and are reflected in the accompanying consolidated statement of activities as changes in the value of annuities payable. The changes are due to events or transactions that have occurred after the agreement s initial recognition such as accretion of the discounted amount of the annuity payable, revaluation of future benefits or future payments. 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 Center and its affiliates report 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 and reported in the consolidated statement of activities as 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. Governmental Grants and Contracts Other than certain awards to fund capital expenditures, governmental grants and contracts are generally considered to be exchange transactions rather than contributions. Revenue from cost reimbursement grants and contracts is recognized to the extent of costs incurred. Revenue from performance based grants and contracts is recognized to the extent of performance achieved. -10-

13 Under arrangements with the Connecticut Department of Social Services (DSS), certain individuals who are served by the Center receive funds from DSS and other sources, which are substantially passed through to the Center in the form of room and board fees at per diem rates established by DSS. Donated Property and Services Donated services are recognized as contributions if the services create or enhance non-financial assets or require specialized skills, are performed by people with those skills and would otherwise be purchased by the Center. Donated property and the use of equipment and facilities are recorded as support and expensed at fair market value when determinable, otherwise at values indicated by the donor. For the year ended June 30, 2015, the Center received donated property valued at $75,000 that is included in contributions in the accompanying statement of activities. While many individuals volunteer their time and perform a variety of tasks that assist the Center, most amounts have not been recognized in the accompanying financial statements for such services because the criteria for recognition of such volunteer efforts have not been met. Functional Expense Allocation Expenses are charged directly to program services, development and fundraising, and management and general based on specific identification to the extent practicable. Expenses related to more than one function have been allocated based on periodic time and expense studies. Management and general expenses include those expenses that are not directly identifiable with a specific function, but provide for the overall support and direction of the Center. Compensated Absences The Center and its affiliates record accrued vacation pay based upon length of service as an expense in the period in which it is earned. Income Taxes The Center and its affiliates are exempt from federal and state income taxes as public charities under Section 501(c)(3) of the Internal Revenue Code. Their informational returns for the years ended June 30, 2012 through 2015 are subject to examination by the Internal Revenue Service and the State of Connecticut. Subsequent Events In preparing these consolidated financial statements, management has evaluated subsequent events through December 1, 2015, which represents the date the consolidated financial statements were available to be issued. Reclassifications Certain amounts in the prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. These reclassifications have no effect on previously reported results. -11-

14 NOTE 3 - CONCENTRATIONS OF CREDIT RISK The Center s financial instruments that are exposed to concentrations of credit risk consist of cash and cash equivalents, investments, investments - other and accounts receivable. Cash and Cash Equivalents The Center places its cash deposits with credit-quality institutions. Such deposits exceed federal depository insurance limits at various times during the year. However, management believes that the Center s deposits are not subject to significant credit risk. Investments The Center s investments are comprised of various mutual funds investing in equities, bonds and money market funds. The money market funds are not protected by federal depository insurance. The value of the mutual funds is subject to fluctuations due to general market conditions and interest rates. Accounts Receivable The Center grants credit to its various business and clients it serves. Receivable balances are considered delinquent if no payment has been made and no payment plan has been established. The Center 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. NOTE 4 - FAIR VALUE MEASUREMENTS 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 or liabilities (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 Center has the ability to access. Level 2 Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities 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. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. -12-

15 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. The fair values of all investments are determined using quoted prices for identical assets in active markets in which the Center has access (Level 1). The following is a description of the valuation methodologies used for financial instruments measured at fair value: Equity and Bond Funds Mutual funds are valued at the quoted net asset value of shares reported in the active market in which the mutual funds are traded. There have been no changes in the methodologies used at June 30, 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 Center 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. Investments at fair value as of June 30, 2015 consist of the following: Money market funds $ 12,178 Equity funds: Large cap 1,821,356 Small cap 425,410 Developing 140,407 International 1,061,158 Bond funds 1,405,429 Total Investments at Fair Value $ 4,865,938 NOTE 5 - INVESTMENT GAINS Investment income for the year ended June 30, 2015 consists of the following: Realized and unrealized losses $ (114,525) Interest and dividends 251,219 Total Investment Gains $ 136,694 Gains and losses (realized and unrealized) included in changes in net assets for the year ended June 30, 2015 are reported in investment gains in the statement of activities. -13-

16 NOTE 6 - PROPERTY, BUILDINGS AND EQUIPMENT, NET Property, buildings and equipment, net as of June 30, 2015 consist of the following: Land and land improvements $ 1,944,006 Buildings and building improvements 10,707,313 Furniture and equipment 1,036,965 Transportation equipment 3,143,797 Construction in progress 245,783 17,077,864 Less accumulated depreciation 8,346,254 Property, Buildings and Equipment, Net $ 8,731,610 NOTE 7 - POST EMPLOYMENT BENEFITS The Center has an agreement with a key employee to provide lifetime health insurance benefits for the key employee and the key employee s spouse upon retirement. As of the date the key employee becomes eligible for Medicare benefits, the Center shall pay for private insurance coverage which will provide benefits supplemental to Medicare benefits that are equal to the insurance benefits the Center provides to its executive employees. Under the agreement the key employee has no obligation to contribute any amount towards the benefit costs. No benefits have been paid under this plan to date. The Center does not fund its postretirement healthcare plan. Management s estimate of the future accumulated benefit obligation is $389,317 at June 30, Management used a discount rate of 4.43% for June 30, 2015 in determining the present value of this benefit obligation the Center. Management utilized projected health care cost trend rates to measure the expected cost of benefits under the plan, which are assumed to increase by 7.1% gradually decreasing until they reach 5.3%, in The following benefit payments, which reflect expected future health care costs, are expected to be paid: Year Ending June $ 17, , , , , ,

17 NOTE 8 - LINE OF CREDIT The Center has a $3,024,000 line of credit, which expires in November The line bears interest at.65% below the bank s prime rate (3.25% at June 30, 2015) and is secured by bank accounts at this institution and a mortgage lien on 2440 Reservoir Drive and 39 Lindeman Drive, Trumbull, Connecticut, 7 Research Drive, Woodbridge, Connecticut, and 803 Clinton Avenue, Bridgeport, Connecticut. The outstanding balance under the line was $1,100,000 as of June 30, The line of credit agreement includes certain financial and other covenants. NOTE 9 - MORTGAGES PAYABLE The Center had the following mortgages outstanding at June 30, 2015: Monthly Principal Interest and Rate Maturity Interest 2015 Research Drive, Reservoir Avenue and Lindeman Drive 4.75% Nov $ 6,889 $ 1,185,167 Edison Road 3.40% Dec , ,024 Connors Lane 6.00% Feb , , Main Street 7.00% Feb , ,233 Marina Drive 6.00% Feb , ,747 Dan Smith Home 6.63% Sep , ,338 Hasco Home 6.43% Feb , ,231 Probus House and Carroll Apartments 9.24% Jun , ,955 Fans Rock Road 6.63% Sep , ,848 Daniels Farm Road 7.34% Sep , ,618 Wayne Road improvements 6.00% Mar , ,032 Wayne Road 6.00% Sep ,032 73,329 Amsterdam Ave., Unit 1C 6.00% Apr ,312 Main Street, Unit % May ,873 Total $ 42,611 $ 4,571,670 Mortgages payable are secured by first security interest in the land and buildings of the Reservoir Avenue office facility and residential facilities of the Center and Affiliates. The Reservoir Avenue facility is also secured by the assignment of leases and a UCC-1 filing on the business assets of the Center. The mortgage agreements for the Center s Amsterdam Ave., Main Street and Wayne Road residential facilities require that the facilities continue to be utilized as group homes. The mortgage agreement with the Department of Housing and Urban Development (HUD) for the construction of Probus House and Carroll Apartments provides that a HUD Reserve for Replacement Fund (Reserve Fund) and a HUD Residual Receipts Fund (Residual Fund) be established as additional security. -15-

18 Since January 1, 1984, the HUD Mortgage agreement required the segregation of $1,824 per annum for the Reserve Fund plus the segregation of any Residual cash receipts of Probus House and Carroll Apartments for the Residual Fund. There were no residual cash receipts from these facilities for the year ended June 30, The funds transferred to the Reserve Fund plus accumulated interest may be used for capital improvements and HUD mortgage payments subject to the approval of HUD, and the Residual Fund plus accumulated interest may be used for any purpose subject to the approval of HUD. Certain mortgage agreements require escrow payments to an escrow fund for capital repairs in excess of $2,500. Any amounts remaining in the mortgage escrow funds upon the termination of the mortgages, which amounted to $319,053 at June 30, 2015, must be remitted to the State of Connecticut. In connection with the mortgages, the Center incurred a cost of $163,098, which will be amortized over the life of the term of the mortgages. Amortization expense was $14,101 and accumulated amortization was $46,825 as of June 30, The costs, net of accumulated amortization, are presented as a direct deduction of the carrying amount of the debt. Principal maturities of the mortgages payable in subsequent years are as follows: Year Ending June $ 251, , , , ,707 Thereafter 3,292,764 4,571,670 Less unamortized debt issuance costs 116,273 Mortgages Payable $ 4,455,397 Interest expense under these mortgages totaled $286,971 for the year ended June 30, NOTE 10 - NOTE PAYABLE The Center has a note payable to the State of Connecticut, with interest of 6% and monthly payments of principal and interest totaling $120 maturing October The proceeds were used for various improvements to residential units and are unsecured. Note payable was $3,139 at June 30, Future maturities of note payable at June 30, 2015 are as follows: Year Ending June $ 1, , Total $ 3,

19 NOTE 11 - LEASE COMMITMENTS Operating Leases The Center has entered into several operating leases for space to house its various day programs and residential facilities. The Center also has additional operating leases for various vans and cars. The terms of the operating leases expire at various times through August Rent and vehicle expenses for the year ended June 30, 2015 amounted to $608,268. At June 30, 2015, minimum future rental payments under the operating leases were as follows: Year Ending June $ 493, , , , ,676 Thereafter 248,282 Total $ 1,484,546 Included in the minimum rental payments, $1,245,751 may be canceled if the Center is notified by the State of Connecticut s DDS that insufficient funding exists for the related program. The Center leases space in its Research Drive property to a tenant under a noncancelable lease which expires on July 31, Future minimum rentals under the lease are $55,307 for the year ending June 30, 2016, $55,500 for the year ending June 30, 2017 and $4,625 for the year ending June 30, NOTE 12 - ANNUITIES PAYABLE The Center has received contributions in the form of charitable gift annuity agreements. These agreements provide that the donors will receive stipulated payments from the Center during their lifetime. The Center has recorded a contribution in an amount equal to the amount of the contribution less the present value of the assumed payments to be made, based on the donors life expectancy. Each year, the Center is required to pay the donors the stipulated annuity payments, a portion of which represents principal payments on the liability, and a portion represents interest. -17-

20 NOTE 13 - PROGRAM REVENUE Program revenue as of June 30, 2015 consists of the following: Fee for service $ 2,773,500 Contract revenue 2,773,761 DSS room and board 1,356,602 Other revenue 35,271 $ 6,939,134 NOTE 14 - BOARD DESIGNATED NET ASSETS At June 30, 2015, the board has designated unrestricted net assets for the following: Board designated endowment $ 1,662,867 Reserve, residual and mortgage escrow 345,259 Future program expansion 50,000 Total Board Designated Net Assets $ 2,058,126 NOTE 15 - TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are available for the following purposes or time periods at June 30, 2015: Purposes: Purchase of property and equipment $ 411,221 Programs 529,552 Beneficial interest in net assets of Auxiliary 69,697 Time periods: Accumulated gains and income on donor-restricted endowment assets restricted until appropriation 871,893 Future periods for operations 9,075 Total Temporarily Restricted Net Assets $ 1,891,

21 NOTE 16 - NET ASSETS RELEASED FROM RESTRICTIONS Net assets were released from restrictions by incurring expenses satisfying the following purpose restrictions for the year ended June 30, 2015: Purposes: Purchase of property and equipment $ 110,278 Programs 281,766 Time periods: Appropriation of donor-restricted endowment assets 32,916 Total Net Assets Released from Restrictions $ 424,960 NOTE 17 - ENDOWMENT The Center s endowment includes both donor-restricted endowment funds and funds designated by the Board of Directors to function as endowments. As required by generally accepted accounting principles, 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 Center 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 Center 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 Center in a manner consistent with the standard of prudence prescribed by CTPMIFA. In accordance with CTPMIFA, the Center 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 Center 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 Center The investment policies of the Center -19-

22 Endowment Net Assets Endowment net asset composition by type of fund is as follows as of June 30, 2015: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 871,893 $ 2,001,792 $ 2,873,685 Board-designated endowment funds 1,662, ,662,867 Total $ 1,662,867 $ 871,893 $ 2,001,792 $ 4,536,552 Changes in endowment net assets for the year ended June 30, 2015 are as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets - beginning of year $ 1,575,690 $ 851,688 $ 1,959,526 $ 4,386,904 Investment return: Investment income 160,122 94, ,683 Investment losses (72,945) (41,440) - (114,385) Total investment return 87,177 53, ,298 Contributions ,266 42,266 Expenditure of endowment assets - (32,916) - (32,916) Endowment Net Assets - End of Year $ 1,662,867 $ 871,893 $ 2,001,792 $ 4,536,552 Funds with Deficiencies From time to time, the fair value of investments associated with donor-restricted endowment funds may fall below the level that the donor or CTPMIFA requires the Center to retain as a fund of perpetual duration. In accordance with generally accepted accounting principles, deficiencies of this nature are reported in unrestricted net assets. There were no such deficiencies as of June 30,

23 Return Objectives and Risk Parameters The Center 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 Center 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 Center s primary objective of preservation of capital and secondary objective of long-term capital appreciation. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the Center 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 Center targets a diversified asset allocation of approximately 30% fixed income and 70% equity mix to achieve its return objectives. Spending Policy and How the Investment Objectives Relate to Spending Policy The Center s spending policy limits annual spending to no more than 4% of the fair market value of endowment funds as of June 30 th annually. This is consistent with the Center s objective to maintain the purchasing power of the endowment assets held in perpetuity as well as to provide additional real growth through new gifts and investment return. NOTE 18 - EMPLOYEE BENEFITS The Center has a defined contribution pension plan that was closed to new participants in January Employees become 100% vested with respect to the employer contributions after completing three years of service. Contributions to the plan for the year ended June 30, 2015 amounted to approximately $452,000. The Center also provides for a noncontributory 403(b) salary reduction plan for all employees who wish to participate. Effective January 1, 2000, the Center entered into supplemental retirement benefit agreements for certain key employees. These agreements provide for an annual contribution of 5% of salary for certain individuals to be contributed on December 31. Employees become 100% vested with respect to the employer contributions to this plan when made. During the year ended June 30, 2015, the Center has reflected pension expense of approximately $35,000 for these contributions. Accrued supplemental retirement benefits amounted to approximately $328,400 at June 30, 2015 and are included in accounts payable and accrued expenses in the consolidated statement of financial position. NOTE 19 - FEDERAL AND STATE ASSISTANCE PROGRAMS The Center participates in a number of federal and state assisted grant programs. The use of grants in programs is subject to future review by the grantors. Such reviews may result in the Center having liabilities to the grantors. -21-

24 NOTE 20 - CASH FLOWS Additional Cash Flow Information The Center paid $338,173 for interest during the year ended June 30,