SUNSET CULTURAL CENTER, INC.

FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2012 AND INDEPENDENT AUDITORS REPORT

SUNSET CULTURAL CENTER, INC. Table of Contents

Page Independent Auditors Report Financial Statements: Statement of Financial Position Statement of Activities and Changes in Net Assets Statement of Cash Flows Notes to Financial Statements Supplemental Schedule: Exhibit B Summary Financial Information and Grant Requirements Notes to Supplemental Schedule 11 12 3 4 5 6 10 2

HAYAS H 'Ill &WAYLAN L

.xccot:NTTNG & C:ONSIJLTT\G. LU'

INDEPENDENT AUDITORS' REPORT

To the Board of Directors Sunset Cultural Center, Inc. We have audited the accompanying statement of financial position of Sunset Cultural Center, Inc. (a nonprofit organization) as of June 30, 2012, and the related statement of activities and changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of Sunset uitural Center, Inc. 's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sunset Cultural Qnter, Inc. as of June 30, 2012 and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the fmancial statements as a whole. l'he supplementary information is presented for 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 audit 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 fmanciai. statements as a whole. October 25, 2012

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1188 Pdrc Drive, Sour: 101 P.O. Bo 1S79 Shnas, CA93902 Id: (831) 759-6300 Fax: (83I 759-6380 P.O. Box 22205 Catrud, CA 93923 Ic!: (831) 621 -5333 or (831 6253374 Fax: (831) 626.9113 104 South Vanderhi,rxt Avenue, SiitcA P.O. Box 927 lung :.oy. CA 93930 'FeE- (831) 3855426 Fax: (11,31) 385-5156 660 CatriinoApuajuo, Ste. 300 IMoitcice, (;A 93910 rfd: (831) 647-6055 Fax: (831) 647-8465 11(11 Rivcrxide .Axriiic. Suite C P a , Rubles, CA 93446 Ic!: (805) 2267375 Fax: (805) 221-3131

SUNSET CULTURAL CENTER, INC. STATEMENT OF FINANCIAL POSITION JUNE 30, 2012 ASSETS Cash and cash equivalents Accounts receivable net Prepaid expenses Certificates of deposit Note receivable Property and equipment net TOTAL ASSETS $ 548,657 9,272 11,926 314,410 22,200 328,760 1,235,225

LIABILITIES AND NET ASSETS Liabilities: Accounts payable Accrued expenses Deferred revenue Lease payable Total liabilities Net Assets: Unrestricted Temporarily restricted Total net assets TOTAL LIABILITIES AND NET ASSETS $ $ 82,544 107,739 118,433 1,823 310,539 697,745 226,941 924,686 1,235,225

See Notes to Financial Statements. 3

SUNSET CULTURAL CENTER, INC. STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED JUNE 30, 2012 Temporarily Restricted

Unrestricted REVENUE AND PUBLIC SUPPORT: Revenue: Ticket sales Theater rental Facility use and other fee income Reimbursed expenses Investment income Rental and other income Total revenue Public support: Enabling grant Friends of Sunset Foundations Fundraising Other grants and donations Show sponsorships In-kind donation Net assets released from restrictions Total public support Total revenue and public support EXPENSES: Theater services Community services Management and general Fundraising Total expenses CHANGES IN NET ASSETS NET ASSETS, BEGINNING NET ASSETS, ENDING $

Total

712,305 186,396 179,859 181,274 1,841 125,934 1,387,609 650,000 29,282 204,057 5,700 25,500 278,975 1,193,514 2,581,123 1,602,735 246,899 292,970 42,780 2,185,384 395,739 302,006 697,745

683 683 30,527 38,637 186,341 16,500 (278,975) (6,970) (6,287) (6,287) 233,228

712,305 186,396 179,859 181,274 2,524 125,934 1,388,292 650,000 30,527 38,637 29,282 390,398 22,200 25,500 1,186,544 2,574,836 1,602,735 246,899 292,970 42,780 2,185,384 389,452 535,234

226,941

924,686

See Notes to Financial Statements. 4

SUNSET CULTURAL CENTER, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2012 CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets Adjustments to reconcile increase in net assets to net cash used by operating activities: Depreciation (Increase) decrease in: Accounts receivable net Grants receivable net Prepaid expenses Increase (decrease) in: Accounts payable Accrued expenses Deferred revenue NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment Change in certificates of deposit NET CASH USED BY INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on capital leases NET CASH USED BY FINANCING ACTIVITIES NET INCREASE IN CASH CASH AT BEGINNING OF YEAR CASH AT END OF YEAR SUPPLEMENTAL DISCLOSURES Interest paid $ $

389,452 35,138 32,161 19,724 9,814 (23,494) (4,805) 62,252 520,242 (255,156) 227 (254,929) (2,977) (2,977) 262,336 286,321 548,657 971

See Notes to Financial Statements. 5

SUNSET CULTURAL CENTER, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2012

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Sunset Cultural Center, Inc. (SCC) is a California nonprofit public benefit corporation that was formed to operate and manage the Sunset Community and Cultural Center (the Center), owned by the City of Carmel-by-the-Sea, (the City), for the benefit of the City, its residents and visitors, and the users of the Center. The Center includes a 718 seat theater with stage, rehearsal rooms, dressing rooms and related facilities. The theater is rented to third party presenters and is used for events produced by SCC. In addition, there are meeting rooms and office space unrelated to the theater that are used by SCC, tenants and many other outside community groups. Basis of Presentation The accompanying financial statements are presented using the accrual basis of accounting in accordance with generally accepted accounting principles. The net assets, revenues, gains and losses, and other support, expenses and other charges in the accompanying financial statements are classified based on the existence or absence of donorimposed restrictions. Accordingly, for reporting purposes, net assets of SCC and changes therein are classified as follows: Unrestricted Net Assets Net assets that are not subject to donor-imposed stipulations. This includes any amounts designated by the Board for certain purposes. Temporarily Restricted Net Assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of SCC and/or the passage of time.

Cash and Cash Equivalents For the purpose of the financial statements, SCC considers all liquid investments having initial maturities of three months or less to be cash equivalents. Certificates of Deposit Certificates of deposit consist of certificates with initial maturities of more than three months and are stated at cost, which equates fair market value. Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value due to the short maturity of these instruments. The recorded value of the note receivable reflects cost which management believes approximates fair value. Recognition of Donor Restrictions Support that is restricted by the donor is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a 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 Statement of Activities as net assets released from restrictions.

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Unconditional Promises to Give Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected over periods in excess of one year are recorded at the present value of the estimated cash flows beyond one year. The discounts on those amounts are computed using risk-free interest rates applicable to the years in which the promises are received. Amortization of the discounts is included in contribution revenue. Concentrations of Credit Risk SCC maintains bank accounts at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 for the year ended June 30, 2012. Cash at these institutions exceeds Federally insured limits at various times. The amount in excess of the FDIC limits totaled $197,665 as of June 30, 2012. Accounts Receivable Accounts receivable are recorded using the allowance method and are presented net of the allowance for uncollectibility. At June 30, 2012, the allowance is estimated to be $800. Property and Equipment The City owns the Center and the related property, plant and equipment. SCC purchases certain tangible assets to support managing the facility. The City has reversionary rights to any assets purchased by SCC. Property and equipment with a useful life of more than one year and an acquisition cost of $1,000 or more are recognized at cost. Donated property is recorded at fair market value on the date received. Such donations are reported as unrestricted support unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted support. Absent donor stipulations regarding how long those donated assets must be maintained, SCC reports expirations of donor restrictions when the donated or acquired assets are placed in service. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Income Taxes SCC is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and from state franchise tax under California Revenue and Taxation Code 23701(d), but is subject to taxes on unrelated business income when earned. With few exceptions, SCC is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2007. Deferred Revenue Reservation fees are recognized as revenue in the fiscal year which includes the related performance. Amounts received in advance are reported as deferred revenue. At June 30, 2012, deferred revenue was $118,433. Contributed Services and Facilities No amounts have been reflected for donated services because they do not meet the criteria for recognition in the financial statements. However, volunteers have donated significant amounts of their time to SCC. SCC receives the use of office space at no cost, the in-kind donation is recognized at the fair value of rent for similar nonprofit organizations in the area. The amount recorded for the year ended June 30, 2012 was $25,500, which is reflected in the financial statements as in-kind donation with an offsetting charge to rent. Advertising It is the policy of SCC to expense advertising costs as incurred. Advertising expense totaled $137,225 for the year ended June 30, 2012. 7

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Functional Allocation of Expenses The costs of providing program services and other activities have been presented on a functional basis in the Statement of Activities. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. Subsequent Events Subsequent events have been evaluated through October 25, 2012, which is the date the financial statements were available to be issued.

NOTE 2.

NOTE RECEIVABLE At June 30, 2012, SCC held a $22,200 non-interest bearing note receivable from Carmel Bach Festival, Inc. The receivable relates to services performed by SCC for the 2009 Bach Festival held at the Sunset Cultural Center. The outstanding balance is due June 30, 2015.

NOTE 3.

PROPERTY AND EQUIPMENT At June 30, 2012, property and equipment consisted of the following: Office equipment and software Building improvements Theater equipment Total Less accumulated depreciation and amortization Net property and equipment Depreciation expense was $35,138 for the year ended June 30, 2012. $ $ 233,683 231,399 73,034 538,116 209,356 328,760

NOTE 4.

LEASING ARRANGEMENTS SCC leases a copier under a capital lease. The gross amount of the asset recorded under office equipment is $10,622 and accumulated amortization is $9,559. The asset is amortized over the lease terms. Amortization expense is included in depreciation expense.

NOTE 4.

LEASING ARRANGEMENTS (Continued) Future minimum lease payments under the capital lease as of June 30, are as follows: 2013 Less amount representing interest Present value of minimum lease payments $ $ 1,974 151 1,823

In addition, SCC as lessor, leases office space to eight tenants under operating leases. Four are rented on a month-to-month basis. The other four are rented under a one year lease agreement, three expire December 31, 2012, and one expires January 2013. Rental income for these leases for the year ended June 30, 2012 was $79,368. Future minimum rental payments to be received on the operating leases amounted to $24,132 as of June 30, 2012. NOTE 5. TEMPORARILY RESTRICTED NET ASSETS As of June 30, 2012, temporarily restricted net assets are restricted for the following purposes: Producers Guild Art Education Performance Carmel Leadership, audience development, and fundraising Facility Show sponsorship Total $ 100,288 60,691 27,958 16,550 11,454 10,000 226,941

The City produced a performance series, Performance Carmel, and under the terms of the Agreement, SCC is to continue producing this series. The City transferred all funds held for Performance Carmel to SCC. The Producers Guild is a fund established to support events produced by Sunset Presents. During the year ended June 30, 2012, net assets were released from donor restrictions when expenses satisfying the restricted purpose were incurred, or by occurrence of other events specified by donors. These assets are shown in the Statement of Activities as Net assets released from restrictions. Purpose restriction accomplished: Facility Art Education Leadership, audience development, and fundraising Producers Guild Show sponsorship Total $ 195,883 39,050 22,552 14,990 6,500 278,975

NOTE 6.

RETIREMENT PLAN During 2005, the Board of Trustees approved the creation of the Sunset Cultural Center, Inc. 403(b) Plan (the Plan), a defined contribution plan. Employees voluntarily make contributions to the Plan in amounts based upon the limits established by Sections 402(g) and 414(v) of the Internal Revenue Code. The Plans assets are invested in certain selfdirected income, money market and mutual funds. The Board of Trustees may approve a discretionary employer contribution to be allocated in proportion to the participants total annual compensation. The Board of Trustees has not approved a contribution for the year ended June 30, 2012.

NOTE 7.

MANAGEMENT AGREEMENT A management agreement (the Agreement) was signed by SCC and the City and accepted by the City Council on June 8, 2004. Responsibility for management of the Center was transferred to SCC on July 1, 2004 for a term of 3 years with the option to extend the term for two additional three-year terms. The renewal option has been exercised for the period July 1, 2010 through June 30, 2013. The Agreement sets performance criteria and provides remedies in the event SCC fails to meet such criteria, including early termination of the Agreement. The City is committed to providing an Enabling Grant of $600,000 for the year ended June 30, 2013. SCC is economically dependent on the Enabling Grant received from the City.

NOTE 8.

COMMITMENTS SCC has entered into a contract for HVAC services. The contract began on April 1, 2010 for a period of five years and totals $274,200. At June 30, 2012, the remaining commitment was $150,810.

NOTE 9.

FRIENDS OF SUNSET FOUNDATION The Friends of Sunset Foundation (Foundation) is a 501(c)(3) organization with its own Board that was formed to support the mission and goals of the Sunset Community and Cultural Center through fundraising activities, gifts and grants. During the year ended June 30, 2012, SCC received $30,527 from the Foundation for various equipment and for the Art Education program. The assets, liabilities, and activities of The Foundation are not included in these financial statements.

NOTE 10. COMMUNITY FOUNDATION The Community Foundation for Monterey County holds an endowment fund for SCC known as the Sunset Theater Endowment Fund in the amount of $107,323 as of June 30, 2012. The balance is not reflected in the accompanying financial statements as SCC has no ownership rights to the fund. No distributions were received from the Fund for the year ended June 30, 2012.

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SUPPLEMENTAL SCHEDULE

SUNSET CULTURAL CENTER, INC. SUPPLEMENTAL SCHEDULE EXHIBIT B SUMMARY FINANCIAL INFORMATION AND GRANT REQUIREMENTS FOR THE YEAR ENDED JUNE 30, 2012 REVENUE: Rentals: Theater Rooms Offices Other Facility fees Grants/sponsorships Total revenue Sunset Presents net Box Office net Adjusted revenue COSTS: Direct costs: All personnel All other Total direct costs Indirect costs Total costs SHORTFALL ENABLING GRANT EXCESS OF REVENUE AND GRANTS OVER COSTS $

162,425 55,034 79,368 22,977 104,818 514,831 939,453 42,954 (40,357) 942,050

709,875 215,090 924,965 494,341 1,419,306 (477,256) 650,000 172,744

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SUNSET CULTURAL CENTER, INC. NOTES TO SUPPLEMENTAL SCHEDULE EXHIBIT B SUMMARY FINANCIAL INFORMATION AND GRANT REQUIREMENTS FOR THE YEAR ENDED JUNE 30, 2012 NOTE 1. The supplemental schedule presents the results of operations as defined in the Agreement in Article 4 Expenses, Section 4.2, for the year ended June 30, 2012. The financial results shown in Exhibit B Summary Financial Information and Grant Requirements differ from the preceding financial statements as follows: 1) 2) The supplemental schedule does not reflect the in-kind donation and expense related to Sunset Cultural Centers use of administrative offices owned by the City. The supplemental schedule shows as expenditures the costs of acquired assets with useful lives in excess of one year. In the accompanying financial statements these assets have been capitalized and depreciation and amortization expense has been recorded for the period. The supplemental schedule shows as expenditures certain lease payments related to a capital lease. In the accompanying financial statements this asset has been capitalized and future lease payments have been recorded as a liability, and depreciation expense has been recorded for the period. The supplemental schedule does not include donations of temporarily restricted net assets which remain restricted as of June 30, 2012, but does include temporarily restricted net assets, which have been released from restriction.

3)

4)

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