International Sephardic Education Foundation Consolidated Financial Report September 30, 2012
Contents Independent Auditor's Report 1 Financial Statements: Consolidated Statements of Financial Position 2 Consolidated Statements of Activities 3 Consolidated Statements of Functional Expenses 4 Consolidated Statements of Cash Flows 5 6-13
Independent Auditor's Report To the Board of Directors International Sephardic Education Foundation New York, New York We have audited the accompanying consolidated statements of financial position of the International Sephardic Education Foundation ( ISEF ) as of September 30, 2012 and 2011, and the related consolidated statements of activities, functional expenses and cash flows for the years then ended. These financial statements are the responsibility of ISEF s management. 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 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Sephardic Education Foundation as of September 30, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. New York, New York May 31, 2013 1
Consolidated Statements of Financial Position September 30, 2012 and 2011 2012 2011 ASSETS Cash and Cash Equivalents $ 268,403 $ 480,084 Investments, at fair value 5,421,519 5,262,722 Pledges Receivable 91,640 52,336 Property and Equipment, net 24,399 17,480 Other Assets 71,866 19,171 Total assets $ 5,877,827 $ 5,831,793 LIABILITIES AND NET ASSETS Liabilities: Accounts payable $ 44,235 $ 39,628 Accrued expenses 32,414 47,258 Total liabilities 76,649 86,886 Commitments Net Assets: Unrestricted 1,456,229 1,834,626 Temporarily restricted 707,081 383,414 Permanently restricted 3,637,868 3,526,867 Total net assets 5,801,178 5,744,907 Total liabilities and net assets $ 5,877,827 $ 5,831,793 See. 2
Consolidated Statements of Activities Years Ended September 30, 2012 and 2011 Temporarily Permanently 2012 Temporarily Permanently 2011 Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Revenue, Gains, and Other Support: Contributions, net of special event direct expenses of $128,202 and $95,747, respectively $ 1,685,046 $ 1,664,553 $ 236,001 $ 3,585,600 $ 1,312,520 $ 1,752,520 $ 246,250 $ 3,311,290 Investment income 64,137 158,982-223,119 3,019 243,683-246,702 Net unrealized and realized gain (loss) on investments 105,045 263,888-368,933 (13,105) (309,738) - (322,843) Donor release from permanently restricted funds 125,000 - (125,000) - - - - - Net assets released from restrictions for scholarships and various projects 1,763,756 (1,763,756) - - 1,827,475 (1,827,475) - - Total revenue, gains, and other support 3,742,984 323,667 111,001 4,177,652 3,129,909 (141,010) 246,250 3,235,149 Expenses: Program activities: Scholarships and projects 3,065,021 - - 3,065,021 3,022,626 - - 3,022,626 Supporting services: General and administrative 467,215 - - 467,215 433,376 - - 433,376 Fund-raising 422,901 - - 422,901 353,294 - - 353,294 Total supporting services 890,116 - - 890,116 786,670 - - 786,670 Total expenses 3,955,137 - - 3,955,137 3,809,296 - - 3,809,296 Change in net assets before foreign currency translation (loss) gain (212,153) 323,667 111,001 222,515 (679,387) (141,010) 246,250 (574,147) Foreign Currency Translation (Loss) Gain (166,244) - - (166,244) 80,835 - - 80,835 Change in net assets (378,397) 323,667 111,001 56,271 (598,552) (141,010) 246,250 (493,312) Net Assets: Beginning 1,834,626 383,414 3,526,867 5,744,907 2,433,178 524,424 3,280,617 6,238,219 Ending $ 1,456,229 $ 707,081 $ 3,637,868 $ 5,801,178 $ 1,834,626 $ 383,414 $ 3,526,867 $ 5,744,907 See. 3
Consolidated Statements of Functional Expenses Years Ended September 30, 2012 and 2011 General and Fund- General and Fund- Total Programs Administrative Raising Total Programs Administrative Raising Scholarships $ 1,756,299 $ 1,756,299 $ - $ - $ 1,872,728 $ 1,872,728 $ - $ - Projects 680,818 680,818 - - 684,863 684,863 - - Operating expenses - Israel office 426,662 426,662 - - 393,686 393,686 - - Alumni events 111,718 111,718 - - - - - - Salaries 404,053 63,802 159,997 180,254 354,041 47,912 143,023 163,106 Payroll taxes 32,763 5,172 12,973 14,618 31,235 4,227 12,618 14,390 Professional services, including $31,504 and $44,361, respectively of pro bono legal services 89,619-89,619-104,960-104,960 - Computer 23,678-23,678-15,857-15,857 - Advertising 12,430-12,430-4,802-4,802 - Office expenses 98,215-98,215-79,291-79,291 - Office and health insurance 36,867-36,867-27,182-27,182 - Employment-related costs - - - - 5,450-5,450 - Depreciation 8,840-8,840-12,513-12,513 - Fund-raising and public relations 169,670 - - 169,670 128,371 - - 128,371 Consulting fees 73,136 20,550 15,413 37,173 70,104 19,210 14,407 36,487 Travel 21,186 - - 21,186 10,940 - - 10,940 Bad debt - - - - 5,570-5,570 - Miscellaneous 9,183-9,183-7,703-7,703 - Total expenses before direct costs of special events 3,955,137 3,065,021 467,215 422,901 3,809,296 3,022,626 433,376 353,294 Direct costs of special events 128,202 - - 128,202 95,747 - - 95,747 Total expenses $ 4,083,339 $ 3,065,021 $ 467,215 $ 551,103 $ 3,905,043 $ 3,022,626 $ 433,376 $ 449,041 See. 2012 2011 4
Consolidated Statements of Cash Flows Years Ended September 30, 2012 and 2011 2012 2011 Cash Flows From Operating Activities: Change in net assets $ 56,271 $ (493,312) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation 8,840 12,513 Bad debt - 5,570 Donated stock (77,087) (1,424) Net unrealized and realized (gain) loss on investments (368,933) 322,843 Contributions restricted for long-term purposes (236,001) (246,250) Changes in operating assets and liabilities: (Increase) decrease in pledges receivable (39,304) 116,404 Increase in other assets (52,695) (2,431) Increase in accounts payable 4,607 11,772 (Decrease) increase in accrued expenses (14,844) 3,154 Net cash used in operating activities (719,146) (271,161) Cash Flows From Investing Activities: Purchases of property and equipment (15,759) (2,868) Purchases of investments (1,555,978) (1,595,185) Proceeds from sales of investments 1,843,201 1,363,206 Net cash provided by (used in) investing activities 271,464 (234,847) Cash Flows From Financing Activities: Contributions restricted for long-term purposes 236,001 246,250 Net decrease in cash and cash equivalents (211,681) (259,758) Cash and Cash Equivalents: Beginning 480,084 739,842 Ending $ 268,403 $ 480,084 See. 5
Note 1. Organization The International Sephardic Education Foundation ( ISEF ) is a not-for-profit organization exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. ISEF was formed for the purpose of promoting equal educational opportunities for Israel s bright youth by supporting higher education. ISEF International Education Foundation ( ISEF Israel ) was registered on August 12, 1984 in Israel as a Society under the Amuta law. Note 2. Summary of Significant Accounting Principles Basis of Accounting: The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America using the accrual basis of accounting. Consolidation: The consolidated financial statements include the accounts of ISEF and ISEF Israel. ISEF controls the operations of ISEF Israel by providing most of its resources which are funded from contributions received in the United States and by exercising budgetary control over ISEF Israel. All significant interorganizational accounts and transactions have been eliminated. Net Assets: Net assets of ISEF are classified based upon the existence or absence of donor-imposed restrictions, as follows: Unrestricted: Net assets that are not subject to donor-imposed stipulations and are, therefore, available for the general operations of ISEF. Temporarily Restricted: Net assets that are subject to donor-imposed stipulations that will be met either by actions of ISEF and/or the passage of time. As such restrictions are satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying consolidated statements of activities as net assets released from restrictions. Permanently Restricted: Net assets that are subject to donor-imposed stipulations with an expectation that the corpus of the gift will be retained in perpetuity. Generally, such donors allow the income from these resources to be used for general or specific purposes. Cash and Cash Equivalents: Cash and cash equivalents include highly liquid instruments with original maturities at the time of purchase of three months or less, excluding cash held for investment purposes which is included in investments. ISEF maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. ISEF has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Investments: Investments are reported at fair value. Unrealized gains and losses are included in investment income in the consolidated statements of activities. Realized gains and losses on investments are determined using the specific-identification method. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Purchases and sales of securities are recorded on a trade-date basis. Property and Equipment: Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided by using the straight-line method over the estimated useful lives, which range from 3 to 7 years. Revenue Recognition: ISEF records contributions of cash and other assets when an unconditional promise to give is received from a donor. Contributions are recorded at the fair value of the assets received at the date of gift and are classified as either restricted or unrestricted support, depending upon donor-imposed stipulations, if any. 6
Note 2. Summary of Significant Accounting Principles (Continued) Expenses: The costs of providing program services and supporting services have been allocated in the financial statements among functional categories depending upon the ultimate purpose of the expense. Functional expenses that are not exclusively attributable to program services or supporting services have been allocated by management in accordance with various criteria. Fair Value: ISEF follows Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, which provides a framework for measuring fair value under accounting principles generally accepted in the United States of America, and applies to all financial instruments that are being measured and reported on a fair value basis. FASB ASC 820 sets out a fair value hierarchy and defines fair value as 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. In determining fair value, ISEF uses various methods including market, income and cost approaches. Based on these approaches, ISEF often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risk inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. ISEF utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, ISEF is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1: Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 2: Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or that can be derived principally from or corroborated by observable market data. Level 3: Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data. For the fiscal years ended September 30, 2012 and 2011, the application of valuation techniques applied to similar assets and liabilities has been consistent. The fair value of investment securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use unobservable inputs due to the limited market activity of the instrument. Credit Risk: ISEF invests in a professionally managed portfolio that contains common shares and bonds of publicly traded companies, exchange-traded funds, mutual funds and money market funds. Such investments are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with such investments and the uncertainty related to changes in the value of such investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment balances and the amounts reported in the consolidated financial statements. 7
Note 2. Summary of Significant Accounting Principles (Continued) Income Taxes: ISEF is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code and from state income taxes. In addition, ISEF is not classified as a private foundation. ISEF Israel is exempt from income taxes in Israel. Management evaluated ISEF s tax positions and concluded that ISEF had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. Generally, ISEF is no longer subject to income tax examinations by U.S. federal, state or local tax authorities for years before 2009. Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events: ISEF evaluates events occurring after the date of the financial statements to consider whether or not the impact of such events needs to be reflected and/or disclosed in the financial statements. Such evaluation is performed through the date the financial statements are available for issuance, which was May 31, 2013 for these consolidated financial statements. 8
Note 3. Investments and Fair Value Measurements The following table presents ISEF's hierarchy for its investments measured at fair value on a recurring basis as of September 30: Fair Value Measurements Using Fair Value 2012 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money Market Funds $ 788,134 $ 788,134 $ - $ - Mutual Funds: Large blend 676,773 676,773 - - High yield bond 135,419 135,419 - - Short-term 49,522 49,522 - - Health 144,342 144,342 - - 1,006,056 1,006,056 - - Exchange-Traded Funds: International 17,401 17,401 - - Domestic 104,514 104,514 - - Commodities 110,667 110,667 - - 232,582 232,582 - - Equity - common stock 127,962 127,962 - - Fixed Income: A1 - A3 501,460-501,460 - AA1 - AA3 520,834-520,834 - B1 - B3 297,508-297,508 - BA1 - BA3 420,134-420,134 - BAA1 - BAA3 1,371,982-1,371,982 - CAA1 23,115-23,115 - Other 131,752-131,752-3,266,785-3,266,785 - Total $ 5,421,519 $ 2,154,734 $ 3,266,785 $ - The fair value of money market fund and mutual funds are based on the net asset value invested by the investment manager. The fair value of exchange-traded funds and equity are based on quoted market prices. The fair value of fixed income securities are based on the last reported bid price provided by broker-dealers. 9
Note 3. Investments and Fair Value Measurements (Continued) Fair Value Measurements Using Fair Value 2011 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money Market Funds $ 517,787 $ 517,787 $ - $ - Mutual Funds: Large blend 169,201 169,201 - - Large value 26,312 26,312 - - High yield bond 244,191 244,191 - - Health 60,253 60,253 - - Natural resources 37,554 37,554 - - 537,511 537,511 - - Exchange-Traded Funds: International 176,577 176,577 - - Domestic 298,666 298,666 - - Financial 138,214 138,214 - - Commodities 97,673 97,673 - - 711,130 711,130 - - Equity - common stock 296,770 296,770 - - Fixed Income: A1 - A3 1,080,549-1,080,549 - AA1 - AA3 787,452-787,452 - BA1 - BA2 456,359-456,359 - BAA1 - BAA3 617,417-617,417 - Other 257,747-257,747-3,199,524-3,199,524 - Total $ 5,262,722 $ 2,063,198 $ 3,199,524 $ - Note 4. Temporarily Restricted Net Assets Temporarily restricted net assets are restricted by purpose for scholarships and various projects. 10
Note 5. Permanently Restricted Net Assets Permanently restricted net assets as of September 30 consist of investments to be held in perpetuity in funds as noted below to generate income for the general purposes of ISEF and to support ISEF s scholarships: 2012 2011 Nina Weiner Endowment $ 536,838 $ 611,838 Benin Fund 1,000,000 1,000,000 Manocherian Endowment 1,001,030 815,029 Fleischman Endowment 600,000 600,000 Alfred and Hanina Sasha Endowment 500,000 500,000 $ 3,637,868 $ 3,526,867 Note 6. Endowments and Unrestricted Reserves ISEF is subject to the State of New York Uniform Prudent Management of Institutional Funds Act ( NYPMIFA ) and has interpreted NYPMIFA 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. ISEF 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. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporary restricted net assets until those amounts are appropriated for expenditure by ISEF in a manner consistent with the standard of prudence prescribed by NYPMIFA. Endowment assets include those assets of donor-restricted funds that ISEF must hold in perpetuity. ISEF has adopted investment and spending policies for endowment assets that attempt to maintain a surplus for ISEF to allow for possible distributions for operating expenses and for unusual or unexpected repairs. To satisfy its long-term rate of return objectives, ISEF relies on the price appreciation of equities that at times make up a lot of its portfolio, but ISEF will also hold cash at times to provide stability in volatile markets. Under this policy, as approved by the board of directors, the overriding objective is to maintain purchasing power. Appropriations for expenditures are reviewed on an annual basis by ISEF. During fiscal years 2012 and 2011, there were $61,060 and $82,586, respectively, of appropriations of funds from donor-restricted endowments. 11
Note 6. Endowments and Unrestricted Reserves (Continued) Investments are represented by donor-restricted endowment and unrestricted reserve funds as follows: Donor-Restricted Endowment Reserves - Temporarily Permanently Unrestricted Restricted Restricted Total Investments, September 30, 2010 $ 1,685,490 $ 386,055 $ 3,280,617 $ 5,352,162 Investment return: Investment income 1,136 243,683-244,819 Net realized and unrealized loss (13,105) (309,738) - (322,843) Total return (11,969) (66,055) - (78,024) Contributions - - 246,250 246,250 Appropriation of endowment assets for expenditure - (82,586) - (82,586) Transfers to operations (175,080) - - (175,080) Subtotal (175,080) (82,586) 246,250 (11,416) Investments, September 30, 2011 1,498,441 237,414 3,526,867 5,262,722 Investment return: Investment income 63,286 158,982-222,268 Net realized and unrealized gain 105,045 263,888-368,933 Total return 168,331 422,870-591,201 Contributions - - 236,001 236,001 Donor release of permanently restricted funds - - (125,000) (125,000) Appropriation of endowment assets for expenditure - (61,060) - (61,060) Transfers into reserves 25,624 25,624 Transfers to operations (507,969) - - (507,969) Subtotal (482,345) (61,060) 111,001 (432,404) Investments, September 30, 2012 $ 1,184,427 $ 599,224 $ 3,637,868 $ 5,421,519 Note 7. Contributions In addition to the contributions received directly by ISEF, the Israeli Council on Higher Education (Perach) transferred $345,405 and $462,162 for the years ended September 30, 2012 and 2011, respectively, directly to the ISEF students who were eligible for scholarships from Perach. Furthermore, the following Israeli universities and colleges contributed matching funds to ISEF s scholarship winners in 2012 and 2011: Bar-Ilan University, Ben-Gurion University of the Negev, Haifa University, The Hebrew University of Jerusalem, The Open University of Israel, Tel Aviv University, Technion - Israel Institute of Technology, The Interdisciplinary Center, Bezalel Academy of Arts and Design, Tel Aviv Jaffa Academic College, Sami Shamoon College of Engineering in Be er Sheva, Ramat Gan College, ORT-Braude College of Engineering, Jezreel Valley College, Sapir College, Sami Shamoon College of Engineering in Ashdod, Hemdat Hadarom Teachers College, Gordon Academic College, Holon Academic Institute of Technology, Hadassah College Jerusalem, the Academy for Music in Jerusalem and Afeka College. The total universities' matching funds for the years ended September 30, 2012 and 2011 were $536,216 and $549,189, respectively. 12
Note 8. Agreement On October 15, 2010, ISEF and the Edmond J. Safra Philanthropic Foundation (the "Safra Foundation") entered into a new agreement to continue its annual grants for three years through the 2012-2013 academic year. The Safra Foundation will be obligated to make three annual grants of up to $1,400,000 during each of the next three academic years provided that ISEF maintains the appropriate scholarship percentage requirements as described in the new agreement. In the event that ISEF does not achieve the scholarship percentage requirements in any academic year, the Safra Foundation shall have the right at its sole discretion to suspend and, if appropriate, terminate any unpaid grants under the new agreement. ISEF maintained such requirements for the year ended September 30, 2012 and the grant of $1,400,000 from the Safra Foundation has been received and recognized as contributions in the accompanying consolidated financial statements. Note 9. Commitments ISEF leases its office space under an operating lease expiring on January 31, 2014. Total rent expense amounted to $46,862 and $45,497, respectively, for the years ended September 30, 2012 and 2011. Future minimum lease payments under this lease as of September 30, 2012 are as follows: Year ending September 30, 2013 $ 48,150 2014 16,207 $ 64,357 Note 10. Consolidating Financial Information The summarized consolidating financial information for ISEF is as follows: Total Before Total ISEF ISEF Israel Eliminations Eliminations Consolidated Assets $ 5,698,619 $ 179,208 $ 5,877,827 $ - $ 5,877,827 Liabilities 9,030 67,619 76,649-76,649 Net assets $ 5,689,589 $ 111,589 $ 5,801,178 $ - $ 5,801,178 Revenue $ 3,546,858 $ 2,709,608 $ 6,256,466 $ (2,078,814) $ 4,177,652 Expenses and foreign currency translation (loss) gain $ 3,538,443 $ 2,661,752 $ 6,200,195 $ (2,078,814) $ 4,121,381 13