Narconon Stone Hawk: Analysis of the 990 filings

Last updated on July 24, 2008 18:10 by Raymond Hill

This page is being revised to take into account the 2006 990 filing.

Questionable growth rate of expenses
Vanishing assets
An overview of Narconon Stone Hawk's financial statements
Unrealistic doubtful accounts
How many Narconon Stone Hawk clients tried/completed the program? It depends where you look...
About the high 'Occupancy' expenses: Narconon Stone Hawk's improper disclosure
Hypothesis on the very high "Advertising" expenses of Narconon Stone Hawk
Narconon Stone Hawk: form 990 filings

Questionable expenses and growth rate of expenses

From the 990 filings of Narconon Stone Hawk, there are questionable expenses, and a dichotomy between the growth rate of many expense items and the growth rate of the number of individuals whom enrolled (corrected for accrual accounting):

In 2006, the entity earned $26,139 per client enrolled (2004: $19,470), while it spent a total of $25,551 per client enrolled (2004: $20,607).

Total revenue per individual increased by 34% between 2004 and 2006, meaning that Narconon Stone Hawk charges more in 2006 to individuals for its drug rehabilitation services.

Program service expenses should grow proportionally to the number of individuals enrolled in the drug rehabilitation program — taking inflation into account.

However the total expenses grew 123% between 2004 and 2006, while the number of individuals whom enrolled grew 80%.

As per 990 filings, close to $5,000 was added to total expenses per individual, or 24%, between 2004 and 2006, while the inflation rate grew at about 7% during that period.

Vanishing assets

Net assets at the beginning of the year must match net assets declared at the end of the previous year (line 19 and 21 on the 990 form.)
Narconon Stone Hawk declared assets of minus $1,413,281 million for the beginning of the year 2004, while it had declared net assets of plus $328,000 at the end of the previous year.

This amounts to $1,742,044 that vanished from the balance sheet between 2003 and 2004, without explanation.

Between 2004 and 2006, there is a net correction of $309,208 to the balance sheet (line 20), thus bringing the vanished amount down to $1,432,836.

Question: What happened to this $1,432,836?

An overview of Narconon Stone Hawk's financial statements

According to forms 990 of Narconon Stone Hawk, between 2003 and 2005 (figures rounded to nearest $1,000):

The number of clients increased 150% (160 to 400). Keep that 150% number in mind, since it should be used as a reference to judge whether the other numbers 'make sense'. Note that we would normally expect economy of scale with regard to costs.
The cost of advertising to attract new clients increased 1679% ($72,000 to $1,290,000; this certainly raises eyebrows...) Now add $130,000 to this $1,290,000 figure, because outside contractors were hired for marketing purpose: this means at least $1,420,000 spent in 2005 to attract new clients. Now we could add to this figure, since Narconon Stone Hawk pays licensing fees to Narconon International, which itself spends significantly on advertising...

This means at least 18% of Narconon Stone Hawk's revenue went to advertise its services — if its 990 form is to be believed. Now compare that with Betty Ford Center which allocate 0.5% of its total revenue toward advertising. ^[ref]
Licensing fees (so that LRH's faith-based 'tech' can be used): $572,000 in 2005 vs. $264,000 in 2003.
The cost of management has increased 173%. This is curious since management is where economy of scale are usually the highest. As it is, the growth of management expenses outpaced the growth in the number of clients... ($552,000 to $1,510,000)
The combined salaries of the paid directors (the Wickstroms) has increased 334%. ($140,000 to $608,000)
Medical expenses have increased 210% ($107,000 to $333,000)

An overview of the progression of costs:

Important not about this graph: the number of clients used was taken from Narconon Stone Hawk's 990 filings. However, it can be demonstrated that Narconon Stone Hawk inflated its number of clients served.

Of note:

There are two paid directors/officers/key employees listed: Kate and Per Wickstrom. Two more are listed, but not paid.
Management expenses ratio over service expenses is 24% as of 2005.
In 2005, an intangible asset increased over 300% from 2004. This item is not detailed (I think it should be). Intangibles on the asset sheet usually refer to the portion of the cost paid for something that is over the book value.
How efficient is Narconon Stone Hawk's fundraising?
- According to its statement of 2003, Narconon Stone Hawk spent close to $300,000 in fundraising expenses, and raised only a bit over $7,000... So the cost of each dollar raised was more than $42.
- According to its statement of 2005, Narconon Stone Hawk spent over to $60,000 in fundraising expenses, and raised only a bit over $14,000... So the cost of each dollar raised was more than $4.
According to the balance sheet, Narconon Stone Hawk has no 'net asset', it's a negative number:
- Narconon Stone Hawk has a debt of at least $754,000 owed (line 63) to the directors of... Narconon Stone Hawk. This figure could be higher, as line 64 is not detailed for 2005, but it must be noted that in 2003, Narconon Stone Hawk owed the amount reported to Per and Kate and Wickstrom.
- The 'net asset' figure has varied wildly between 2003 and 2005. Usually, this figure is pretty stable from one year to the other, when financial statements are properly done and the entity is properly managed (2003: $328,763; 2004: negative $1,647,483; 2005: negative $147,854).

Again, I could have made mistakes, in collating data and/or interpretation: therefore, if you have any doubt, download the forms and see for yourself if this make sense.

Unrealistic doubtful accounts

Another strange figure on Narconon Stone Hawk's filing: in 2004, it declared $170,000 in doubtful accounts — funds it doesn't have high hope of recovering from clients (line 47a) — out of a total of $282,681 of accounts receivable.

So in 2004, Narconon Stone Hawk thought that 60% of its accounts receivable had a low probability of being paid. Such a high percentage of doubtful accounts is very unusual. And when considering that in 2003 and 2005 there no doubtful accounts at all, it just doesn't make sense.

How many Narconon Stone Hawk clients tried/completed the program? It depends where you look...

According to Narconon Stone Hawk 990 forms, submitted to the IRS:

2003: 160 admitted, 110 completed
2004: 250 admitted, 200 completed
2005: 400 admitted, 330 completed

Cumulative 2003-2005: 810 admitted, 640 completed

According to the information submitted by Narconon Stone Hawk to the the Manistee Planning Commission:

Cumulative 2003-2006 (March): 743 admitted, 579 completed

Now a bit farther in the same document, in the section titled "THE IMPACT OF NARCONON STONE HAWK'S CURRENT OPERATIONS AND PLANNED EXPANSION", it says:

2003: 100 'students' entered the program
2004: 210 'students' entered the program
2005: 311 'students' entered the program

Cumulative: 621 'students' (clients) entered the program (no word on completion in that section)

Well, that's a lot of discrepancies...

From 810 admitted according to 990 forms, to 743 admitted according to the "Demographics" in the Manistee minutes, to 621 admitted according to the "THE IMPACT OF..." in the Manistee minutes. Which figure is factual?

About the high 'Occupancy' expenses: Narconon Stone Hawk's improper disclosure

Source: Department of Labor & Economic Growth

Source: City of Albion: General Property Information

According to the IRS, here is the definition of 'Occupancy' (line 36) on the 990 form:

"... total amount paid or incurred for the use of office space or other facilities, heat, light, power, and other utilities, outside janitorial services, mortgage interest, property insurance, real estate taxes, and similar expenses."

According to Narconon Stonehawk's 990 form of 2005:

Total occupancy expenses: $1,385,594/year, or $115,466/month.

If a few newspaper articles from the Petoskey News-Review are correct, the property used by Narconon Stone Hawk in Battle Creek is owned by TIA Corporation. ^{[see

"Petoskey planners reject drug rehab home",

"Comments sought on drug rehab center"]}

Narconon Stone Hawk also owns a property in Albion, which is used to host 'students' for the withdrawal part of Narconon rehabilitation treatment. Official records show that this property is also owned by TIA Corporation. ^{[City
of Albion: General Property Information]} Notice also that the address supplied in the 'Taxpayer Information' is actually the address of the Narconon Stone Hawk Rehabilitation Center.

TIA Corporation is a 'Real Estate Leasing Company' as described in its 2003 annual declaration (see image on the right.)

TIA Corporation is owned by the Kathleen J. Wickstrom.

Kathleen J. Wickstrom is the president of Narconon Stone Hawk.

A definition of Inurement is appropriate at this point:

Inurement occurs when a transaction or exchange occurs whereby an individual with a personal interest in the exempt organization activities acquires economic gain through the use of funds or assets of that exempt organization. It should be noted that there is nothing wrong with "insiders" transacting with the exempt organization, as long as reasonable compensation at fair market values is exchanged. ^[ref]

Now the key question: does TIA Corporation lease the properties used by Narconon Stone Hawk at a fair market value?

Add to this that Narconon Stone Hawk owed of at least $754,000 to the directors of Narconon Stone Hawk at the end of 2005.

At this point, this is obvious that the directors of Narconon Stone Hawk have significant private financial interests that potentially conflict with their duty as directors of a non-profit entity. This is why the IRS requires such private financial interests to be disclosed. In Part III of Schedule A (Form 990), there is the following question:

2 During the year, has the organization, either directly or indirectly, engaged in any of the following acts with any substantial contributors, trustees, directors, officers, creators, key employees, or members of their families, or with any taxable organization with which any such person is affiliated as an officer, director, trustee, majority owner, or principal beneficiary? (if the answer is 'Yes,' attach a detailed statement explaining the transactions.)

a) Sale, exchange, or leasing of property?

b) Lending of money or other extension of credit?

In the 990 filings of Narconon Stone Hawk for 2003-2005, both these questions were answered 'No'.

The IRS explains well how to answer this question:

Lines 2a through 2e. These lines apply to both sides of a listed transaction. Reporting is required, for example, whether the exempt organization is a payer or payee, buyer or seller, lender or borrower. ^[ref]

In conclusion, there is a false statement from Narconon Stone Hawk and its directors to the IRS.

[contributions]

Hypothesis on the very high "Advertising" expenses of Narconon Stone Hawk

Here is an excerpt from a contract that Narconon centers have to enter with Narconon International, titled "LICENSE AGREEMENT: (NARCONON INTERNATIONAL/CENTER-MARKS)":

NARCONON INT, CENTER shall pay to NARCONON INT a weekly fee equal to Ten Percent (10%) of its gross income, including donations received to support its services, after deduction of costs only of materials purchased from NARCONON INT or ABLE, investment income, commissions received for referrals to other organizations, refunds and bounced checks (that have previously been included in gross income).

Now, notice that as of 2005, the 990 form of Narconon Stone Hawk shows licensing fees of $572,000, while revenue from its rehab services were $7,735,000. Visibly, the licensing fees as reported represent 7.4%, not 10% of the revenue as should be expected.

Part of the missing licensing fees could possibly be explained through the 'Accounts receivable' item: this is money that has not been received, reportedly. If we deduct 'Account receivable' from total revenue we get:

$7,735,000 - $732,000 = $7,003,000

Not quite 10% yet, but getting closer with 8.2%.

Now the interesting excerpt from the contract mentioned above:

"after deduction of costs only of materials purchased from NARCONON INT or ABLE"

Now if we deduct these 'Advertising' expenses — lets hypothesised these expenses were actually "materials purchased from NARCONON INT or ABLE" — we are getting right on 10%:

$7,017,000 - $1,290,000 = $5,714,000
$572,000 / $5,714,000 = 10%

What if we apply the same calculation for 2004?

$5,135,022 - $282,681 - $580,886 = $4,271,455
$428,542 / $4,271,455 = 10%

Coincidence? Maybe, in which case more details from Narconon Stone Hawk would be welcomed. As it is we can speculate that these 'Advertising' expenses went to Narconon International and/or ABLE. Narconon Stone Hawk could have bought a bunch of TWTH booklets (e.g. any pamphlet from its Life Improvement courses), which cost partly consists of licensing fees, again... In short, another path to funnel more money up the hierarchy.

Update, June 30, 2007: I found this anonymous account from an ex-Narconon employee, and this actually supports the current hypothesis:

Furthermore, thousands of dollars out of that $22,000 goes to purchasing books from the Association for Better Living and Education (ABLE), itself an arm of Scientology and the "publisher and copyright owner" of the books Narconon uses (books that are all LRH's teachings). ^[ref]