GOODWILL KEYSTONE AREA AND RELATED ENTITY

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1 COMBINED FINANCIAL STATEMENTS WITH SUPPLEMENTARY INFORMATION AND INFORMATION ON FEDERAL AWARDS YEARS ENDED JUNE 30, 2009 AND 2008 AND INDEPENDENT AUDITOR'S REPORT

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3 TABLE OF CONTENTS Page Independent Auditor's Report 1 Combined Financial Statements Combined Statements of Financial Position 3 Combined Statements of Activities 5 Combined Statements of Functional Expenses 7 Combined Statements of Cash Flows 9 Notes to Combined Financial Statements 11 Supplementary Information Combining Statements of Financial Position 25 Combining Statements of Activities 29 Statements of Functional Expenses 33 Combining Statements of Cash Flows 40 Supplementary Information: MH/MR Programs Schedule of Revenue and Expenses Berks County MH/MR 43 Schedule of Revenue and Expenses Bucks County MH/MR 44 Schedule of Revenue and Expenses Chester County MH/MR 45 Schedule of Revenue and Expenses Cumberland/Perry County MH/MR 46 Schedule of Revenue and Expenses Dauphin County MH/MR 47 Schedule of Revenue and Expenses Lancaster County MH/MR 48 Schedule of Revenue and Expenses Montgomery County MH/MR 49 Schedule of Revenue and Expenses Schuylkill County MH/MR 50

4 TABLE OF CONTENTS (Cont d) Page Information on Federal Awards Schedule of Expenditures of Federal Awards 52 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 53 Report on Compliance with Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A Schedule of Findings and Questioned Costs 57 Summary Schedule of Prior Audit Findings 58

5 An Association of Independent Firms MEMBER Members American and Pennsylvania Institutes of Certified Public Accountants INDEPENDENT AUDITOR'S REPORT To the Board of Directors of Goodwill Keystone Area and Related Entity Harrisburg, Pennsylvania We have audited the accompanying combined statements of financial position of Goodwill Keystone Area (a nonprofit organization) and Related Entity as of June 30, 2009 and 2008, and the related combined statements of activities, functional expenses, and cash flows for the years then ended. These combined financial statements are the responsibility of Goodwill Keystone Area and Related Entity s management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and 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 combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Goodwill Keystone Area and Related Entity as of June 30, 2009 and 2008, and the changes in their net assets and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. HARRISBURG LANCASTER LEHIGH VALLEY Fax: MAILING Address McKonly & Asbury LLP 415 Fallowfield Road Camp Hill, PA 17011

6 In accordance with Government Auditing Standards, we have also issued our report dated January 20, 2010, on our consideration of Goodwill Keystone Area and Related Entity s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and 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 and important for assessing the results of our audits. Our audits were conducted for the purpose of forming an opinion on the basic combined financial statements of Goodwill Keystone Area and Related Entity taken as a whole. The supplementary information on pages 24 to 50 is presented for purposes of additional analysis and is not a required part of the basic combined financial statements of Goodwill Keystone Area and Related Entity. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the basic combined financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic combined financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic combined financial statements taken as a whole. McKonly & Asbury, LLP Camp Hill, Pennsylvania January 20,

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8 COMBINED STATEMENTS OF FINANCIAL POSITION JUNE 30, 2009 AND 2008 ASSETS Current assets Cash and cash equivalents $ 9,716,377 $ 9,486,614 Accounts receivable - net of allowance for doubtful accounts of $15,900 for 2009 and $16,000 for ,839,412 2,765,873 Promises to give - net 6,561 4,362 Inventory Donated goods 906, ,783 Purchased goods 164, ,737 Total inventory 1,071, ,520 Due from affiliate 266, ,655 Prepaid expenses and other assets 488, ,864 Total current assets 14,389,205 14,000,888 Investments 2,631,942 2,912,094 Deferred financing costs 43,857 - Land, buildings, and equipment Land 2,279,096 1,179,096 Buildings and improvements 14,892,447 11,886,310 Furniture and equipment 5,046,441 4,747,644 Transportation equipment 2,264,567 2,169,025 24,482,551 19,982,075 Less accumulated depreciation (11,333,187) (10,504,246) Total land, buildings, and equipment 13,149,364 9,477,829 Total assets $ 30,214,368 $ 26,390,811 The accompanying notes are an integral part of these financial statements. 3

9 LIABILITIES AND NET ASSETS Current liabilities Accounts payable $ 377,670 $ 453,791 Accrued expenses 194, ,814 Accrued payroll and payroll taxes 1,463,291 1,190,765 Deferred revenue 66, ,845 Other current liabilities - 345,318 Current maturities of long-term debt 115,803 96,716 Total current liabilities 2,217,732 2,512,249 Long-term debt 3,444,899 1,314,241 Total liabilities 5,662,631 3,826,490 Net assets Unrestricted 24,465,316 22,470,744 Temporarily restricted 86,421 93,577 Total net assets 24,551,737 22,564,321 Total liabilities and net assets $ 30,214,368 $ 26,390,811 4

10 COMBINED STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2009 Temporarily Unrestricted Restricted Total Public support, revenues, gains and other support Public support Contributions $ 179,546 $ - $ 179,546 Contributions - donated goods 9,792,702-9,792,702 United Way 7,475-7,475 Revenues, gains, and other support Donated goods and retail services Donated goods retail sales 16,239,550-16,239,550 Salvage sales 1,765,487-1,765,487 Workforce development services Fees for service - government 3,445,875-3,445,875 Fees for service - non-government 37,550-37,550 Grant revenue - government 2,545,257-2,545,257 Grant revenue - non-government 125, , ,997 Farm revenue 80,865-80,865 Business services Contract revenue 5,623,513-5,623,513 Project revenue 404, ,080 Income from perpetual trust 180, ,000 Interest and dividends 179, ,984 Gain (loss) on disposal of assets (58,757) - (58,757) Net investment losses (468,090) - (468,090) Management fee revenue 60,000-60,000 Rental income 85,705-85,705 Miscellaneous income 79,869-79,869 Net assets released from restriction 108,310 (108,310) - Total public support, revenues, gains, and other support 40,414,764 (7,156) 40,407,608 Expenses Program services Donated goods and retail services 22,422,941-22,422,941 Workforce development services 6,356,862-6,356,862 Business services 4,586,417-4,586,417 Supporting services Management and general 3,530,290-3,530,290 Occupancy and indirect 1,316,261-1,316,261 Fundraising 207, ,421 Total expenses 38,420,192-38,420,192 Increase (decrease) in net assets 1,994,572 (7,156) 1,987,416 Net assets beginning of year 22,470,744 93,577 22,564,321 Net assets end of year $ 24,465,316 $ 86,421 $ 24,551,737 The accompanying notes are an integral part of these financial statements. 5

11 COMBINED STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2008 Temporarily Unrestricted Restricted Total Public support, revenues, gains, and other support Public support Contributions $ 179,668 $ - $ 179,668 Contributions - donated goods 9,089,573-9,089,573 United Way 9,641-9,641 Revenues, gains, and other support Donated goods and retail services Donated goods retail sales 14,398,212-14,398,212 Salvage sales 2,335,543-2,335,543 Workforce development services Fees for service - government 3,429,787-3,429,787 Fees for service - non-government 44,304-44,304 Grant revenue - government 2,485,214-2,485,214 Grant revenue - non-government 245,218 98, ,359 Farm revenue 90,114-90,114 Business services Contract revenue 5,085,323-5,085,323 Project revenue 443, ,294 Income from perpetual trust 189, ,300 Interest and dividends 374, ,996 Gain (loss) on disposal of assets 11,137-11,137 Net investment losses (163,605) - (163,605) Management fee revenue 60,000-60,000 Rental income 38,184-38,184 Miscellaneous income 53,175-53,175 Net assets released from restriction 220,935 (220,935) - Total public support, revenues, gains, and other support 38,620,013 (122,794) 38,497,219 Expenses Program services Donated goods and retail services 21,112,395-21,112,395 Workforce development services 6,699,885-6,699,885 Business services 4,482,596-4,482,596 Supporting services Management and general 3,145,178-3,145,178 Occupancy and indirect 1,052,209-1,052,209 Fundraising 231, ,179 Total expenses 36,723,442-36,723,442 Increase (decrease) in net assets 1,896,571 (122,794) 1,773,777 Net assets beginning of year 20,574, ,371 20,790,544 Net assets end of year $ 22,470,744 $ 93,577 $ 22,564,321 The accompanying notes are an integral part of these financial statements. 6

12 COMBINED STATEMENT OF FUNCTIONAL EXPENSES YEAR ENDED JUNE 30, 2009 Program Services Supporting Services Donated Goods Total and Workforce Program and Retail Development Business Management Occupancy Fund Supporting Services Services Services and General and Indirect Raising Services Payroll $ 10,088,070 $ 4,596,121 $ 3,117,698 $ 1,905,681 $ 243,256 $ 135,729 $ 20,086,555 Payroll taxes and employee benefits 2,472, , , ,437 65,097 10,369 4,442,969 Total payroll and benefits 12,561,059 5,556,323 3,626,573 2,331, , ,098 24,529,524 Occupancy 5,615, ,716 84,772 30, ,897 (76) 6,428,438 Supplies and resale goods 1,580,089 78, ,644 70,566 32,794 2,047 2,131,755 Travel and vehicle 581,783 70,587 99,267 2,180 16, ,266 Staff travel and development 44, ,559 62,993 73,456 1,032 5, ,897 Maintenance and repairs 412,892 19,817 6,394 2,856 86, ,732 Rental and maintenance of equipment 99,639 5,221 15,586 23,427 7,328 2, ,708 Professional fees and contracted services 48,453 39, , ,359 9,249 5, ,830 Subcontracts 123,014 1,472 (47,586) 16,533 24,729 6, ,311 Printing and advertising 110,056 25,560 16,638 81, , ,604 Telephone 99,054 56,194 15,372 41,350 7, ,136 Bad debt expense 1, ,251 47, ,197 Postage 178,421 48,097 14,381 18, ,612 Membership dues ,548 1, , ,249 Employee and organizational assistance 93 16, ,435 Conferences, conventions, and meetings 4,134 10,493 1,319 9,458-6,319 31,723 Miscellaneous 353,239 (8,813) 11, , , ,319 Total expenses before depreciation 21,813,588 6,299,017 4,479,842 3,422,486 1,043, ,261 37,265,736 Depreciation 609,353 57, , , , ,154,456 Total expenses $ 22,422,941 $ 6,356,862 $ 4,586,417 $ 3,530,290 $ 1,316,261 $ 207,421 $ 38,420,192 The accompanying notes are an integral part of these financial statements. 7

13 COMBINED STATEMENT OF FUNCTIONAL EXPENSES YEAR ENDED JUNE 30, 2008 Program Services Supporting Services Donated Goods Total and Workforce Program and Retail Development Business Management Occupancy Fund Supporting Services Services Services and General and Indirect Raising Services Payroll $ 9,518,300 $ 4,739,570 $ 3,009,341 $ 1,758,756 $ 234,389 $ 143,030 $ 19,403,386 Payroll taxes and employee benefits 2,341, , , ,781 61,768 29,223 4,300,377 Total payroll and benefits 11,859,345 5,708,691 3,506,780 2,160, , ,253 23,703,763 Occupancy 5,525, ,313 91,194 36, , ,150,988 Supplies and resale goods 1,497,068 70, ,544 60,256 28,277 3,393 2,031,880 Travel and vehicle 543, ,139 86,788 2,794 8, ,168 Staff travel and development 46, ,703 44,905 97, , ,289 Maintenance and repairs 361,140 16,815 4, , ,144 Rental and maintenance of equipment 63,092 8,784 12,226 15,540 10,325 6, ,438 Professional fees and contracted services 71,209 44, , , , ,646 Subcontracts - 192,008 31, ,432 Printing and advertising 62,915 40,864 23,715 62, , ,318 Telephone 111,598 64,002 13,188 30,087 7, ,779 Postage 152,199 41,703 18,381 22, ,192 Membership dues ,477 1, , ,773 Conferences, conventions, and meetings 4,461 10,386 5,274 13, ,335 43,014 Employee and organizational assistance 118 3, ,900 Miscellaneous 293,650 48,475 11,786 99, , ,915 Total expenses before depreciation 20,592,995 6,640,283 4,365,518 3,081, , ,948 35,694,639 Depreciation 519,400 59, ,078 63, , ,028,803 Total expenses $ 21,112,395 $ 6,699,885 $ 4,482,596 $ 3,145,178 $ 1,052,209 $ 231,179 $ 36,723,442 The accompanying notes are an integral part of these financial statements. 8

14 COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2009 AND Cash flows from operating activities Net increase in net assets $ 1,987,416 $ 1,773,777 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities Depreciation and amortization 1,154,456 1,028,803 Loss on investments, net 468, ,605 (Gain) loss on disposition of assets 58,757 (11,137) (Increase) decrease in Accounts receivable (73,539) (405,324) Promises to give - net (2,199) 10,639 Interest income receivable - 1,747 Inventory (73,841) 89,178 Prepaid expenses and other assets (838) (183,737) Due from affiliates (8,137) (258,655) Deferred financing costs (43,857) - Increase (decrease) in Accounts payable (76,121) 161,502 Accrued expenses (66,658) 76,892 Accrued payroll and payroll taxes 272, ,201 Deferred revenue (98,033) (24,255) Other current liabilities (345,318) 141,729 Due to affiliates - (42,148) Net cash provided by operating activities 3,152,704 2,658,817 Cash flows from investing activities Purchase of land, buildings, and equipment (4,884,748) (980,085) Proceeds from disposition of assets - 17,999 Purchase of investments (187,938) (36,468) Net cash used in investing activities (5,072,686) (998,554) Cash flows from financing activities Payment of long-term debt (102,444) (91,448) Proceeds from long-term debt 2,252,189 - Net cash provided by (used in) financing activities 2,149,745 (91,448) Net increase in cash and cash equivalents 229,763 1,568,815 Cash and cash equivalents - beginning 9,486,614 7,917,799 Cash and cash equivalents - ending $ 9,716,377 $ 9,486,614 (continued) 9

15 COMBINED STATEMENTS OF CASH FLOWS (Cont'd) YEARS ENDED JUNE 30, 2009 AND Supplemental disclosures of cash flow information Cash paid during the year for interest $ 113,552 $ 76,968 The accompanying notes are an integral part of these financial statements. 10

16 NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Activities Goodwill Keystone Area is a private, nonprofit corporation whose purpose is to support persons with disabilities and other barriers to independence in achieving their fullest potential as workers and as members of the broader community. Goodwill Keystone Area provides services within a 22 county area in central, southeastern, and mid-eastern Pennsylvania. Goodwill Keystone Area provides education and career services, job placement opportunities, onthe-job training and employment, post-employment support, and personal development to individuals with disabilities and other barriers to independence. Goodwill Services, Inc., a non profit corporation, whose purpose is to support persons with disabilities and other barriers to independence in achieving their fullest potential as workers and as members of the broader community is a wholly owned subsidiary of Goodwill Keystone Area. Goodwill Services, Inc. provides on the job training, career services, paid employment experiences and job placement opportunities for individuals with severe disabilities through participation in the nish/abilityone Federal contract program. Effective July 1, 2008, Goodwill Industries Keystone Area and related entities (related entities are defined in principles of combination below) approved and adopted a plan of corporate reorganization that included combining all subsidiaries, except for Goodwill Services, Inc. with Keystone. The restructured entity was renamed Goodwill Keystone Area and consists of Keystone and Goodwill Services, Inc. (collectively referred to as Goodwill ). Goodwill receives fees for service and program funded support from various funding sources including federal, state and local government; as well as business service contract, donated goods and retail services revenue. Continued fees for funding and revenues are dependant on the availability of federal, state, and local government funds, contributions and support from the public sector. Goodwill is a member of Goodwill Industries International, Inc. Goodwill Industries Keystone Area Foundation (the Foundation) is an affiliated entity more fully described in note 2. The Foundation issues separate audited financial statements and is not included in these financial statements. The accompanying financial statements are not intended to present all related entities of Goodwill at June 30, 2009 and 2008, and, thus, do not represent a comprehensive financial report. (continued) 11

17 NOTES TO COMBINED FINANCIAL STATEMENTS Principles of Combination The combined financial statements for the year ended June 30, 2009, include the accounts of Goodwill Keystone Area and its Related Entity, Goodwill Services, Inc. The combined financial statements for the year ended June 30, 2008, include Goodwill Industries Keystone Area and its related entities, Goodwill Industries of Central Pennsylvania, Goodwill Services, Inc., Goodwill Industries of Southeastern Pennsylvania, and Goodwill Industries of Mid-Eastern Pennsylvania, Inc. Intercompany transactions and balances have been eliminated in combination. Financial Statement Presentation Goodwill presents its financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 117, Financial Statements of Notfor-Profit Organizations. Under SFAS No. 117, Goodwill is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Contributions In accordance with SFAS No. 116, Accounting for Contributions Received and Made, contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support. This requirement is dependent on the existence and/or nature of any donor restrictions. Support that is restricted by the donor is reported as an increase in unrestricted net assets if the restriction expires in the reporting period in which the support is recognized. All other donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. If a restriction is fulfilled in the same time period in which the contribution is received, Goodwill reports the support as unrestricted. One of the requirements of SFAS No. 116 is to record donated goods as a contribution at fair value in the period received. Goodwill has always received a large quantity of donated used goods and has established a methodology to capture fair value of donated goods sold. Only those items that are salable are valued. (continued) 12

18 NOTES TO COMBINED FINANCIAL STATEMENTS During the years ended June 30, 2009 and 2008, Goodwill recognized contributed merchandise as contribution revenue. This merchandise captures program related expenses/processes accomplished by people with disabilities and other challenging conditions before it reaches its point of sale. Fair value of the contributions is determined by deducting from the selling price of the donated items allocated retail department, transportation, and occupancy costs. The fair value of donated goods recognized as contribution revenue is as follows: June 30, 2009 $ 9,792,702 June 30, 2008 $ 9,089,573 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amount of revenue and expense during the reporting period. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents For purposes of these financial statements, Goodwill considers all short-term investments with a maturity of three months or less to be cash equivalents. At year-end and at various times during the years, Goodwill had cash balances that may have exceeded the federally insured limit in deposit accounts at local banks. Promises to Give- Net Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed using risk-free interest rates applicable to the years in which the promises are received. Amortization of the discounts is included in contribution revenue. Conditional promises to give are not included as support until the conditions are substantially met. Inventory Inventory purchased for resale is stated at the lower of cost (first-in, first-out method) or market. Contributed inventory is measured at fair value at the point of being offered for sale. Deferred Financing Costs Financing cost consists of fees for obtaining the financing and are being amortized on the straight-line method over the term of the financing. (continued) 13

19 NOTES TO COMBINED FINANCIAL STATEMENTS Land, Buildings, and Equipment Land, buildings, and equipment are stated at cost. Expenditures and betterments that extend the useful lives of the assets are capitalized, while maintenance and repairs are expensed when incurred. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets as follows: Buildings and improvements Furniture and equipment Transportation equipment 2 50 years 3 20 years 3 10 years During 2009, Goodwill purchased a building and land for $3,729,066 in Reading, Pennsylvania. As of June 30, 2009, the building had not been placed in service. Goodwill plans to place the building in service by June Goodwill will begin depreciating the building once it is placed in service. Impairment Goodwill reviews long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment loss has occurred, based on the expected cash flows, a loss is recognized in the statement of activities. No impairment losses were recognized during the years ended June 30, 2009 and Income from Perpetual Trust Per a resolution adopted by the Board of Directors during the 2007 year, the beneficial interest in perpetual trust was transferred to Goodwill Industries Keystone Area Foundation. The beneficial interest in perpetual trust represents Goodwill s interest in an irrevocable trust held by a financial institution s trust department. Income passed through from the perpetual trust was $180,000 and $189,300 for the years ended June 30, 2009 and 2008, respectfully. Grants and Contracts Support received under grants and contracts with the state and local agencies is recorded as public support in the appropriate fund when the related costs are incurred. Grants and contracts receivable represent amounts due for expenditures incurred prior to year-end. The deferred revenue account is used to account for program-funded fees received for services in progress. Donated Materials, Equipment, and Services Donated materials, equipment, and services have been recorded at their estimated fair value at date of receipt. Goodwill s Board of Directors donate significant amounts of time to the various programs and operations of Goodwill. However, no amounts have been recorded for these services primarily because no objective basis is available to measure their value. (continued) 14

20 NOTES TO COMBINED FINANCIAL STATEMENTS Program and Supporting Services The costs of providing various program and supporting services have been summarized on a functional basis in the statement of functional expenses. Accordingly, certain costs have been allocated among the programs and supporting services benefited, based on the methodology, which is most appropriate. Functional Expense Allocations Expenses relating to more than one function are allocated to program and supporting services based on employee time estimated, square footage, or other appropriate usage factors. Accounts Receivable Goodwill records accounts receivable at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The allowance for doubtful accounts at June 30, 2009 and 2008 was $15,900 and $16,000. Tax Exempt Status Goodwill is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. In addition, each Organization was organized under the Pennsylvania Nonprofit Corporation Law of 1972 and, as such, is exempt from state income taxes. In December 2008, The Financial Accounting Standards Board issued FASB Staff Position FIN 48-3, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises. FSP FIN 48-3 permits certain nonpublic enterprises, as defined under the interpretation, to defer the effective date of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, to its annual financial statements for fiscal years beginning after December 15, The Corporation has elected to defer the application of Interpretation 48 for the year ending June 30, Management currently evaluates its uncertain tax positions in accordance with FASB Statement 5, Accounting for Contingencies. Accordingly, a loss contingency will be recognized when it is probable that the liability has been incurred and the amount of the loss can be reasonably estimated. Reclassification Certain reclassifications have been made to the prior year financial statements in order for them to be in conformity with the current year presentation. (continued) 15

21 NOTES TO COMBINED FINANCIAL STATEMENTS 2. FOUNDATION Goodwill Industries Keystone Area Foundation (the Foundation) is a not-forprofit organization as described in Section 501(c)(3) of the Internal Revenue Code. The purpose of the Foundation is to raise funds and support the activities of Goodwill Keystone Area and Related Entity and other organizations with similar missions. The initial funds to the Foundation were contributed by Goodwill during the year ending June 30, A majority number of The Board of Directors of the Foundation is comprised of members of the Board of Directors of Goodwill. The financial statements of the Foundation are not included in the financial statements of Goodwill. The primary components of the Foundation s financial statements are summarized below as of and for the years ended June 30, 2009 and 2008: Total assets $ 7,391,312 $ 9,205,460 Total liabilities $ 353,750 $ 359,632 Unrestricted net assets 4,299,578 5,199,635 Temporarily restricted net assets 175, ,521 Permanently restricted net assets 2,562,104 3,424,672 Total liabilities and net assets $ 7,391,312 $ 9,205,460 Revenue and support net of investment loss (1,467,496) $ (810,668) Total expenses 340, ,430 Decrease in net assets $(1,808,266) $(1,243,098) 3. INVESTMENTS Investments are carried at market value. Realized and unrealized gains and losses are reported in the statement of activities as increases or decreases in unrestricted net assets. (continued) 16

22 NOTES TO COMBINED FINANCIAL STATEMENTS The following table represents investments held at June 30, 2009 and 2008: Cost Market Value Cost Market Value Pooled fixed income funds $ 1,516,473 $ 1,254,743 $ 1,299,905 $ 1,292,612 Pooled equity funds 709, , , ,426 Stocks and options 684, , , ,056 Total $ 2,910,799 $ 2,631,942 $ 2,986,876 $ 2,912, FAIR VALUE MEASUREMENTS FASB Statement No. 157, Fair Value Measurements, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB Statement No. 157 are described as follows: Level 1 Level 2 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets or liabilities in inactive markets. Inputs other than quoted prices that are observable for the asset or liability. Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. (continued) 17

23 NOTES TO COMBINED FINANCIAL STATEMENTS The asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at June 30, 2009 and Pooled Fixed income funds: Valued at the closing price reported on the active market which the individual securities are traded. Pooled Equity Funds: Valued at the closing price reported on the active market which the individual securities are traded. Stocks and options: Valued at the closing price reported on the active market which the individual securities are traded. Donated Goods Inventory: Valued at their estimated fair value at the point being offered for sale. The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although Goodwill believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following tables set forth by level, within the fair value hierarchy, Goodwill s investments and donated goods at fair value as of June 30, 2009 and 2008: Investments at fair value as of June 30, 2009: Level 1 Level 2 Level 3 Total Pooled fixed income funds $1,254,743 $ - $ - $1,254,743 Pooled equity funds 748, ,329 Stocks and options 628, ,870 Total investments at fair value $2,631,942 $ - $ - $2,631,942 Donated goods inventory at fair value as of June 30, 2009: Level 1 Level 2 Level 3 Total Donated goods inventory $ - $ - $ 906,430 $ 906,430 (continued) 18

24 NOTES TO COMBINED FINANCIAL STATEMENTS Investments at fair value as of June 30, 2008: Level 1 Level 2 Level 3 Total Pooled fixed income funds $1,292,612 $ - $ - $1,292,612 Pooled equity funds 915, ,426 Stocks and options 704, ,056 Total investments at fair value $2,912,094 $ - $ - $2,912,094 Donated goods inventory at fair value as of June 30, 2008: Level 1 Level 2 Level 3 Total Donated goods inventory $ - $ - $ 874,783 $ 874,783 The following is a summary of changes in fair value of Goodwill s financial assets for the year ended June 30, 2009: Donated Goods Beginning balance as of July 1, 2008 $ 874,783 Change in market value of donated goods 31,647 Balance as of June 30, 2009 $ 906, LINES OF CREDIT At June 30, 2009 and 2008, Goodwill has an available $1,250,000 unsecured line of credit with a financial institution. Borrowings under the line bear interest at a variable rate of 175 basis points per annum above the 1 month LIBOR rate (2.47% and 5.32% at June 30, 2009 and 2008, respectively). The line of credit is subject to annual review. As of June 30, 2009 and 2008, no amounts were outstanding. (continued) 19

25 NOTES TO COMBINED FINANCIAL STATEMENTS 6. LONG-TERM DEBT Long-term debt at June 30, 2009 and 2008 consisted of the following: Mortgage loan payable to a bank with monthly payments of $3,337 including interest at 2.32% per annum, with final payment due in May The mortgage is collateralized by related real estate. $ 503,298 $ 524,958 Loan payable to a bank with monthly payments of $8,870. Until December 2004, the interest was at the Tax Free Fixed Rate as determined annually in November. At December 2004, the interest rate switched to the Tax Free Floating Rate for the remainder of the loan. At June 30, 2009 and 2008, the interest on the loan was 2.56% and 4.80% per annum, respectively. Final payment is due in November The mortgage is collateralized by related real estate. 805, ,999 Mortgage loan payable in the amount of $3,109,470 of which $2,252,189 had been drawn on as of June 30, The loan requires monthly payments of $21,767 including interest at 4.30% per annum to a bank. At 2014 through 2029 it shall be a fixed rate based on the then Federal Home Loan Bank of Pittsburgh Fixed Rate Index for Amortizing Loans of five (5) years. In 2029 the interest rate on the loan shall be a fluctuating interest rate per annum equal to seventy (70%) of the Fulton Bank prime rate as in effect from time to time. Final payment is due June The mortgage is collateralized by related real estate. 2,252,189 - Total debt 3,560,702 1,410,957 Current maturities of long-term debt (115,803) (96,716) Total long-term debt $ 3,444,899 $ 1,314,241 (continued) 20

26 NOTES TO COMBINED FINANCIAL STATEMENTS Aggregate maturities of long-term debt at June 30 are as follows: Total 2010 $ 115, $ 234, $ 242, $ 250, $ 259,651 Thereafter $ 2,457,201 Total interest expense for the years ended June 30, 2009 and 2008 $111,352 and $76,968 respectively. was 7. TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are classified as follows at June 30, 2009 and 2008: Grants from the Foundation $ 81,893 $ 84,641 Miscellaneous 4,528 8,936 $ 86,421 $ 93, DUES TO INTERNATIONAL ORGANIZATION Goodwill is an autonomous community based nonprofit organization, which is a member of Goodwill Industries International, Inc. Dues paid to the international organization are calculated by formulas applied to earned revenue, including fees for service revenue. Goodwill Industries International, Inc. provides leadership and other various services for member Goodwill Organizations. Dues incurred during the years ended June 30, 2009 and 2008 were $147,051 and $135,239. (continued) 21

27 NOTES TO COMBINED FINANCIAL STATEMENTS 9. RETIREMENT PLANS Goodwill has a 401(k) Profit Sharing Plan ( the Plan ) for employees. Employees who have reached age 21 and completed 1,000 hours of service are eligible for employer (non-elective) contributions. Benefits are subject to three year vesting. Goodwill contributes 3% of an employee s salary as a retirement benefit and matches 50% of a participant s contributions up to a maximum of 2% of salary. The amount of employer contributions for the years ended June 30, 2009 and 2008, were $452,670 and $443,355. As of June 30, 2009 and 2008, zero was due to the Plan for employer contributions. 10. LEASES Goodwill leases a number of its stores, warehouses, donation centers, and office spaces under various operating-type lease arrangements with terms generally ranging from one to ten years, plus renewal options. In some cases Goodwill is responsible for payment of utilities, real estate taxes, common area maintenance costs, and must also meet certain minimum insurance requirements. Total rents charged to expense for these facilities during the years ended June 30, 2009 and 2008, were $4,038,996 and $4,039,062, respectively. Goodwill leases three trucks under an operating lease agreement with a term of six years. The terms of the lease include a fixed monthly payment and a mileage rate, both adjusted annually based on the most current Consumer Price Index. Total charged to expense during 2009 and 2008 for these vehicles was $23,433 and $35,968, respectively. Future minimum payments under the leases are as follows for the years ended June 30: Total 2010 $ 3,663, $ 2,869, $ 1,686, $ 1,285, and thereafter $ 3,272,814 (continued) 22

28 NOTES TO COMBINED FINANCIAL STATEMENTS 11. CONTINGENT LIABILITIES Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies, principally the federal government. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of expenditures which may be disallowed by the grantor cannot be determined at this time although the Organizations expect such amounts, if any, to be immaterial. Goodwill is involved in various legal proceedings, claims, and administrative actions arising in the normal course of business. However, in the opinion of management, Goodwill s liability, if any, under any pending litigation or administrative proceeding will not materially affect its financial condition. 12. SUBSEQUENT EVENTS Management evaluated subsequent events through January 20, 2010, the date the financial statements were available to be issued. Events or transactions occurring after June 30, 2009, but prior to January 20, 2010, that provided additional evidence about conditions that existed at June 30, 2009, have been recognized in the financial statements for the year ended June 30, Events or transactions that provided evidence about conditions that did not exist at June 30, 2009 but arose before the financial statements were available to be issued have not been recognized in the financial statements for the year ended June 30, RISKS AND UNCERTAINTIES Goodwill invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect investment balances and the amounts reported in the statements of financial position. 23

29 SUPPLEMENTARY INFORMATION 24

30 COMBINING STATEMENTS OF FINANCIAL POSITION JUNE 30, 2009 ASSETS Goodwill Keystone Goodwill Area Services, Inc. Elimination Total Current assets Cash and cash equivalents $ 9,699,053 $ 17,324 $ - $ 9,716,377 Accounts receivable 1,496,733 1,358,579-2,855,312 Less allowance for doubtful accounts (15,900) - - (15,900) Promises to give - net 6, ,561 11,186,447 1,375,903-12,562,350 Inventory Donated goods 906, ,430 Purchased goods 164, ,931 Total inventory 1,071, ,071,361 Prepaid expenses and other assets 489,986 (1,284) - 488,702 Due from affiliates 6,154,521 6,064,286 (11,952,015) 266,792 Total current assets 18,902,315 7,438,905 (11,952,015) 14,389,205 Investments 1,244,601 1,387,341-2,631,942 Deferred financing fees 43, ,857 Land, buildings, and equipment Land 2,279, ,279,096 Buildings and improvements 14,892, ,892,447 Furniture and equipment 4,986,374 60,067-5,046,441 Transportation equipment 2,013, ,834-2,264,567 24,171, ,901-24,482,551 Less accumulated depreciation (11,133,282) (199,905) - (11,333,187) Total land, buildings, and equipment 13,038, ,996-13,149,364 Total assets $ 33,229,141 $ 8,937,242 $ (11,952,015) $ 30,214,368 25

31 LIABILITIES AND NET ASSETS Goodwill Keystone Goodwill Area Services, Inc. Elimination Total Current liabilities Accounts payable $ 356,262 $ 21,408 $ - $ 377,670 Accrued expenses 143,817 50, ,156 Accrued payroll and payroll taxes 1,403,448 59,843-1,463,291 Deferred revenue 66, ,812 Current maturities of long-term debt 115, ,803 Due to affiliates 11,952,015 - (11,952,015) - Total current liabilities 14,038, ,590 (11,952,015) 2,217,732 Long-term debt 3,444, ,444,899 Total liabilities 17,483, ,590 (11,952,015) 5,662,631 Net assets Unrestricted 15,659,664 8,805,652-24,465,316 Temporarily restricted 86, ,421 Total net assets 15,746,085 8,805,652-24,551,737 Total liabilities and net assets $ 33,229,141 $ 8,937,242 $ (11,952,015) $ 30,214,368 26

32 COMBINING STATEMENTS OF FINANCIAL POSITION JUNE 30, 2008 ASSETS Goodwill Goodwill Goodwill Industries Goodwill Industries of Industries of Central Industries of Mid-Eastern Keystone Pennsylvania, Goodwill Southeastern Pennsylvania, Area Inc. Services, Inc. Pennsylvania Inc. Elimination Total Current assets Cash and cash equivalents $ 8,524,302 $ 234,359 $ 89,644 $ 115,898 $ 522,411 $ - $ 9,486,614 Accounts receivable - 934, , , ,101 (54,462) 2,781,873 Less allowance for doubtful accounts - (16,000) (16,000) Promises to give - net 23, (19,312) 4,362 Inventory Donated goods - 272, , , ,783 Purchased goods 6,700 36,353-10,066 69, ,737 Total inventory 6, , , , ,520 Prepaid expenses and other assets 322,393 87,551 (1,028) 57,776 21, ,864 Due from affiliates - - 4,769,899 2,491,339 1,358,751 (8,361,334) 258,655 Total current assets 8,877,069 1,548,935 5,578,288 3,410,425 3,021,279 (8,435,108) 14,000,888 Investments Investments - - 1,497,407 1,174, ,925-2,912,094 Investment in Keystone and Goodwill Industries of Central PA net assets , , ,000 (400,000) ,697,407 1,274, ,925 (400,000) 2,912,094 Land, buildings, and equipment Land - 306, ,375 31,000-1,179,096 Buildings and improvements 6,600 6,804,728-3,656,262 1,418,720-11,886,310 Furniture and equipment 532,149 1,620,330 59, ,505 1,791,618-4,747,644 Transportation equipment 50, , , , ,090-2,169, ,773 9,347, ,876 5,927,267 3,808,428-19,982,075 Less accumulated depreciation (436,681) (4,457,415) (159,952) (2,535,576) (2,914,622) - (10,504,246) Total land, buildings, and equipment 152,092 4,890, ,924 3,391, ,806-9,477,829 Total assets $ 9,029,161 $ 6,439,251 $ 7,425,619 $ 8,076,878 $ 4,255,010 $ (8,835,108) $ 26,390,811 27

33 LIABILITIES AND NET ASSETS Goodwill Goodwill Goodwill Industries Goodwill Industries of Industries of Central Industries of Mid-Eastern Keystone Pennsylvania, Goodwill Southeastern Pennsylvania, Area Inc. Services, Inc. Pennsylvania Inc. Elimination Total Current liabilities Accounts payable $ 63,019 $ 143,043 $ 19,170 $ 102,899 $ 125,660 $ - $ 453,791 Accrued expenses 197,357 25,622 34,735 2, ,814 Accrued payroll and payroll taxes 245, ,850 52, , ,276-1,190,765 Deferred revenue - 164, ,845 Other current liabilities 54, ,634-10,345 17,651 (73,774) 345,318 Current maturities of long-term debt - 21,551-75, ,716 Due to affiliates 7,902, , (8,361,334) - Total current liabilities 8,463,238 1,463, , , ,208 (8,435,108) 2,512,249 Long-term debt - 503, , ,314,241 Total liabilities 8,463,238 1,966, ,882 1,237, ,208 (8,435,108) 3,826,490 Unrestricted Undesignated 565,923 4,379,026 7,318,737 6,839,256 3,767,802 (400,000) 22,470, ,923 4,379,026 7,318,737 6,839,256 3,767,802 (400,000) 22,470,744 Temporarily restricted - 93, ,577 Total net assets 565,923 4,472,603 7,318,737 6,839,256 3,767,802 (400,000) 22,564,321 Total liabilities and net assets $ 9,029,161 $ 6,439,251 $ 7,425,619 $ 8,076,878 $ 4,255,010 $ (8,835,108) $ 26,390,811 28

34 COMBINING STATEMENTS OF ACTIVITIES YEAR ENDED JUNE 30, 2009 Goodwill Keystone Area Temporarily Unrestricted Restricted Public support, revenues, gains, and other support Contributions $ 179,546 $ - Public support Contributions - donated goods 9,792,702 - United Way 7,475 - Revenues, gains, and other support Donated Goods and retail services Donated goods and retail sales 16,239,550 - Salvage sales 1,765,487 - Workforce development services Fees for service - government 3,445,875 - Fees for service - non-government 37,550 - Grant revenue - government 2,545,257 - Grant revenue - non-government 125, ,154 Farm revenue 80,865 - Business services revenue Contract revenue 1,613,829 - Project revenue 404,080 - Income from perpetual trust 180,000 - Interest and dividends 136,162 - Gain (loss) on disposal of assets (58,757) - Net investments gains (losses) (241,889) - Management fee revenue 300,861 - Rental income 85,705 - Miscellaneous income 79,869 - Net assets released from restriction 108,310 (108,310) Total public support, revenues, gains, and other support 36,828,320 (7,156) Expenses Program services Donated goods and retail services 22,422,941 - Workforce development services 6,356,862 - Business services 2,486,888 - Supporting services Management and general 3,530,290 - Occupancy and indirect 1,316,261 - Fundraising 207,421 - Total expenses 36,320,663 - Increase (decrease) in net assets 507,657 (7,156) Net assets beginning of year 15,152,007 93,577 Net assets end of year $ 15,659,664 $ 86,421 29

35 Goodwill Services, Inc. Totals Temporarily Unrestricted Eliminations Unrestricted Restricted Total $ - $ - $ 179,546 $ - $ 179, ,792,702-9,792, ,475-7, ,239,550-16,239, ,765,487-1,765, ,445,875-3,445, ,550-37, ,545,257-2,545, , , , ,865-80,865 4,009,684-5,623,513-5,623, , , , ,000 43, , , (58,757) - (58,757) (226,201) - (468,090) - (468,090) - (240,861) 60,000-60, ,705-85, ,869-79, ,310 (108,310) - 3,827,305 (240,861) 40,414,764 (7,156) 40,407, ,422,941-22,422, ,356,862-6,356,862 2,099,529-4,586,417-4,586, ,861 (240,861) 3,530,290-3,530, ,316,261-1,316, , ,421 2,340,390 (240,861) 38,420,192-38,420,192 1,486,915-1,994,572 (7,156) 1,987,416 7,318,737-22,470,744 93,577 22,564,321 $ 8,805,652 $ - $ 24,465,316 $ 86,421 $ 24,551,737 30

36 COMBINING STATEMENTS OF ACTIVITIES YEAR ENDED JUNE 30, 2008 Goodwill Industries Goodwill Industries of Goodwill Keystone Area Central Pennsylvania, Inc. Services, Inc. Temporarily Unrestricted Unrestricted Restricted Unrestricted Public support and revenues Contributions $ 19,965 $ 152,805 $ - $ - Public support Contributions - donated goods 23,337 2,865, United Way 6,851 2, Revenues, gains, and other support Donated Goods and retail services Donated goods retail sales - 3,751, Salvage sales - 655, Workforce development services Fees for service - government - 1,731, Fees for service - non-government - 37, Grant revenue - government - 317, Grant revenue - non-government - 211,093 98,141 - Farm revenue Business services revenue Contract revenue - 840,866-3,571,611 Project revenue - 201, Income from perpetual trust - 189, Interest and dividends 283, ,647 Gain (loss) on disposal of assets - (342) Net investment gains (losses) (71,911) Management fee revenue 3,815, Rental income - 38, Miscellaneous income 11,648 27,260-9 Net assets released from restriction - 220,935 (220,935) - Total public support, revenues, gains, and other support 4,160,990 11,243,467 (122,794) 3,546,606 Expenses Program services Donated goods and retail services 234,395 6,471, Workforce development services 322,962 2,315, Business services - 1,376,853-1,996,231 Supporting services Management and general 3,006,355 1,123, ,697 Occupancy and indirect - 475, Fundraising 221,452 9, Total expenses 3,785,164 11,772,987-2,226,928 Increase (decrease) in net assets prior to transfer to affiliates 375,826 (529,520) (122,794) 1,319,678 Transfer to affiliates Increase (decrease) in net assets 375,826 (529,520) (122,794) 1,319,678 Net assets beginning of year 190,097 4,908, ,371 5,999,059 Net assets end of year $ 565,923 $ 4,379,026 $ 93,577 $ 7,318,737 31