ROCKFORD AREA HABITAT FOR HUMANITY, INC. FINANCIAL STATEMENTS and INDEPENDENT AUDITOR S REPORT. For the years ended June 30, 2014 and 2013

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1 FINANCIAL STATEMENTS and INDEPENDENT AUDITOR S REPORT For the years ended June 30, 2014 and 2013

2 TABLE OF CONTENTS Independent Auditor s Report 1 Statements of Financial Position 2 Statements of Activities 3 Statements of Functional Expenses 4-5 Statements of Cash Flows 6 Notes to Financial Statements 7-14

3 Quimby & Co., P.C. Certified Public Accountants 697 S. Blackhawk Blvd. Rockton, IL / Fax 815/ Board of Directors Rockford Area Habitat for Humanity, Inc. Rockford, Illinois INDEPENDENT AUDITOR S REPORT We have audited the accompanying financial statements of Rockford Area Habitat for Humanity, Inc. (a nonprofit organization), which comprise the Statements of Financial Position as of June 30, 2014 and 2013, and the related Statements of Activities, Cash Flows and Functional Expenses for the years then ended, and the related notes to the 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. Auditor s 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. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s 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 auditor considers internal control relevant to the entity 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 entity 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 the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rockford Area Habitat for Humanity, Inc. as of June 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. QUIMBY & CO., P.C. Rockton, Illinois January 9, 2015

4 STATEMENTS OF FINANCIAL POSITION June 30, 2014 and 2013 ASSETS Cash and cash equivalents: Unrestricted $ 281,827 $ 270,523 Escrow 230, , , ,822 Prepaid expenses 13, Security deposit 4, Building materials inventory 23,368 20,840 Mortgages receivable, net of discount 1,670,717 1,593,885 Construction in progress 202, ,876 Homes held for transfer 42,819 37,519 Land held for development 18,974 41,222 Property and equipment, net 22,298 16,892 Total assets $2,509,655 $2,450,056 LIABILITIES AND NET ASSETS Liabilities: Accounts payable $ 34,265 $ 51,833 Escrow held 230, ,299 Accrued liabilities 10,160 14,669 Net assets: Total liabilities 274, ,801 Unrestricted 2,235,148 2,160,255 Total net assets 2,235,148 2,160,255 Total liabilities and net assets $2,509,655 $2,450,056 See accompanying notes to financial statements. Page 2

5 STATEMENTS OF ACTIVITIES for the years ended June 30, 2014 and Revenues and support: Contributions: Cash $ 207,525 $ 110,975 In-kind 27,299 32,275 Transfers to homeowners 318, ,000 Mortgage discount amortization 134, ,291 Special fundraising event, net of expenses of $6,881 and $8,589, respectively 13,994 18,693 Interest income Other 21,556 5,824 ReStore sales 265, ,160 Total revenues and support 988, ,480 Expenses: Program services 666, ,800 Management and general 49,554 42,125 Fundraising, including ReStore activity 197, ,135 Total expenses 913,927 1,050,060 Change in net assets 74,893 ( 111,580) Net assets, beginning of year 2,160,255 2,271,835 Net assets, end of year $2,235,148 $2,160,255 See accompanying notes to financial statements. Page 3

6 STATEMENT OF FUNCTIONAL EXPENSES for the year ended June 30, 2014 Program Management Services and General Fundraising Total Cost of homes transferred $373,908 $ -- $ -- $373,908 Discount on mortgages issued 169, ,529 Salary and benefits 73,657 24,046 75, ,126 Postage and freight ,405 6,704 Insurance 5,500 2,326 4,006 11,832 Professional services 7,743 7, ,318 Rental 5,500 5,565 74,075 85,140 Property taxes 11, ,644 Habitat tithe 6, ,254 Utilities 2, ,927 12,959 Miscellaneous ,007 3,721 Dedications Printing ,667 Advertising ,823 5,197 Dues and subscriptions -- 2, ,940 Supplies and small tools 1,106 2,762 3,506 7,374 Telephone and fax 1,854 1,063 2,358 5,275 Training Depreciation 1, ,752 5,522 Travel, food and lodging 2, ,561 Licenses, fees and permits 1, ,766 4,793 Newsletter ,915 5,915 Repairs Total functional expenses $666,635 $49,554 $197,738 $913,927 See accompanying notes to financial statements. Page 4

7 STATEMENT OF FUNCTIONAL EXPENSES for the year ended June 30, 2013 Program Management Services and General Fundraising Total Cost of homes transferred $520,800 $ -- $ -- $ 520,800 Discount on mortgages issued 166, ,377 Salary and benefits 76,248 19,559 75, ,199 Postage and freight ,903 4,667 Insurance 4,113 2,748 3,949 10,810 Professional services 942 6, ,877 Rental 6,000 5,400 64,028 75,428 Property taxes 10, ,459 Habitat tithe 7, ,049 Utilities 2, ,015 15,605 Miscellaneous ,683 4,279 Dedications Printing ,333 Advertising ,219 3,224 Dues and subscriptions Supplies and small tools 1,430 4,421 7,208 13,059 Telephone and fax 2,229 1,123 2,930 6,282 Training 8,399 ( 35 ) 134 8,498 Depreciation ,425 7,585 Travel, food and lodging 2, ,527 Licenses, fees and permits ,501 2,888 Newsletter ,683 6,683 Repairs Total functional expenses $811,800 $42,125 $196,135 $1,050,060 See accompanying notes to financial statements. Page 5

8 STATEMENTS OF CASH FLOWS for the years ended June 30, 2014 and Cash flows from operating activities: Change in net assets $ 74,893 ($111,580) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 5,522 7,585 Mortgage discount amortization ( 134,514 ) ( 128,291 ) Contributions receivable -- 16,041 Prepaid expenses ( 13,099 ) -- Security deposits ( 4,425 ) -- Building materials inventory ( 2,528 ) ( 334 ) Mortgages receivable 57,682 33,185 Construction in progress 43, ,697 Homes held for transfer ( 5,300 ) 10,863 Land held for development 22,248 ( 18,756 ) Accounts payable ( 17,568 ) 10,123 Escrows held 6,783 61,998 Accrued liabilities ( 4,509 ) 4,737 Net cash from operating activities 29,015 62,268 Cash flows from investing activities: Purchase of property and equipment ( 10,928 ) ( 17,609 ) Net cash from investing activities ( 10,928 ) ( 17,609 ) Net increase in cash and cash equivalents 18,087 44,659 Cash and cash equivalents, beginning of year 493, ,163 Cash and cash equivalents, end of year $511,909 $493,822 Supplemental disclosures: Changes in construction in progress are comprised of the following cash and non-cash components: 2014 Cash Non-cash Net Change Construction in progress Payments made ($302,779 ) $ -- ($302,779 ) In-kind contributions received -- ( 27,299 ) ( 27,299 ) Transfers to homeowners , ,908 Total $ 43, Cash Non-cash Net Change Construction in progress Payments made ($311,828 ) $ -- ($311,828 ) In-kind contributions received -- ( 32,275 ) ( 32,275 ) Transfers to homeowners , ,800 Total $176,697 See accompanying notes to financial statements. Page 6

9 NOTES TO FINANCIAL STATEMENTS NOTE I ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND PURPOSE Rockford Area Habitat for Humanity, Inc. (RAHFH) is a nondenominational Christian not-for-profit entity organized as an Illinois corporation in Its purpose is to work in partnership with God and people everywhere, from all walks of life, to develop communities with God s people in need by building and renovating houses, so that there are decent houses in decent communities in which God s people can live and grow into all that God intended. SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting RAHFH maintains its records and prepares its financial statements on the accrual basis which is the basis of accounting generally accepted in the United States of America. Accordingly, the financial statements reflect accounts receivable, accounts payable and accrued expenses. Cash Equivalents RAHFH considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Building Materials Inventory The building materials inventory is stated at the lower of cost or market. Mortgages Receivable Mortgages receivable consist of non-interest bearing mortgages secured by real estate and payable in monthly installments over the lives of the mortgages. Each mortgage is discounted at the date of origination based upon the term of the mortgage and prevailing interest rates for low income housing. The original discount is amortized and taken into income over the life of the mortgage. Mortgages that become delinquent and are in the process of foreclosure are reflected as a receivable until RAHFH effectively receives title to real estate securing the mortgage. Upon receipt of title by RAHFH, the mortgage receivable is transferred to homes awaiting transfer and is carried at the lower of the outstanding mortgage balance or fair value of the home and real estate securing the mortgage at the time of title transfer. Subsequent costs to refurbish and make the homes available for transfer to potential new homeowners are added to the carrying value when incurred. Property and Equipment Property and equipment purchased by RAHFH are carried at cost. Donated assets are capitalized at their estimated fair value as of the date of the gift. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized. The cost and accumulated depreciation of an asset are eliminated from the accounts upon retirement, sale or other disposition, and the gain or loss is included in the statement of activities in the period realized. Page 7

10 NOTES TO FINANCIAL STATEMENTS NOTE I ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, Continued SIGNIFICANT ACCOUNTING POLICIES, Continued Transfers to Homeowners and Program Services Transfers to homeowners are recorded at the gross mortgage amount plus down payment received. Program services include construction costs, family selection, family support and educational ministries. Contributions Unconditional promises to give are recognized as revenue when the underlying promises are received by RAHFH. Gifts of cash and other assets are reported as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor 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. However, if a restriction is fulfilled in the same time period in which the contribution is received, RAHFH reports the support as unrestricted. Gifts of furniture and equipment are reported as unrestricted support unless explicit donor stipulations specify how the assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, RAHFH reports expirations of donor restrictions when the donated long-lived assets are placed in service. Contributed Services Contributed services that create or enhance non-financial assets or require specialized skills and would typically otherwise have to be purchased by RAHFH are recorded at fair value at the date of contribution as revenue and expense in the period received. Contributed services that do not meet these criteria are not recorded. A substantial number of volunteers have made significant contributions of their time to RAHFH s program and supporting services. The value of this contributed time is not reflected in these financial statements since it is not susceptible to objective measurement or valuation and management believes it does not meet the criteria for recording. Income Taxes RAHFH is a nonprofit Illinois Corporation and has been granted exemption from federal income tax under Section 501(c)(3) of the Internal Revenue Code, as other than a private foundation. Expense Allocation Directly identifiable expenses are charged to programs and supporting services. Expenses related to more than one function are charged to programs and supporting services on the basis of time records, square footage and estimates by RAHFH s management. Management and general expenses include those expenses not directly identifiable with any specific function but provide for the overall support and direction of RAHFH. Page 8

11 NOTES TO FINANCIAL STATEMENTS NOTE I ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, Continued SIGNIFICANT ACCOUNTING POLICIES, Continued Use of Estimates by Management The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE II HOMES AWAITING TRANSFER As of June 30, 2014 and 2013 the values of previously sold homes being held by RAHFH were $42,819 and $37,519, respectively. NOTE III MORTGAGES RECEIVABLE At June 30, 2014, RAHFH held 93 mortgages on homes that had been constructed and transferred to owners. All mortgages are non-interest bearing and vary in term from approximately 38 years to less than a year. The average term for all mortgages outstanding at year end is approximately 13 years. RAHFH imputes interest for these mortgages at the date of their origination, using the estimated prevailing interest rates for low income housing. At June 30, 2014, the rates used ranged from 7.69% to 9.00%. Imputed interest is recorded as discounts to the mortgages that are amortized, using the declining balance method, over the lives of the mortgages. For the years ended June 30, 2014 and 2013, imputed interest of $134,514 and $128,291, respectively, was amortized and recorded as income. The following summarizes mortgages receivable activities at June 30: Number Net Of Mortgages Imputed Mortgages 2014 Homes Receivable Interest Receivable Mortgages receivable, beginning of year 89 $2,977,933 ($1,384,048 ) $1,593,885 Homes transferred to homeowners 7 420,000 ( 187,744 ) 232,256 Homes transferred back to RAHFH ( 2 ) ( 43,140 ) 18,215 ( 24,925 ) Payments received -- ( 263,263 ) -- ( 263,263 ) Mortgages paid off (1) ( 1 ) ( 1,750 ) -- ( 1,750 ) Amortization of imputed interest , ,514 Mortgages receivable, end of year 93 $3,089,780 ($1,419,063 ) $1,670,717 Page 9

12 NOTES TO FINANCIAL STATEMENTS NOTE III MORTGAGES RECEIVABLE, Continued Number Net Of Mortgages Imputed Mortgages 2013 Homes Receivable Interest Receivable Mortgages receivable, beginning of year 84 $2,844,741 ($1,345,962 ) $1,498,779 Homes transferred to homeowners 7 428,000 ( 178,946 ) 249,054 Homes transferred back to RAHFH ( 1 ) ( 36,335 ) 12,569 ( 23,766 ) Payments received -- ( 240,577 ) -- ( 240,577 ) Mortgages paid off (1) ( 1 ) ( 17,896 ) -- ( 17,896 ) Amortization of imputed interest , ,291 Mortgages receivable, end of year 89 $2,977,933 ($1,384,048 ) $1,593,885 At June 30 estimated amounts due in the future, are summarized as follows: Fiscal Mortgages 2014 Year Receivable 2015 $ 211, , , , ,881 Thereafter 2,100,398 3,089,780 Imputed interest ( 1,419,063 ) Net mortgages receivable $1,670,717 Fiscal Mortgages 2013 Year Receivable 2014 $ 251, , , , ,860 Thereafter 1,914,445 2,977,933 Imputed interest ( 1,384,048 ) Net mortgages receivable $1,593,885 Page 10

13 NOTES TO FINANCIAL STATEMENTS NOTE IV CONSTRUCTION IN PROGRESS The following summarizes construction in progress at June 30: Number 2014 of Homes Cost Construction in progress, beginning of year 5 $245,876 Additional costs on beginning homes ,032 Additional site preparation and homes started 3 202,046 Homes completed and transferred to homeowners ( 5 ) ( 373,908 ) Construction in progress, end of year 3 $202, Construction in progress, beginning of year 6 $422,573 Additional costs on beginning homes -- 98,227 Additional site preparation and homes started 5 245,876 Homes completed and transferred to homeowners ( 6 ) ( 520,800 ) Construction in progress, end of year 5 $245,876 NOTE V PROPERTY AND EQUIPMENT At June 30, the cost or value and accumulated depreciation of property and equipment are as follows: Vehicle $41,117 $41,117 Office furniture Computer and office equipment 24,500 19,428 Construction and warehouse equipment 12,995 12,995 Leasehold improvements 7,141 7,141 86,218 81,146 Less accumulated depreciation ( 63,920 ) ( 64,254 ) $22,298 $16,892 NOTE VI NON-CANCELABLE LEASES RAHFH leases its administrative offices on a month to month basis. The original term of the lease was five years. In addition, RAHFH had an option for a three year extension on the same terms, covenants and conditions as provided for during the initial term, except that monthly rental shall be increased by a pro-rata share, per tenant, of increases in the lessor s annual operating expenses. The lease required the landlord to furnish all utilities. Effective July 1, 2007 RAHFH extended the lease for three years, at a monthly rent of $380. Effective July 1, 2010 the lease was extended through November 30, 2012 with an increase in the monthly rent to $450 on December 1, Effective November 30, 2012 the lease became month to month at $450 per month. Effective June 1, 2014, entered into a new annual lease to reflect additional space and a 3% increase with monthly rent of $615. Amounts charged to rent under this lease in 2014 and 2013 were $5,565 and $5,400, respectively. Page 11

14 NOTES TO FINANCIAL STATEMENTS NOTE VI NON-CANCELABLE LEASES, Continued RAHFH leases its ReStore location under a non-cancelable operating lease. The original lease was modified and extended in September 2009 to reflect the leasing of additional space. The modification extended the term of the lease for three years, from October 1, 2009 to September 30, 2012, and required monthly payments of $6,257. Monthly payments include both the base rent and the estimated common area maintenance charge. Effective November 1, 2012, RAHFH entered into a new lease for a different space. The new lease expires December 31, 2016 and requires monthly payments of $6,500. Amounts charged to expense in 2014 and 2013, under the extended lease and the new lease were $74,075 and $64,028, respectively. RAHFH leases storage space under a non-cancelable operating lease. The lease ran through September 30, 2012 and required monthly payments of $500. This lease was extended through December 31, 2016 and requires monthly payments of $500. Amounts charged to expense in 2014 and 2013 were $5,500 and $6,000, respectively. Total minimum rental payments required under the terms of these leases without regard to possible increases or additional assessments, are as follows: Fiscal Storage Period Offices and ReStore Total 6 months ended 12/31/2014 $3,690 $ 39,000 $ 42, ,075 78,000 81, ,000 78,000 $6,765 $195,000 $201,765 NOTE VII IN-KIND CONTRIBUTIONS During the years ending June 30, 2014 and 2013, RAHFH received various donated building materials and supplies totaling $27,299 and $32,275, respectively, for the construction of homes. NOTE VIII COMMUNITY SUPPORT RAHFH receives a substantial amount of support from donations, grants and volunteers. A significant reduction in the level of this support, if this were to occur, could have a significant effect on RAHFH s activities. NOTE IX TRANSACTIONS WITH HABITAT FOR HUMANITY INTERNATIONAL RAHFH annually remits a portion of its contributions (excluding in-kind contributions) to Habitat for Humanity International. These funds are used to construct homes in economically depressed areas around the world. For the years ended June 30, 2014 and 2013, RAHFH contributed $6,254 and $7,049, respectively, to Habitat for Humanity International. These amounts are included in program services expense in the Statements of Activities and Functional Expenses. Page 12

15 NOTES TO FINANCIAL STATEMENTS NOTE X RETIREMENT PLAN All employees of RAHFH are eligible to participate in its SIMPLE IRA plan. Employees can make salary reduction contributions in any amount up to the legal limits. At the Board of Directors discretion, RAHFH will contribute either (1) a non-elective employer contribution equal to 2% of the employee s compensation regardless of whether such employees make their own contributions; or (2) a dollar-for-dollar match up to 3% of compensation. The amount charged to expense by RAHFH for this plan for the years ended June 30, 2014 and 2013 was $4,123 and $4,287, respectively. NOTE XI SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the statement of financial position date but before financial statements are issued or are available to be issued. These events and transactions either provide additional evidence about conditions that existed at the date of the statement of financial position, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events), or provide evidence about conditions that did not exist at the date of the statement of financial position but arose after that date (that is, non-recognized subsequent events). Subsequent to June 30, 2014, RAHFH changed its year end from June 30 to December 31 to align activities with funding sources. RAHFH has evaluated subsequent events through January 9, 2015, the date these financial statements were available for issuance, and determined that there were no significant non-recognized events through that date. NOTE XII INCOME TAXES RAHFH follows the authoritative guidance issued by the Financial Accounting Standards Board clarifying the accounting for uncertainty in income taxes recognized in an entity s financial statements and prescribing a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has not been met. This guidance also addresses de-recognition, classification, interest and penalties, disclosures and transition. The RAHFH does not believe the financial statements include (or reflect) any uncertain tax positions. RAHFH conducts business solely in the United States and as a result, files tax returns for the United States and Illinois. In the normal course of business the Center is subject to examination by taxing authorities. RAHFH s tax returns for years subsequent to 2009 are open, by statute, for review by authorities. At June 30, 2014 there are no ongoing income tax audits or unresolved disputes with the various tax authorities the RAHFH currently files or has filed with. NOTE XIII FAIR VALUE MEASUREMENTS RAHFH follows the authoritative guidance of ASC Topic 820, Fair Value Measurements, which establishes a single authoritative definition of fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. ASC Topic 820 applies to all assets and liabilities that are being measured and reported on a fair value basis. Under ASC Topic 820, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for Page 13

16 NOTES TO FINANCIAL STATEMENTS NOTE XIII FAIR VALUE MEASUREMENTS, Continued ranking the quality and reliability of the information used to determine fair values. Investments with readily available actively quoted prices or for which value can be measured from actively quoted prices generally will have a higher degree of market price observability and lesser degree of judgment used in measuring fair value. In the absence of actively quoted prices and observable inputs, RAHFH estimates prices based on available historical data and near term future pricing information that reflects its market assumptions. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1 Quoted market prices in active markets for identical assets and liabilities. Level 2 Observable market based inputs or observable inputs that are corroborated by market data. Level 3 Unobservable inputs that are not corroborated by market data. At June 30, 2014 and 2013, no assets other than cash and equivalents were measured at fair value on a recurring basis. Page 14