The Salvation Army USA, Western Territory and Affiliates

Transcription

1 The Salvation Army USA, Western Territory and Affiliates Combined Financial Statements as of and for the Years Ended September 30, 2013 and 2012, and Independent Auditors Report

2 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES TABLE OF CONTENTS INDEPENDENT AUDITORS REPORT 1 2 COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012: Statements of Financial Position 3 6 Statements of Activities 7 10 Statements of Cash Flows 11 Page Statements of Functional Expenses Notes to Combined Financial Statements 14 40

3 INDEPENDENT AUDITORS REPORT To The Salvation Army USA, Western Territory and Affiliates: We have audited the accompanying combined financial statements of The Salvation Army USA, Western Territory and Affiliates (the Territory ), all of which are under common ownership and common management, which comprise the combined statements of financial position as of September 30, 2013 and 2012, and the related combined statements of activities, cash flows, and functional expenses for the years then ended, and the related notes to the combined financial statements. Management s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility 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. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Territory s preparation and fair presentation of the combined 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 Territory 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 combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Territory as of September 30, 2013 and 2012, and the results of its combined changes in net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. January 31,

5 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENTS OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2013, WITH COMPARATIVE TOTALS FOR 2012 (Dollars in thousands) ASSETS Unrestricted Land, General Board Buildings, and Total Temporarily Permanently Operating Designated Equipment Unrestricted Restricted Restricted Total Summarized CASH AND CASH EQUIVALENTS $ 29,460 $ - $ 5,485 $ 34,945 $ 10,088 $ 20 $ 45,053 $ 44,301 RESTRICTED CASH (Note 2) 22, ,297 2,372-24,669 22,470 ACCOUNTS RECEIVABLE Net (Note 5) 13,253 1,021-14, ,274 20,565 LEGACIES AND BEQUESTS RECEIVABLE , , , ,421 PLEDGES RECEIVABLE Net (Note 4) , ,511 9,180 DUE TO (FROM) FUNDS 59,278 63,766 (123,044) INVENTORY 5, , ,207 5,015 PREPAID EXPENSES AND DEFERRED CHARGES 7,888 2,948-10, ,836 12,970 MORTGAGES AND NOTES RECEIVABLE - 1,643-1, ,643 1,566 Total 137,546 69,378 (117,559) 89, , , , ,488 INVESTMENTS (Notes 5 and 15): Investments at fair value 72, , , , ,886 1,386,657 1,267,687 Assets held under split-interest agreements ,160 10, , ,043 Total investments 72, , , , ,726 1,505,657 1,378,730 LAND, BUILDINGS, AND EQUIPMENT (Note 8): Land at cost , , , ,456 Buildings net of accumulated depreciation of $432,653 and $397,629 in 2013 and 2012, respectively - - 1,135,100 1,135, ,135,100 1,118,315 Construction in progress - - 6,839 6, ,839 17,373 Equipment net of accumulated depreciation of $79,674 and $95,526 in 2013 and 2012, respectively ,923 34, ,923 42,352 Assets held for sale (Note 6) ,017 13,234 2,086-15,320 18,924 Total land, buildings, and equipment 217-1,435,607 1,435,824 2,086-1,437,910 1,443,420 TOTAL $ 210,582 $ 689,277 $ 1,318,048 $ 2,217,907 $ 598,781 $ 627,755 $ 3,444,443 $ 3,179,638 (Continued) - 3 -

6 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENTS OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2013, WITH COMPARATIVE TOTALS FOR 2012 (Dollars in thousands) LIABILITIES AND NET ASSETS Unrestricted Land, General Board Buildings, and Total Temporarily Permanently Operating Designated Equipment Unrestricted Restricted Restricted Total Summarized LIABILITIES: Accounts payable and accrued expenses (Notes 2, 5, and 8) $ 36,890 $ 44,421 $ - $ 81,311 $ - $ - $ 81,311 $ 78,966 Liability for split-interest agreements ,322 4,623 95,945 92,577 Mortgages and notes payable (Note 8) - 114, , , , ,646 Estimated liability for self-insured claims (Note 15) 47,698 7,402-55, ,100 60,379 Estimated liability for pension plan, retirement, and postretirement benefits (Note 7) - 516, , , ,606 Other liabilities 27,500 1, ,320 2,372-31,692 43,062 Total liabilities 112, , ,225 1,020,767 93,694 4,623 1,119,084 1,180,236 NET ASSETS (Notes 9 and 10): Unrestricted 98,494 4,823 1,093,823 1,197, ,197,140 1,058,921 Temporarily restricted , , ,841 Permanently restricted , , ,640 Total net assets 98,494 4,823 1,093,823 1,197, , ,132 2,325,359 1,999,402 TOTAL $ 210,582 $ 689,277 $ 1,318,048 $ 2,217,907 $ 598,781 $ 627,755 $ 3,444,443 $ 3,179,638 See notes to combined financial statements. (Concluded) - 4 -

7 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2012 (Dollars in thousands) ASSETS Unrestricted Land, General Board Buildings, and Total Temporarily Permanently 2012 Operating Designated Equipment Unrestricted Restricted Restricted Total CASH AND CASH EQUIVALENTS $ 30,753 $ - $ 3,060 $ 33,813 $ 10,457 $ 31 $ 44,301 RESTRICTED CASH (Note 2) 20, ,250 2,220-22,470 ACCOUNTS RECEIVABLE Net (Note 5) 10,976 9, , ,565 LEGACIES AND BEQUESTS RECEIVABLE ,936 99, ,421 PLEDGES RECEIVABLE Net (Note 4) , ,180 DUE TO (FROM) FUNDS 58,740 63,714 (122,454) INVENTORY 5, , ,015 PREPAID EXPENSES AND DEFERRED CHARGES 9,891 3,019-12, ,970 MORTGAGES AND NOTES RECEIVABLE - 1,566-1, ,566 Total 135,828 77,631 (119,137) 94, ,640 99, ,488 INVESTMENTS (Notes 5 and 15): Investments at fair value 64, , , , ,479 1,267,687 Assets held under split-interest agreements ,360 9, ,043 Total investments 64, , , , ,162 1,378,730 LAND, BUILDINGS, AND EQUIPMENT (Note 8): Land at cost , , ,456 Buildings net of accumulated depreciation of $397, ,118,315 1,118, ,118,315 Construction in progress ,373 17, ,373 Equipment net of accumulated depreciation of $95, ,352 42, ,352 Assets held for sale (Note 6) 1,028-15,810 16,838 2,086-18,924 Total land, buildings, and equipment 1,028-1,440,306 1,441,334 2,086-1,443,420 TOTAL $ 201,118 $ 621,662 $ 1,321,169 $ 2,143,949 $ 590,001 $ 445,688 $ 3,179,638 (Continued) - 5 -

8 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2012 (Dollars in thousands) LIABILITIES AND NET ASSETS (DEFICIT) Unrestricted Land, General Board Buildings, and Total Temporarily Permanently 2012 Operating Designated Equipment Unrestricted Restricted Restricted Total LIABILITIES: Accounts payable and accrued expenses (Notes 2, 5, and 8) $ 33,506 $ 45,351 $ 109 $ 78,966 $ - $ - $ 78,966 Liability for split-interest agreements ,529 4,048 92,577 Mortgages and notes payable (Note 8) - 117, , , ,646 Estimated liability for self-insured claims (Note 15) 48,215 12,164-60, ,379 Estimated liability for pension plan, retirement, and postretirement benefits (Note 7) - 561, , ,606 Other liabilities 30,119 9, ,431 2,631-43,062 Total liabilities 111, , ,875 1,085,028 91,160 4,048 1,180,236 NET ASSETS (DEFICIT) (Notes 9 and 10): Unrestricted 89,278 (124,651) 1,094,294 1,058, ,058,921 Temporarily restricted , ,841 Permanently restricted , ,640 Total net assets (deficit) 89,278 (124,651) 1,094,294 1,058, , ,640 1,999,402 TOTAL $ 201,118 $ 621,662 $ 1,321,169 $ 2,143,949 $ 590,001 $ 445,688 $ 3,179,638 See notes to combined financial statements. (Concluded) - 6 -

9 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENTS OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2013, WITH COMPARATIVE TOTALS FOR 2012 (Dollars in thousands) Unrestricted Land, General Board Buildings, and Total Temporarily Permanently Operating Designated Equipment Unrestricted Restricted Restricted Total Summarized SUPPORT AND REVENUE: Public support: Received directly: Contributions $ 173,086 $ 1,360 $ 140 $ 174,586 $ 8,152 $ 72 $ 182,810 $ 179,772 Donations-in-kind and contributed services 130, , , ,881 Legacies and bequests income - 102, ,839 (22,386) 180, , ,508 Contributions from split-interest agreements , ,101 3,466 Change in value of split-interest agreements , ,167 7,895 Total received directly 303, , ,149 (3,549) 181, , ,522 Received indirectly: Allocated by federated fundraising organizations 2, ,022 1,173-3,195 3,765 Contributed by unassociated and nonfederated organizations Total received indirectly 2, ,042 1,173-3,215 3,804 Total public support 305, , ,191 (2,376) 181, , ,326 Fees and grants from government agencies 74,850-2,970 77, ,820 78,103 Other revenue: Program service fees 58, , ,754 53,876 Sales to the public 150, , , ,595 Investment revenue (Note 5): Dividends and interest ,904-13,637 20,690-34,327 29,245 Realized gain on sale of investments net 8,202 65,260-73,462 11,848-85,310 19,925 Unrealized (loss) gain on investments net (2,170) 18,384-16,214 27,789-44, ,377 Gain on sale of land, buildings, and equipment 1,354-5,202 6, ,556 4,533 Other revenue 11, , ,681 11,404 Total other revenue 228,650 96,548 5, ,400 60, , ,955 Total support and revenue 609, ,747 8, ,411 58, ,492 1,057, ,384 NET ASSETS RECLASSIFIED DUE TO FULFILLMENT OF DONOR RESTRICTIONS (Note 11): Satisfaction of purpose-restriction 27,108-23,249 50,357 (50,357) Satisfaction of time-restriction 1, ,456 (1,456) INTERFUND TRANSFERS 188,105 (156,073) (32,032) Total 826,021 44,674 (471) 870,224 6, ,492 1,057, ,384 (Continued) - 7 -

10 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENTS OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2013, WITH COMPARATIVE TOTALS FOR 2012 (Dollars in thousands) Unrestricted Land, General Board Buildings, and Total Temporarily Permanently Operating Designated Equipment Unrestricted Restricted Restricted Total Summarized EXPENSES: Program services: Corps community center $ 176,803 $ - $ - $ 176,803 $ - $ - $ 176,803 $ 166,951 Rehabilitation 179, , , ,092 Residential and institutional 110, , , ,182 Other social services 195, , , ,892 Total program services 662, , , ,117 Supporting services: Management and general 118, , , ,106 Fundraising 35, , ,806 33,479 Total supporting services 154, , , ,585 Total expenses 817, , , ,702 EXCESS (DEFICIENCY) OF SUPPORT AND REVENUE OVER EXPENSES 8,904 44,674 (471) 53,107 6, , , ,682 CHANGE IN VENTURE (Note 5) PENSION-RELATED CHANGES OTHER THAN NET PERIODIC PENSION COST (Note 7) - 84,800-84, ,800 (62,241) CHANGE IN NET ASSETS 9, ,474 (471) 138,219 6, , ,957 80,602 NET ASSETS (DEFICIT) Beginning of year 89,278 (124,651) 1,094,294 1,058, , ,640 1,999,402 1,918,800 NET ASSETS End of year $ 98,494 $ 4,823 $ 1,093,823 $ 1,197,140 $ 505,087 $ 623,132 $ 2,325,359 $ 1,999,402 See notes to combined financial statements. (Concluded) - 8 -

11 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2012 (Dollars in thousands) Unrestricted Land, General Board Buildings, and Total Temporarily Permanently 2012 Operating Designated Equipment Unrestricted Restricted Restricted Total SUPPORT AND REVENUE: Public support: Received directly: Contributions $ 167,085 $ 867 $ 160 $ 168,112 $ 11,001 $ 659 $ 179,772 Donations-in-kind and contributed services 128, , ,881 Legacies and bequests income - 88,234-88,234 13,954 11, ,508 Contributions from split-interest agreements , ,466 Change in value of split-interest agreements , ,895 Total received directly 295,966 89, ,227 35,733 12, ,522 Received indirectly: Allocated by federated fundraising organizations 2, ,241 1,524-3,765 Contributed by unassociated and nonfederated organizations Total received indirectly 2, ,280 1,524-3,804 Total public support 298,246 89, ,507 37,257 12, ,326 Fees and grants from government agencies 77, , ,103 Other revenue: Program service fees 53, , ,876 Sales to the public 144, , ,595 Investment revenue (Note 5): Dividends and interest 1,365 11,614-12,979 16,266-29,245 Realized gain on sale of investments net 80 12,218-12,298 7,627-19,925 Unrealized gain on investments net - 94,870-94,870 58, ,377 Gain (loss) on sale of land, buildings, and equipment 284-4,250 4,534 (1) - 4,533 Other revenue 11, , ,404 Total other revenue 211, ,702 4, ,406 82, ,955 Total support and revenue 587, ,803 4, , ,806 12, ,384 NET ASSETS RECLASSIFIED DUE TO FULFILLMENT OF DONOR RESTRICTIONS (Note 11): Satisfaction of purpose-restriction 49,869-35,677 85,546 (85,546) - - Satisfaction of time-restriction 1, ,986 (1,986) - - INTERFUND TRANSFERS 168,772 (165,931) (2,841) Total 807,863 41,872 37, ,548 32,274 12, ,384 (Continued) - 9 -

12 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2012 (Dollars in thousands) Unrestricted Land, General Board Buildings, and Total Temporarily Permanently 2012 Operating Designated Equipment Unrestricted Restricted Restricted Total EXPENSES: Program services: Corps community center $ 166,951 $ - $ - $ 166,951 $ - $ - $ 166,951 Rehabilitation 169, , ,092 Residential and institutional 109, , ,182 Other social services 198, , ,892 Total program services 644, , ,117 Supporting services: Management and general 112, , ,106 Fundraising 33, , ,479 Total supporting services 145, , ,585 Total expenses 789, , ,702 EXCESS OF SUPPORT AND REVENUE OVER EXPENSES 18,161 41,872 37,813 97,846 32,274 12, ,682 CHANGE IN VENTURE (Note 5) PENSION-RELATED CHANGES OTHER THAN NET PERIODIC PENSION COST (Note 7) - (62,241) - (62,241) - - (62,241) CHANGE IN NET ASSETS (DEFICIT) 18,322 (20,369) 37,813 35,766 32,274 12,562 80,602 NET ASSETS (DEFICIT) Beginning of year 70,956 (104,282) 1,056,481 1,023, , ,078 1,918,800 NET ASSETS (DEFICIT) End of year $ 89,278 $ (124,651) $ 1,094,294 $ 1,058,921 $ 498,841 $ 441,640 $ 1,999,402 See notes to combined financial statements. (Concluded)

13 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND 2012 (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 325,957 $ 80,602 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 43,969 41,249 Unrealized gain on investments net (44,003) (153,377) Realized gain on sale of investments net (85,310) (19,925) Change in value of split-interest agreements (6,167) (7,895) Pension-related changes other than net periodic pension cost (84,800) 62,241 Gain on sale of land, buildings, and equipment (6,556) (4,533) Contribution of land, buildings, and equipment (23) (935) Contributions restricted for long-term investments (4,970) (3,173) Contributions restricted for land, buildings, and equipment (5,612) (4,755) Changes in operating assets and liabilities: Accounts receivable net (2,736) 1,662 Legacies and bequests receivable (151,262) (18,758) Pledges receivable net 2,669 (433) Inventory (192) (824) Prepaid expenses and deferred charges 2,134 2,009 Mortgages and notes receivable (77) (2) Accounts payable and accrued expenses 5,668 4,469 Estimated liability for self-insured claims (5,279) (272) Estimated liability for pension plan, retirement, and postretirement benefits 39,704 35,085 Other liabilities (2,955) (7,201) Net cash provided by operating activities 20,159 5,234 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of unrestricted investments (907,885) (357,169) Proceeds from sale of investments 920, ,235 Purchases of land, buildings, and equipment (55,432) (90,132) Proceeds from sale of land, buildings, and equipment 16,567 22,917 Increases in restricted cash (2,199) (1,833) Decreases in restricted cash - 2,036 Net cash used in investing activities (28,531) (23,946) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of mortgages and notes payable Repayment of mortgages and notes payable (5,164) (4,796) Overdraft line of credit borrowings net 3,662 1,045 Proceeds restricted for long-term investments 4,970 3,173 Proceeds restricted for land, buildings, and equipment 5,612 4,755 Net cash provided by financing activities 9,124 4,231 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 752 (14,481) CASH AND CASH EQUIVALENTS Beginning of year 44,301 58,782 CASH AND CASH EQUIVALENTS End of year $ 45,053 $ 44,301 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 8,767 $ 8,811 Donations-in-kind and contributed services $ 130,724 $ 128,881 SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES: Accrued land, buildings, and equipment purchases $ 1,397 $ 8,382 Purchase of investments not yet paid $ 1,218 $ 9,633 Sale of investments not yet received $ 205 $ 9,232 See notes to combined financial statements

14 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENTS OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED SEPTEMBER 30, 2013, WITH COMPARATIVE TOTALS FOR 2012 (Dollars in thousands) Program Services Supporting Services Corps Residential Other Total Total Community and Social Program Management Supporting Total Total Center Rehabilitation Institutional Services Services and General Fundraising Services Expenses Summarized EXPENSES: Salaries and allowances $ 57,054 $ 59,835 $ 39,190 $ 37,429 $ 193,508 $ 41,188 $ 10,527 $ 51,715 $ 245,223 $ 238,307 Employee and officer benefits 21,032 22,057 14,447 13,797 71,333 15,183 3,880 19,063 90,396 76,771 Payroll taxes 4,765 9,786 5,612 4,394 24,557 3,728 1,200 4,928 29,485 29,402 Professional fees 6,195 1,456 2,286 1,132 11,069 18,050 5,274 23,324 34,393 29,487 Supplies 7,890 13,819 5,793 7,698 35,200 2, ,856 38,056 37,817 Communications 1,593 1, ,591 1, ,278 5,869 6,633 Postage and shipping , ,164 3,933 5,072 5,078 Occupancy 33,168 30,991 22,461 12,262 98,882 10, , , ,799 Furnishings and equipment 3,468 2,770 1,081 1,390 8,709 2, ,416 11,125 8,221 Printing and publications 1,162 5, ,999 1,695 9,466 11,161 18,160 18,196 Travel and transportation 6,947 11, ,723 22,183 2, ,730 24,913 23,466 Conferences, meetings, and major trips 7, ,979 2, ,478 11,457 13,135 Direct assistance 1,049 3,661 5, , , , ,167 Organization dues Awards and grants 1, , ,177 2,405 World service support (Note 14) ,432 7, ,432 12,822 Depreciation (Note 2) 18,531 8,495 8, ,986 7, ,983 43,969 41,249 Interest expense 2,603 2,432 2,902-7, ,767 8,812 Other expenses (Note 14) 2,018 4,669 1,340 1,772 9,799 6, ,268 17,067 14,513 TOTAL $ 176,803 $ 179,631 $ 110,734 $ 195,544 $ 662,712 $ 118,599 $ 35,806 $ 154,405 $ 817,117 $ 789,702 See notes to combined financial statements

15 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES COMBINED STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED SEPTEMBER 30, 2012 (Dollars in thousands) Program Services Supporting Services Corps Residential Other Total Total 2012 Community and Social Program Management Supporting Total Center Rehabilitation Institutional Services Services and General Fundraising Services Expenses EXPENSES: Salaries and allowances $ 54,421 $ 57,480 $ 39,099 $ 36,598 $ 187,598 $ 40,048 $ 10,661 $ 50,709 $ 238,307 Employee and officer benefits 17,532 18,517 12,596 11,790 60,435 12,901 3,435 16,336 76,771 Payroll taxes 4,703 9,809 5,630 4,427 24,569 3,589 1,244 4,833 29,402 Professional fees 5, ,063 1,332 11,141 14,914 3,432 18,346 29,487 Supplies 8,546 13,279 5,494 7,196 34,515 3, ,302 37,817 Communications 2,093 1, ,150 1, ,483 6,633 Postage and shipping , ,372 4,051 5,078 Occupancy 29,469 31,311 20,985 12,174 93,939 13, , ,799 Furnishings and equipment 2,401 1, ,215 5,966 2, ,255 8,221 Printing and publications 1,223 4, ,735 2,099 9,362 11,461 18,196 Travel and transportation 6,737 11, ,757 21,711 1, ,755 23,466 Conferences, meetings, and major trips 9, ,894 2, ,241 13,135 Direct assistance 1,560 3,785 5, , , ,167 Organization dues Awards and grants 1, , ,405 World service support (Note 14) ,821 12, ,822 Depreciation (Note 2) 17,360 7,916 8, ,383 6, ,866 41,249 Interest expense 2,378 2,527 2,842-7,747 1,065-1,065 8,812 Other expenses (Note 14) 1,714 3,910 1,475 1,417 8,516 5, ,997 14,513 TOTAL $ 166,951 $ 169,092 $ 109,182 $ 198,892 $ 644,117 $ 112,106 $ 33,479 $ 145,585 $ 789,702 See notes to combined financial statements

16 THE SALVATION ARMY USA, WESTERN TERRITORY AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2013 AND PURPOSE AND ORGANIZATION The Salvation Army, founded in 1865, is a not-for-profit international religious organization and charitable movement organized and operated on a quasi-military pattern and is a branch of the Christian Church. Its membership includes officers (clergy), soldiers and adherents (laity), members of varied activity groups, and volunteers who serve as advisors, associates, and committed participants in its service functions. The Salvation Army USA, Western Territory and Affiliates (the Territory or The Salvation Army ) is an organization exempt from federal income taxation under Section 501(a) as an entity described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, and is exempt from state income taxes under related state provisions. The accompanying combined financial statements include all programs and operations of the Territory, all of which are under common ownership and management. The Territory comprises the states of Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, New Mexico, Nevada, Oregon, Utah, Washington, and Wyoming; Guam; the Marshall Islands; and the States of Micronesia. The Territory is incorporated in the state of California with corporate headquarters located in Long Beach, California. All intercompany accounts and transactions have been eliminated. The Salvation Army has controlling interests in five limited liability partnerships (collectively, the Partnerships ) and one limited liability corporation (the Corporation ). The Partnerships operate housing facilities for low-to-moderate income elderly persons. The Corporation owns and operates a for-profit commercial facility. The Salvation Army has a captive insurance company, known as Crestmont Insurance (the Captive ), incorporated in the state of Hawaii. All self-insurance losses, which accrue after September 30, 2004, are processed through the Captive. The Salvation Army operates a variety of programs, including corps community centers that provide spiritual, educational, and recreational services; homeless and emergency shelters; senior citizens residences; children s day care centers; adult rehabilitation centers; substance abuse centers; emergency disaster services; assistance for the poor, disabled, and retired; jail and hospital visitation; and camping activities. The combined financial statements of the Territory include its affiliates: The Salvation Army Services, Inc. ( Services, Inc. ), is a nonreligious organization that is incorporated in the state of California. Services, Inc., receives funding from various government agencies, which is used primarily for the purchase and operation of transitional and family housing projects. Each of these eight projects contracts with the Territory to provide program services

17 Nonprofit public benefit corporations ( Affordable Housing ), known as Silvercrests, have been formed by the Territory to operate housing facilities for low-to-moderate income elderly persons. At September 30, 2013 and 2012, 33 such housing facilities were managed by the Territory. Affordable Housing is controlled by the Department of Housing and Urban Development (HUD). 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying combined financial statements have been prepared in accordance with the national accounting policies of The Salvation Army. These policies are consistent with accounting principles generally accepted in the United States of America (GAAP). In order to observe restrictions, which donors place on grants and other gifts, as well as designations made by the Territory board of directors (the Board of Directors ), all assets, liabilities, and activities are accounted for in the following net asset classifications: Unrestricted Net Assets Unrestricted net assets are not subject to donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes or locations by action of the Board of Directors. Temporarily Restricted Net Assets Temporarily restricted net assets are subject to donor-imposed stipulations that may be fulfilled by actions of The Salvation Army to meet the stipulations or become unrestricted at the date specified by the donor. Permanently Restricted Net Assets Permanently restricted net assets are subject to donor-imposed stipulations that they be retained and invested permanently by The Salvation Army. The donors require or permit The Salvation Army to use all or part of the investment return on these net assets for specified or unspecified purposes. Cash and Cash Equivalents For purposes of these combined financial statements, cash equivalents are defined as short-term, highly liquid investments that are both readily convertible to known amounts of cash and have original maturities of three months or less. Restricted Cash Restricted cash consists of reserves required under the terms of the regulatory agreements with HUD for the replacement of property and other project expenditures. Restricted cash is also being held for the repayment of the flexible term notes as well as certain social programs. Restricted cash balances are held in separate, largely uninsured demand deposit accounts and not comingled with other funds of the Territory. Restricted cash held at September 30, 2013 and 2012, consists of the following (in thousands): HUD reserves $ 19,941 $ 18,695 Programs and other 4,728 3,775 Total restricted cash $ 24,669 $ 22,470 Due to (from) Funds The Territory funds various costs of programs through transfers between general operating, board designated, and land, buildings, and equipment as funds are available for specific purposes and needs. These transfers are shown as due to (from) funds in the accompanying combined statements of financial position

18 Pledges Receivable Pledges receivable that are expected to be collected within one year are recorded at net realizable value. Pledges receivable that are expected to be collected in future years are recorded at their fair value based on the present value of their estimated future cash flows and are discounted at the rate applicable to the year in which the pledge was made. Conditional pledges receivable are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Inventory Inventory for goods purchased for resale are stated at the lower of weighted-average cost or market. Inventory for goods donated for resale are based on estimated fair value. Investments The Territory headquarters has the responsibility for investment activity for all programs within the Territory for unrestricted assets, including board-designated assets, temporarily restricted assets, and permanently restricted assets. The temporarily restricted assets, including the life income funds, and permanently restricted asset portfolios are maintained on a pooled mutual fund accounting basis with the total earnings, investment expenses, appreciation, and depreciation, whether realized or unrealized, being allocated to each participating account on a pro rata basis. Income earned on unrestricted board-designated assets is distributed to the constituent accounts on the basis of a stated percentage of the monthly account balances during the year. Amounts deposited may be withdrawn when required for use by the centers of operation. The excess of investment income earned over amounts distributed is reported as unrestricted board-designated revenue. The Board of Directors generally designates a portion of these excess funds, if any, for specified projects for use within the Territory. Charitable gift annuities are maintained in a separate portfolio and are invested in accordance with applicable laws for such monies. Investment income and net appreciation (depreciation) on investments of donor endowments, whether permanently or temporarily restricted, are reported as follows: As increases in permanently restricted net assets if the terms of the gift or relevant state law require that they be added back to the principal of the permanently restricted contributions As decreases in unrestricted net assets when there are losses that reduce the fair value of the assets of endowment funds below the required level, and as increases in unrestricted net assets when there are gains that restore the fair value of the assets of endowment funds to the required level As increases (decreases) in temporarily restricted net assets in all other cases Split-Interest Agreements The following instruments are recorded as income and net assets at the present value of their ultimate Territory interest: Trusts Held by a Third Party Donors have established and funded trusts, which are administered by organizations other than The Salvation Army. Under the terms of the trusts, The Salvation Army has the irrevocable right to receive the income earned on the trust assets either in perpetuity or for the life of the trust. The Salvation Army does not control the assets held by an outside trust. The Salvation Army recognizes its interest in the present value of the assets and the future income streams as contributions from split-interest agreements. The discount rates for both fiscal years 2013 and 2012 ranged from 0.02% to 14.73%

19 Charitable Remainder Trusts Donors have established and funded trusts under which specified distributions are to be made to a designated beneficiary or beneficiaries over the trust s term. Upon termination of the trust, The Salvation Army receives the assets remaining in the trust. Trusts are recorded as increases to net assets at the fair value of trust assets, less the present value of the estimated future payments to be made under the specific terms of the trust and are revalued at the end of each fiscal year. The discount rates for fiscal years 2013 and 2012 ranged from 1.2% to 9.0% and 1.6% to 9.0%, respectively. Charitable Gift Annuities Donors have contributed assets to The Salvation Army in exchange for a promise by The Salvation Army to pay a fixed amount for a specified period of time to the donor or to individuals or to organizations designated by the donor. Under the terms of such agreements, no trust exists as the assets received are held by, and the annuity liability is an obligation of, The Salvation Army. The liability is based upon the annuity 2000 mortality table. The discount rates ranged from 1% to 10.4% and from 1% to 12% for fiscal years 2013 and 2012, respectively. Pooled (Life) Income Funds The Salvation Army manages a life income fund. The fund is divided into units, and contributions from many donors are pooled and invested as a group. Donors are assigned a specific number of units based on the proportion of the fair value of their contributions to the total fair value of the pooled income fund on the date of the donor s entry into the pooled fund. The donor is paid the actual income earned on those units until his or her death. Upon the donor s death, the value of these assigned units reverts to The Salvation Army. The Salvation Army recognizes its interest in the assets received as contribution revenue at the fair value of the assets received net of a discount for future interest based on the life expectancy of the donor. The liability is based upon the annuity 2000 mortality table. Land, Buildings, and Equipment Land, buildings, improvements, and equipment are recorded at cost or, if donated, at fair value at the date of donation. Support and Revenue All items of support and revenue are stated on the accrual basis. Contributions subject to donor-imposed restrictions are recorded as temporarily restricted support and are reclassified as unrestricted when the donor-imposed restriction has been fulfilled or the stipulated time period has elapsed. Contributions with restrictions that are met during the fiscal year are recorded as unrestricted support. Support and revenue are reported as increases in unrestricted net assets, unless use of the related assets is limited by donor-imposed restrictions that are not fulfilled in the accounting period. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets, unless their use is restricted by explicit donor stipulations or by law. All expenses are reported as decreases in unrestricted net assets. Expirations of temporary restrictions on net assets, that is, the expiration of the donor-imposed stipulated purpose or the elapsing of the specified time period, are reported as reclassifications of net assets. Pledges receivable that are scheduled to be received after the end of the reporting period are shown as increases in temporarily restricted net assets and are reclassified to unrestricted net assets when the purpose or time restriction is met. Pledges receivable subject to donor-imposed stipulations that the corpus be maintained permanently are recognized as increases in permanently restricted net assets. Donations-in-Kind and Contributed Services Material gifts-in-kind items used in The Salvation Army corps and unit programs and services (vehicles, equipment, etc.) and donated goods distributed (clothing, furniture, foodstuffs, etc.) are recorded as income and expense at the time the items are placed into service or distributed

20 Goods donated for sale in The Salvation Army adult rehabilitation centers and thrift stores are recorded and processed as donations-in-kind on the basis of a percentage-of-sales revenue determined by appraisal studies. Contributed land, buildings, and equipment are recorded at fair value at the date of donation as unrestricted support and revenue, unless the use of such contributed assets is restricted by a donorimposed restriction. Contributed services are reported as contributions at their fair value if such services create or enhance nonfinancial assets, would have been purchased if not provided by contribution, require specialized skills, and are provided by individuals possessing such specialized skills. In addition, the appropriate value of donated services of individuals is recorded as an expense when such services qualify for cost reimbursement from third-party providers. Expenses All expenses are stated on the accrual basis and presented in the combined statements of activities and statements of functional expenses. Depreciation Depreciation is computed using the straight-line method over the estimated service lives of the related assets (40 to 50 years for buildings and improvements and 4 to 20 years for vehicles and equipment). Depreciation expense totaled $43,969,000 and $41,249,000 at September 30, 2013 and 2012, respectively. Depreciation is also provided on equipment used in cost reimbursement programs that provide for reimbursement of depreciation by a third-party providers. Provision is made for major future costs of property maintenance and replacement of vehicles and some equipment by transfer of operating net assets to board-designated unrestricted net assets. Use of Estimates The preparation of combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Actual results could differ from these estimates. 3. RECENT ACCOUNTING PRONOUNCEMENTS In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which further amends Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. ASU No requires the categorization by level for items that are only required to be disclosed at fair value and information about transfers between Level 1 and Level 2. In addition, the ASU provides guidance on measuring the fair value of financial instruments managed within a portfolio and the application of premiums and discounts on fair value measurements. The ASU requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The new guidance was effective for the Territory beginning October 1, The adoption of ASU No did not have a material impact on the Territory s combined financial statements. See Notes 5 and 12 for disclosures

21 In October 2012, the FASB issued ASU No , Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows a consensus of the FASB Emerging Issues Task Force. ASU No addresses how cash receipts arising from the sale of certain donated financial assets should be classified in the statement of cash flows of not-for-profit entities. Cash receipts from the sale of donated financial assets should be classified consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that were nearly immediately converted into cash. ASU No is effective prospectively for the Territory beginning October 1, The adoption of ASU is not expected to have a material impact on the combined financial statements. In February 2013, the FASB issued ASU No , Financial Instruments, which clarified the scope of ASU No ASU No clarifies that the requirement to disclose the level of fair value hierarchy within which the fair value instruments are classified does not apply to nonpublic entities for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. ASU No was effective upon issuance and did not have a material impact on the combined financial statements. See Note 12 for disclosure. 4. PLEDGES RECEIVABLE 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. Unconditional promises to give at September 30, 2013 and 2012, include the following (in thousands): Gross amounts due in: Less than one year $ 3,238 $ 5,588 One to five years 2,483 3,475 More than five years 1,966 1,903 Total gross pledges receivable 7,687 10,966 Less discount to present value (873) (1,052) Less allowance for doubtful pledges (303) (734) Pledges receivable net $ 6,511 $ 9,

22 5. INVESTMENTS The composition of the Territory s investments measured at fair value on a recurring basis at September 30, 2013 and 2012, and the fair value hierarchy of the valuation techniques utilized by management to determine such fair value are as follows (in thousands): 2013 Assets Level 1 Level 2 Level 3 Total Investments: Cash equivalents $ 11,505 $ - $ - $ 11,505 Debt securities: U.S. Treasury securities - 29,289-29,289 U.S. corporate bonds 26,681 16,019-42,700 U.S. government and agency securities - 30,270-30,270 Equity securities: U.S. equity securities 125, ,641 Foreign equity securities 106, ,684 Mutual funds: U.S. government fixed income funds 117, ,892 U.S. corporate fixed income funds 130, ,834 Foreign corporate fixed income funds 40, ,039 U.S. equity funds 272, ,923 Foreign equity funds 131, ,153 Global equity funds 62, ,278 Alternative investments: Multistrategy hedge funds , ,641 Real asset funds ,361 47,361 Global equity hedge funds ,027 39,027 Commingled funds foreign equity - 135, ,466 1,025, , ,029 1,503,703 Dividends and interest receivable ,954 Total investments $ 1,025,630 $ 211,044 $ 267,029 $ 1,505,

23 2012 Assets Level 1 Level 2 Level 3 Total Investments: Cash equivalents $ 14,383 $ - $ - $ 14,383 Debt securities: U.S. Treasury securities - 34,860-34,860 U.S. corporate bonds 25,829 14,124-39,953 U.S. government and agency securities - 41,312-41,312 Equity securities: U.S. equity securities 191, ,465 Foreign equity securities 113, ,359 Mutual funds: U.S. government fixed income funds 140, ,788 U.S. corporate fixed income funds 54, ,745 Foreign corporate fixed income funds 24, ,095 U.S. equity funds 199, ,037 Foreign equity funds 118, ,518 Global equity funds 51, ,450 Alternative investments: Multistrategy hedge funds , ,394 Real asset funds ,442 34,442 Global equity hedge funds ,309 46,309 Commingled funds foreign equity - 166, , , , ,145 1,376,905 Dividends and interest receivable ,825 Total investments $ 933,669 $ 257,091 $ 186,145 $ 1,378,730 The Territory s policy is to classify investments with quoted prices from active markets for identical assets as Level 1. During the year ended September 30, 2013, management identified $34,860,000 of U.S. Treasury securities in the Territory s portfolio as of September 30, 2012, that trade over the counter which had previously been classified as Level 1 and should have been classified as Level 2. Accordingly, the amount has been reclassified from Level 1 to Level 2 to correct the error. Territory management identified this discrepancy through the process of adopting ASU No At September 30, 2013 and 2012, investments held by the Captive totaled $72,819,000 and $64,262,000, respectively, and are included above. At September 30, 2013 and 2012, assets held under split-interest agreements totaled $119,000,000 and $111,043,000, respectively, and are included above. Investments measured and reported at fair value in the combined statements of financial position are categorized using level inputs, as defined by ASC 820, and are classified and disclosed in one of the following categories: Level 1 Quoted prices (unadjusted) in active markets for identical investments that the Territory can access at the measurement date. Level 2 Pricing inputs other than quoted prices included in Level 1 that are observable for the investment, either directly or indirectly. Level 3 Pricing inputs are developed from unobservable inputs and include situations where there is little or no market activity for the investment

24 In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. At September 30, 2013 and 2012, purchases of investments not yet paid for totaled $1,218,000 and $9,633,000, respectively, which are included in other liabilities in the accompanying combined statements of financial position. At September 30, 2013 and 2012, proceeds from the sale of investments not yet received totaled $205,000 and $9,232,000, respectively, which are included in accounts receivable net in the accompanying combined statements of financial position. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts in the accompanying combined statements of financial position. A description of valuation inputs and techniques that the Territory utilizes to measure the fair value of each major category of investments in accordance with ASC 820 is as follows: Debt Securities (U.S. Treasury Securities) U.S. Treasury securities include U.S. Treasury notes that are valued based on prices provided by third-party vendors that obtain feeds from a number of live data sources, including active market makers and interdealer brokers. To the extent that U.S. Treasury securities are actively quoted, they are categorized as Level 1. To the extent that these securities are not actively traded, but inputs are observable and timely, they are categorized as Level 2. Debt Securities (U.S. Corporate Bonds) Investment-grade bonds are valued using inputs and techniques that include third-party pricing vendors, dealer quotations, and recently executed transactions in securities of the issuer or comparable issuers. Adjustments to individual bonds can be applied to recognize trading differences compared to other bonds issued by the same issuer. Values for high-yield bonds are based primarily on pricing vendors and dealer quotations from relevant market makers. The dealer quotations received are supported by credit analysis of the issuer that takes into consideration credit-quality assessments; daily trading activity; and the activity of the underlying equities, listed bonds, and sector-specific trends. To the extent that these inputs are observable and timely, the values of corporate bonds are categorized as Level 2. To the extent that the values are actively quoted, they are categorized as Level 1. Debt Securities (U.S. Government and Agency Securities) U.S. government and agency securities are valued using inputs and techniques that include identification of similar issues and market activity. To the extent that these inputs are observable and timely, the values of U.S. government and agency securities are categorized as Level 2. Equity Securities (United States and Foreign) Equity securities that are actively traded on a securities exchange are valued based on quoted prices from the applicable exchange and are categorized as Level 1. Mutual Funds Mutual funds registered with the Securities and Exchange Commission as mutual funds under the Investment Company Act of 1940 are valued based on quoted market prices, which represent the net asset value (NAV) of shares, and are categorized as Level