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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

Goodwill Industries International, Inc. and Related Entities

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 24 - 25 Independent auditor’s report on compliance for each major program and on internal control over compliance required by OMB Circular A-133 26 - 27 Schedule of findings and questioned costs 28 - 29

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Independent Auditor’s Report on the Consolidating Financial Statements and on the Supplementary Information To the Board of Directors Goodwill Industries International, Inc. and Related Entities

We have audited the accompanying consolidating financial statements of Goodwill, Inc. and Related Entities (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 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.

To the Board of Directors March 4, 2014 Page 2 of 2

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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, 2014


Consolidating Statement of Financial Position

December 31, 2013 with 2012 Totals

See notes to the consolidating financial statements. 3

2013 2012

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) 825,859 901,343

Pledges receivable 658,334 658,334 1,752,598

Grants receivable 1,206,180 1,206,180 2,271,525

Prepaid expenses and other assets 513,486 6,611 520,097 392,781

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 673,567 673,567 393,119

Rebates payable 820,000 820,000 820,000

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 72,176 109,635

Total liabilities 8,457,624 2,520,597 (9,969) 10,968,252 8,414,637

Net assets

Unrestricted 14,479,204 987,090 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 26,989,661 987,090 - 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$


Consolidating Statement of Activities

Year Ended December 31, 2013 with 2012 Totals


2013 2012

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 895,302 895,302 443,466

Rental 297,244 297,244 297,239

Investment income 115,286 115,286 133,861

Contributions 87,798 87,798 191,577

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 804,775 804,775 508,916

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) - 790,876 717,335

Net gain on investments 331,233 331,233 325,769

Change in allowance for doubtful accounts receivable 185,849 185,849 (8,985)

Unrealized gain on interest rate swap 37,459 37,459 1,720

Transfer to loan loss reserve (1,000,000) 1,000,000 - -

Change in unrestricted net assets 358,327 987,090 - 1,345,417 1,035,839

Temporarily restricted activities

Contributions 8,743,669 8,743,669 11,371,967


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 3,046,353 - - 3,046,353 4,957,717

Permanently restricted activities


Change in permanently restricted net assets 54,501 - - 54,501 59,055

Change in net assets 3,459,181 987,090 - 4,446,271 6,052,611

Net assets, beginning of year 23,530,480 - - 23,530,480 17,477,869

Net assets, end of year 26,989,661$ 987,090$ -$ 27,976,751$ 23,530,480$


Consolidating Statement of Cash Flows

Year Ended December 31, 2013 with 2012 Totals


2013 2012

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 1,015,078 985,153

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 9,969 261,333 (382,115)

Pledges receivable 1,094,264 1,094,264 (1,460,068)

Grants receivable 1,065,345 1,065,345 790,300

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 10,628 364,138 372,989

Deferred revenue 280,448 280,448 15,364

Rebates payable - 820,000

Total adjustments 2,806,087 26,486 - 2,832,573 600,405

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 1,938,299 - - 1,938,299 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$


Notes to the Consolidating 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 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, 2013. The net operating loss carry-forwards will expire at various dates through 2033. 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.



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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 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:

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.



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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 - 820,000 820,000

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.



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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.



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C. INVESTMENTS - CONTINUED The following is a summary of investments at December 31,:

2013 2012

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,:

2013 2012

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,:

2013 2012

Unrealized gain (loss) 428,912$ (102,482)$

Realized gain 27,485 498,099

456,397$ 395,617$



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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 2012. 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,:

2013 2012

Membership dues 507,236$ 803,955$

Member agreements 306,939 384,715

Other receivables 184,042 163,683

GoodTrak 153,230 45,342

Services and supplies 145,812 163,384

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$



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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,:

2013 2012

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,:

2013 2012

SCSEP 890,039$ 1,758,936$

Good Guides 316,141 349,179

Good Prospects - 84,114

Pathways out of poverty - 79,296

1,206,180$ 2,271,525$



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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 2018. 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 285,656$

2015 800,922

2016 843,031

2017 555,783

2018 14,608

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,:

2013 2012

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$



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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 2014. In accordance with the terms of the loan document, a $1,000,000 loan loss reserve account at a bank was established during 2013. 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, 2013. 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, 2013. Future payments of principal on the notes payable are as follows as of December 31, 2013:


2014 285,656$

2015 800,922

2016 843,031

2017 555,783

2018 14,608

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 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 0.1677% and 0.2087% at December 31, 2013 and 2012, respectively. The bonds are secured by the land and building at 15810 Indianola Drive.



15

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 2012. Future payments of principal on the bonds payable are as follows as of December 31, 2013:


2014 100,000$

2015 100,000

2016 100,000

2017 100,000

2018 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,:

2013 2012

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$



16

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,:

2013 2012

Undesignated - general operations 13,100,324$ 13,165,507$

Designated

Loan loss reserve 1,000,000 -

Loan commitment 410,600 -

International activities 955,370 955,370

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,:

2013 2012

Private Foundation Funds 9,357,016$ 5,596,617$

Operations Funds - non-endowment 1,251,441 1,904,670

Operations Funds - endowment 118,726 101,732

International activities - non-endowment 342,770 457,183

International activities - endowment 151,094 114,492

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:

2013 2012

Private Foundation Funds 4,921,950$ 6,119,256$

Operations Funds - non-endowment 740,286 201,266

Operations Funds - endowment 8,617 15,079

International activities - non-endowment 114,413 122,051

5,785,266$ 6,457,652$



17

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.



18

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 2012.

Endowment funds consisted of the following at December 31, 2013, with 2012 totals:

2012

Temporarily Permanently

Unrestricted Restricted Restricted Total Total

Kenneth K. King Training Trust * -$ 27,770$ 918,081$ 945,851$ 905,567$

Richard and Lois England * 7,271 122,998 130,269 112,791

Frank F. Flegal Education and Training 83,685 20,000 103,685 89,952

International activities

Gerald Clore Training 137,426 100,000 237,426 202,112

Barker Education 6,485 123,131 129,616 130,080

Sioux City 7,183 5,200 12,383 10,631

-$ 269,820$ 1,289,410$ 1,559,230$ 1,451,133$

2013

* 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:

2013 2012

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 619 216 835 34,058

- 62,213 54,501 116,714 108,963

Appropriations (8,617) (8,617) (15,079)

Endowment funds, ending -$ 269,820$ 1,289,410$ 1,559,230$ 1,451,133$



19

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,:

2013 2012

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, 2014. 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, 2013. Therefore, the Organization will provide additional loan proceeds to a member totaling $410,600 during the year ending December 31, 2014.



20

O. PASS THROUGH AWARDS The following chart provides a summary of pass through and direct federal awards expended during the years ended December 31,:

2013 2012

Pass through awards 12,389,327$ 14,483,898$

Direct awards 775,170 1,734,581

13,164,497$ 16,218,479$


Consolidated Schedule of Functional Expense

Year Ended December 31, 2013

21

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 1,413,139 278,061 466,395 2,157,595 306,948 52,938 2,517,481

Payroll taxes 488,834 103,101 163,587 755,522 136,754 19,544 911,820

Personnel expenses 8,494,745 1,823,739 2,850,217 13,168,701 2,253,712 336,013 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 2,391,638 521,557 740,590 3,653,785 393,335 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 524,408 148,201 206,107 878,716 124,536 18,330 1,021,582

Real estate related expenses 142,531 185,684 328,215 182,862 219,102 730,179

Rental and maintenance 225,674 524 78,074 304,272 80,069 3,552 387,893

Professional dues 148,001 205 221,100 369,306 (3,529) 5,740 371,517

Supplies 155,747 69,137 65,530 290,414 24,364 25,711 340,489

Telephone and communications 94,303 21,582 98,658 214,543 101,830 316,373

Seminar and training fees 127,479 13,527 28,882 169,888 28,657 (23) 198,522

Printing, publications, and advertising 34,905 40,611 24,963 100,479 464 20 100,963

Bond interest 13,971 11,081 25,052 19,638 22,643 67,333

Employee relations 25,572 1,917 27,489 36,932 59 64,480

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 3,312,775 700,084 51,514,148

Depreciation and amortization 569,616 138,843 708,459 201,928 104,691 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$

Goodwill Industries International, Inc.

Schedule of Expenditures of Federal Awards


22

Federal Other

Federal Grantor CFDA Identifying Federal

CFDA Program Title Number Number Expenditures

U.S. Department of Labor

Senior Community Service Employment Program (SCSEP) 17.235 Multiple 11,303,396$

U.S. Department of Justice

Juvenile Mentoring Program 16.726 2011-JU-FX-0020 1,833,801

Recovery Act Edward Byrne Memorial Competitive Grant Program ARRA 16.808 2009-SC-B9-0035 27,300

Subtotal U.S. Department of Justice 1,861,101

Total Expenditures of Federal Awards 13,164,497$


Notes to the Schedule of Expenditures of Federal Awards

23

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) 17.235 10,856,022$

U.S. Department of Justice

Juvenile Mentoring Program 16.726 1,526,855

Recovery Act Edward Byrne Memorial Competitive Grant Program ARRA 16.808 6,450

Subtotal U.S. Department of Labor 1,533,305

Total Awards Passed Through 12,389,327$

2 0 2 1 L S t r e e t, N W

S u i t e 4 0 0

2 0 0 3 6

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 To the Board of Directors Goodwill Industries International, Inc. We have audited, 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, the consolidating financial statements of Goodwill, Inc. and Related Entities (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 and have issued our report thereon dated March 4, 2014. 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 consolidating 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 consolidating 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.


25

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. 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.


2 0 2 1 L S t r e e t, N W

S u i t e 4 0 0

2 0 0 3 6

26

Independent Auditor’s Report on Compliance for Each Major Program and on Internal Control over Compliance Required by OMB Circular A-133 To the Board of Directors Goodwill Industries International, Inc. Report on Compliance for the 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 GII’s major federal program for the year ended December 31, 2013. GII's major federal program is 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 GII’s major federal program 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 the major federal program. However, our audit does not provide a legal determination of GII's compliance. Opinion on the 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 its major federal program for the year ended December 31, 2013.


27

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 the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the 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


28

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 program:

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

(CFDA 17.235)

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

$394,935

X Yes No


Schedule of Findings and Questioned Costs


29

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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