Audited Consolidated Financial Statements & Reports Required … · · 2013-04-08Audited...

Audited Consolidated Financial Statements & Reports Required by Government Auditing

Standards and OMB Circular A-133

GOODWILL INDUSTRIES INTERNATIONAL, INC. AND RELATED ENTITIES

December 31, 2012

Goodwill Industries International, Inc. and Related Entities

Contents

Independent Auditor’s Report on the Consolidated Financial Statements and Supplementary Schedule of Expenditures of Federal Awards 1 - 2 Consolidated Financial Statements

Consolidated statements of financial position 3 Consolidated statements of activities 4 Consolidated statements of cash flows 5 Notes to the consolidated financial statements 6 - 20

Additional Information

Independent auditor's report on the additional information 21 Schedule of functional expense 22

Reports Required by Government Auditing Standards and OMB Circular A-133

Schedule of expenditures of federal awards 23 Notes to the schedule of expenditures of federal awards 24 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 25 - 26 Independent auditor’s report on compliance for each major program; and report on internal control over compliance in accordance with OMB Circular A-133 27 - 28 Schedule of findings and questioned costs 29 - 30

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Independent Auditor’s Report on the Consolidated Financial Statements and Supplementary Schedule of Expenditures of Federal Awards To the Board of Directors Goodwill Industries International, Inc. and Related Entities

We have audited the accompanying consolidated financial statements of Goodwill Industries International, Inc. and Related Entities (the Organization), which comprise the consolidated statement of financial position as of December 31, 2012, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements. The prior year summarized comparative information has been derived from the Organization's 2011 consolidated financial statements and, in our report dated February 23, 2012, we expressed an unqualified opinion on those consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated 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), 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

To the Board of Directors March 4, 2013 Page 2 of 2

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Opinion In our opinion, the 2012 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Goodwill Industries International, Inc. and Related Entities as of December 31, 2012, 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. Other Matters Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. 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 not a required part of the consolidated 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated 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 consolidated 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, 2013, 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, 2013


Consolidated Statements of Financial Position

See notes to the consolidated financial statements. 3

2012 2011

Temporarily Permanently December 31, Unrestricted Restricted Restricted Total Total

Assets

Cash and cash equivalents - Note B 1,938,299$ -$ -$ 1,938,299$ 2,062,368$

Investments - Notes B, C, & D 7,782,092 7,242,096 1,234,909 16,259,097 9,952,539

Accounts and notes receivable - Note E 901,343 901,343 528,213

Pledges receivable - Note F 932,598 932,598 292,530

Grants receivable - Note G 2,271,525 2,271,525 3,061,825

Prepaid expenses and other assets 392,781 392,781 594,500

Property and equipment - Notes H & I 8,429,474 8,429,474 8,679,903

Total assets 21,715,514$ 8,174,694$ 1,234,909$ 31,125,117$ 25,171,878$

Liabilities and Net Assets

Liabilities

Accounts payable 3,628,270$ -$ -$ 3,628,270$ 3,984,825$

Accrued expense - Note D 1,841,730 1,841,730 1,468,741

Deferred revenue 393,119 393,119 377,755

Capital lease obligation - - 29,450

Bonds payable - Note I 1,600,000 1,600,000 1,700,000

Interest rate swap agreement - Notes B & I 109,635 109,635 111,355

Security deposit - Note M 21,883 21,883 21,883

Total liabilities 7,594,637 - - 7,594,637 7,694,009

Net assets - Notes J & K 14,120,877 8,174,694 1,234,909 23,530,480 17,477,869

Total liabilities and net assets 21,715,514$ 8,174,694$ 1,234,909$ 31,125,117$ 25,171,878$


Consolidated Statements of Activities


2012 2011

Temporarily Permanently Year Ended December 31, Unrestricted Restricted Restricted Total Total

Revenue and support

Membership dues 19,097,240$ -$ -$ 19,097,240$ 17,922,153$

Federal awards - Note N 16,218,479 16,218,479 30,424,132

Contributions - Note L 2,311,077 11,371,967 13,683,044 3,044,029

Program services fees 2,738,776 2,738,776 2,430,117

Legacies and bequests 443,466 443,466 134,732

Rental - Note M 297,239 297,239 297,239

Investment income - Note C 133,861 32,609 166,470 126,905

Other income 5,701 5,701 12,373

41,245,839 11,404,576 - 52,650,415 54,391,680

Net assets released from restriction - Note J 6,457,652 (6,457,652) - -

Total revenue and support 47,703,491 4,946,924 - 52,650,415 54,391,680

Expense

Program services

Sponsored programs and grants - Note N 22,791,216 22,791,216 32,777,301

Direct services to membership 13,648,595 13,648,595 12,810,872

Support services to membership 5,947,774 5,947,774 5,354,413

Total program services 42,387,585 42,387,585 50,942,586

Management and general services

General and administrative 4,098,640 4,098,640 3,644,262

Resource development 508,916 508,916 479,458

Total management and general 4,607,556 4,607,556 4,123,720

Total expense 46,995,141 - - 46,995,141 55,066,306

Change in net assets from operations 708,350 4,946,924 - 5,655,274 (674,626)

Net gain on investments - Note C 325,769 10,793 59,055 395,617 72,882

Unrealized gain (loss) on interest rate swap - Note I 1,720 1,720 (51,186)

Change in net assets 1,035,839 4,957,717 59,055 6,052,611 (652,930)

Net assets, beginning of year 13,085,038 3,216,977 1,175,854 17,477,869 18,130,799

Net assets, end of year 14,120,877$ 8,174,694$ 1,234,909$ 23,530,480$ 17,477,869$


Consolidated Statements of Cash Flows


Year Ended December 31, 2012 2011

Cash flows from operating activities

Change in net assets 6,052,611$ (652,930)$

Adjustments to reconcile change in net assets

to net cash provided by operating activities:

Net gain on investments (395,617) (72,882)

Uncollectible accounts 8,985 78,646

Loss on disposal of property and equipment 1,970 -

Depreciation and amortization 985,153 908,110

Unrealized (gain) loss on interest rate swap (1,720) 51,186

Changes in assets and liabilities:

Accounts and notes receivable (382,115) 96,252

Pledges receivable (640,068) (252,261)

Grants receivable 790,300 2,133,309

Prepaid expenses and other assets 201,719 (107,889)

Accounts payable (356,555) (1,511,697)

Accrued expense 372,989 (62,099)

Deferred revenue 15,364 55,288

Total adjustments 600,405 1,315,963

Net cash provided by operating activities 6,653,016 663,033

Cash flows from investing activiites

Proceeds from sales of investments 5,767,459 1,465,191

Purchases of investments (11,678,400) (342,964)

Purchases of property and equipment (736,694) (960,111)

Net cash (used in) provided by investing activities (6,647,635) 162,116

Cash flows from financing activiites

Principal payment on bonds payable (100,000) (100,000)

Principal payments on capital lease obligation (29,450) (37,265)

Net cash used in financing activities (129,450) (137,265)

Net (decrease) increase in cash and cash equivalents (124,069) 687,884

Cash and cash equivalents, beginning of year 2,062,368 1,374,484

Cash and cash equivalents, end of year 1,938,299$ 2,062,368$

Supplemental disclosure of cash flow information:

Cash paid during the year for interest 72,581$ 78,416$


Notes to the Consolidated Financial Statements

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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, community-based, 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. 15810 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 entirely by GII via sole corporate membership. Principles of consolidation: The consolidated 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 has applied for, but has not yet been granted, exemption from the payment of income taxes on its exempt activities under Section 501(c)(3) of the Internal Revenue Code. While awaiting approval of its application for exemption, GMJCS will file Federal Form 990 and intends to operate within its intended exempt purposes. 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 $401,000 at December 31, 2012. The net operating loss carry-forwards will expire at various dates through 2032. 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 years ended December 31, 2009 through 2012 remain open for examination by taxing authorities.



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A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Basis of accounting: The Organization prepares its consolidated 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 consolidated 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: For financial statement purposes, the Organization considers demand deposits to be cash equivalents. Amounts held within the investment portfolio are not included in cash and cash equivalents because they are held for long-term or investment purposes. 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 web-based 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:

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. Direct services to membership: Direct services to membership includes consultations, executive professional development, training seminars, data processing, financial and management information, and assistance in the development of national and local communications materials. Support services to membership: Support services to membership includes learning events such as the Conference of Executives and the Delegate Assembly.

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.



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A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED Functional allocation of expenses: The costs of providing various program and supporting services have been summarized on a functional basis in the statement of activities. Accordingly, certain costs have been allocated among the program and supporting services benefited. Measure of operations: The Organization does not include either 1) net gain on investments or 2) unrealized gain (loss) on interest rate swap in the change in net assets from operations. Prior-year comparative totals: The consolidated financial statements include certain 2011 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 2011 consolidated financial statements, from which the summarized information was derived.

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. Such investments 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 consolidated 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.



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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.

The following is a summary of the fair values of investments, which are measured on a recurring basis using Level 1 inputs, at December 31,:

2012 2011

Cash and cash equivalents 7,795,545$ 2,724,576$

Mutual funds - bonds 5,408,061 5,048,456

Mutual funds - equities 3,055,491 2,179,507

16,259,097$ 9,952,539$

The Organization maintains investments which are held to fund the deferred compensation obligation which is described in Note D. The investments held to fund deferred compensation totaled $223,500 and $168,000 at December 31, 2012 and 2011, respectively. Investment return consists of the following for the years ended December 31,:

2012 2011

Interest and dividends 199,731$ 152,927$

Investment fees (33,261) (26,022)

166,470$ 126,905$

Realized gain 498,099$ 249,039$

Unrealized loss (102,482) (176,157)

395,617$ 72,882$



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D. RETIREMENT PLANS Deferred compensation: The Organization has deferred compensation agreements with key employees under Section 457(b) and 457(f) of the Internal Revenue Code. The Organization has designated certain investments as held to fund its obligation under the agreements (see Note C). During the year ended December 31, 2011, the Organization provided a distribution to the participant under the deferred compensation agreement representing full satisfaction of its obligation. The Organization’s contributions under the deferred compensation plan totaled $55,500 and $168,000 during the years ended December 31, 2012 and 2011, respectively. The deferred compensation liability is included in accrued expense and totaled $223,500 and $168,000 at December 31, 2012 and 2011, 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 $1,003,948 and $922,707 for the years ended December 31, 2012 and 2011, respectively.

E. ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable consists of amounts owed to the Organization primarily for membership dues or program services. Accounts and notes 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. In particular, the portion of the allowance relating to doubtful member notes receivable totaled $327,000 and $486,000 as of December 31, 2012 and 2011, respectively.

Accounts and notes receivable consist of the following at December 31,:

2012 2011

Membership dues and programs 1,012,681$ 351,642$

Member notes receivable 384,715 514,638

Other receivables 163,683 308,871

1,561,079 1,175,151

Less allowance for doubtful accounts and notes (659,736) (646,938)

901,343$ 528,213$



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F. 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 records multi-year pledges receivable at the present value of their estimated future cash flows. 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. During the year ended December 31, 2012, the Organization obtained commitments in excess of its goal for the National PSA Campaign. Therefore, the Organization has indicated its intention to provide a rebate to the member donors relating to amounts received in excess of the project budget. Therefore, the Organization has recorded the National PSA Campaign pledges and the related contributions net of the rebate which is intended to be provided to member donors in the future. Pledges receivable consist of the following at December 31,:

2012 2011

National PSA Campaign 1,383,000$ -$

Bank of America - Vested in Vets 250,000 -

Caterpillar Foundation 119,598 267,858

Hurricane Katrina Campaign - 32,500

1,752,598 300,358

Less rebate for National PSA Campaign (820,000) -

Less discount to net present value - (3,756)

Less allowance for doubtful pledges - (4,072)

932,598$ 292,530$



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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,:

2012 2011

SCSEP 1,758,936$ 1,815,046$

Good Guides 349,179 707,388

Good Prospects 84,114 105,512

Pathways out of poverty 79,296 364,736

Agrability - 69,143

2,271,525$ 3,061,825$

H. 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,:

2012 2011

Land 1,500,000$ 1,500,000$

Building and improvements 8,076,402 8,048,999

Furniture and equipment 5,209,698 5,540,802

Artwork 60,000 60,000

14,846,100 15,149,801

Less accumulated depreciation and amortization (6,416,626) (6,469,898)

8,429,474$ 8,679,903$



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I. DEBT OBLIGATIONS 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 15810 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 0.2087% and 0.2953% at December 31, 2012 and 2011, respectively. The bonds are secured by the land and building at 15810 Indianola Drive. 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, 2012 and 2011. Future payments of principal on the bonds payable are as follows:

Year Ending December 31, Amount

2013 100,000$

2014 100,000

2015 100,000

2016 100,000

2017 100,000

Thereafter 1,100,000

1,600,000$



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I. DEBT OBLIGATIONS - CONTINUED 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 loss within the 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 year ended December 31,:

2012 2011

Interest rate swap agreement, beginning 111,355$ 60,169$

Unrealized (gain) loss on interest rate swap (1,720) 51,186

Interest rate swap agreement, ending 109,635$ 111,355$

J. 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,:

2012 2011

Undesignated - general operations 13,165,507$ 12,129,668$

Designated - international activities 955,370 955,370

14,120,877$ 13,085,038$

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.



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J. NET ASSETS - CONTINUED

Temporarily restricted net assets consist of the following at December 31,:

2012 2011

Endowment Funds (Note K) 101,732$ 88,551$ Alumni Century Fund 11,571 11,571 Alumni Travel Fund 13,094 16,462 Anthony Family Foundation - Family Strengthening 45,591 35,000 Anthony Family Foundation - Community College 19,841 19,841 Bank of America - Vested in Vets 499,729 - Casey Foundation 9,783 - Charles Schwab - Good A$$et$ 17,728 157,497 Charles Schwab - Good A$$et$ 2 166,760 - Disaster Relief Fund 78,232 80,232 Disaster Relief Fund - Ike 1,816 1,816 Disaster Relief Fund - Infrastructure 18,522 35,128 Dulin Executive Management Development Fund 70,955 60,955 Dulin Membership GII Training Fund 36,235 30,755 Dulin Senior Management Fund 120,878 130,878 Dulin Strategic Planning Fund 15,846 15,846 Elsine Katz Fund 2,567 3,555 Goizueta Foundation - 168,814 Goizueta 2013 608,846 - Kresge Foundation 54,106 - Lumina II 296,620 386,640 Matthews Entrepreneurial Award 232 232 National Assembly Works Support - 5,000 National PSA Campaign 1,446,375 - Public Policy Fund 35,398 76,398 QBE Foundation 50,000 - Robert Watkins Award Fund 37,194 39,415 Tornado Relief Fund 15,755 15,755 Tracfone Wireless, Inc. 135,357 116,073 Walmart Foundation - Beyond Jobs Program - 1,052,248 Walmart Foundation - Beyond Jobs Program 2.0 2,983,824 - Walmart Foundation - GoodJobs Program 466,016 - Walmart Foundation - My Free Taxes 242,415 - International activities

Endowment Funds (Note K) 114,492 92,844 Asia Associations - Going Global Fund 250 250 Caterpillar Foundation 403,792 505,564 Going Global Fund 24,343 40,858 International Foundation Grant Zimbabwe 1,305 1,305 Oakland/Philippine Fund 13,163 13,163 Revolving No - Interest Loan Fund 2,000 2,000 Russia Training Fund 1,500 1,500 UMCOR Grant For Russia 10,831 10,831

8,174,694$ 3,216,977$



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J. NET ASSETS - CONTINUED 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, 2012: Endowment Funds (Note K) 15,079$ Alumni Travel Fund 9,869 Anthony Family Foundation - Family Strengthening 9,409 Bank of America - Vested in Vets 271 Charles Schwab - Good A$$et$ 144,769 Charles Schwab - Good A$$et$ 2 33,240 Casey Foundation 140,217 Disaster Relief Fund 2,000 Disaster Relief Fund - Infrastructure 16,606 Dulin Executive Management Development Fund 20,000 Dulin Membership GII Training Fund 9,520 Dulin Senior Management Fund 40,000 Elsine Katz Fund 1,132 Goizueta Foundation 155,948 Goizueta 2013 2,602,600 Kresge Foundation 95,894 Lumina II 190,020 Matthews Entrepreneurial Award 4,115 National Assembly Works Support 5,000 National PSA Campaign 53,625 Public Policy Fund 41,000 Robert Watkins Award Fund 3,399 Tracfone Wireless, Inc. 716 Walmart Foundation - Beyond Jobs Program 1,056,654 Walmart Foundation - Beyond Jobs Program 2.0 516,808 Walmart Foundation - GoodJobs Program 533,984 Walmart Foundation - My Free Taxes 633,726 International activities

Caterpillar Foundation 105,536 Going Global Fund 16,515

6,457,652$



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K. 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.



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K. 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, 2012 and 2011.

Endowment funds consisted of the following at December 31, 2012, with 2011 totals:

2011

Temporarily Permanently

Unrestricted Restricted Restricted Total Total

Frank F. Flegal Education and Training -$ 69,952$ 20,000$ 89,952$ 81,968$

Kenneth K. King Training Trust * 26,515 879,052 905,567 851,478

Richard and Lois England * 5,265 107,526 112,791 102,628

International activities

Barker Education 6,949 123,131 130,080 130,547

Gerald Clore Training 102,112 100,000 202,112 181,038

Sioux City 5,431 5,200 10,631 9,590

-$ 216,224$ 1,234,909$ 1,451,133$ 1,357,249$

2012

* 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, 2012, with 2011 totals:

2011

Temporarily Permanently

Unrestricted Restricted Restricted Total Total

Endowment funds, beginning -$ 181,395$ 1,175,854$ 1,357,249$ 1,370,182$

Investment return

Interest and dividends 41,212 41,212 28,897

Investment fees (14,311) (14,311) (1,554)

Realized gain (loss) 25,191 8,867 34,058 14,128

Unrealized gain (loss) (2,184) 50,188 48,004 (26,026)

- 49,908 59,055 108,963 15,445

Appropriations (15,079) (15,079) (28,378)

Endowment funds, ending -$ 216,224$ 1,234,909$ 1,451,133$ 1,357,249$

2012



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L. IN-KIND CONTRIBUTIONS The Organization receives in-kind contributions primarily related to donated advertising which is recorded at estimated fair value. In addition, donated services are recognized as contributions and expensed in accordance with generally accepted accounting principles (GAAP). In order to meet the criteria for recognition in the consolidated 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,:

2012 2011

Advertising 1,444,500$ 1,444,500$

Professional services 675,000 247,767

2,119,500$ 1,692,267$

M. 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 $297,239 for both of the years ended December 31, 2012 and 2011. Future minimum cash basis rental receipts are as follows:

Year Ending December 31, Amount

2013 334,290$

2014 285,510

619,800$

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.



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N. PASS THROUGH AWARDS The following chart provides a summary of federal awards which were passed through to the Organization’s members during the years ended December 31,:

2012 2011

Pass through awards 14,483,898$ 28,264,042$

Direct awards 1,734,581 2,160,090

16,218,479$ 30,424,132$

O. SUBSEQUENT EVENTS

Subsequent events have been evaluated through March 4, 2013, which is the date the consolidated financial statements were available to be issued. In March 2013, the Organization’s Executive Committee approved a motion for GII to fund a loan loss reserve of $1,000,000 for GMJCS. The reserve is intended to cover the first $1,000,000 of losses on loans made by GMJCS to GII members. The loan loss reserve will be used by GMJCS only in the event that such losses occur.

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Independent Auditor’s Report on the Additional Information

To the Board of Directors Goodwill Industries International, Inc. and Related Entities We have audited the consolidated financial statements of Goodwill Industries International, Inc. and Related Entities as of and for the year ended December 31, 2012, and have issued our report thereon dated March 4, 2013, which contained an unqualified opinion on those consolidated financial statements. Our audit was performed for the purpose of forming an opinion on the consolidated financial statements as a whole. The schedule of functional expense on the following page is presented for the purposes of additional analysis and is not a required part of the consolidated financial statements. Such additional information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The additional information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the additional information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.



Schedule of Functional Expense

Year Ended December 31, 2012

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Program Services Total

Sponsored General

Programs and Direct Services Support Services Administrative Resource

Grants to Membership to Membership Total Services Development

Salaries 1,630,344$ 6,101,926$ 2,361,440$ 10,093,710$ 1,868,974$ 322,899$ 12,285,583$

Employee benefits 291,906 1,258,967 503,773 2,054,646 326,577 71,837 2,453,060

Payroll taxes 120,942 438,952 165,121 725,015 124,806 21,443 871,264

Personnel expenses 2,043,192 7,799,845 3,030,334 12,873,371 2,320,357 416,179 15,609,907

Awards and grants 19,660,295 511,429 80,949 20,252,673 114 7,636 20,260,423

Professional fees 681,838 1,852,860 887,052 3,421,750 410,219 16,730 3,848,699

Printing, publications, and advertising 694 1,487,818 40,370 1,528,882 2,110 30 1,531,022

Conferences and conventions 44,636 359,738 972,341 1,376,715 116,538 15,954 1,509,207

Travel and agency vehicles 150,056 354,135 196,919 701,110 43,883 17,916 762,909

Real estate related expenses 84,020 128,767 212,787 419,744 6,475 639,006

Professional dues 189,009 181,568 370,577 9,836 9,798 390,211

Supplies 158,390 76,350 67,589 302,329 68,184 1,793 372,306

Telephone and communications 24,106 86,030 75,613 185,749 106,018 291,767

Rental and maintenance 159 146,153 58,396 204,708 84,386 2,089 291,183

Seminar and training fees 25,030 143,760 68,366 237,156 27,369 7,858 272,383

Employee relations 28,885 4,133 33,018 43,938 374 77,330

Bond interest 13,854 10,756 24,610 46,062 1,169 71,841

Postage and shipping 2,820 9,211 19,153 31,184 11,482 166 42,832

Bank service charges 1,337 2,738 4,075 25,162 29,237

Bad debt 1,503 3,091 4,594 4,391 8,985

Capital lease interest 273 235 508 232 740

22,791,216 13,146,210 5,828,370 41,765,796 3,740,025 504,167 46,009,988

Depreciation and amortization 502,385 119,404 621,789 358,615 4,749 985,153

Total expense 22,791,216$ 13,648,595$ 5,947,774$ 42,387,585$ 4,098,640$ 508,916$ 46,995,141$

Management and General Services

Goodwill Industries International, Inc.

Schedule of Expenditures of Federal Awards


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Federal Grantor Federal Other

Pass Through Grantor CFDA Identifying Federal

CFDA Program Title Number Number Expenditures

U.S. Department of Labor

Senior Community Service Employment Program (SCSEP) - Note C 17.235 Various 12,043,411$

Program of Competitive Grants for Worker Training and

Placement in High Growth and Emerging Industry Sectors - Note C ARRA 17.275 Various 2,022,094

Subtotal U.S. Department of Labor 14,065,505

U.S. Department of Justice

Juvenile Mentoring Program - Note C 16.726 2011-JU-FX-0020 1,578,980

Recovery Act Edward Byrne Memorial Competitive

Grant Program - Note C ARRA 16.808 2009-SC-B9-0035 482,689

Subtotal U.S. Department of Justice 2,061,669

U.S. Department of Agriculture

Purdue University

Cooperative Extension Service 10.500 8000026124-AG 91,305

Total Expenditures of Federal Awards 16,218,479$


Notes to the Schedule of Expenditures of Federal Awards

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A. 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 consolidated financial statements.

B. 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.

C. SUBRECIPIENTS

The following is a summary of federal awards which were passed through to subrecipients during the year ended December 31, 2012:

Federal

Federal Grantor CFDA Pass Through

CFDA Program Title Number Amount

U.S. Department of Labor

Senior Community Service Employment Program (SCSEP) 17.235 11,487,751$

Program of Competitive Grants for Worker Training and

Placement in High Growth and Emerging Industry Sectors ARRA 17.275 1,605,266


U.S. Department of Justice

Juvenile Mentoring Program 16.726 1,318,096

Recovery Act Edward Byrne Memorial Competitive Grant Program ARRA 16.808 72,785


Total Awards Passed Through 14,483,898$

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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 To the Board of Directors Goodwill Industries International, Inc. We have audited the consolidated financial statements of Goodwill Industries International, Inc. and Related Entities (the Organization), which comprise the consolidated statement of financial position as of December 31, 2012, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements and have issued our report thereon dated March 4, 2013. 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), the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. The financial statements of 15810 Indianola Drive, LLC (the LLC) and Goodwill Mission and Job Creation Services, Inc. (GMJCS) were not audited in accordance with Government Auditing Standards and, accordingly, this report does not extend to the related entities. Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered GII's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of GII’s internal control. Accordingly, we do not express an opinion on the effectiveness of GII’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of GII’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit, we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.


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Compliance and Other Matters As part of obtaining reasonable assurance about whether GII's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We included a recommendation, which we consider to be an informational matter describing potential changes related to single audits of federal awards, that we reported to the Audit Committee in a separate letter dated March 4, 2013. Purpose of this Report The purpose of this report is solely to describe the scope of our testing on internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of GII’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering GII’s internal control and compliance. Accordingly, this report is not suitable for any other purpose.


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Independent Auditor’s Report on Compliance for Each Major Program; and Report on Internal Control over Compliance in Accordance with OMB Circular A-133 To the Board of Directors Goodwill Industries International, Inc. Report on Compliance for Each Major Federal Program We have audited the compliance of Goodwill Industries International, Inc. (GII) with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on each of GII’s major federal programs for the year ended December 31, 2012. GII's major federal programs are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. Management’s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for each of GII’s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about GII's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of GII's compliance. Opinion on Each Major Program In our opinion, GII complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2012.


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Report on Internal Control over Compliance Management of GII is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered GII's internal control over compliance with the types of compliance requirements that could have a direct and material effect on a major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of GII’s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Purpose of this Report The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose.



Schedule of Findings and Questioned Costs


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Section I – Summary of Audit Results

Financial Statements Type of auditor's report issued:

Unmodified

Internal control over financial reporting: Material weakness(es) identified? Significant deficiency(ies) identified that are not

considered to be material weakness(es)? Noncompliance material to financial statements noted?

Federal Awards Internal control over the major programs: Material weakness(es) identified? Significant deficiency(ies) identified that are not

considered to be material weakness(es)? Type of auditor's report issued on compliance for the major programs: Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133? Identification of major programs:

U.S. Department of Labor Senior Community Service Employment Program

(CFDA 17.235)

Program of Competitive Grants for Worker Training and Placement in High Growth and Emerging Industry Sectors

(CFDA ARRA 17.275)

U.S. Department of Justice Juvenile Mentoring Program (CFDA 16.726)

Recovery Act Edward Byrne Memorial Competitive Grant Program (CFDA ARRA 16.808)

Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee?

Yes X No Yes X None reported

Yes X No Yes X No Yes X None reported

Unmodified Yes X No $486,700

X Yes No


Schedule of Findings and Questioned Costs


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Section II – Financial Statement Findings No matters were reported.

Section III – Federal Award Findings and Questioned Costs

No matters were reported.

Section IV – Prior Year No matters were reported.

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