CHILDREN FIRST, INC. FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 AND REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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1 CHILDREN FIRST, INC. FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 AND REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

2 TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT 1-2 Financial Statements for the Years Ended December 31, 2012 and 2011: Statements of Financial Position 3 Statements of Activities 4-5 Statement of Functional Expenses 6 Statements of Cash Flows 7 Notes to Financial Statements 8-21 SUPPLEMENTARY INFORMATION Schedule of Expenditures of Federal Awards 22 Notes to Schedule of Expenditures of Federal Awards 23 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY OMB CIRCULAR A Schedule of Findings, Questioned Costs, and Recommendations 28-29

3 29750 U.S. Hwy. 19 North, Suite 101 Clearwater, FL To the Board of Directors Children First, Inc. Sarasota, Florida INDEPENDENT AUDITORS' REPORT We have audited the accompanying statements of financial position of Children First, Inc., (the Organization) as of December 31, 2012 and 2011, and the related statements of activities and cash flows for the years then ended, the related statement of functional expenses for the year ended December 31, 2012, and the related notes to the financial statements. The prior year summarized comparative information included in the statement of functional expenses has been derived from the 2011 financial statements and, in our report dated April 3, 2012, we expressed an unqualified opinion on those financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Organization s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Organization 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. CONTINUED 1

4 INDEPENDENT AUDITORS REPORT CONTINUED Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Organization as of December 31, 2012 and 2011, and the changes in its net assets and its cash flows for the years then ended, and its functional expenses for the year ended December 31, 2012 in accordance with accounting principles generally accepted in the United States of America. Other Matters Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards for the year ended December 31, 2012 is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, 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 financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 19, 2013, on our consideration of the Organization's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and 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 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 Organization's internal control over financial reporting and compliance. Clearwater, Florida March 19,

5 CHILDREN FIRST, INC. STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2012 AND 2011 ASSETS Current Assets Cash $ 619,999 $ 989,596 Grants and contracts receivable 117, ,417 United Way receivable 120, ,041 Other receivables 54,577 43,724 Prepaid expenses 27,597 31,268 Total current assets 939,623 1,328,046 Property and Equipment, Net 4,728,739 4,799,451 Other Assets Investments - 21,131 Beneficial interest 6,650 6,034 Deposits 4,569 1,000 11,219 28,165 $ 5,679,581 $ 6,155,662 Current Liabilities LIABILITIES AND NET ASSETS Accounts payable and accrued expenses $ 250,705 $ 251,049 Deferred revenue 157, ,493 Current portion of notes payable 31,532 31,429 Total current liabilities 439, ,971 Long-Term Liabilities Notes payable, net of current portion 888, ,129 Total liabilities 1,327,918 1,594,100 Net Assets Unrestricted 4,193,538 4,418,927 Temporarily restricted 133, ,601 Permanently restricted 24,277 6,034 Total net assets 4,351,663 4,561,562 $ 5,679,581 $ 6,155,662 See accompanying notes to financial statements 3

6 CHILDREN FIRST, INC. STATEMENT OF ACTIVITIES YEAR ENDED DECEMBER 31, 2012 (WITH COMPARATIVE TOTALS FOR 2011) Temporarily Permanently Total Unrestricted Restricted Restricted Revenue and Other Support Federal grant revenue $ 5,197,392 $ - $ - $ 5,197,392 $ 4,071,269 Federal grant revenue - ARRA ,237,085 Contract revenue 1,196, ,196,507 1,381,020 Contributions and other 926,132 9,000 17, , ,292 United Way allocations 117, , , ,931 Program fees 124, , ,423 In-kind contributions 638, , ,929 Special events, net of direct expenses of $83,469 and $61, , , ,811 Interest income including gains from investments 1, ,453 23,224 Net assets released from restrictions: Expiration of time/use restrictions 132,123 (132,041) (82) - - Total revenue and other support 8,525,451 (2,753) 18,243 8,540,941 8,437,984 Expenses Program services: Head Start 2,824, ,824,289 2,496,236 Early Head Start 2,866, ,866,634 1,836,536 Early Childhood Education 1,340, ,340,360 1,214,010 Families First Initiative 87, ,456 58,917 Other restricted grants 500, , ,866 ARRA ,254,319 Supporting services: Management and general 742, , ,442 Fundraising 349, , ,538 Total program and supporting services 8,711, ,711,418 8,608,864 Change in Net Assets Before Other Changes (185,967) (2,753) 18,243 (170,477) (170,880) Other Changes Loss disposal of assets (39,422) - - (39,422) - Change in Net Assets (225,389) (2,753) 18,243 (209,899) (170,880) Net Assets at Beginning of Year 4,418, ,601 6,034 4,561,562 4,732,442 Net Assets at End of Year $ 4,193,538 $ 133,848 $ 24,277 $ 4,351,663 $ 4,561,562 See accompanying notes to financial statements 4

7 CHILDREN FIRST, INC. STATEMENT OF ACTIVITIES YEAR ENDED DECEMBER 31, 2011 Temporarily Permanently Total Unrestricted Restricted Restricted 2011 Revenue and Other Support Federal grant revenue $ 4,071,269 $ - $ - $ 4,071,269 Federal grant revenue - ARRA 1,237, ,237,085 Contract revenue 1,381, ,381,020 Contributions and other 665,292 12, ,292 United Way allocations 123, , ,931 Program fees 123, ,423 In-kind contributions 533, ,929 Special events, net of direct expenses of $61, , ,811 Interest and investment income 23, ,224 Net assets released from restrictions: Expiration of time/use restrictions 214,918 (213,649) (1,269) - Total revenue and other support 8,520,687 (81,608) (1,095) 8,437,984 Expenses Program services: Head Start 2,496, ,496,236 Early Head Start 1,836, ,836,536 Early Childhood Education 1,214, ,214,010 Families First Initiative 58, ,917 Other restricted grants 671, ,866 ARRA 1,254, ,254,319 Supporting services: Management and general 771, ,442 Fundraising 305, ,538 Total program and supporting services 8,608, ,608,864 Change in Net Assets (88,177) (81,608) (1,095) (170,880) Net Assets at Beginning of Year 4,507, ,209 7,129 4,732,442 Net Assets at End of Year $ 4,418,927 $ 136,601 $ 6,034 $ 4,561,562 See accompanying notes to financial statements 5

8 CHILDREN FIRST, INC. STATEMENT OF FUNCTIONAL EXPENSES YEAR ENDED DECEMBER 31, 2012 (WITH COMPARATIVE TOTALS FOR 2011) Program Services Supporting Services Early Families Other Total Management Total Head Early Head Childhood First Restricted Program and Supporting Total Expenses Start Start Education Initiative Grants Services General Fundraising Services Salaries $ 1,456,909 $ 1,508,006 $ 663,427 $ 54,812 $ 180,244 $ 3,863,398 $ 507,051 $ 238,029 $ 745,080 $ 4,608,478 $ 4,558,770 Payroll taxes 130, ,802 56,732 4,183 12, ,168 39,438 18,427 57, , ,438 Employee insurance 125, ,409 79,425 1,619 22, ,047 30,673 6,764 37, , ,706 Retirement 85,612 89,846 37,908 1,418 13, ,691 24,054 13,227 37, , ,089 Total Salaries and Related Expenses 1,798,180 1,859, ,492 62, ,537 4,785, , , ,663 5,662,967 5,654,003 Contractual services 270, ,993 64,235 6,101 53, ,682 67,575 27,290 94, , ,055 Repairs and maintenance 99,005 61,497 49, , ,343 6, , , ,572 Utilities and telephone 77,329 48,188 41,335-8, ,922 6,384 3,572 9, , ,404 Rent 142, ,931 34,195 - (159) 334,426 1,338-1, , ,487 Insurance 48,317 24,107 12, ,719 4,542 1,053 5,595 90,314 96,837 Food and nutrition 172,633 79,987 75,894 2,357 4, ,854 2,922 1,621 4, , ,661 Transportation 10, ,632 14,056 1, ,607 15,663 18,812 Staff training and travel 40,011 61,386 2, , ,638 10,496 3,402 13, , ,445 Program supplies 78,599 67,001 40,726 8,494 89, , , ,910 Office supplies and postage 5,596 3,250 2, ,772 24,530 6,237 6,230 12,467 36,997 46,328 Parent activities 5,065 3,793 10,194 2,938 57,956 79, , ,408 Children's screening and therapy 2, , , Printing and advertising 28,591 19,247 5,283 4,193 1,230 58,544 3,683 21,264 24,947 83,491 57,777 Miscellaneous , ,122 7, ,941 14,063 56,577 Property tax expense 6,553-1, ,138-2,431 2,431 10,569 22,128 Subsriptions and dues 3,807 2, ,231 1,888 5,024 6,912 13, , , ,318 24, ,754 2,630, ,157 73, ,264 2,825,248 2,717,442 Total Expenses Before Depreciation 2,790,040 2,856,560 1,182,810 86, ,291 7,416, , ,554 1,071,927 8,488,215 8,371,445 Depreciation 34,249 10, , ,742 20, , , ,419 Total Expenses $ 2,824,289 $ 2,866,634 $ 1,340,360 $ 87,456 $ 500,291 $ 7,619,030 $ 742,726 $ 349,662 $ 1,092,388 $ 8,711,418 $ 8,608,864 See accompanying notes to financial statements 6

9 CHILDREN FIRST, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND Cash Flows from Operating Activities: Change in net assets $ (209,899) $ (170,880) Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Depreciation 223, ,419 Loss on sale of property and equipment 39,422 - Change in beneficial interest (616) 1,095 (Increase) decrease in: Decrease (increase) in grants and contract receivable 26, ,984 Decrease (increase) in United Way receivable - 9,368 Decrease (increase) in other receivables (10,853) (8,473) Decrease (increase) in prepaid expenses 3,671 16,885 Decrease (increase) in deposits (3,569) 13,008 Increase (decrease) in: Increase (decrease) in accounts payable and accrued expenses (344) 54,642 Increase (decrease) in deferred revenue (234,410) 33,444 Net cash provided by (used in) operating activities (167,387) 341,492 Cash Flows from Investing Activities: Proceeds from the disposal of property and equipment 18,400 - Purchases of property and equipment (210,313) (51,290) Net change in investment transactions 21,131 (21,131) Net cash used in investing activities (170,782) (72,421) Cash Flows from Financing Activities: Repayment on notes payable (31,428) (49,253) Net cash used in financing activities (31,428) (49,253) Net (Decrease) Increase in Cash (369,597) 219,818 Cash at Beginning of Year 989, ,778 Cash at End of Year $ 619,999 $ 989,596 See accompanying notes to financial statements 7

10 NOTE A - NATURE OF ORGANIZATION CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Children First, Inc. (the Organization) is a not-for-profit organization whose purpose is to strengthen children and families by improving the quality of their lives through a comprehensive approach to development, education, health, and well-being. Federal Head Start and Early Head Start programs are available for children from birth to five years of age. Subsidized children and preschool programs are available for families with low income. The Organization also offers The Families First Initiative, which focuses on strengthening families. Funding is provided primarily from the Department of Health and Human Services. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Presentation The financial statements of the Organization are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (US GAAP). The Organization presents information regarding its financial position and activities according to three classes of net assets described as follows: - Unrestricted Net Assets - All resources over which the governing board has discretionary control. The governing board of the Organization may elect to designate such resources for specific purposes. This designation may be removed at the Board s discretion. - Temporarily Restricted Net Assets - Resources accumulated through donations or grants for specific operating or capital purpose. Such resources will become unrestricted when the requirements of the donor or grantee have been satisfied through expenditure for the specified purpose or program or through the passage of time. - Permanently Restricted Net Assets - Resources accumulated through donations or grants that are subject to the restriction in perpetuity that the principal be invested. These net assets include the original value of the gift, plus any subsequent additions. 8

11 CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 2. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, as well as pro rata allocations in the recording of expenditures, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Significant estimates included in the financial statements include allocation of expenses by function and useful lives of depreciable assets. 3. Fair Value Measurement The financial statements are prepared in accordance with an accounting standard, for all financial assets and liabilities and for nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements or on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on a measurement date. The standard also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. 4. Fair Value of Financial Instruments The following methods and assumptions were used by the Organization in estimating the fair value of its financial instruments: Cash - the carrying amount reported in the statements of financial position approximates fair value because of the short maturity of those instruments. Investments - consists of common stock, which is valued at quoted market prices. Beneficial interest - the trust assets are composed of cash and equivalents, fixed income, equity securities, and real and tangible asset funds and are valued using Level 2 inputs for fair value purposes. 9

12 CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 4. Fair Value of Financial Instruments - Continued Grants receivable - the carrying amount reported in the statements of financial position approximates fair value because of the short maturity of those instruments. Accounts payable and accrued expenses - the carrying amount reported in the statements of financial position approximates fair value because of the short maturity of those instruments. Note payable - the fair value of the Organization's debt is at rates offered to the Organization for similar debt instruments of comparable maturities by the Organization s financial institution. Interest rate swap - the fair value of the interest rate swap is based on dealer quotations which generally represents an estimate of the amount the Organization would pay or receive to terminate the agreement at the reporting date. 5. Cash Cash consists of cash on deposit with financial institutions and petty cash funds. The Organization considers all highly liquid investments with an initial maturity of three months or less as cash. Financial instruments, which potentially subject the Organization to concentrations of credit risk, consist principally of cash held in financial institutions in excess of federally-insured limits. From time to time throughout the years ending December 31, 2012 and 2011, the Organization s cash balance may have exceeded the federally insured limit. However, the Organization has not experienced and does not expect to incur any losses in such accounts. 6. Grants, Contracts, and Other Receivables Contributions are recognized when the donor makes a promise to give to the Organization that is, in substance, unconditional. Unconditional promises to give are reported at fair value at the date the promise is received to the extent estimated to be collected by the Organization. Other conditional promises to give are recognized when the conditions on which they depend are substantially met. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire during the fiscal year in which the contributions are recognized. All other donor-restricted contributions are reported as increases in temporarily or permanently restricted net assets depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets. 10

13 CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 6. Grants, Contracts, and Other Receivables - Continued Grants and contracts receivable represent amounts due from various federal, state, and local agencies for purposes specified by each grant. Management monitors the collection status of its receivable balance on an ongoing basis. The Organization uses the allowance method to determine uncollectible unconditional promises. Based on management s analysis of possible bad debts, an allowance for doubtful accounts was not deemed necessary at December 31, 2012 and Property and Equipment Property and equipment are stated at cost, if purchased or at estimated fair value at the date of receipt if acquired by gift. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. Major renewals and betterments are capitalized. Maintenance, repairs, and minor renewals are expensed as incurred. It is the policy of the Organization to maintain all property and equipment in good condition. Depreciation expense is provided on a straight-line basis over the estimated useful lives of the assets ranging from 5 40 years. 8. Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are measured at fair value in the statements of financial position. Investment income or loss (including realized and unrealized gains and losses on investments, interest, and dividends) are included as a component in the statements of activities. 9. Deferred Revenue and Revenue Recognition Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support depending on the existence or nature of any donor restrictions. Revenue is reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Federal grants are considered exchange transactions and are recorded as unrestricted revenue when earned. Certain of the Organization's contract awards are cost reimbursement contracts. Revenue under these contracts is deferred until earned. Revenue is earned and recognized in the financial statements when eligible expenses are incurred. 11

14 CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 10. Donated Services and Materials Donated materials are recorded as support at their fair value at the date of donation. Contributions of services are recorded as support at their estimated fair value if the services received create or enhance non-financial assets or require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. For the years ended December 31, 2012 and 2011, the value of contributed services meeting the requirements for recognition in the financial statements has been recorded as unrestricted support. In addition, many individuals volunteer their time and perform a variety of tasks that assist the Organization, but these services do not meet the criteria for recognition as contributed services under the financial accounting standards. 11. Functional Allocation of Expenses The costs of providing the various program and other activities have been summarized on a functional basis in the statement of functional expenses. Accordingly, certain costs have been allocated among the programs and supporting services benefited based on direct usage or management's estimates of the benefit derived by each activity. 12. Income Taxes The Organization is a not-for-profit organization that is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. 13. Uncertain Tax Positions The Organization accounts for the effect of any uncertain tax positions based on a more likely than not threshold to the recognition of the tax positions being sustained based on the technical merits of the position under scrutiny by the applicable taxing authority. If a tax position or positions are deemed to result in uncertainties of those positions, the unrecognized tax benefit is estimated based on a cumulative probability assessment that aggregates the estimated tax liability for all uncertain tax positions. The Organization has identified its tax status as a tax-exempt entity as its only significant tax position; however, the Organization has determined that such tax position does not result in an uncertainty requiring recognition. The Organization is not currently under examination by any taxing jurisdiction. The Organization s federal returns are generally open for examination for three years following the date filed. 12

15 CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 14. Derivative Financial Instruments Accounting standards require that all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. If the derivative is a hedge, depending on the nature of the hedge, a change in fair value of the derivative will either be offset against the change in the fair value of a hedge asset or liability through earnings. The Organization utilizes interest rate swaps to manage interest rate costs and to hedge against risks associated with changing interest rates. The Organization designates interest rate swaps as hedges of specific debt instruments. Interest differentials on interest rate swaps are recognized as adjustments to interest incurred on the related debt instruments. NOTE C - BENEFICIAL INTEREST The Organization established an endowment account with Community Foundation of Sarasota County (CFSC). Although the Organization does not have the right to receive the endowment assets per the Trust Agreement, the contribution to the endowment fund is considered an asset of the Organization as it has been named beneficiary. Earnings on the endowment funds are periodically distributed to the Organization in accordance with the trust agreement. CFSC has been granted variance power over funds contributed by donors to CFSC on behalf of the Organization. Therefore, those donated funds are not considered to be an asset of CFSC. NOTE D - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 2012 and 2011: Land $ 1,220,357 $ 1,220,357 Buildings 4,311,486 4,419,992 Furniture, fixtures, and equipment 819, ,623 Vehicles 157, ,355 Leasehold improvements 620, ,411 7,129,546 7,027,738 Less accumulated depreciation (2,400,807) (2,228,287) $ 4,728,739 $ 4,799,451 13

16 NOTE E - FAIR VALUE MEASUREMENT CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Fair values of assets measured on a recurring basis at December 31, 2012 are as follows: Fair Value Measurements at Reporting Date Using Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Total Assets Inputs Inputs Fair Description: Level 1 Level 2 Level 3 Value Assets Investments $ - $ - $ - $ - Beneficial interest - 6,650-6,650 Total assets at fair value $ - $ 6,650 $ - $ 6,650 Fair values of assets measured on a recurring basis at December 31, 2011 are as follows: Quoted Prices In Active Significant Markets for Other Significant Identical Observable Unobservable Total Assets Inputs Inputs Fair Description: Level 1 Level 2 Level 3 Value Assets Investments $ 21,131 $ - $ - $ 21,131 Beneficial interest - 6,034-6,034 Total assets at fair value $ 21,131 $ 6,034 $ - $ 27,165 14

17 CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 NOTE F - INVESTMENT Investments are stated at their fair market values and consist of the following at December 31, 2012 and 2011: Common stock $ - $ 21,131 The components of investment income are summarized as follows: Interest income $ 615 $ 2,254 Unrealized/realized gain on investments 1,838 20,970 NOTE G - NOTES PAYABLE Notes payable consist of the following at December 31, 2012 and 2011: $ 2,453 $ 23, Note payable at December 31, 2011 bearing interest at LIBOR plus 2.5% (currently %), principal and interest payments due monthly, maturing June 30, 2014, at which time all unpaid principal and interest is due, with extension possible through June 30, 2016, secured by real property and assignment of pledges. Note payable at December 31, 2010 bearing interest at 6.25%, interest only payments through January 20, This note payable was modified and renewed to include an interest rate swap effective June 30, 2011 $ 920,129 $ 951,558 Less current portion (31,531) (31,429) Total notes payable, net $ 888,598 $ 920,129 15

18 NOTE G - NOTES PAYABLE - CONTINUED CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Future maturities of notes payable as of December 31, 2011 are as follows: NOTE H - LINE-OF-CREDIT 2013 $ 33, , , ,057 Total $ 920,129 The Organization has a revolving line-of-credit with a financial institution, with no outstanding balance as of December 31, 2012 and The line-of-credit permits borrowings up to $200,000, bearing interest at the greater of 3% or prime plus 0.5%. All outstanding principal and interest is due upon maturity on June 27, The line is secured by real property and assignment of pledges. NOTE I - FAIR VALUE OF INTEREST RATE SWAP During June 2011, the Organization entered into a derivative financial instrument with a lender to manage the overall borrowing costs associated with its note payable (NOTE G). At December 31, 2012 and 2011, the outstanding notional balance is $920,129 and $951,558, respectively. This swap matures on June 2014, with an option to terminate through June Credit losses from counterparty non-performance are not anticipated. This agreement fixes the interest rate at 5.10%. The swap is a cash flow hedge, as it has been designated against the note payable carrying a variable rate of interest and converts such loan to fixed debt. Amounts received or paid as a result of the swap agreement are recognized as an expense called change in fair value of interest rate swap on the statements of activities. The net effect on the Organization s operating results is that interest on the variable-rate debt being hedged is recorded based on fixed interest rates. The interest rate swap contract is reflected at fair value in the statements of financial position and the related gain (loss) is recognized as a change in net assets. The fair value of the interest rate swap as of December 31, 2012 and 2011 is not material to the financial statements and was not recorded. The fair value is based on dealer quotations which generally represent an estimate of the amount the Organization would pay or receive to terminate the agreement at the reporting date. 16

19 NOTE J - TEMPORARILY RESTRICTED NET ASSETS CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 As of December 31, 2012 and 2011, temporarily restricted net assets related to the following: United Way - pledges $ 120,288 $ 120,041 Other donations for restricted purposes 13,560 16,560 $ 133,848 $ 136,601 Net assets released from restriction related to temporarily restricted net assets was $132,041 and $213,649 for the years ended December 31, 2012 and 2011, respectively. NOTE K - PERMANENTLY RESTRICTED NET ASSETS Permanently restricted net assets consist of endowments for Nurturing Dads and the Wishnie Memorial Fund which amounted to $24,277 and $6,034 at December 31, 2012 and 2011, respectively. NOTE L - ENDOWMENT FUND The Organization s endowment consists of individual funds established for a variety of purposes. Its endowment is comprised of donor-restricted endowment funds. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law The Organization has interpreted the Florida Uniform Prudent Management of Institutional Funds Act (FUPMIFA) 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 Organization 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 Organization in a manner consistent with the standard of prudence prescribed by FUPMIFA. 17

20 NOTE L - ENDOWMENT FUND - CONTINUED CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 In accordance with FUPMIFA, the Organization considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the Organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Organization (7) The investment policies of the Organization For the years ended December 31, 2012 and 2011, the Organization has elected not to add appreciation for cost of living or other spending policies to its permanently restricted endowment for inflation and other economic conditions. Summary of Endowment Assets: Endowment assets as of December 31 are invested as follows: Beneficial interest $ 6,650 $ 6,034 Summary of Endowment Assets as of December 31, 2012: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment $ - $ - $ 6,650 $ 6,650 Summary of Endowment Assets as of December 31, 2011: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment $ - $ - $ 6,034 $ 6,034 18

21 NOTE L - ENDOWMENT FUND - CONTINUED CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Changes in Endowment Net Assets as of December 31, 2012: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning $ - $ - $ 6,034 $ 6,034 Interest and dividends Net investment depreciation Released from restriction - - (82) (82) Endowment net assets, ending $ - $ - $ 6,650 $ 6,650 Changes in Endowment Net Assets as of December 31, 2011: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning $ - $ - $ 7,129 $ 7,129 Interest and dividends Net investment depreciation Released from restriction - - (1,269) (1,269) Endowment net assets, ending $ - $ - $ 6,034 $ 6,034 Return Objectives, Risk Parameters, and Strategies The Organization has adopted an investment and spending policy for endowment assets that attempts to preserve the real (inflation adjusted) value of endowment assets, increase the real value of the portfolio, and facilitate a potential distribution to support some level of future operations. Endowment assets include those assets of donor-restricted funds that the Organization must hold in perpetuity or for a donor-specified period(s). The terms of the operating policies of the endowment fund (the Fund) requires that the Fund will be managed by the Finance Committee and approved by the Board of Directors. The Organization s President is responsible for the operation of the investment program and acts in accordance with established written procedures and internal controls of the investment policy. The objective of the Fund is to use its assets entrusted to its care, to invest and manage those funds with fiduciary responsibility while maximizing return. The amount invested shall vary from time to time and shall be established by the committees as conditions permit. 19

22 NOTE L - ENDOWMENT FUND - CONTINUED Spending Policy CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Management is in the process of formalizing endowment policy guidelines to establish the maximum percentage of endowment earnings that can be used to fund operations. Historically, the Organization has used its endowment earnings to fund operations, although it has been minimal. NOTE M - IN-KIND CONTRIBUTIONS Certain services are provided to the Organization gratis or at a cost substantially less than fair market value. The difference between that actual charge and the estimated fair market value is reflected as in-kind revenue and expense in the accompanying financial statements. In-kind revenue and expense of $638,843 and $533,929 for the years ended December 31, 2012 and 2011, respectively, consisted primarily of in-kind rent for centers and in-kind professional services. Additionally, volunteers and parents have donated 16,243 and 16,680 hours for 2012 and 2011, respectively, to the Organization in various capacities. However, these services are not reflected in the financial statements as the services do not require specialized skills. The value of other contributed services meeting the requirements for recognition in the financial statements was not material and has not been reflected in the financial statements. NOTE N - OPERATING LEASES The Organization leases center space, a vehicle, and certain office equipment under operating leases, which expire on various dates through The rent expense on these leases for the years ended December 31, 2012 and 2011 was $17,580 and $33,978, respectively. Certain of the Organization's leases for center space have cancellation options requiring notice from 30 to 180 days. Future minimum lease payments required under non-cancelable leases as of December 31, 2012 are as follows: 2013 $ 24, , , ,497 Total minimum lease payments $ 60,739 20

23 NOTE O - RETIREMENT PLANS CHILDREN FIRST, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 The Organization has a 403(b) retirement plan covering all employees who have completed 1,000 or more hours of service within a one-year service period. The Organization's policy is to contribute 5% of eligible employee's compensation to the plan. In addition, for employees contributing at least 1% of compensation, the Organization will also contribute $1 for each $1 the employee contributes to the plan up to 2% of compensation. The employer's contribution vests based on the years of service. Forfeitures are used by the Organization to offset its contribution to the plan. Retirement expense for the years ended December 31, 2012 and 2011 was $265,973 and $238,090, respectively. NOTE P - CONCENTRATIONS OF RISK The Organization received federal funding from the Department of Health and Human Services in 2012 and 2011 and the American Reinvestment and Recovery Act in 2011, which accounted for approximately 61% and 63% of revenues for 2012 and 2011, respectively. The Organization receives a substantial amount of support from grantor agencies for its programs. If this support were to be reduced or eliminated, it could affect the operation of the supported programs. In addition, the Organization is subject to audit examination by grantor agencies. In the event that reimbursed expenditures were disallowed, repayments would be required. Management believes the Organization is in compliance with the terms of its grant agreements. Financial instruments, which potentially subject the Organization to concentrations of credit risk, consist principally of cash held in financial institutions in excess of federally-insured limits. From time to time throughout the years ending December 31, 2012 and 2011, the Organization s cash balance may have exceeded the federally insured limit. However, the Organization has not experienced and does not expect to incur any losses in such accounts. NOTE Q - SUBSEQUENT EVENTS The Organization evaluated subsequent events through March 19, 2013, the date the financial statements were available and issued. The Organization is not aware of any subsequent events which would require recognition or disclosures in the financial statements. 21

24 SUPPLEMENTARY INFORMATION

25 CHILDREN FIRST, INC. SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS DECEMBER 31, 2012 CFDA Contract Federal Grantor/Pass-through Grantor Program Title Number Number(s) Expenditures U.S. Department of Agriculture: Passed through Florida Department of Health: Child Care Food Program S-6 $ 370,209 U.S. Department of Health and Human Services Early Head Start CH0508/19 4,827,183 Total Expenditures of Federal Awards $ 5,197,392 22

26 CHILDREN FIRST, INC. NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS DECEMBER 31, 2012 BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards includes the grant activity of Children First, Inc. and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with accounting principles generally accepted in the United States of America as applicable to non-profit organizations and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. MATCH The Organization is required to provide at least 20% of the cost of the Head Start program through cash or in-kind contributions from non-federal sources. The Organization met this match requirement for the year ended December 31,

27 29750 U.S. Hwy. 19 North, Suite 101 Clearwater, FL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors Children First, Inc. Sarasota, Florida We have audited, in accordance with the 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, the financial statements of Children First, Inc. (the Organization), as of and for the year ended December 31, 2012, and the related notes to the financial statements, which collectively comprise the Organization's basic financial statements, and have issued our report thereon dated March 19, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Organization s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization's internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Organization s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. CONTINUED 24

28 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS CONTINUED Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Organization's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Clearwater, Florida March 19,

29 29750 U.S. Hwy. 19 North, Suite 101 Clearwater, FL INDEPENDENT AUDITORS' REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY OMB CIRCULAR A-133 To the Board of Directors Children First, Inc. Sarasota, Florida Report on Compliance for Each Major Federal Program We have audited Children First, Inc. s (the Organization) compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended December 31, The Organization s major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors' Responsibility Our responsibility is to express an opinion on compliance for each of the Organization's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Organization's compliance. Opinion on Each Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, CONTINUED 26