GOODWILL INDUSTRIES OF SOUTH FLORIDA, INC. AND SUBSIDIARY

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1 CONSOLIDATED FINANCIAL STATEMENTS

2 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position 2 Consolidated Statements of Activities 3 Consolidated Statements of Functional Expenses 4 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7-19

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors of Goodwill Industries of South Florida, Inc. and Subsidiary We have audited the accompanying consolidated financial statements of Goodwill Industries of South Florida, Inc. and Subsidiary (a nonprofit organization), which comprise the consolidated statements of financial position as of December 31, 2012 and 2011, and the related consolidated statements of activities, functional expenses and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Goodwill Industries of South Florida, Inc. and Subsidiary as of December 31, 2012 and 2011, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Miami, Florida May 15, 2013 An Independent Member of Baker Tilly International MIAMI 1001 Brickell Bay Drive, 9th Floor, Miami FL T F FORT LAUDERDALE 301 East Las Olas Boulevard, 4 th Floor, Fort Lauderdale, FL T F

4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, ASSETS Cash and cash equivalents $ 5,372,730 $ 8,117,489 Accounts and other receivables, net 5,272,870 4,977,358 Pledges receivable 80,000 31,847 Inventories 7,417,097 7,286,473 Prepaid expenses, deferred lease charges and other 829, ,110 Other assets 1,076,401 1,235,037 Goodwill 1,392,000 1,392,000 Land, buildings and equipment, net 36,186,696 31,172,696 TOTAL ASSETS $ 57,627,549 $ 54,487,010 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable $ 3,108,637 $ 1,446,490 Accrued expenses and other liabilities 4,758,764 4,211,568 Mortgage notes, notes payable and lines of credit 21,006,992 18,662,809 Obligations under capital leases 374,850 3,584 TOTAL LIABILITIES 29,249,243 24,324,451 COMMITMENTS AND CONTINGENCIES (NOTE 21) NET ASSETS Unrestricted (including $100,000 and $68,153 of board-designated monies as of 2012 and 2011, respectively) 28,378,306 30,130,712 Temporarily restricted - 31,847 TOTAL NET ASSETS 28,378,306 30,162,559 TOTAL LIABILITIES AND NET ASSETS $ 57,627,549 $ 54,487,010 The accompanying notes are an integral part of these consolidated financial statements

5 CONSOLIDATED STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED DECEMBER 31, CHANGES IN UNRESTRICTED NET ASSETS: REVENUES AND SUPPORT: Contributions: Donated goods sales $ 38,018,451 $ 32,926,111 Contributions 888, ,663 United Way allocation 421, ,065 TOTAL CONTRIBUTIONS 39,328,509 34,307,839 Manufacturing sales 36,818,209 53,024,511 Service contracts revenue 10,769,060 10,676,378 Commercial services revenue 4,510,136 4,418,121 Rehabilitation fees 2,313,390 2,677,509 Miscellaneous income 27,461 29,472 TOTAL REVENUES AND SUPPORT BEFORE NET ASSETS RELEASED FROM RESTRICTIONS 93,766, ,133,830 NET ASSETS RELEASED FROM RESTRICTIONS 31,847 34,819 TOTAL REVENUES AND SUPPORT 93,798, ,168,649 EXPENSES: Program services: Apparel manufacturing 37,439,707 46,903,633 Donated goods operations 31,694,219 28,259,561 Service contracts 10,368,176 10,189,353 Commercial services 5,256,032 5,190,449 Rehabilitation services 5,891,391 5,756,530 TOTAL PROGRAM SERVICES 90,649,525 96,299,526 Supporting services: Management and general 4,612,760 4,482,153 Fundraising 288, ,351 TOTAL FUNCTIONAL EXPENSES 95,551, ,152,030 (DECREASE) INCREASE IN UNRESTRICTED NET ASSETS (1,752,406) 4,016,619 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS Net assets released from restrictions (31,847) (34,819) DECREASE IN TEMPORARILY RESTRICTED NET ASSETS (31,847) (34,819) (DECREASE) INCREASE IN NET ASSETS (1,784,253) 3,981,800 NET ASSETS - BEGINNING OF YEAR 30,162,559 26,180,759 NET ASSETS - END OF YEAR $ 28,378,306 $ 30,162,559 The accompanying notes are an integral part of these consolidated financial statements

6 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2012 Program Services Supporting Services Donated Management Apparel Goods Service Commercial Rehabilitation and Total Manufacturing Operations Contracts Services Services General Fundraising Expenses PAYROLL AND RELATED COSTS Disabled wages $ 11,592,731 $ 1,236,088 $ 4,176,265 $ 1,952,107 $ 294,024 $ 254,454 $ - $ 19,505,669 Non-disabled wages 3,552,182 11,171,096 2,435,859 1,710,044 3,178,101 2,240,670-24,287,952 Employee health and welfare benefits 424,445 1,146, , , , ,877-3,269,876 Other payroll-related expenses 1,650,594 1,209, , , , ,989-4,532,109 Total payroll and related costs 17,219,952 14,763,583 8,321,862 4,220,330 4,151,889 2,917,990-51,595,606 EXPENSES Occupancy 554,122 11,201, , , , ,432 1,478 13,074,053 Professional fees 1,452, , ,685 36, , , ,516 3,936,806 Materials and supplies (office and commercial) 16,496,503 1,824, ,812 58, , ,129 11,013 19,849,571 Telephone 73, ,559 55,315 57,703 66,153 96, ,731 Postage and freight 428, ,306 3,705 2,289 4,862 11, ,884 Equipment rental and maintenance 68,438 41,242 12,762 29,173 27,425 44, ,413 Printing and advertising 36, ,160 1,819 14,477 7,951 13,806 1, ,320 Travel 55,290 37,313 68,381 23,994 69,589 51, ,419 Fleet and transportation costs 11, ,563 85,181 58,494 33,284 14,494-1,007,970 Conferences and meetings 33,403 13,778 1,882 19, ,905 1, ,560 Special assistance to individuals - 7, ,350 3,600-14,479 Membership dues 2,998 1,069 6,536 1,959 18, , ,203 Awards ,250-2,355 Interest 136,339 48,610 4,185 89,093 56,607 48, ,429 Miscellaneous ,782 4,767 1, , ,526 Total expenses before depreciation and amortization 36,570,920 30,861,537 10,327,932 5,079,043 5,778,937 4,516, ,733 93,423,325 Depreciation and amortization 868, ,682 40, , ,454 96,537-2,127,693 Total Functional Expenses $ 37,439,707 $ 31,694,219 $ 10,368,176 $ 5,256,032 $ 5,891,391 $ 4,612,760 $ 288,733 $ 95,551,018 The accompanying notes are an integral part of these consolidated financial statements

7 CONSOLIDATED STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2011 Program Services Supporting Services Donated Management Apparel Goods Service Commercial Rehabilitation and Total Manufacturing Operations Contracts Services Services General Fundraising Expenses PAYROLL AND RELATED COSTS Disabled wages $ 11,805,006 $ 984,406 $ 4,187,185 $ 1,928,388 $ 289,002 $ 269,233 $ - $ 19,463,220 Non-disabled wages 3,881,363 10,324,467 2,528,206 1,682,271 3,160,044 1,947,394-23,523,745 Employee health and welfare benefits 413,724 1,121, , , , ,596-3,263,356 Other payroll-related expenses 1,684,583 1,084, , , , ,013-4,396,450 Total payroll and related costs 17,784,676 13,515,585 8,446,836 4,159,616 4,111,822 2,628,236-50,646,771 EXPENSES Occupancy 571,401 10,181, , , , ,107 5,831 11,987,691 Professional fees 1,261, , ,638 35, , , ,025 3,774,876 Materials and supplies (office and commercial) 25,569,743 1,101, ,125 75, , ,692 21,190 28,219,915 Telephone 48, ,525 46,481 41,910 53, , ,959 Postage and freight 543, ,780 3,911 1,149 4,607 14,639 5, ,097 Equipment rental and maintenance 62,602 47,618 14,479 20,698 17,476 41, ,597 Printing and advertising 23, ,036 1,108 12,689 8,685 17,919 3, ,673 Travel 76,673 20,104 61,823 30,469 77,427 58, ,130 Fleet and transportation costs 11, ,958 45,740 49,268 21,016 14, ,037 Conferences and meetings 21,147 8,149 4,707 3,059 1,501 23, ,597 Special assistance to individuals - 1, ,500 4,329-10,921 Membership dues 2, ,966 16, , ,794 Awards ,000 7,000 1,236 18,286 Interest 168,745 51,531 5, ,269 70,062 68, ,566 Miscellaneous , , ,484 Total expenses before depreciation and amortization 46,147,028 27,488,786 10,137,204 5,030,162 5,654,688 4,382, ,351 99,210,394 Depreciation and amortization 756, ,775 52, , ,842 99,978-1,941,636 Total Functional Expenses $ 46,903,633 $ 28,259,561 $ 10,189,353 $ 5,190,449 $ 5,756,530 $ 4,482,153 $ 370,351 $ 101,152,030 The accompanying notes are an integral part of these consolidated financial statements

8 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ (1,784,253) $ 3,981,800 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 2,127,693 1,941,636 (Increase) decrease in assets: Restricted cash - 762,963 Accounts and other receivables, net (295,512) 3,770,132 Pledges receivable (48,153) 34,819 Inventories (130,624) 3,137,484 Prepaid expenses, deferred lease charges and other (555,645) 33,673 Other assets 90,814 (135,870) Increase (decrease) in liabilities: Accounts payable and accrued expenses and other liabilities 2,209,343 (3,581,401) TOTAL ADJUSTMENTS 3,397,916 5,963,436 NET CASH PROVIDED BY OPERATING ACTIVITIES 1,613,663 9,945,236 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and building improvements (6,644,711) (3,680,786) NET CASH USED IN INVESTING ACTIVITIES (6,644,711) (3,680,786) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) of lines of credit, net 1,092,557 (1,000,000) Proceeds from debt 2,000,000 - Payments on debt and capital lease obligations (806,268) (931,902) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,286,289 (1,931,902) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,744,759) 4,332,548 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 8,117,489 3,784,941 CASH AND CASH EQUIVALENTS - END OF YEAR $ 5,372,730 $ 8,117,489 NON CASH INVESTMENT AND FINANCING TRANSACTIONS: Equipment acquired through capital leases $ 429,160 $ - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 406,979 $ 467,685 The accompanying notes are an integral part of these consolidated financial statements

9 1. ORGANIZATION Goodwill Industries of South Florida, Inc. and Subsidiary ( Goodwill ) is a not-for-profit organization established in The purpose of Goodwill is to help people with disabilities and special needs make the transition to independence. Goodwill provides vocational rehabilitation, training and employment to help people achieve employment and self-sufficiency. Goodwill operates numerous entrepreneurial activities such as collecting and selling donated materials, manufacturing and contracting services with the private and public sectors. These activities serve as tools for the training and employment of individuals with disabilities and special needs as well as providing revenues to support Goodwill s mission. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The accompanying consolidated financial statements include the accounts of Goodwill and the accounts of Big Blue Box Productions, Inc. ( Big Blue Box ), a wholly owned subsidiary and a corporation formed in April 2010 to create, produce, sell, donate or purchase articles, films or other materials that further the objective or purpose of Goodwill. All intercompany balances and transactions have been eliminated in consolidation. Basis of Presentation The consolidated financial statements of Goodwill have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ). Net assets and revenues and support are classified into three categories of net assets based on the existence or absence of donor-imposed restrictions. The three net asset categories are as follows: Unrestricted - Net assets that are free of donor-imposed restrictions; all revenues, gains and losses that are not changes in permanently or temporarily restricted net assets. Goodwill has unrestricted, board designated net assets resulting from contributions whose use by Goodwill is not limited by donor-imposed stipulations. Goodwill has earmarked such funds not to be expended for an unspecified period of time. Temporarily Restricted - Net assets whose use by Goodwill is limited by donor-imposed stipulations that either expire by passage of time or that can be fulfilled or removed by actions of Goodwill pursuant to those stipulations. Permanently Restricted - Net assets whose use by Goodwill is limited by donor-imposed stipulations that neither expire with the passage of time nor can be fulfilled or otherwise removed by actions of Goodwill. As of December 31, 2012 and 2011, Goodwill did not have any permanently restricted net assets. Significant Customers and Concentrations Goodwill has several large contracts with Defense Supply Center Philadelphia ( DSCP ) and US Army Natick Soldier System Center ( Natick ) for the production of military apparel. Sales to DSCP and Natick accounted for approximately $30,190,000 or 82% and $47,849,000 or 90% of total manufacturing sales during 2012 and 2011, respectively. Additionally, the amounts due from DSCP and Natick represent approximately $2,260,000 or 85% and $1,757,000 or 78% of the total manufacturing accounts receivable balance of approximately $2,661,000 and $2,245,000 at December 31, 2012 and 2011, respectively. Management expects manufacturing orders to decline in 2013 and has planned accordingly as this is an ordinary part of doing business with the Federal government. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates

10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Cash Equivalents All highly liquid investments with an initial maturity of three months or less are considered to be cash equivalents. Accounts and Other Receivables Accounts receivable are stated at the amount Goodwill expects to collect. Management monitors the collection status of its accounts receivable balance on an ongoing basis. Based on management s analysis of possible bad debts, the allowance for doubtful accounts is $200,000 and $300,000 as of December 31, 2012 and 2011, respectively. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Inventories Inventories consist of merchandise purchased and used in Goodwill s manufacturing process, including the production of aprons, flags, garrison caps, army combat uniforms, battle dress uniforms, airman battle uniforms, navy working uniforms, and fleece jackets. Inventories are stated at the lower of cost (first-in, first-out basis) or market. Finished goods inventory includes the cost of applicable labor and materials. In addition, Goodwill records inventory for donated goods at estimated fair value, which is determined based on its future economic benefit. Prepaid expenses, deferred lease charges and other Prepaid expenses, deferred lease charges and other consist primarily of prepaid insurance, legal fees and other professional fees incurred in connection with Goodwill s stores and future projects. These costs are amortized over the period benefitted. Goodwill Goodwill represents the excess of the purchase price over the fair values of the net assets of acquired businesses. Goodwill is reviewed at least annually for impairment. Other intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives and reviewed for impairment upon the occurrence of certain triggering events in accordance with the provisions of an accounting standard on goodwill and other intangible assets. Management believes that no impairment of goodwill exists at December 31, 2012 and 2011 (see NOTE 7). Land, Buildings and Equipment, Net Land, buildings and equipment are stated at cost or, if donated to Goodwill, at fair value at date of donation. If donors stipulate how long the assets must be used, the contributions are recorded as restricted support. In the absence of such stipulations, contributions of property and equipment are recorded as temporarily restricted support. Depreciation of buildings and equipment is computed on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives of buildings and equipment are as follows: Asset Buildings and improvements Equipment Equipment held under capital leases Leasehold improvements Life years 5-15 years Shorter of useful life or lease term Shorter of useful life or lease term - 8 -

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-Lived Assets Goodwill reviews its long-lived assets for possible impairment at least annually, and more frequently if circumstances warrant. Impairment is determined to exist when estimated amounts recoverable through future cash flows from operations on an undiscounted basis are less than the long-lived asset carrying values. If a longlived asset is determined to be impaired, it is written down to its estimated fair value to the extent that the carrying amount exceeds the fair value of the long-lived asset. No write-downs for impairment of long-lived assets were recorded in 2012 or Contributions Contributions received or made, including unconditional promises to give, are recognized as revenues in the period received or made at their estimated fair value. Contributions are considered to be available for the general programs of Goodwill unless specifically restricted by the donor. Goodwill records gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Consolidated Statements of Activities as net assets released from restrictions. However, if a restriction is fulfilled in the same period in which the contribution is received, Goodwill reports the support as unrestricted. Manufacturing Sales Manufacturing sales consist of products manufactured for a fixed or determinable fee based on contractual terms. Product revenue is recognized when delivery has occurred and collectability is probable. Goodwill does not offer price concessions or discounts. Goodwill is generally not contractually obligated to accept returns, except for defective products. Based on management s analysis of historical returns, it has been determined that an allowance for estimated returns is not necessary. Service Contracts Revenue, Commercial Services Revenue and Rehabilitation Fees Program services are supported by grants and/or contracts. Revenues are recorded as related expenditures are incurred and services are performed under the provisions of the agreements. Revenue for training contracts that require certain performance standards to be met by the participants is recognized as performance standards are met, which approximately matches the expenses incurred in the program. The unexpended portion of such revenues may be available for application to approved expenditures in future years or repayable to granting agencies. Functional Allocation of Expenses The costs of providing services have been allocated on a functional basis among apparel manufacturing, donated goods operations, service contracts, commercial services, rehabilitation services, management and general and fundraising expenses. Allocations are generally made on a specific identification basis by program activity and supporting services benefited. Occupancy and depreciation expenses are allocated to cost centers based on square footage. Taxes Collected from Customers and Remitted to Governmental Authorities Goodwill records taxes collected from customers, which are directly imposed on a transaction with that customer, on a net basis. That is, in instances in which Goodwill acts as a collection agent for a taxing authority by collecting taxes that are the responsibility of the customer, Goodwill records the amount collected as a liability and relieves such liability upon remittance to the taxing authority without impacting revenues or expenses

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Shipping and Handling Activities Shipping and handling costs of approximately $780,000 and $743,000 are included in program services in the Consolidated Statements of Functional Expenses for the years ended December 31, 2012 and 2011, respectively. Bond Issue Costs Goodwill capitalizes costs associated with the issuance of debt instruments. These costs are amortized on a straight-line method, which approximates the effective interest rate method, over the term of the debt. Income Taxes Goodwill Industries of South Florida, Inc. is registered with the Internal Revenue Service as a non-profit organization under Internal Revenue Code Section 501(c)(3) and, accordingly, is exempt from income taxes, except for any taxes which may arise from unrelated business income. Management believes there is no unrelated business income. Big Blue Box Productions, Inc. ( BBB ) is a C Corporation. At December 31, 2012 and 2011, BBB had both federal and state net operating loss ( NOL ) carry forwards of approximately $102,000 and $103,000, respectively. The asset and liability method of accounting requires that deferred income taxes reflect the tax consequences of future years differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. In addition, future tax benefits, such as NOL carry forwards, are required to be recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is required to be established for those benefits that do not meet the more-likely-than-not criteria. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Due to the uncertainty surrounding the timing of realizing the benefits of its deferred tax asset in future tax returns, BBB recorded a full valuation allowance against its net deferred tax asset of approximately $38,000 and $39,000 as of December 31, 2012 and 2011, respectively. The valuation allowances relates to NOL carry forwards for which management has concluded it is more likely than not that this item will not be realized in the ordinary course of business. The valuation allowance for deferred tax assets decreased approximately $1,000 as of December 31, 2012 and increased by approximately $15,000 as of December 31, Collectively, Goodwill recognizes and measures tax positions based on their technical merit and assesses the likelihood that the positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. Interest and penalties on tax liabilities, if any, would be recorded in interest expense and other non-interest expense, respectively. The U.S. Federal jurisdiction and Florida are the major tax jurisdictions where Goodwill files income tax returns. Goodwill is generally no longer subject to U.S. Federal or state examinations by tax authorities for years before

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentrations of Credit Risk Financial instruments, which potentially subject Goodwill to concentrations of credit risk, consist primarily of cash and cash equivalents maintained in financial institutions in excess of the Federal Deposit Insurance Corporation insured limit of $250,000. By policy, Goodwill limits the amount of credit risk exposure to any one financial institution. Although cash balances may exceed federally insured limits at times during the year, Goodwill has not experienced and does not expect to incur any losses in such accounts. Subsequent Events Goodwill has evaluated subsequent events through May 15, 2013, which is the date the consolidated financial statements were available to be issued. Reclassifications Certain items have been reclassified from the 2011 presentation to conform to the 2012 presentation. Adopted Pronouncements Testing Goodwill for Impairment Goodwill, which is an indefinite-lived intangible asset, is evaluated at least annually, and more often when events indicate that an impairment exists. In September 2011, the Financial Accounting Standards Board ( FASB ) issued an accounting standard update on the accounting guidance related to testing goodwill for impairment. This update permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit s fair value is less than its carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that a reporting unit s fair value is more likely than not greater than its carrying value, the two-step impairment test would be unnecessary. The qualitative assessment is optional, allowing companies to proceed directly to the quantitative assessment. This update is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011; however, early adoption is permitted. For 2011, Goodwill elected early adoption, and the implementation of this update did not have a material effect on the consolidated financial statements. 3. ACCOUNTS AND OTHER RECEIVABLES, NET Accounts and other receivables consisted of the following at December 31: Federal Government $ 3,150,633 $ 2,800,876 State Government 1,724,998 1,849,199 Commercial 597, ,283 5,472,870 5,277,358 Less allowance for doubtful accounts (200,000) (300,000) $ 5,272,870 $ 4,977,358 There was no bad debt expense for the years ended December 31, 2012 and

14 4. PLEDGES RECEIVABLE, NET Unconditional promises to give that are expected to be collected in future years are recorded at the present value of the estimated future cash flows. Amortization of the discounts is included in contributions in the Consolidated Statements of Activities. Pledges receivable are classified as temporarily restricted net assets on the Consolidated Statements of Financial Position due to time restrictions. When a restriction expires, temporarily restricted net assets are transferred to unrestricted net assets (see NOTE 15). During 2010, Goodwill received a pledge from a donor for $100,000 with no stipulated restrictions. Monies received from the pledge amounted to $31,847 and $34,819 in December 31, 2012 and 2011, respectively, of unconditional promises to give at net realizable value and are considered to be unrestricted, board designated. The remaining amount of the pledge, $31,847, was received during At December 31, 2012, pledges totaled $80,000 for which no present value discount has been recorded since the pledges were paid in INVENTORIES Inventories consisted of the following at December 31: 6. OTHER ASSETS Other assets consisted of the following at December 31: Raw materials $ 1,998,936 $ 1,530,527 Work in progress 1,822,957 1,323,352 Finished goods 999,963 2,276,757 Supplies 26,305 35,705 Subtotal 4,848,161 5,166,341 Donated goods 2,568,936 2,120,132 $ 7,417,097 $ 7,286,473 Bond Issuance Costs Security deposits $ 322,934 $ 413,748 Bond issuance costs, net of amortization 203, ,289 Split-dollar insurance plan 550, ,000 $ 1,076,401 $ 1,235,037 Bond issuance costs are amortized over the life of the bonds. Amortization expense for the years ended December 31, 2012 and 2011, included in depreciation and amortization in the Consolidated Statements of Functional Expenses was $67,

15 6. OTHER ASSETS (CONTINUED) Split-dollar Insurance Plan In 2003, the Board of Directors of Goodwill approved a split-dollar life insurance plan to provide retirement income to the President and CEO of Goodwill. The retirement income arrangement was provided to the President and CEO for his services of over twenty years in the absence of an adequate retirement plan available through standard arrangements. The split-dollar arrangement provides for the periodic premiums required under the life insurance contract which are treated as a series of loans secured by the life insurance policy. At December 31, 2012 and 2011, the amounts under the split-dollar arrangement totaled $550,000. The face value of the life insurance policy is $1,800,000. The repayment of the loans will be from death benefits on the insured. In the event that the employee voluntarily terminates his participation in the plan, the employee is to repay the employer the cumulative premiums plus accumulated interest at the applicable federal rate through the date the premiums were funded. The repayment will be accomplished first through the cash surrender value of the insurance policy and the remaining portion will be paid in cash from the employee. The plan meets IRS applicable requirements and is considered a common practice among non-profit organizations in order to retain valuable executives. Although the plan is expected to be for an indefinite period of time, the employer also retains the right to terminate the plan provided that the policy continues in effect in accordance with its terms and as such, termination by the employer will not accelerate the recovery of the cumulative premiums made. The planned periodic annual premium is $40,000. Failure to pay a planned periodic premium will not, in itself, cause the policy to terminate so long as the excess amounts funded over the periodic annual premium in previous years cover for the annual premium required under the policy for any particular year not funded. Goodwill has no obligation to make any premium payments for the plan. For the years ended December 31, 2012 and 2011, loans under the split-dollar life insurance plan amounted to $550,000. The loans are collateralized by the life insurance policy for which the net cash surrender value of the policy at December 31, 2012 and 2011 was $596,589 and $514,491, respectively. 7. GOODWILL Goodwill represents the excess of the purchase price over the fair values of the net assets of the business acquired. Goodwill acquired two companies on May 13, 2003 and May 15, The companies were purchased for a total of $2,500,000. The transactions were accounted for as purchases and the cost of the transactions exceeded the fair value of assets acquired by $1,392,000. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. The goodwill impairment test has two steps. The first step identifies potential impairments by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. Based on its most recent analysis, management of Goodwill believes that no impairment of goodwill exists

16 8. LAND, BUILDINGS AND EQUIPMENT, NET Land, buildings and equipment consisted of the following at December 31: Land $ 4,692,339 $ 3,295,339 Buildings and improvements 22,780,937 21,257,947 Equipment 22,285,159 18,886,369 Leasehold improvements 6,125,561 5,803,620 Other improvements 351, ,224 Equipment under capital leases 457,861 24,711 56,693,080 49,619,210 Less accumulated depreciation and amortization (including accumulated amortization for capital leases of $12,144 and $7,381 in 2012 and 2011, respectively) (20,506,384) (18,446,514) $ 36,186,696 $ 31,172,696 Total depreciation expense for buildings, leaseholds and other improvements and equipment for the years ended December 31, 2012 and 2011 was approximately $2,060,000 and $1,874,000, respectively. 9. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consisted of the following at December 31: Accrued payroll $ 1,059,255 $ 1,067,214 Reserve for worker's compensation (see NOTE 19) 834, ,070 Sales tax payable 194, ,073 Miami Herald advance 125, ,001 Retirement plan employer match 273, ,033 Deferred compensation 408, ,639 Deferred rent 1,620,655 1,402,044 Other liabilities 242, ,494 $ 4,758,764 $ 4,211,

17 10. MORTGAGE NOTES, NOTES PAYABLE AND LINES OF CREDIT Mortgage notes, notes payable and lines of credit consisted of the following at December 31: Revolving line of credit with maximum borrowings of $6,000,000 with a balloon payment due December 31, 2013 with interest due monthly at prime rate (3.25% at December 31, 2012 and 2011), collateralized by accounts receivable. $ 2,949,973 $ - Term promissory note entered into during May 2008, payable in monthly principal and interest installments through May 2013, with interest at 6.50%, collateralized by accounts receivables. Note was paid off in January ,857,416 Promissory note, with interest due monthly at 2.96% maturing on 5/28/2013, collateralized by property. 2,000,000 - Industrial Development Revenue Bonds issued by the Miami-Dade County Industrial Development Authority on December 17, 2010 (Series 2010) with monthly principal interest payments at variable rates determined on a monthly basis (see NOTE 12), maturing on December 1, Bonds are collateralized by properties and equipment (NOTE 12). 16,057,019 16,805,393 Total mortgage notes, notes payable and lines of credit $ 21,006,992 $ 18,662,809 The aggregate amount of required payments on debt is as follows: Years Ending December 31, 2013 $ 5,711, , , , ,755 Thereafter 12,112,398 $ 21,006,992 Interest expense for the years ended December 31, 2012 and 2011 was $383,429 and $474,566, respectively. The promissory note due May 28, 2013 is expected to be extended and refinanced to a term loan through the financing of the laundry facility (NOTE 22)

18 11. OBLIGATIONS UNDER CAPITAL LEASES Goodwill leases certain machinery and equipment under agreements that are classified as capital leases. The cost of the equipment under capital leases was $457,861 and $24,711 as of December 31, 2012 and 2011, respectively and is included in the Consolidated Statements of Financial Position as land, buildings and equipment. The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2012, are as follows: Years Ending December 31, 2013 $ 91, , , , ,380 Total minimum lease payments 394,928 Less: amount representing interest (20,078) Present value of net minimum lease payments $ 374, BOND TRANSACTIONS On May 13, 2003, the Miami-Dade County Industrial Development Authority ( IDA ) issued Industrial Development Revenue Bonds (Goodwill Industries of South Florida, Inc. Project) Series 2003 in the amount of $9,400,000. The proceeds of the bonds enabled Goodwill to (1) purchase the assets and operating rights of two privately owned companies involved in the flag manufacturing and embroidery business, (2) refinance existing debt on the main location, and (3) expand Goodwill s main facility located at 2121 NW 21 st Street in Miami. The bonds were set to mature on May 1, 2028 and interest on the bonds was compounded at a weekly rate on a monthly basis. Goodwill was required to make quarterly payments of principal to SunTrust Bank for deposit into a bond-sinking fund, the principal of which was used to affect the optional redemption of bonds. In December 17, 2010, Goodwill retired the 2003 Bond Series and a new 2010 Bond Series was issued with a par amount of $17,480,000 and a maturity date of December 1, The proceeds were used to refinance the existing Series 2003, refinance several existing loans that were used to purchase facilities, inventory and equipment, and pay swap termination fees. The collateral for the bond includes facilities located at 2121 NW 21 st Street, 2111 NW 22 nd Avenue, 461 Palm Avenue, South Dixie Highway, 2104 W. Commercial Blvd., 550 E. Oakland Park Blvd and equipment located in the main facility. The financing consists of tax exempt bank qualified bonds and taxable bank loans. The tax exempt bank qualified loans are broken down into two Series. Series 2010A has a principal amount of $7,000,000 and Series 2010B has a principal amount of $7,044,600. Both series have a variable interest rate equal to 69% of one-month LIBOR plus 2.10% and was 1.60% and 1.64%, respectively, at December 31, 2012 and Principal payments for both series will start August 1, 2015 and have a maturity date of December 1, There is a call option, at the option of the bank with a required one-year notice, which includes an interest rate reset at June 30, 2016 and on June 30 of each fifth year thereafter

19 12. BOND TRANSACTIONS (CONTINUED) The taxable bank loans are made up of Facility C and D and were used to refund existing debt that did not qualify for tax-exempt status. Facility C has a principal amount of $2,160,000 and a variable interest rate equal to onemonth LIBOR plus 1.85% and was 2.06% and 2.12%, respectively, at December 31, 2012 and The principal of Facility C shall be payable beginning February 1, 2011 and has a maturity date of December 31, Facility D has a principal amount of $1,275,400 and a variable interest rate of one-month LIBOR plus 2.00% and was 2.21% and 2.27%, respectively at December 31, 2012 and The principal of Facility D shall be payable beginning December 1, 2013 and has a maturity date of August 1, The bank loan agreements contain financial covenants that require Goodwill to maintain a minimum debt service coverage of 1.35 and maximum debt to tangible net worth of 2.25 until December 31, 2011 when it was reduced to Goodwill was in compliance with the financial covenants at December 31, 2011 but was not in compliance with the Debt Service Coverage ratio at December 31, Goodwill obtained a waiver from the Bank. 13. LEASE OBLIGATIONS Goodwill is obligated under various operating leases for store facilities. These store leases provide for the payment by Goodwill of the property taxes and are subject to yearly increases, not to exceed 5%, based on the consumer price index. At December 31, 2012, the aggregate approximate rental commitments for non-cancelable operating leases are as follows: Years Ending December 31, 2013 $ 6,194, ,851, ,913, ,693, ,866,000 Thereafter 35,682,000 $ 64,199,000 Rental expense for store facilities is calculated on a straight line basis and approximated $8,142,000 and $7,506,000 for the years ended December 31, 2012 and 2011, respectively, and is included within the caption of occupancy in the Consolidated Statements of Functional Expenses. Rent expense is deferred and amortized over the life of the leases. As of December 31, 2012 and 2011, deferred rent of $1,620,655 and $1,402,044, respectively, is included in Accrued expenses and other liabilities in the accompanying Consolidated Statements of Financial Position. 14. BUSINESS LEASE During October 2004, Goodwill ( Landlord ) entered into a business lease agreement with the City of Miami (the City, Tenant ) to use the land owned by the landlord, and the building built on it with monies from the City, for a municipal parking garage and incidental storage and office uses related to such garage operations. The parking garage is to be operated, managed, and administered by the Tenant in substantially the same manner as all other off-street parking facilities belonging to the City of Miami Department of Off-Street Parking. The lease is for 20 years for $1 per year. The Landlord has exclusive use of one hundred fifty (150) parking spaces, for parking only, at no rental charge. Upon the termination of the lease, the Tenant agrees that it will peacefully surrender and deliver the premises to the Landlord. Accordingly, at December 31, 2012 and 2011, this building is not reflected as an asset on the consolidated financial statements

20 15. NET ASSETS Temporarily restricted net assets represent contributions received or receivable that are designated for use in general operations for periods after December 31, 2012 and 2011, respectively. Net assets of $31,847 and $34,819 were released from donor restrictions due to time restrictions expiring during the years ended December 31, 2012 and 2011, respectively. 16. DONATED SERVICES Goodwill recognizes donated services from the Miami-Dade Public Schools. The revenues for such services classified under rehabilitation fees on the Consolidated Statements of Activities totaled $103,278 in 2012 and $124,232 in Expenses for the same amount were also recognized as non-disabled wages in training programs. The value of the services donated was based on yearly teaching salaries provided by the Miami-Dade Public Schools. 17. REHABILITATION FEES Rehabilitation fees consisted of the following for the years ended December 31: 18. RETIREMENT PLAN Federal and State vendor contracts $ 1,412,871 $ 1,583,258 Miami-Dade and Broward County Public Schools (see NOTE 16) 103, ,232 The School Board of Miami-Dade County 145, ,352 Enterprise zone 250, ,992 Miami-Dade and Broward County General contracts 138,819 79,876 Other 262, ,799 $ 2,313,390 $ 2,677,509 Effective August 1997, Goodwill elected to change its retirement plan from a 403(b) plan to a 401(k) plan. The plan is for eligible employees who have reached the age of 21 and completed one year of service. Goodwill contributes a matching amount determined on a yearly basis. Goodwill made contributions to the plan during the years ended December 31, 2012 and 2011 of $273,883 and $231,033, respectively. 19. WORKERS COMPENSATION INSURANCE On June 1, 2003, Goodwill became self-insured under the laws of the State of Florida for workers compensation. Goodwill uses the services of a third party administrator to handle all claims for Goodwill. Goodwill maintains commercial excess coverage with independent insurance carriers for workers compensation above the selfinsurance retention of $500,000. Goodwill maintains a reserve for current and future claims based on historical experience and information provided by the third party administrator. At December 31, 2012 and 2011, the reserve for workers compensation was $834,602 and $696,070, respectively, and is included in Accrued expenses and other liabilities in the Consolidated Statements of Financial Position. For the years ended December 31, 2012 and 2011, workers compensation expense was approximately $952,000 and $856,000, respectively

21 20. DEFERRED COMPENSATION PLAN In 2011, Goodwill s Board of Directors approved a deferred compensation plan for a select group of management employees for services they have rendered and will render to Goodwill. The Plan is intended to be an eligible plan for purposes of Internal Revenue code section 457(b) and 457(f) and the regulations issued thereunder, are effective as of January 1, Participants are vested in this plan over a four year service period. Expenses accrued under this plan for the years ended December 31, 2012 and 2011 totaled $408,284 and $199,636, respectively. 21. COMMITMENTS AND CONTINGENCIES Litigation Goodwill is exposed to various asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material effect on Goodwill s financial position or the results of its operations. 22. COMMERCIAL LAUNDRY FACILITY In 2011, Goodwill s Board of Directors resolved to build and operate a commercial laundry facility to serve the hospitals and health industry in South Florida. The Board further authorized Goodwill to finance this project through a loan and line of credit, with the proceeds going towards state of the art equipment and the purchase and renovation of a building. The facility is located in a Miami-Dade County Enterprise Zone in order to obtain certain tax credits and other incentives. As of the date of these financial statements, the facility is expected to be completed in June 2013 pending financing approval. In March 2012, Goodwill entered into a loan agreement with a financial institution for the acquisition of a building related to the Laundry facility project. The total cost of the building is $2,500,000, which was purchased with cash and a loan. The loan has a principal of $2,000,000, bears interest at LIBOR plus 2.75%, is secured by the building and requires that certain financial covenants be met. In July 2012, Goodwill entered into an agreement with a laundry equipment manufacturer for the design, supply and installation of the laundry and mechanical equipment for a total cost of $7,625,106. In February 2013, Goodwill entered into a lease agreement with a financial institution for the purchase of this equipment. The financing is for 100% of the value of the equipment and bears a payment factor of %. There are no financial covenants for this agreement. In August 2012, Goodwill entered into an agreement with a construction company for the design and build-out of the existing building into a commercial healthcare laundry facility, which includes the design, engineering, construction, and renovation for a total cost of $4,277,625. Goodwill anticipates entering into an agreement with a financial institution for the financing of the project that includes $3,890,585 of New Market Tax Credit financing during June