Target Hunger, Inc. Independent Auditor's Report and Financial Statements December 31,2011 and 2010

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1 Independent Auditor's Report and Financial Statements

2 Independent Auditor's Report and Financial Statements Contents Independent Auditor's Report 1 Statements of Financial Position 2 Statements of Activities 3 Statements of Functional Expenses 4 Statements of Cash Flows 5 Notes to the Financial Statements 6

3 A Professional Corporation One Gree way Plozo. Suite 320 Houston, Texas Independent Auditor's Report To the Board of Directors of Target Hunger, Inc. We have audited the accompanying statements of financial position of Target Hunger, Inc. (a nonprofit organization) as of December 31, 2011 and 2010, and the related statements of activities, functional expenses, and cash flows for the years then ended. These financial statements are the responsibility of the Organization's management. Our responsibility is to express an opinion on these fmancial 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 fmancial statements referred to above present fairly, in all material respects, the financial position of Target Hunger, Inc. as of, 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. June 29,

4 Statements of Financial Position 20ll 2010 Assets Cash and cash equivalents, unrestricted $ 321,188 $ 344,839., Cash and cash equivalents, restricted 85, ,297/ Contributions receivable: United Way funding allocated for the next fiscal year 92,802 92,508 V Unconditional promises to give 281, ,515 Total current assets 781, ,159 Unconditional promises to give 115,000 Inventory 30,844 33,492 vi Fixed assets, net 148,095 25,671 V Total assets $ 960,063 $ 926,322 Liabilities Accounts payable $ 39,470 $ 28,433 Accrued vacation 34,857 40,645 Accrued pension liability, current 14,251 2,052 Total current liabilities 88,578 71,130 Accrued pension liability, noncurrent 13,151 Total liabilities 88,578 84,281 Net assets Unrestricted net assets 563, ,698 Temporarily restricted net assets 307, ,343 Total net assets 871, ,041 Total liabilities and net assets $ 960,063 $ 926,322 The accompanying notes are an integral part of these statements. 2

5 Statement of Activities For the Years Ended December 31, 2011 and Changes in unrestricted net assets Revenues, gains, and support United Way grant $ 267,464 $ 288,325 Contributions 658, ,854 Goverrunent grant 19,206 24,869 In-kind donations: Donated food 2,176,911 4,245,998 Donated facilities 42,169 42,169 Other donated materials 140,020 25,267 Miscellaneous income 3,371 6,192 Assets released from restriction 236, ,745 Total unrestricted revenues, gains, and support 3,543,595 5,540,419 Expenses: Program 3,041,119 5,196,902 Management and support 170, ,427 Fundraising 174, ,688 Total expenses 3,385,801 5,531,017 Change in unrestricted net assets 157,794 9,402 Changes in temporarily restricted net assets United Way grant 92,802 92,508 Contributions 15, ,029 Net assets released from restrictions (236,152) (277,745) Change in temporarily restricted net assets (128,350) 136,792 Change in total net assets 29, ,194 Net assets, beginning of year 842, ,847 Net assets, end of year $ 871,485 $ 842,041 The accompanying notes are an integral part of these statements. 3

6 Statements of Functional Expenses For the Year Ended December 31,2011 (with Comparative Totals for 2010) Food Youth Community Client Program Support Total Total Expe nditure s Services Development Gardens Se rvices Services Services Fundraising Expenses Expenses Direct assistance: Food $ 2,384,976 $ - $ - $ - $ 2,384,976 $ - $ - $ 2,384,976 $ 4,533,361 Clothing and other 12,818 12,818 12,818 8,499 Salaries and wages 135,383 28,301 54, , ,146 97,252 67, , ,854 Payroll taxes 20,684 4,324 8,384 16,896 50,288 14,858 10,316 75,462 48,729 Employee benefits expense 15,649 3,271 6,343 12,783 38,046 11,241 7,804 57,091 55,298 Contract labor 5,237 3,607 4,041 12,885 2,675 15,560 19,490 Meals served Pantry expense 23,867 23,867 23,867 18,283 Program supplies 27 6,254 1,338 7,619 7,619 6,983 Field trip expense 1,263 1,263 1,263 2,949 Staff development ,299 3,044 Auto expense 6,060 3,263 9,323 9,323 5,542 Occupancy 36,857 7,705 14,939 30,107 89,608 26,477 18, , ,741 Office and supplies expense 3, ,620 3,264 9,715 2,870 1,993 14,578 17,519 Communications 1, ,751 6,934 1, ,335 8,301 Technology and software 2, ,176 6,718 11,253 2,015 3,527 16,795 23,625 Accounting related service 4,873 1,019 1,975 3,981 11,848 3,501 2,430 17,779 31,872 Insurance 5,005 1,046 2,028 4,088 12,167 3,595 2,496 18,258 22,861 Depreciation 1, , ,426 5,597 Gala expense 45,953 45,953 44,727 Banquet and awards 2, ,363 1,439 5, ,825 5,537 Public relations 2, ,032 2,065 6,194 1,770 6,784 14,748 35,311 Miscellaneous expenses 5,497 1,149 2,228 4,490 13,364 3,949 2,741 20,054 15,425 Total expenditures $ 2,659,748 $ 54,808 $ 106,914 $ 219,649 $ 3,041,119 $ 170,204 $ 174,478 $ 3,385,801 $ 5,531,017 The accompanying notes are an integral part of these statements. 4

7 Statements of Cash Flows For the Years Ended December 31, 2011 and Cash flows from operating activities: Increase in net assets $ 29,444 $ 146,194 Adjustments to reconcile to net cash provided by operating activities: Depreciation 4,426 5,597 Donated fumiture and fixtures (126,850) (Increase) decrease in operating assets: Accounts receivable 31,278 (85,851) Contributions restricted in use by donor 31,106 (46,797) Inventory 2, Increase (decrease) in operating liabilities: Accounts payable 11,037 (18,194) Accrued vacation (5,788) 3,099 Accrued pension liability (952) (4,138) Net cash (used in) provided by operating activities (23,651) 158 Cash flows from investing activities Fixed asset purchases Net cash provided by investing activities Change in cash and cash equivalents (23,651) 158 Cash and cash equivalents, beginning of year 344, ,681 Cash and cash equivalents, end of year $ 321,188 $ 344,839 Supplemental disclosures: Interest and taxes paid $ $ The accompanying notes are an integral part of these statements. 5

8 Notes to the Financial Statements Note 1- Nature of Activities Target Hunger, Inc. (the "Organization") is a nonprofit corporation with a mission to alleviate hunger and its root causes in inner-city neighborhoods. The organization works with various neighborhood service providers, churches, community leaders and residents; and is supported through funds and donations received from the United Way of Greater Houston (UWGH), The Houston Food Bank, and from private donors including corporations and individuals. Services provided are distinguished by specific programs, which are outlined below. Food Services The Organization distributes food to over 12,500 clients through various manners on a monthly basis through its 10 food pantries, Home Delivery Program, and eleven senior day-sites. Community Food Fairs are hosted bi-weekly to provide participants with informative and educational mini-workshops on social, health, and community issues. Nutrition classes are provided to help clients maximize utilization of food resources. Youth Development Youth Development includes a variety of programs, primarily encompassed in the After-School Program; and also the Summer Youth Enrichment Program that is a free summer day camp. Community Gardens The Target Hunger Community Gardens Program includes 16 community gardens within the city of Houston that are operated by volunteers. Client and Social Services Client and Social Services programs include but are not limited to educational and literacy programs to help clients improve their reading, math, and writing skills; English as a second language (ESL) to non- English speaking clients; self-esteem workshops; job-skills workshops; and life skills and group counseling services. Note 2 - Significant Accounting Policies Financial Statement Presentation The financial statements have been prepared on the accrual basis of accounting, in accordance with accounting principles generally accepted in the United States. In accordance, rith generally accepted accounting principles, the Organization reports information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The three classes are defined below. As of December 31, 2011, the Organization has not received any permanently restricted contributions. Unrestricted Net Assets-Net assets that are not subject to restrictions. Temporarily Restricted Net Assets-Net assets subject to restrictions that permit the Organization to use or expend the assets only as specified. The restrictions are satisfied either by the passage of time or by expenditures for specific programs of the Organization. 6

9 Notes to the Financial Statements (Continued) Note 2 - Significant Accounting Policies (Continued) Cash and Cash Equivalents Cash and cash equivalents represents cash in banks and short-term investments with an initial maturity of three months or less. At December 31, 2010 and 2009 the Organization did not have any deposits exceeding FDIC limitations. Inventory The inventory balance is comprised of food at the pantries, available for distribution to the Organization's clients. The value of the inventories is estimated based on a per pound food valuation. The Organization monitors the average per pound value evidenced on documentation received in conjunction with large pantry and grocer donations, to ensure that the value estimate used is reasonable. Fixed Assets Purchased fixed assets, exceeding $1,000 are capitalized at cost. Donations of fixed assets are recorded as contributions at their estimated fair value and are recorded as unrestricted net assets unless the donor has restricted the donated asset for a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire or maintain fixed assets are recorded as restricted contributions. Fixed assets are depreciated using the straight-line method, over the estimated useful lives ranging from three to eight years. Contributions and Promises to Give Contributions are recognized as income and recorded as a receivable when the donor makes 3..'1 unconditional promise to give to the Organization. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions are met in the fiscal year in which the contributions were recognized. All other donor-restricted contributions are reported as increases in temporarily or permanently restricted net assets. When a restriction expires or is met by the Organization, temporarily restricted net assets are reclassified to unrestricted net assets. Contributed Goods, Services and Facilities The Organization receives significant food donations, which are distributed to clients. These donations are received from The Houston Food Bank, corporations (generally, national grocery chains), and private donors. The Organization received approximately 62,000 and 40,000 volunteer hours during the years ended, respectively. These donated services included a variety of tasks that assist the Organization, most significantly in the food service programs.. During the years ended December 31, 2011 and 2010, the Organization did not receive any donated volunteer services meeting the requirements to be recorded in the financial statements. Additionally, the Organization's pantries are located in donated space at various churches and community centers in Harris County. The Organization recognizes these donations as revenue at an estimated fair market value based on commercial property rates in the same area. Contributed facilities for the years ended December 31, 2011 and 2010 were recorded at approximately $39,669 for both periods. During 2011 and 2010, the Organization also received donated temporary space from the Houston Independent School District (HISD), valued at $2,500. 7

10 Notes to the Financial Statements (Continued) Note 2 - Significant Accounting Policies (Continued) Income Taxes Target Hunger qualifies as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code and, therefore, has no provision for federal income taxes. In addition, Target Hunger qualifies for the charitable contribution deduction under Section 170(b)(1 )(A) and has been classified as an organization that is not a private foundation under Section 509(a)(2). The Organization did not record any expense for federal income taxes during the fiscal years ended. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that can affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. When available, the Organization records food donations and the food assistance provided to the clients at the fair value provided by the donor. When fair values are not provided, the Organization estimates the value of the donation. Prior to the year ended December 31, 2011, the donation and distribution estimates were valued at $1.50 per pound, a standardized value established by a national pantry organization. During 2011, the Organization decreased its estimated fair value per pound to $0.62, a rate more consistent recent declines in the fair value per pound, provided by donors. This decrease in the estimate affected the value of inventory, in-kind contributions and in-kind distributions. Note 3 - Fair Value Certain assets are reported at fair value in the accompanying statements of financial position. The fair value measurement accounting literature establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels: Levell inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority. Level 2 inputs consists of observable inputs other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs consist of significant unobservable inputs and have the lowest priority. The Organization's cash and cash equivalents balances, contributions receivable, and accounts payable and accrued liabilities are recorded at amounts that approximate fair value. The recorded values of these assets and liabilities approximate their fair values based on their short-term nature. The fair value of the accrued pension liability (sponsored by an outside entity) is based on an actuarial valuation considering current market conditions and anticipated future returns. These valuations are considered to be based on Level 1 inputs. The Organization receives significant non-cash contributions which flow through the statement of activities. A substantial portion of these contributions are recorded at fair values at an average per pound rate. This valuation is a level 2 input and is the basis for the inventory valuation. 8

11 Note 4 - Unconditional Promise to Give Target Hunger, Inc. Notes to the Financial Statements (Continued) The Organization receives awards from various corporations and foundations. All pledges are considered fully collectible and no allowance is deemed necessary. During 2010, the Organization received an award from a foundation in the form of a multi-year pledge. Under the terms ofthe award, Target Hunger was awarded $230,000 to support its programs. Target Hunger is scheduled to receive two payments of $115,000 each, payable during the years ended December 31,2011 and 2012 Note 5 - Fixed Assets The fixed assets at December 31,2011 Land Computer and software Automobiles Office equipment Furniture and fixtures Less: Accumulated depreciation and 2010 consist of the following: $ 13,668 $ 13,668 16,283 16,283 22,810 22,810 13,143 13, , '--- 12, ,244 78, '-C 5_7-,--, 1_49~) (52,723) =$=====14=8~,0=95=$ 25,671 Depreciation expense for the years ended December 31, 2011 and 2010 was approximately $4,426 and $5,597, respectively. During 2011, the Organization received in-kind furniture and fixture donations valued at $126,850. Note 6 - Restrictions on Net Assets The restrictions on net assets relate to timing of the contribution receipt of pledged or promised contributions and restrictions on the usage of the contributions. Temporarily restricted net assets are available for the following purposes or periods: Funds received: Fundraising event Hurricane relief Youth programs Food services program Funds received, restricted in use $ 60,000 20,000 5,191 s 62,000 20,000 30,029 4,268 85, ,297 Funds pledged: UWTGC, for use in future period Foundations, for use in future period Corporation, for use in future period Funds pledged, restricted in use Temporarily restricted net assets 92,802 90, , ,000 15, , ,046 $ 307,993 $ 436,343 9

12 Notes to the Financial Statements (Continued) Note 7 - Government Grants During 2011 and 2010, the Organization received funds from National Federal Emergency Management Agency ("FEMA") as part of an emergency food and shelter program to provide food to needy clients in Harris County and ARRA funds to support an additional food distribution program. Revenue is recognized when earned and expenses are recognized as incurred. Grant receipts and expenditures were approximately $19,000 and $25,000 for the years ending December 31, 2011 and Note 8 - Lease Commitments The Organization's headquarters are located in a building owned by HlSD. The Organization leases a portion of this building from HlSD. The Organization renewed the lease for an additional 60 months, effective November 1, Under the terms of the new agreement, Target Hunger makes monthly lease payments of approximately $5,700. Future minimum lease payments as of December 31, 2011 are as follows: Year Ending December, 31 Minimum Lease Payments $ 67,956 $ 67,956 $ 56,630 Note 9 - Joint Costs and Allocation of Expenses For the year ended, Target Hunger allocates a portion of employee costs of staff members, who are primarily dedicated to fund development objectives, to the programs, to reflect the efforts provided to program activities. Salary and related expenses for the development director were allocated between fundraising, management and general, and programs at 60%, 20%, and 20%, respectively. Note 10 - Concentration of Support TIle Organization recorded $360,266 and $380,833 of UWGH funding allocations into income for the years ending December 31, 2011 and 2010, representing 34% and 27%, respectively, of revenues and other support (excluding in-kind contributions). These contributions represent 11% and 7%, respectively, of total support for these periods. In-kind contributions represent approximately 69% and 76% of the Organization's total support, during 2011 and 2010, respectively. Donations from The Houston Food Bank represented over 95% of in-kind donations for the years ended December 31, 2011 and Note 11 - Advertising Costs During the year ended December 31, 2011 and 2010, Target Hunger advertising totaled approximately $9,000 and $12,500, respectively. Advertising expenses are included in the public relations category on the statement of functional expenses. 10

13 Notes to the Financial Statements (Continued) Note 12 - Employee Benefits The Organization participates in a co-leasing employment agreement with a third party. Under this agreement, the Organization receives group health, life, long-term disability, flexible benefits and dental insurance programs. Welfare benefit plan contributions expensed for the years ended December 31, 2011 and 2010 were $41,592 and $44,869, respectively. The Organization also offers a defined contribution plan, with an employer match contribution. During 2011 and 2010, the employer contributions totaled approximately $15,000 and $12,500, respectively. During 2004, the United Way pension plan was converted to a cash balance plan. This plan is currently under-funded. In 2004, Target Hunger stopped making payroll based payments into the Plan. Actuarially determined deficit payments are made to the newly converted cash balance plan. Target Hunger will make these payments until the Plan is fully funded, which was estimated by the plan administrator to be in At the time of the conversion, the Organization's portion of the liability to the plan, as determined by the plan administrator was $13,100; this amount has fluctuated due to administrative costs and returns on investments. As of December 31,2011, the Organization's portion of the liability is $14,25l. Note 13 - Subsequent Event Review In preparing the financial statements, the Organization has evaluated the events and transactions for potential recognition or disclosure through June 29, 2012, the date that the fmancial statements were available to be issued. 11