Audited Consolidating Financial Statements, Additional Information, and Reports Required by Government Auditing Standards and OMB Circular A-133

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1 Audited Consolidating Financial Statements, Additional Information, and Reports Required by Government Auditing Standards and OMB Circular A-133 GOODWILL INDUSTRIES INTERNATIONAL, INC. AND RELATED ENTITIES December 31, 2013

2 Contents Independent Auditor s Report on the Consolidating Financial Statements and on the Supplementary Information 1-2 Consolidating Financial Statements Consolidating statement of financial position 3 Consolidating statement of activities 4 Consolidating statement of cash flows 5 Notes to the consolidating financial statements 6-20 Additional Information Consolidated schedule of functional expense 21 Reports Required by Government Auditing Standards and OMB Circular A-133 Schedule of expenditures of federal awards 22 Notes to the schedule of expenditures of federal awards 23 Independent auditor s 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 auditor s report on compliance for each major program and on internal control over compliance required by OMB Circular A Schedule of findings and questioned costs 28-29

3 Independent Auditor s Report on the Consolidating Financial Statements and on the Supplementary Information To the Board of Directors Goodwill Industries International, Inc. We have audited the accompanying consolidating financial statements of Goodwill, Inc. (the Organization), which comprise the consolidating statement of financial position as of December 31, 2013, and the related consolidating statements of activities and cash flows for the year then ended, and the related notes to the consolidating financial statements. Management s Responsibility for the Consolidating Financial Statements Management is responsible for the preparation and fair presentation of these consolidating 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 consolidating financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility L S t r e e t, N W S u i t e Our responsibility is to express an opinion on these consolidating financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and, with respect to Goodwill Industries International, Inc. (GII) only, 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 consolidating financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidating financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidating financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Organization s preparation and fair presentation of the consolidating 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 consolidating financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the 2013 consolidating financial statements referred to above present fairly, in all material respects, the consolidating financial position of Goodwill, Inc. and Related Entities as of December 31, 2013, and the changes in their net assets and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 1

4 To the Board of Directors March 4, 2014 Page 2 of 2 Report on Summarized Comparative Information We have previously audited the Organization s 2012 consolidated financial statements, and our report thereon dated March 4, 2014, expressed an unmodified opinion on those audited consolidated financial statements. In our opinion, the summarized comparative information has presented herein as of and for the year ended December 31, 2012, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Report on Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidating financial statements as a whole. The accompanying consolidated schedule of functional expense is presented for purposes of additional analysis and is not a required part of the consolidating financial statements. The schedule of expenditures of federal awards, as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, is presented for purposes of additional analysis and is also not a required part of the consolidating 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 consolidating financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidating financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidating financial statements or to the consolidating financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidating 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 4, 2014, on our consideration of GII s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, 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 the 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 GII s internal control over financial reporting or compliance. Washington, DC March 4,

5 Consolidating Statement of Financial Position December 31, 2013 with 2012 Totals GII / LLC GMJCS Eliminations Total Total Assets Cash and cash equivalents $ 2,303,723 $ 1,013,576 $ - $ 3,317,299 $ 1,938,299 Investments 21,718,840 21,718,840 16,259,097 Accounts receivable 835,828 (9,969) 825, ,343 Pledges receivable 658, ,334 1,752,598 Grants receivable 1,206,180 1,206,180 2,271,525 Prepaid expenses and other assets 513,486 6, , ,781 Notes receivable 2,487,500 2,487,500 - Property and equipment 8,210,894 8,210,894 8,429,474 Total assets $ 35,447,285 $ 3,507,687 $ (9,969) $ 38,945,003 $ 31,945,117 Liabilities and Net Assets Liabilities Accounts payable $ 3,174,758 $ 9,969 $ (9,969) $ 3,174,758 $ 3,628,270 Accrued expense 2,217,123 10,628 2,227,751 1,863,613 Deferred revenue 673, , ,119 Rebates payable 820, , ,000 Notes payable 2,500,000 2,500,000 - Bonds payable 1,500,000 1,500,000 1,600,000 Interest rate swap agreement 72,176 72, ,635 Total liabilities 8,457,624 2,520,597 (9,969) 10,968,252 8,414,637 Net assets Unrestricted 14,479, ,090 15,466,294 14,120,877 Temporarily restricted 11,221,047 11,221,047 8,174,694 Permanently restricted 1,289,410 1,289,410 1,234,909 Total net assets 26,989, ,090-27,976,751 23,530,480 Total liabilities and net assets $ 35,447,285 $ 3,507,687 $ (9,969) $ 38,945,003 $ 31,945,117 See notes to the consolidating financial statements. 3

6 Consolidating Statement of Activities Year Ended December 31, 2013 with 2012 Totals GII / LLC GMJCS Eliminations Total Total Unrestricted activities Revenue and support Membership dues $ 19,976,038 $ - $ - $ 19,976,038 $ 19,097,240 Federal awards 13,164,497 13,164,497 16,218,479 In-kind contributions 10,176,656 10,176,656 2,119,500 Program service fees 2,789,527 2,789,527 2,738,776 Legacies and bequests 895, , ,466 Rental 297, , ,239 Investment income 115, , ,861 Contributions 87,798 87, ,577 Other income 21,816 28,643 (17,971) 32,488 5,701 47,524,164 28,643 (17,971) 47,534,836 41,245,839 Net assets released from restriction 5,785,266 5,785,266 6,457,652 Total revenue and support 53,309,430 28,643 (17,971) 53,320,102 47,703,491 Expense Program services Direct services to membership 24,015,431 23,582 24,039,013 13,647,092 Sponsored programs and grants 18,439,932 18,439,932 22,788,125 Support services to membership 5,730,803 5,730,803 5,947,774 Total program services 48,186,166 23,582-48,209,748 42,382,991 Management and general services General and administrative 3,514,703 17,971 (17,971) 3,514,703 4,094,249 Resource development 804, , ,916 Total management and general services 4,319,478 17,971 (17,971) 4,319,478 4,603,165 Total expense 52,505,644 41,553 (17,971) 52,529,226 46,986,156 Change in unrestricted net assets from operations 803,786 (12,910) - 790, ,335 Net gain on investments 331, , ,769 Change in allowance for doubtful accounts receivable 185, ,849 (8,985) Unrealized gain on interest rate swap 37,459 37,459 1,720 Transfer to loan loss reserve (1,000,000) 1,000, Change in unrestricted net assets 358, ,090-1,345,417 1,035,839 Temporarily restricted activities Contributions 8,743,669 8,743,669 11,371,967 Net gain on investments 70,663 70,663 10,793 Investment income 17,287 17,287 32,609 Net assets released from restriction (5,785,266) (5,785,266) (6,457,652) Change in temporarily restricted net assets 3,046, ,046,353 4,957,717 Permanently restricted activities Net gain on investments 54,501 54,501 59,055 Change in permanently restricted net assets 54, ,501 59,055 Change in net assets 3,459, ,090-4,446,271 6,052,611 Net assets, beginning of year 23,530, ,530,480 17,477,869 Net assets, end of year $ 26,989,661 $ 987,090 $ - $ 27,976,751 $ 23,530,480 See notes to the consolidating financial statements. 4

7 Consolidating Statement of Cash Flows Year Ended December 31, 2013 with 2012 Totals Year Ended December 31, GII / LLC GMJCS Eliminations Total Total Cash flows from operating activities Change in net assets $ 3,459,181 $ 987,090 $ - $ 4,446,271 $ 6,052,611 Adjustments to reconcile change in net assets to net cash provided by operating activities: Net gain on investments (456,397) (456,397) (395,617) Change in allowance for doubtful accounts receivable (185,849) (185,849) 8,985 Change in allowance for doubtful notes receivable 12,500 12,500 - Depreciation and amortization 1,015,078 1,015, ,153 Loss on disposal of property and equipment - 1,970 Unrealized gain on interest rate swap (37,459) (37,459) (1,720) Changes in assets and liabilities: Accounts receivable 251,364 9, ,333 (382,115) Pledges receivable 1,094,264 1,094,264 (1,460,068) Grants receivable 1,065,345 1,065, ,300 Prepaid expenses and other assets (120,705) (6,611) (127,316) 201,719 Accounts payable (453,512) 9,969 (9,969) (453,512) (356,555) Accrued expense 353,510 10, , ,989 Deferred revenue 280, ,448 15,364 Rebates payable - 820,000 Total adjustments 2,806,087 26,486-2,832, ,405 Net cash provided by operating activities 6,265,268 1,013,576-7,278,844 6,653,016 Cash flows from investing activiites Proceeds from sales of investments 4,763,311 4,763,311 5,767,459 Purchases of investments (9,766,657) (9,766,657) (11,678,400) Purchases of property and equipment (796,498) (796,498) (736,694) Net cash used in investing activities (5,799,844) - - (5,799,844) (6,647,635) Cash flows from financing activiites Payments from issuance of notes receivable (2,500,000) (2,500,000) - Proceeds from issuance of notes payable 2,500,000 2,500,000 - Principal payment on bonds payable (100,000) (100,000) (100,000) Principal payments on capital lease obligation - (29,450) Net cash used in financing activities (100,000) - - (100,000) (129,450) Net increase (decrease) in cash and cash equivalents 365,424 1,013,576-1,379,000 (124,069) Cash and cash equivalents, beginning of year 1,938, ,938,299 2,062,368 Cash and cash equivalents, end of year $ 2,303,723 $ 1,013,576 $ - $ 3,317,299 $ 1,938,299 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 67,334 $ - $ - $ 67,334 $ 72,581 See notes to the consolidating financial statements. 5

8 Notes to the Consolidating Financial Statements A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: Goodwill Industries International, Inc. (GII) was established in 1902 and was later incorporated in the Commonwealth of Massachusetts. GII improves the quality of life of people with disabilities and other special needs. GII s membership consists of local Goodwill Industries in the United States, Canada, and internationally. All GII members are autonomous, communitybased, nonprofit corporations that provide rehabilitation services, training, placement, and employment for people with disabilities and other disadvantaged persons. GII provides its members with various services, including consulting for workforce development, retail, contracts, strategic planning, education/training, national public relations, and research. GII also represents its membership before the Federal government and international entities Indianola Drive, LLC (the LLC) was organized in 2004 under the laws of the State of Delaware. The LLC operates, uses, develops, improves, renovates, maintains, manages, leases, and, when applicable, sells, exchanges, or otherwise disposes of real, personal, and mixed property. The LLC is a single-member limited liability company owned entirely by GII. Goodwill Mission and Job Creation Services, Inc. (GMJCS) was organized in 2012 under the laws of the District of Columbia. GMJCS advances the creation of jobs and services for people with disabilities and economic disadvantages by providing funds and working capital to Goodwill member organizations with terms that are more beneficial, and at a lower total cost, than Goodwill members could obtain from conventional commercial lending sources. GMJCS is controlled by GII through sole corporate membership. Principles of consolidation: The consolidating financial statements include the accounts of GII, the LLC, and GMJCS (collectively referred to as the Organization). Significant intra-entity accounts and transactions have been eliminated in consolidation. Income taxes: GII is exempt from the payment of income taxes on its exempt activities under Section 501(c)(3) of the Internal Revenue Code and has been classified by the Internal Revenue Service as other than a private foundation within the meaning of Section 509(a)(1) of the Internal Revenue Code. As a single-member limited liability company, LLC is treated as a disregarded entity for income tax purposes. Therefore, the LLC s financial activity is reported in conjunction with the Federal income tax filings of GII. GMJCS is exempt from the payment of income taxes on its exempt activities under Section 501(c)(3) of the Internal Revenue Code and has been classified by the Internal Revenue Service as other than a private foundation within the meaning of Section 509(a)(3) of the Internal Revenue Code. The Organization is subject to income tax on its unrelated business activities, such as income from the virtual member market place and rental income, which is debt financed. However, the Organization has generated net operating loss carry-forwards resulting from these taxable activities. The net operating loss carry-forwards, which may be applied against future years taxable income, totaled approximately $429,000 at December 31, The net operating loss carry-forwards will expire at various dates through A deferred tax asset has not been recognized due to the uncertainty of realizing a benefit from the net operating loss carry-forwards. The Organization believes that it has appropriate support for income tax positions taken. Therefore, management has not identified any uncertain income tax positions. Generally, income tax returns related to the current and three prior years remain open for examination by taxing authorities. 6

9 Notes to the Consolidating Financial Statements A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Basis of accounting: The Organization prepares its consolidating financial statements on the accrual basis of accounting. Revenue, other than contributions, is recognized when earned and expense when the obligation is incurred. Use of estimates: The preparation of consolidating financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from estimates. Cash and cash equivalents: The Organization classifies demand deposits as cash and cash equivalents. Cash and cash equivalents held within the investment portfolio are not included in cash and cash equivalents because they are held for either long-term or for investment purposes. Prepaid expenses and other assets: Prepaid expenses and other assets primarily consist of costs paid in advance of the period in which the Organization expects to incur the obligation. Deferred revenue: Deferred revenue consists of meeting registrations, event sponsorships, and GoodTrak fees. Revenue relating to meeting registrations and event sponsorships is recognized in the period when the meeting or event occurs. Fees related to GoodTrak, which is GII's webbased software system that allows client tracking and case management for Goodwill members, is recognized using the straight-line method over the user s service period. Contributions: Contributions are recorded as unrestricted, temporarily restricted, or permanently restricted support depending upon the existence and/or nature of donor restrictions. Support that is restricted by the donor is reported as an increase in temporarily or permanently restricted net assets, as applicable. Within temporarily restricted net assets, amounts are reclassified to unrestricted net assets when restrictions expire. Program services: Program service descriptions are as follows: Direct services to membership: Direct services to membership includes consultations, executive professional development, training seminars, data processing, financial and management information, the loan program from GMJCS, and assistance in the development of national and local communications materials. Sponsored programs and grants: Sponsored programs and grants includes efforts to develop higher quality job opportunities for people with disabilities and disadvantages, to provide awards for family-strengthening at the local community level, to improve the current workforce development system for the Hispanic population, and to build family economic success. Support services to membership: Support services to membership includes learning events such as the Conference of Executives and the Delegate Assembly. 7

10 Notes to the Consolidating Financial Statements A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Management and general services: Management and general services descriptions are as follows: General and administrative: The general and administrative service includes expenditures to secure proper administrative functioning, maintain the building, and manage the financial responsibilities of the Organization. Resource development: The resource development service includes expenditures that encourage and secure financial support for the Organization. Functional allocation of expenses: The costs of providing various program and supporting services have been summarized on a functional basis in the accompanying consolidating statement of activities. Accordingly, certain costs have been allocated among the program and supporting services benefited. Reclassifications: Certain accounts relating to the prior year have been reclassified to conform to the current year presentation with no effect on previously reported net income. Amounts reported in the December 31, 2012 consolidated financial statements were reclassified as follows: Previously 2012 Currently Reported Reclassification Reported Pledges receivable $ 932,598 $ 820,000 $ 1,752,598 Rebates payable - 820, ,000 Accrued expense 1,841,730 21,883 1,863,613 Security deposit 21,883 (21,883) - Contributions 2,311,077 (2,119,500) 191,577 In-kind contributions - 2,119,500 2,119,500 Direct services to membership 13,648,595 (1,503) 13,647,092 Sponsored programs and grants 22,791,216 (3,091) 22,788,125 General and administrative 4,098,640 (4,391) 4,094,249 Change in allowance for doubtful accounts receivable - (8,985) (8,985) Measure of operations: The Organization does not include 1) net gain on investments; 2) change in allowance for doubtful accounts receivable; and 3) unrealized gain on interest rate swap in the change in unrestricted net assets from operations. Prior-year comparative totals: The consolidating financial statements include certain 2012 summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a complete presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the 2012 consolidated financial statements, from which the summarized information was derived. Subsequent events: Subsequent events have been evaluated through March 4, 2014, which is the date the consolidating financial statements were available to be issued. 8

11 Notes to the Consolidating Financial Statements B. CONCENTRATIONS AND RISKS Credit risk: The Organization maintains demand deposits and money market funds at financial institutions. At times, certain balances held within these accounts may not be fully guaranteed or insured by the U.S. Government. The uninsured portions of cash and money market accounts are backed solely by the assets of the underlying institution. Therefore, the failure of an underlying institution could result in financial loss to the Organization. However, the Organization has not experienced losses on these accounts in the past, and management believes the risk of loss, if any, to be minimal. Market risk: The Organization invests in a professionally managed portfolio of mutual funds, which are exposed to market and credit risks. Therefore, the Organization s investments may be subject to significant fluctuations in fair value. As a result, the investment balances reported in the accompanying consolidating financial statements may not be reflective of the portfolio's value during subsequent periods. Interest rate risk: The Organization has bonds payable with a variable rate of interest. To minimize the unpredictability of interest payments, the Organization has entered into an interest rate swap agreement to convert the interest portion of its obligation from a variable rate to a fixed rate. Therefore, interest payments are calculated using the fixed interest rate and no other cash payments are required in relation to the interest rate swap agreement unless it is terminated prior to maturity. In the event of termination prior to maturity, the amount paid or received in termination would be calculated as the net present value, using current interest rates, of the remaining interest payments due through the end of the original term of the agreement. C. INVESTMENTS In accordance with generally accepted accounting principles, the Organization uses the following prioritized input levels to measure fair value. The input levels used for valuing investments are not necessarily an indication of risk. Level 1 Observable inputs that reflect quoted prices for identical assets or liabilities in active markets, such as stock quotes; Level 2 Includes inputs other than Level 1 inputs that are directly or indirectly observable in the marketplace, such as yield curves or other market data; Level 3 Unobservable inputs which reflect the reporting entity s assessment of the assumptions that market participants would use in pricing the asset or liability including assumptions about risk, such as bid/ask spreads and liquidity discounts. Investments recorded at fair value which are classified within Level 1 include mutual funds, the fair values for which were based on quoted prices for identical assets in active markets. Management believes the estimated fair value of investments to be a reasonable approximation of the exit price for the assets. Investments recorded at cost include cash and cash equivalents. Investments recorded at cost are not required to be classified in one of the levels prescribed by the fair value hierarchy. 9

12 Notes to the Consolidating Financial Statements C. INVESTMENTS - CONTINUED The following is a summary of investments at December 31,: Investments, at fair value Mutual funds - fixed income $ 5,425,483 $ 5,408,061 Mutual funds - equities 3,120,882 3,055,491 8,546,365 8,463,552 Investments, at cost Cash and cash equivalents 13,172,475 7,795,545 $ 21,718,840 $ 16,259,097 The Organization s cash and cash equivalents investments include certificates of deposit, which are held to fund the deferred compensation obligation described in Note D. The investments held to fund deferred compensation totaled approximately $279,000 and $223,500 at December 31, 2013 and 2012, respectively. Investment income consists of the following for the years ended December 31,: Interest and dividends $ 166,436 $ 199,731 Investment fees (33,863) (33,261) $ 132,573 $ 166,470 Net gain on investments consists of the following for the years ended December 31,: Unrealized gain (loss) $ 428,912 $ (102,482) Realized gain 27, ,099 $ 456,397 $ 395,617 10

13 Notes to the Consolidating Financial Statements D. RETIREMENT PLANS Deferred compensation: The Organization has deferred compensation agreements with key employees under Sections 457(b) and 457(f) of the Internal Revenue Code. The Organization maintains certain investments which are designated as held to fund its obligation under the agreements (see Note C). The Organization s contributions under the deferred compensation plan totaled $55,500 for each of the years ended December 31, 2013 and The deferred compensation liability is included in accrued expense and totaled approximately $279,000 and $223,500 at December 31, 2013 and 2012, respectively. Defined contribution: The Organization has a defined contribution 403(b) thrift plan which is available to all full-time employees who have completed six months of service. The Organization s contributions on behalf of each eligible employee equal 7.5% of the employee s compensation plus 4.3% of compensation in excess of the Social Security Average Annual Wage in effect on the first day of the plan year. The Organization's contributions to the plan, excluding applicable forfeitures, totaled $1,010,849 and $1,003,948 for the years ended December 31, 2013 and 2012, respectively. E. ACCOUNTS RECEIVABLE Accounts receivable consists of amounts owed to the Organization primarily for membership dues and program services. Accounts receivable are recorded at net realizable value. The Organization provides for probable losses on accounts and notes receivable using the allowance method. The allowance is determined based on management's experience and collection efforts. Balances that remain outstanding after the Organization has used reasonable collection efforts are written off. Accounts receivable consist of the following at December 31,: Membership dues $ 507,236 $ 803,955 Member agreements 306, ,715 Other receivables 184, ,683 GoodTrak 153,230 45,342 Services and supplies 145, ,384 1,297,259 1,561,079 Less allowance relating to member agreements (270,000) (327,000) Less allowance relating to other programs (201,400) (332,736) $ 825,859 $ 901,343 11

14 Notes to the Consolidating Financial Statements F. PLEDGES RECEIVABLE AND REBATES PAYABLE Pledges receivable: The Organization records pledges receivable (unconditional promises to give contributions) that are expected to be collected within one year at net realizable value. The Organization provides for probable losses on pledges receivable using the allowance method. The allowance is determined based on management's experience and collection efforts. Balances that remain outstanding after the Organization has used reasonable collection efforts are written off. Pledges receivable consist of the following at December 31,: National PSA Campaign $ 658,334 $ 1,383,000 Bank of America - Vested in Vets - 250,000 Caterpillar Foundation - 119,598 $ 658,334 $ 1,752,598 Rebates payable: The Organization obtained commitments in excess of its goal for the National PSA Campaign. Therefore, the Organization previously indicated its intention to provide rebates to the member donors relating to amounts received in excess of the project budget. Therefore, the Organization recorded a liability totaling $820,000 at December 31, 2013 and 2012 for rebates payable relating to the pledges which will either be used for another PSA Campaign or will be returned to the member donors. G. GRANTS RECEIVABLE Grants receivable consist of amounts due from federal government agencies. Management periodically reviews the status of all grants receivable for collectability. Each balance is assessed based on management's knowledge of and relationship with the government agency and the age of the receivable balance. As a result of these reviews, balances deemed to be uncollectible are charged directly to bad debt expense. Management believes that the use of the direct write-off method approximates the results that would be presented if an allowance for doubtful accounts was recorded. Grants receivable consist of the following at December 31,: SCSEP $ 890,039 $ 1,758,936 Good Guides 316, ,179 Good Prospects - 84,114 Pathways out of poverty - 79,296 $ 1,206,180 $ 2,271,525 12

15 Notes to the Consolidating Financial Statements H. NOTES RECEIVABLE The Organization has issued loan proceeds totaling $2,500,000 to four Goodwill members and, in return, has obtained notes receivable from the members. The notes bear interest at a rate of 3.5% per annum and mature on various dates through The notes receivable have been recorded at their unpaid principal balances, less an allowance for potential loan losses. Management determines an estimate of possible losses based on its assessment of the current status of individual loans, the borrower s ability to repay, and current economic conditions. The evaluation of the allowance is inherently subjective, and it is reasonably possible that a change in the estimate could occur in the near term, as additional information becomes available. Future principal payments on notes receivable are as follows as of December 31, 2013: Year Ending December 31, Amount 2014 $ 285, , , , ,608 2,500,000 Less allowance for doubtful notes receivable (12,500) $ 2,487,500 I. PROPERTY AND EQUIPMENT Acquisitions of property and equipment greater than $3,000 are recorded at cost and depreciated using the straight-line method over the following estimated useful lives: building 30 years; building improvements 10 years; and furniture and equipment 3 to 5 years. Property and equipment consists of the following at December 31,: Land $ 1,500,000 $ 1,500,000 Building and improvements 8,162,429 8,076,402 Furniture and equipment 4,687,769 5,209,698 Artwork 60,000 60,000 14,410,198 14,846,100 Less accumulated depreciation and amortization (6,199,304) (6,416,626) $ 8,210,894 $ 8,429,474 13

16 Notes to the Consolidating Financial Statements J. DEBT OBLIGATIONS Notes payable: The Organization has notes payable to three private foundations for use in making program related investments in the form of loans to member organizations. The notes payable have a maximum principal totaling $10,000,000 and interest is determined at a rate of 2% per annum. Principal and interest payments will begin in September In accordance with the terms of the loan document, a $1,000,000 loan loss reserve account at a bank was established during The loan loss reserve would be used to absorb the first $1,000,000 of loss from any qualified loans as a result of late payments or loan charge-offs. The loan document contains various financial and non-financial debt covenants, including the requirement that GMJCS maintain positive unrestricted net assets. GMJCS was in compliance with the various debt covenants at December 31, The loan document also describes various events of default and, in accordance with these terms, GMJCS had not defaulted on the loans during the year ended December 31, Future payments of principal on the notes payable are as follows as of December 31, 2013: Year Ending December 31, Amount 2014 $ 285, , , , ,608 $ 2,500,000 Bonds payable: The Organization had tax-exempt bonds payable which were issued by Maryland Economic Development Corporation, the original trustee. The original principal amount of the bonds was $3,700,000, which was used for the purchase of land and building at Indianola Drive. During 2010, the bonds were purchased from the original trustee by a bank. Although the outstanding principal amount was not changed, the interest terms changed. The Organization has signed a credit agreement with the bank that stipulates payment terms relating to principal and interest. The bonds mature on February 1, 2034 and interest is based on LIBOR plus 2.5%, multiplied 67% and a margin rate factor (as determined by the Bank). LIBOR was % and % at December 31, 2013 and 2012, respectively. The bonds are secured by the land and building at Indianola Drive. 14

17 Notes to the Consolidating Financial Statements J. DEBT OBLIGATIONS - CONTINUED The agreement with the bank contains various debt covenants, including requirements that the Organization maintain unrestricted liquidity of greater than 15% and maintain a cash flow to debt service ratio of not less than 1.15 to 1. The Organization was in compliance with the debt covenants at December 31, 2013 and Future payments of principal on the bonds payable are as follows as of December 31, 2013: Year Ending December 31, Amount 2014 $ 100, , , , ,000 Thereafter 1,000,000 $ 1,500,000 Interest rate swap agreement: The Organization has an interest rate swap agreement, which is intended to allow the Organization to minimize the risk of future interest rate fluctuations related to the bonds payable described above. As the variable interest rate on the bonds payable decreases, the interest rate swap liability increases. The agreement expires February 1, 2034 and has a fixed interest rate of 2.24%. The fair value of the interest rate swap agreement is the estimated amount that the swap issuer would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the current credit worthiness of the swap counter parties. In particular, the fair value of the interest rate swap agreement was based on an income approach calculation using Level 3 inputs. In the calculation, the swap issuer estimated the fair value of the liability based on both the present value of projected future interest rates and the fixed rate stipulated in the agreement. Management believes the calculation to be a reasonable approximation of the fair value of the liability under the interest rate swap agreement. The change in the liability under the interest rate swap agreement was recorded as an unrealized gain within the consolidating statement of activities. The fair value of the interest rate swap agreement, which was measured on a recurring basis using Level 3 inputs, consists of the following as of and for the years ended December 31,: Interest rate swap agreement, beginning $ 109,635 $ 111,355 Unrealized gain on interest rate swap (37,459) (1,720) Interest rate swap agreement, ending $ 72,176 $ 109,635 15

18 Notes to the Consolidating Financial Statements K. NET ASSETS Unrestricted net assets: Unrestricted net assets include those net assets whose use is not restricted by donors, even though their use may be limited in other respects, such as by board designation. Unrestricted net assets consist of the following at December 31,: Undesignated - general operations $ 13,100,324 $ 13,165,507 Designated Loan loss reserve 1,000,000 - Loan commitment 410,600 - International activities 955, ,370 $ 15,466,294 $ 14,120,877 Temporarily restricted net assets: Temporarily restricted net assets include those net assets whose use by the Organization has been donor restricted by specific time or purpose limitations. Temporarily restricted net assets consist of the following at December 31,: Private Foundation Funds $ 9,357,016 $ 5,596,617 Operations Funds - non-endowment 1,251,441 1,904,670 Operations Funds - endowment 118, ,732 International activities - non-endowment 342, ,183 International activities - endowment 151, ,492 $ 11,221,047 $ 8,174,694 Net assets are released from restrictions either as a result of the expiration of a time restriction or due to the satisfaction of a purpose restriction. The following net assets were released from restrictions during the year ended December 31, 2013: Private Foundation Funds $ 4,921,950 $ 6,119,256 Operations Funds - non-endowment 740, ,266 Operations Funds - endowment 8,617 15,079 International activities - non-endowment 114, ,051 $ 5,785,266 $ 6,457,652 16

19 Notes to the Consolidating Financial Statements L. ENDOWMENTS The Organization s endowments consist of donor-restricted endowment funds which are classified within permanently restricted net assets. As required by generally accepted accounting principles, 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 Board of Director s interpretation of the Commonwealth of Massachusetts law underlies the Organization s net asset classification of donor-restricted endowment funds as requiring the preservation of the fair value of the original gift. As a result of this interpretation, the Organization classifies as permanently restricted net assets (1) the original value of gifts donated to the permanent endowment, (2) the original value of subsequent gifts to the permanent endowment, and (3) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument. Absent explicit direction from the donor regarding the classification of investment income from the permanently restricted endowments, investment income is recorded in temporarily restricted activities until appropriated for spending. Return Objectives and Risk Parameters The Organization has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Under this policy, as approved by the Board of Directors, the endowment assets are invested in a manner that is intended to produce results that achieves constant growth of the distribution amount and the corpus. Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Objectives To satisfy its long-term objectives, the Organization relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Organization targets a diversified asset allocation that places more emphasis on fixed income securities than equity securities to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How Investment Objectives Relate to Spending Policy The Organization has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by the endowment funds while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Organization must hold in perpetuity or for donor-specified periods. Under this policy, as approved by the Board of Directors, the endowment assets are invested in a balanced portfolio comprised of cash, fixed income securities, and equity securities. 17

20 Notes to the Consolidating Financial Statements L. ENDOWMENTS CONTINUED Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor originally contributed as an endowment fund to the Organization. In accordance with generally accepted accounting principles, deficiencies of this nature would be reported within unrestricted net assets. However, there were no funds with deficiencies at December 31, 2013 and Endowment funds consisted of the following at December 31, 2013, with 2012 totals: Temporarily Permanently Unrestricted Restricted Restricted Total Total Kenneth K. King Training Trust * $ - $ 27,770 $ 918,081 $ 945,851 $ 905,567 Richard and Lois England * 7, , , ,791 Frank F. Flegal Education and Training 83,685 20, ,685 89,952 International activities Gerald Clore Training 137, , , ,112 Barker Education 6, , , ,080 Sioux City 7,183 5,200 12,383 10,631 $ - $ 269,820 $ 1,289,410 $ 1,559,230 $ 1,451,133 * The gift instruments for these endowment funds include donor instructions indicating that investment appreciation (depreciation) should be included in permanently restricted net assets. Changes in endowment funds consist of the following for the year ended December 31, 2013, with 2012 totals: Temporarily Permanently Unrestricted Restricted Restricted Total Total Endowment funds, beginning $ - $ 216,224 $ 1,234,909 $ 1,451,133 $ 1,357,249 Investment return Interest and dividends 32,724 32,724 41,212 Investment fees (14,603) (14,603) (14,311) Unrealized gain 43,473 54,285 97,758 48,004 Realized gain ,058-62,213 54, , ,963 Appropriations (8,617) (8,617) (15,079) Endowment funds, ending $ - $ 269,820 $ 1,289,410 $ 1,559,230 $ 1,451,133 18

21 Notes to the Consolidating Financial Statements M. IN-KIND CONTRIBUTIONS The Organization received in-kind contributions related to Public Service Announcements (PSA) or other donated advertising which was recorded at estimated fair value. From time to time, donated services are recognized as contributions and expense in accordance with generally accepted accounting principles (GAAP). In order to meet the criteria for recognition in the consolidating financial statements, contributions of in-kind services must (a) create or enhance non-financial assets or (b) require specialized skills, be performed by people with those skills, and would otherwise be purchased by the Organization. The Organization received the following in-kind contributions during the years ended December 31,: Public Service Announcements $ 10,176,656 $ - Donated advertising - 1,444,500 Professional services - 675,000 $ 10,176,656 $ 2,119,500 N. COMMITMENTS & CONTINGENCIES Tenant lease: The Organization has an operating lease agreement to provide office space in its building to an unrelated tenant. The lease agreement expires in 2014 and the tenant provided a security deposit of $21,883 equal to the first month's rent. Rental revenue totaled $297,244 and $297,239 for the years ended December 31, 2013 and 2012 respectively. Future minimum lease payments will total $285,510 during the year ending December 31, Government grants: Amounts received or receivable from government agencies relating to grants are subject to audit and adjustment by the government agencies. The amount of expenditures which may be potentially disallowed cannot be determined at this time, although management expects such amounts, if any, to be immaterial. Note receivable: The Organization s loan committee approved $910,600 but only $500,000 has been recorded in notes receivable at December 31, Therefore, the Organization will provide additional loan proceeds to a member totaling $410,600 during the year ending December 31,

22 Notes to the Consolidating Financial Statements O. PASS THROUGH AWARDS The following chart provides a summary of pass through and direct federal awards expended during the years ended December 31,: Pass through awards $ 12,389,327 $ 14,483,898 Direct awards 775,170 1,734,581 $ 13,164,497 $ 16,218,479 20

23 Consolidated Schedule of Functional Expense Year Ended December 31, 2013 Program Services Management and General Services Total Sponsored General Direct Services Programs and Support Services Administrative Resource to Membership Grants to Membership Total Services Development Salaries $ 6,592,772 $ 1,442,577 $ 2,220,235 $ 10,255,584 $ 1,810,010 $ 263,531 $ 12,329,125 Employee benefits 1,413, , ,395 2,157, ,948 52,938 2,517,481 Payroll taxes 488, , , , ,754 19, ,820 Personnel expenses 8,494,745 1,823,739 2,850,217 13,168,701 2,253, ,013 15,758,426 Awards and grants 530,354 15,743,795 26,121 16,300,270 16,300,270 Public Service Announcements (in-kind) 10,176,656 10,176,656 10,176,656 Professional fees 2,391, , ,590 3,653, ,335 56,363 4,103,483 Conferences and conventions 347,575 56,023 1,035,299 1,438,897 27,450 9,496 1,475,843 Travel and agency vehicles 524, , , , ,536 18,330 1,021,582 Real estate related expenses 142, , , , , ,179 Rental and maintenance 225, , ,272 80,069 3, ,893 Professional dues 148, , ,306 (3,529) 5, ,517 Supplies 155,747 69,137 65, ,414 24,364 25, ,489 Telephone and communications 94,303 21,582 98, , , ,373 Seminar and training fees 127,479 13,527 28, ,888 28,657 (23) 198,522 Printing, publications, and advertising 34,905 40,611 24, , ,963 Bond interest 13,971 11,081 25,052 19,638 22,643 67,333 Employee relations 25,572 1,917 27,489 36, ,480 Bank service charges 4,362 6,603 10,965 40,653 51,618 Postage and shipping 8,348 1,031 11,134 20,513 1,802 3,078 25,393 Loan costs 23,128 23,128 23,128 23,469,397 18,439,932 5,591,960 47,501,289 3,312, ,084 51,514,148 Depreciation and amortization 569, , , , ,691 1,015,078 Total expense $ 24,039,013 $ 18,439,932 $ 5,730,803 $ 48,209,748 $ 3,514,703 $ 804,775 $ 52,529,226 21

24 Schedule of Expenditures of Federal Awards Year Ended December 31, 2013 Federal Other Federal Grantor CFDA Identifying Federal CFDA Program Title Number Number Expenditures U.S. Department of Labor Senior Community Service Employment Program (SCSEP) Multiple $ 11,303,396 U.S. Department of Justice Juvenile Mentoring Program JU-FX ,833,801 Recovery Act Edward Byrne Memorial Competitive Grant Program ARRA SC-B ,300 Subtotal U.S. Department of Justice 1,861,101 Total Expenditures of Federal Awards $ 13,164,497 22

25 Notes to the Schedule of Expenditures of Federal Awards 1. BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards includes the federal grant activity of Goodwill Industries International, Inc. and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A- 133, Audits of State, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic consolidating financial statements. 2. EXPENDITURES Expenditures are recognized following the cost principles contained in OMB Circular A-122, Cost Principles for Non-Profit Organizations, wherein either certain types of expenditures are not allowable or reimbursements of allowable costs are limited. 3. SUBRECIPIENTS The following is a summary of federal awards which were passed through to subrecipients during the year ended December 31, 2013: Federal Federal Grantor CFDA Pass Through CFDA Program Title Number Amount U.S. Department of Labor Senior Community Service Employment Program (SCSEP) $ 10,856,022 U.S. Department of Justice Juvenile Mentoring Program ,526,855 Recovery Act Edward Byrne Memorial Competitive Grant Program ARRA ,450 Subtotal U.S. Department of Labor 1,533,305 Total Awards Passed Through $ 12,389,327 23