Item 5.2 Attachment · Section 501(c)(3) charitable organizations generally receive greater tax...

November 23, 2009 Board of Directors National Society of Professional Engineers Alexandria, Virginia In planning and performing our audit of the consolidated financial statements of the National Society of Professional Engineers and Affiliates (hereinafter referred to collectively as NSPE) as of and for the year ended June 30, 2009, in accordance with auditing standards generally accepted in the United States, we considered the NSPE’s internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the NSPE’s internal control. Accordingly, we do not express an opinion on the effectiveness of the NSPE’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control that we consider to be material weaknesses, as defined above. However, in response to your request, in connection with our audit we also considered other matters involving certain internal controls and operations that are presented for your consideration. Our comments and recommendations are intended to improve the internal control or result in other operating efficiencies. We will be pleased to discuss these comments in further detail at your convenience, perform any additional study of these matters, or assist you in implementing the recommendations. Our comments are summarized as follows:

Item 5.2 Attachment

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CONSIDERATIONS IN EVALUATING THE ADVANTAGES AND DISADVANTAGES OF REORGANIZATION Current Structure and Income Tax Status The NSPE group of affiliated entities is currently structured as follows: National Society of Professional Engineers – a section 501(c)(6) organization National Engineers Week Foundation – a section 501(c)(3) organization NSPE Educational Foundation – a section 501(c)(3) organization All three entities are exempt from federal and state income taxes, based on qualifying under the sections of the Internal Revenue Code noted above. Included within the NSPE corporate entity is NICET. Although it is entitled to an overall exemption from income taxes, NSPE currently generates unrelated business taxable income, which is subject to income tax in the form of the unrelated business income tax (UBIT), resulting from its advertising activities and the debt‐financed rental income generated from its headquarters building. Comparison of Operating Restrictions and Taxation Private Inurement Section 501(c)(3) and section 501(c)(6) organizations have some very different operating restrictions and tax issues. Where they are alike is that each has a statutory prohibition against private inurement. The differences between the two categories are important for purposes of our analysis. State and Local Taxes Section 501(c)(3) charitable organizations generally receive greater tax benefits than those organizations that are exempt under section 501(c)(6). These benefits may include exemption from sales taxes and, in certain cases, exemption from real estate and personal property taxes. NSPE currently pays approximately $124,000 in real estate taxes and $12,000 in personal property taxes annually. The amount of sales tax paid is more difficult to determine, since it is recorded in the same general ledger account as the purchase to which it relates (e.g. office supplies). NSPE’s outside legal counsel has concluded that it is unlikely that an organization like NSPE, if converted to section 501(c)(3) status, would qualify for either the exemption for real estate taxes or the exemption from personal property taxes, based on how the applicable laws are written and interpreted. These property tax exemptions are normally available only to narrow categories of charitable organizations, not the entire population of section 501(c)(3) entities. Outside legal counsel has concluded that the exemption from sales taxes on purchases made by a new section 501(c)(3) NSPE affiliate would likely qualify for exemption.

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Unemployment Taxes As a section 501(c)(6) organization, NSPE currently pays approximately $4,000 annually in federal unemployment taxes. Section 501(c)(3) organizations are eligible for an exemption from federal unemployment taxes. Contribution Income Section 501(c)(3) organizations may also receive tax‐deductible charitable contributions and grants, a benefit not normally available with respect to section 501(c)(6) organizations. Political Activities In exchange for the benefits received, a section 501(c)(3) organization is subject to stricter operating restrictions than a section 501(c)(6) organization. The most important of these operating restrictions that is relevant to NSPE is the prohibition against involvement in political activities. While political intervention is subject to a tax if directly carried on by a section 501(c)(6) organization, it is completely prohibited under section 501(c)(3). As it relates to NSPE, the current political action committee (PAC) that is affiliated with NSPE does not result in any tax liability for NSPE, since NSPE does not itself spend any of its own funds for political purposes – it merely enables members to contribute to the PAC in connection with their dues payments. Even such a limited involvement and affiliation with a PAC would be prohibited for a section 501(c)(3) organization, resulting in both a tax liability and loss of income tax exemption. Lobbying Activities Differences between the two types of organization also exist in relation to lobbying activities. Currently, as a section 501(c)(6) organization, NSPE is subject to a requirement to calculate lobbying expenditures as a percentage of dues revenue and notify members of that percentage, which represents a nondeductible portion of the dues paid. Section 501(c)(3) are not subject to such a notification requirement. In its place, however, section 501(c)(3) must calculate as report to the IRS, as part of the annual Form 990 information return, how much was spent on lobbying. Section 501(c)(3) organizations may not engage in “substantial” amounts of lobbying. The term substantial can be quantified if the organization makes a certain election, resulting in the calculation of two specific limits on lobbying each year. Exceeding either limit would trigger a tax for the organization, if the election is made. Unrelated Business Income Tax Issues Another important difference arises from the application of the UBIT rules to section 501(c)(3) and 501(c)(6) organizations. It has been the position of the Internal Revenue Service for several years that income from certification programs is normally exempt from income taxes for a section 501(c)(6) organization, but subject to UBIT for a section 501(c)(3) organization. This different application of the UBIT rules stems from the difference in exempt purposes between the two types of organization. The exempt purpose of a section 501(c)(6) organization like NSPE is to promote the common business interests of its members and to promote the industry as a whole. A section 501(c)(3) organization’s purpose must be one that has a distinct public benefit. Certification programs like those of NICET/NSPE,

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while perhaps accomplishing some form of public benefit, primarily serve to further the business interests of certified members and to promote the industry as a whole. Therefore, income earned by NICET/NSPE from its certification program, while nontaxable for the section 501(c)(6) organization, would likely be taxable if transferred to a section 501(c)(3) organization. Income from any educational programs (seminars, publications, etc), including any education that could lead to certification, would likely remain nontaxable if transferred to a section 501(c)(3) organization. Finally, the existing taxable activities – advertising and debt‐financed rental operations – would remain subject to UBIT regardless of whether they are carried out through a section 501(c)(6) or a section 501(c)(3) organization. Options for Reorganizing You have asked for input from NSPE’s outside legal counsel and our firm regarding the potential advantages and disadvantages of reorganizing NSPE’s activities that are currently carried out through the section 501(c)(6) entity by moving some or all of these activities into a new section 501(c)(3) charitable organization. The most obvious activities that could be transferred into a new section 501(c)(3) organization, without any adverse affects, would be the building operations, including the rental activities, and the publication of the magazine, including its advertising. This would still, however, leave the vast majority of the remaining operations in the section 501(c)(6) organization (the building and publication functions account for only $1.1 million out of NSPE’s $11.5 million of annual revenue), and hardly seems worth pursuing for the limited benefits it would bring. For the UBIT reasons explained earlier, transferring the NICET certification program into a section 501(c)(3) organization would be counterproductive, as it would convert an activity that is currently nontaxable, into one that is subject to income tax. The final remaining material activity is the membership function itself, including the membership dues revenue. This activity could be transferred into a section 501(c)(3) organization, but only if it became completely disassociated with the PAC, meaning that members could not be solicited for a PAC contribution by the new section 501(c)(3) organization, nor could the new organization even collect and remit PAC contributions via the annual membership renewal process. The PAC would need to either be dissolved or affiliated solely with the remaining section 501(c)(6) entity (the NICET certification organization). Sales Tax Benefits and Issues Reorganizing certain activities into a new section 501(c)(3) would certainly bring some savings in the form of avoiding sales tax on purchases. Additionally, sales and similar taxes incurred in other states in connection with meetings might also be reduced or avoided altogether.

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Measuring the sales and other tax savings is difficult for two reasons. The first is that it is not known exactly how much sales tax is currently being paid. Management estimates range from $50,000 to $100,000 per year, but it is impossible to determine an exact figure. The second factor is that savings in this area depends on which and how many activities are transferred into a new section 501(c)(3) organization. Under no scenario would all sales taxes be eliminated entirely. In addition, sales tax exemption on purchases is generally only available with respect to purchases that will be used exclusively for tax‐exempt purposes. Purchases of items that will be used in an unrelated trade or business activity (e.g. NSPE’s building rental and advertising activities) are generally not eligible for exemption from sales tax. In fact, purchases of mixed‐use items (i.e. partially for tax‐exempt use and partially for unrelated purposes) are often not eligible for the sales tax exemption. Other (Non‐Tax‐Related) Considerations In addition to the tax‐related matters explained earlier, there are several additional factors that NSPE should consider in evaluating the potential for a reorganization. Potential for Contribution and Grant Income One of the more difficult potential benefits for us to assess is the likelihood that creating a new section 501(c)(3) charitable entity could increase gift‐giving by NSPE members or increase the level of corporate or foundation grants received by the new affiliate. Given the existing potential for such income being attracted by National Engineers Week Foundation and NSPE Educational Foundation, it seems doubtful that any added benefit would arise as a result of establishing another section 501(c)(3) organization. Operating Costs Creating and operating a new affiliate would obviously incur additional costs, both up‐front costs as well as recurring costs (an additional round of annual Form 990 filings, audits, separate insurance policies, bank accounts, etc). In addition, creating a new section 501(c)(3) entity would require an updated evaluation of NSPE’s functional cost allocation system, likely resulting in changes to the chart of accounts and methods of allocating costs by breaking out certain activities into another entity. Summary and Conclusions While this analysis has not evaluated all possible advantages and disadvantages of reorganizing, the factors explained in this letter lead us to believe that a reorganization would result in limited benefits in relation to the costs incurred and the added operating restrictions to monitor. If any reorganization is done, it would seem that the only approach that could possibly have benefits would be the scenario involving dissolving the PAC or disassociating the PAC from the membership function, which would be transferred to the new section 501(c)(3) organization.

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If NSPE would desire a separation of the building and its operations from the remainder of NSPE, as a method of reducing legal risks and exposure, segregating it into a separate corporation, without transferring any of the other activities of NSPE, would be rather simple and could be accomplished rather easily. Further benefits could be obtained by paying off the remaining debt on the building in connection with such a transfer. Paying off the debt would exclude any rental income from the unrelated business income tax, which has not been material so far, but could become so in the future if debt continues to be outstanding. If you would like us to consider additional factors in our analysis, or would like to discuss this issue with us, feel free to contact us at your convenience. We appreciate the opportunity to continue to be of service to NSPE. This letter is intended solely for the information and use of management and the board of directors and is not intended to be, and should not be, used by anyone other than these specified parties. Sincerely, Zack, P.C.

November 23, 2009 Rockville, Maryland

National Society of Professional Engineers and Affiliates Consolidated Financial Statements and Supplemental Information Year Ended June 30, 2009

Table of Contents Independent Auditor’s Report ....................................................................................................................... 1 Financial Statements Consolidated Statement of Financial Position .................................................................................................... 2-3 Consolidated Statement of Activities ..................................................................................................................... 4 Consolidated Statement of Changes in Net Assets ................................................................................................. 5 Consolidated Statement of Cash Flows .................................................................................................................. 6 Notes to Consolidated Financial Statements .................................................................................................... 7-19 Supplemental Information Independent Auditor’s Report on Supplemental Information .............................................................................. 20 Consolidating Statement of Financial Position ............................................................................................... 21-22 Consolidating Statement of Activities .................................................................................................................. 23

National Society of Professional Engineers and Affiliates

Consolidated Statement of Financial PositionJune 30, 2009

Assets

Current assets:Cash and cash equivalents 1,584,841$ Investments 5,928,760 Receivables 879,880 Advances and loans to state societies, net 23,259 Due from affiliates 84,724 Prepaid expenses 291,704

Total current assets 8,793,168

Fixed assets, net 6,047,821

Other assets:Financing costs (net of accumulated amortization of $47,670) 8,160

Long-term portion of loans to state societies 17,150

Total other assets 25,310

TOTAL ASSETS 14,866,299$

See accompanying notes to consolidated financial statements. 2


Consolidated Statement of Financial Position - continuedJune 30, 2009

Liabilities and Net Assets

Current liabilities:Accounts payable and accrued expenses 1,245,065$ Deferred membership dues and other fees 3,328,745 Other deferred revenue 611,736 Due to affiliates 62,098 Current portion of revolving notes payable 100,000

Total current liabilities 5,347,644

Deferred membership dues and other fees - Long-term 753,350 Long-term portion of revolving notes payable 1,500,000

Total liabilities 7,600,994

Net assets:Unrestricted:

General/undesignated funds 4,510,457 Board-designated funds 2,123,933

Total unrestricted net assets 6,634,390

Temporarily restricted 630,915

Total net assets 7,265,305

TOTAL LIABILITIES AND NET ASSETS 14,866,299$



Consolidated Statement of ActivitiesYear Ended June 30, 2009

TemporarilyUnrestricted Restricted Total

Revenue:Membership dues 3,535,140$ 0$ 3,535,140$ License and examination fees 4,169,014 0 4,169,014 Rental income 617,168 0 617,168 Investment return 32,959 2,425)( 30,534 Contributions and grants 1,466,238 191,928 1,658,166 Publications, advertising, and promotional items 643,468 0 643,468 Administrative and other fees 2,099,933 0 2,099,933 Net assets released from restrictions 223,115 223,115)( 0

Total revenue 12,787,035 33,612)( 12,753,423

Expenses:Program services:

NICET 3,949,699 0 3,949,699 Membership benefits and services 3,488,958 0 3,488,958 State and chapter relations 1,525,525 0 1,525,525 Interest groups 954,666 0 954,666 Governance 412,693 0 412,693 Competence, professionalism and advocacy 178,166 0 178,166 Engineers Week programs 1,472,281 0 1,472,281

Scholarships and grants 75,646 0 75,646 Total program service expenses 12,057,634 0 12,057,634

Supporting services and administration 934,023 0 934,023

Total expenses 12,991,657 0 12,991,657

Change in net assets 204,622)($ 33,612)($ 238,234)($



Consolidated Statement of Changes in Net AssetsYear Ended June 30, 2009

TemporarilyUnrestricted Restricted Total

Balance at June 30, 2008 6,839,012$ 664,527$ 7,503,539$

Change in net assets for the year ended June 30, 2009 204,622)( 33,612)( 238,234)(

Balance at June 30, 2009 6,634,390$ 630,915$ 7,265,305$



Consolidated Statement of Cash FlowsYear Ended June 30, 2009

Increase (decrease) cash and cash equivalents:Cash flows from operating activities

Changes in net assets 238,234)($

Adjustments to reconcile changes in net assets to net cashused in operating activities:

Depreciation and amortization 533,259 Net realized and unrealized losses on investments 171,940 Changes in assets and liabilities:

Receivables 587,338)( Advances and loans to state societies 47,738 Due from affiliates 23,104)( Prepaid expenses 43,096)( Accounts payable and accrued expenses 14,075)( Deferred membership dues and other fees 153,141 Other deferred revenue 145,150)( Due to affiliates 9,553

Net cash used in operating activities 135,366)(

Cash flows from investing activitiesProceeds from sales of investments 5,095,691 Purchase of investments 5,493,322)( Purchase of fixed assets 715,508)(

Net cash used in investing activities 1,113,139)(

Cash flows from financing activitiesProceeds from new revolving note payable 500,000 Payments for mortgage payable 216,028)( Payments for revolving notes payable 219,048)(

Net cash provided from financing activities 64,924

Changes in cash and cash equivalents 1,183,581)( Cash and cash equivalents - June 30, 2008 2,768,422

Cash and cash equivalents - June 30, 2009 1,584,841$


National Society of Professional Engineers and Affiliates Notes to Consolidated Financial Statements

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Note 1 Nature of Operations These consolidated financial statements include the accounts of the following organizations: ● National Society of Professional Engineers (NSPE) ● National Engineers Week Foundation (NEWF) ● National Society of Professional Engineers Educational Foundation (NSPE EF) The three organizations are collectively referred to in the consolidated financial statements and notes as NSPE and Affiliates. NSPE is organized and operated exclusively as a not-for-profit membership organization for the engineering profession. NSPE provides services to approximately 41,000 members, 53 state and territorial societies, and 567 local chapters. The mission of NSPE is to promote the ethical and competent practice of engineering, advocate licensure, and enhance the image and well-being of its members. Revenue is received primarily through annual dues from members, and license and examination fees. Founded in 1951 by NSPE, the National Engineers Week program is celebrated annually by thousands of engineers, engineering students, teachers, and leaders in government and business. In 1988, the Foundation consortium expanded its scope and now includes more than 100 engineering, scientific, and education societies, as well as major corporations dedicated to enhancing the public understanding of the engineering profession and promoting pre-college interest in engineering and technology. Revenue is received primarily through cash contributions from corporate sponsors. NEWF was incorporated on August 13, 2002. The National Engineers Week program was originally a program of NSPE EF from its inception in 1951 until NEWF’s incorporation. NEWF also supports programs such as Introduce a Girl to Engineering Day and the Future City Competition. Activities of these programs are set out in Board-designated operating funds. Third-party corporate contributions to these programs in excess of incurred expenses are accounted for as temporarily restricted net assets.

NSPE EF was established by NSPE in 1960 in accordance with the laws of the State of Delaware. The mission of the Foundation is to encourage and assist students in the pursuit of careers in the field of engineering. The Foundation’s primary activity in fulfillment of this mission is the awarding of scholarships to graduating high school seniors who are enrolling in engineering programs at accredited universities.


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Note 2 Summary of Significant Accounting Policies This summary of significant accounting policies of NSPE and Affiliates is presented to assist in understanding the consolidated financial statements. The consolidated financial statements and notes are representations of the management of NSPE and Affiliates, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States.

Principles of Consolidation The accompanying consolidated financial statements are presented on the accrual basis of accounting and all significant interorganization transactions and balances have been eliminated.

Cash and Cash Equivalents NSPE and Affiliates considers all demand deposits and federally insured certificates of deposit with original maturities of three months or less to be cash equivalents. Cash or money market accounts held by external investment managers are classified as investments as these funds are not readily available for operations. Investments Investments in debt and marketable equity securities, mutual funds, and money market accounts held for investing purposes are carried at fair value. Investments in certificates of deposit are carried at cost. Unrealized and realized gains and losses are recorded as a component of investment return in the consolidated statement of activities. Receivables Receivables represent amounts due under royalty agreements, interest on certificates of deposit, unconditional promises to give, dues collected by state societies on NSPE’s behalf, and amounts invoiced for services, sales and rentals. Management evaluates the collectability of receivables based on prior collection and circumstances associated with each receivable. In the estimation of management, no allowance for uncollectible receivables in necessary at June 30, 2009. Fixed Assets Fixed assets are carried at cost. NSPE and Affiliates capitalizes expenditures for fixed assets over $10,000. Substantially all fixed assets are depreciated on the straight-line method over the following useful lives: Building 45 years Building improvements Over the remaining life of the building Furniture and fixtures 5 to 10 years Equipment 3 to 5 years Maintenance, repairs and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred.


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Note 2 Summary of Significant Accounting Policies (Continued) Classification of Net Assets Net assets and revenue, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of NSPE and Affiliates and changes therein are classified and reported as follows: Unrestricted Net Assets – Net assets that are not subject to donor-imposed stipulations or where donor-imposed stipulations are met in the year of the contribution. Temporarily Restricted Net Assets – Net assets subject to donor-imposed stipulations that may or may not be met, either by actions of NSPE and Affiliates and/or the passage of time. When a restriction is satisfied or expires, temporarily restricted net assets are transferred to unrestricted net assets and reported on the statement of activities as net assets released from restrictions. Permanently Restricted Net Assets – Net assets subject to donor-imposed stipulations that they be maintained permanently by the organization, with part or all of the income earned on any related investments to be used for general or specific purposes. NSPE and Affiliates does not have any permanently restricted net assets at June 30, 2009.

Unrestricted net assets consist of the following five components:

General fund (undesignated funds) Board-designated operating funds: National Institute for Certification in Engineering Technologies (NICET) Board-designated interest group (practice division) funds: Professional Engineers in Construction (PEC) Professional Engineers in Higher Education (PEHE) Professional Engineers in Government (PEG) Professional Engineers in Industry (PEI) Professional Engineers in Private Practice (PEPP) Board-designated reserve funds: NSPE Reserve Fund NSPE Product Development Fund NICET Reserve Fund The balances of all Board-designated operating funds represent the cumulative net result of operations, including transfers for those funds.

The NSPE and NICET Reserve Funds represent monies appropriated by the Board of Directors to be set aside for contingencies and the future financial health of NSPE and NICET. The NSPE Reserve Fund monies are segregated from all other cash funds and maintained in separate savings or time deposit accounts. The NSPE Product Development Fund represents a special reserve fund, set aside and available for development costs for new products and services.


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Note 2 Summary of Significant Accounting Policies (Continued) Revenue Recognition It is NSPE and Affiliate’s policy to record and display donor-restricted gifts as temporarily restricted net assets, and to reclassify them as unrestricted net assets when a stipulated time restriction expires or when a purpose restriction is accomplished. Overhead Allocation Expenses, including administrative and other salaries and benefits, which are not directly charged to a specific project, are accumulated in an overhead pool. This overhead pool is allocated to projects based on the amount of direct salary and salary burden charged to projects.

Advertising The costs of advertising are expensed as incurred. Total advertising expenses were $193,305 for the year ended June 30, 2009.

Income Taxes NSPE is exempt from federal income tax under Section 501(c)(6) of the Internal Revenue Code. NSPE does, however, engage in unrelated business activities from which it derives revenue, which is subject to income tax. NEWF and NSPE EF are both exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code, except for unrelated business income. In June 2006, Financial Accounting Standards Board Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes – An Interpretation of SFAS No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an organization’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS Mo. 109). FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. FSP FIN 48-3 deferred the required adoption of FIN 48 for most nonpublic enterprises to annual periods beginning after December 15, 2008. Many not-for-profit organizations have not previously applied the provisions of SFAS No. 109 and, during the deferral period, the Financial Accounting Standards Board has issued additional guidance on how to apply the provisions of FIN 48 to these entities. NSPE and Affiliates, pursuant to the FSP, has elected to defer its application of FIN 48 until its required effective date of July 1, 2009. Management does not believe the adoption of FIN 48 will have a material effect on the financial condition or the results of operations of NSPE and Affiliates.


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Note 2 Summary of Significant Accounting Policies (Continued) Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures. Actual results could differ from those estimates. Subsequent Events In connection with the preparation of the consolidated financial statements, NSPE and Affiliates evaluated subsequent events after the statement of financial position date through November 23, 2009, which was the date the consolidated financial statements were available to be issued.

Note 3 Investments

The following is a summary of investments held at June 30, 2009: Certificates of deposit $ 4,501,000 Money market accounts 812,350 Fixed income securities 219,989 Mutual funds 212,659 Equity securities 182,762 Total $ 5,928,760 Investment income for the year ended June 30, 2009 is comprised of the following: Interest and dividends $ 202,474 Net realized and unrealized losses on investments (171,940) Total $ 30,534

Note 4 Fair Value Measurements

On July 1, 2008, NSPE and Affiliates adopted SFAS No. 157, Fair Value Measurements, for valuing its investments measured at fair value on a recurring basis. As defined in SFAS No. 157, fair value is based on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (June 30). SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and, therefore, a fair value measurement should be based on assumptions that market participants would use in pricing the asset.


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Note 4 Fair Value Measurements (Continued) In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below: Level 1 – Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or model-driven valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data. Level 3 – Unobservable inputs, which are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. Fair values of all investments in debt and marketable equity securities, mutual funds, and money market accounts held for investing purposes were determined using Level 1 inputs. No Level or 2 or Level 3 inputs were utilized in any fair value measurements reflected in the consolidated financial statements of NSPE and Affiliates.

Note 5 Receivables Receivables consist of the following at June 30, 2009: Royalty income $ 625,000 State and national dues 83,864 Reimbursement for services 50,031 Sales and rental revenue 48,640 Contributions receivable 40,000 Accrued interest 32,345 Total $ 879,880


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Note 6 Advances and Loans to State Societies

Advances and loans to state societies consist of the following at June 30, 2009: Advances to state societies $ 97,527 Reserve for potentially uncollectible advances ( 97,268) Current portion of loans to state societies 23,000 Total $ 23,259 In 2006 and 2007, NSPE made cash advances to several of its state societies to offset cash flow issues associated with delays in dues billing that resulted from the conversion to a new Association Management Software package. Most of these advances are not formalized by a signed note receivable. NSPE is working with each state to create repayment plans suited to the cash flow of the individual state, and it is expected that most of these advances will eventually be repaid. Due to uncertainties concerning the extent and timing of collection, however, NSPE has setup a reserve against substantially all outstanding advance balances. In 2005, NSPE loaned $115,000 to one of its state societies. The loan calls for ten semi-annual principal payments beginning January 31, 2006. The loan bears interest at prime. Anticipated principal collections from such state society are as follows: 2010 $ 23,000 2011 17,150 Total 40,150 Current portion ( 23,000) Long-term portion $ 17,150

Note 7 Fixed Assets

Fixed assets consist of the following at June 30, 2009: Land $ 1,548,075 Building and building improvements 7,108,371 Furniture and fixtures 349,118 Software 1,165,415 Equipment 733,812 10,904,791 Accumulated depreciation ( 4,856,970) Total $ 6,047,821 Depreciation expense for the year ended June 30, 2009 was $527,676.


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Note 8 Deferred Membership Dues and Other Fees

Membership dues and renewal fees collected in advance are accounted for as deferred revenue, and are recognized ratably over the period to which they pertain.

Current deferred membership dues and other fees are as follows at June 30, 2009: National dues $ 1,901,213 NICET renewal & registry fees 893,733 NICET certifying exam fees 533,799 Total $ 3,328,745 NICET certifications can be renewed for a three-year period, and the renewal fees collected are recognized as revenue ratably over a three-year period. At June 30, 2009, NICET had collected $576,709 and $176,641 in certification fees applicable to fiscal years 2011 and 2012, respectively. NICET recognizes certifying exam fees at the time the exams are administered. Fees paid in advance are classified as deferred revenue.

Note 9 Mortgage and Notes Payable

In 1999, NSPE obtained a $1,450,000 mortgage note from Bank of America, collateralized by a first trust on the headquarters building and land. The note had a term of 10 years, with interest at 7.465%. The mortgage note was retired on its maturity date of April 1, 2009.

As part of the financing agreement related to the mortgage note, NSPE also negotiated a 10-year revolving note in the amount of $1,000,000, with interest at a rate equal to 1.4% above the 30-day LIBOR rate. This note was retired on its maturity date of April 1, 2009. In June 2005, NSPE borrowed $1,500,000 under a 9-year revolving note, negotiated with Bank of America in 2003. Commencing July 1, 2005, principal payments became payable in 108 equal monthly installments (based upon a 15-year amortization). A $600,000 balloon payment will be due on this loan on July 1, 2014. Interest on the outstanding balance accrues at a rate equal to 1.4% above the 30-day LIBOR rate. As of June 30, 2009, the outstanding balance on this note was $1,100,000. In June 2008, NSPE entered into an additional 10-year revolving note with Bank of America. This note allows NSPE to borrow up to $2,000,000 during the first three years. Interest on the outstanding balance accrues at a rate equal to 1.4% above the 30-day LIBOR rate. As of June 30, 2009, NSPE had borrowed $500,000 under this note.


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Note 9 Mortgage and Notes Payable (Continued) All of the revolving notes payable of NSPE are collateralized by NSPE’s headquarters building. The financing agreements on each of the revolving notes contain certain restrictive covenants pertaining to liquidity, net worth and aggregate long-term debt. NSPE believes it is in compliance with all covenants at June 30, 2009. Anticipated maturities of the revolving notes are as follows: Year Ending June 30

2010 $ 100,000 2011 100,000 2012 171,429 2013 171,429 2014 171,429 Thereafter 885,713 1,600,000 Less - Current portion 100,000 Total $ 1,500,000

Costs and expenses associated with the notes were capitalized and amortized on the straight-line method over the lives of the loans. Amortization expense charged to operations was $5,583 for the year ended June 30, 2009. Interest expense incurred during the year ended June 30, 2009, in relation to both the financing of NSPE’s headquarters building and the additional revolving notes, was as follows: 10-year mortgage note $ 9,057 Revolving notes 39,017 Total $ 48,074


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Note 10 Temporarily Restricted Net Assets

Contributions are received from donors for use in support of various programs of NSPE and Affiliates. These contributions have either purpose restrictions as to the use of the funds for specific types of expenditures or time restrictions as to when the funds may be used. Temporarily restricted net assets are comprised of the following as of June 30, 2009:

Contributions Net Assets Balance and Investment Released from Balance Nature of Restriction July 1, 2008 Income Restrictions June 30, 2009

NSPE: NSPE Legal Fund $ 42,035 $ 2,970 ($ 300) $ 44,705 NEWF: For specific programs: Introduce a Girl to Engineering Day 43,874 50,000 ( 57,376) 36,498 Extraordinary Women Engineers Project 20,394 45,000 ( 29,569) 35,825 Strategic planning 5,445 75,000 ( 64,029) 16,416 Other programs 6,044 20,000 ( 23,244) 2,800

NSPE EF: Scholarship Funds 517,216 (3,467) ( 47,937) 465,812 Disaster relief & other programs 29,519 0 ( 660) 28,859 Totals $ 664,527 $ 189,503 ($ 223,115) $ 630,915

Note 11 Benefit Plans

The NSPE Employee Savings Plan and Trust is a defined contribution plan, which is open to all regular full-time and part-time employees as of the date of their employment. For the year ended June 30, 2009, NSPE’s contribution to the plan was an amount equal to 3% of each participant’s annual salary. This amount vests immediately. NSPE made additional matching contributions for each employee, up to 2% of the employee’s salary. This additional 2% matching contribution vests over a five year period at 20 percent per year. NSPE’s contribution to the plan totaled $247,543 for the year ended June 30, 2009.


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Note 12 Commitments and Contingencies Leases NSPE leases equipment from vendors under various operating leases with original or remaining terms of five years or less. Minimum future lease payments are as follows: 2010 $ 25,591 2011 18,459 Total $ 44,050 Rental expense under operating leases was $47,637 for the year ended June 30, 2009.

Note 13 Board-Designated Funds The balances of the Board-designated funds as of June 30, 2009 are as follows:

Other operating funds: NICET $ 412,904 Total other operating funds 412,904 Interest Group funds: PEC $ 71,441 PEE 102,486 PEG 8,774 PEI 115,115 PEPP 144,682 Total Interest Group funds 442,498 Reserve funds: NSPE Reserve Fund 527,128 NSPE Product Development Fund 48,800 NICET Reserve Fund 700,603 Total reserve funds 1,268,531

Total Board-designated funds $ 2,123,933


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Note 14 Related Parties In addition to the three organizations included in these consolidated financial statements, NSPE and Affiliates has other unconsolidated affiliates. MATHCOUNTS Foundation is an affiliated organization founded by NSPE. NSPE holds one position on the board of directors of MATHCOUNTS Foundation, and the Foundation shares office space with NSPE. MATHCOUNTS Foundation sponsors a nationwide competition among junior high school students. NSPE has also established, as a segregated fund under Section 527 of the Internal Revenue Code, a political action committee (PAC) to receive member donations to be used for political contributions. Management has chosen not to consolidate the accounts of the PAC due to immateriality. NSPE collects contributions from its members on behalf of its affiliates. NSPE provides services and incurs expenses on behalf of its affiliates, some of which are reimbursed to NSPE by them. The total reimbursed expenses, unreimbursed expenses, and the balances due to and from the affiliates are as follows as of and for the year ended June 30, 2009:

Reimbursed Unreimbursed Due to Due from Expenses Expenses NSPE NSPE

MATHCOUNTS Foundation $ 902,294 $ 100,000 $ 84,724 $ 61,703 PAC 0 0 0 395 Totals $ 902,294 $ 100,000 $ 84,724 $ 62,098

Note 15 Tenant Leases

NSPE leases three floors of office space, approximating 21,400 square feet, to various tenants in its headquarters building in Alexandria, Virginia. These rental activities utilize approximately 48% of the total space available in NSPE’s headquarters building. Minimum future rentals to be received on non-cancelable leases are as follows: Year Ending June 30 Amount

2010 $ 477,093 2011 442,937 2012 430,336 2013 342,758 2014 327,830 Thereafter 1,338,959 Total future minimum rentals $ 3,359,913


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Note 16 Supplemental Cash Flows Information NSPE and Affiliates paid the following amounts for interest and income taxes during the year ended June 30, 2009: Interest $ 48,074 Taxes $ 0

Note 17 Other Deferred Revenue Other deferred revenue consists of the following at June 30, 2009: Convention registration and exhibitor fees $ 34,334 Affinity Card Royalties, paid in advance 572,833 Other miscellaneous 4,569 Total $ 611,736

Supplemental Information


Consolidating Statement of Financial PositionJune 30, 2009

NationalEngineers NSPE

Week EducationalAssets NSPE Foundation Foundation Subtotal Eliminations Total

Current assets:Cash and cash equivalents 1,438,431$ 123,668$ 22,742$ 1,584,841$ 0$ 1,584,841$ Investments 4,316,895 500,209 1,111,656 5,928,760 0 5,928,760 Receivables 838,004 40,000 1,876 879,880 0 879,880 Advances and loans to state societies, net 23,259 0 0 23,259 0 23,259 Due from affiliates 126,590 921 485 127,996 43,272 84,724 Prepaid expenses 291,704 0 0 291,704 0 291,704

Total current assets 7,034,883 664,798 1,136,759 8,836,440 43,272 8,793,168

Fixed assets, net 6,047,821 0 0 6,047,821 0 6,047,821

Other assets:Financing costs (net of accumulated amortization of $47,670) 8,160 0 0 8,160 0 8,160

Long-term portion of loans to state societies 17,150 0 0 17,150 0 17,150

Total other assets 25,310 0 0 25,310 0 25,310

TOTAL ASSETS 13,108,014$ 664,798$ 1,136,759$ 14,909,571$ 43,272$ 14,866,299$

See Independent Auditor's Report on Supplemental Information. 21


Consolidating Statement of Financial Position (Continued)June 30, 2009

NationalEngineers NSPE

Week EducationalLiabilities and Net Assets NSPE Foundation Foundation Subtotal Eliminations Total

Current liabilities:Accounts payable and accrued expenses 1,159,252$ 18,923$ 66,495$ 1,244,670$ 395)($ 1,245,065$ Deferred membership dues and other fees 3,328,745 0 0 3,328,745 0 3,328,745 Other deferred revenue 611,736 0 0 611,736 0 611,736 Due to affiliates 63,899 35,994 5,872 105,765 43,667 62,098 Current portion of mortgage payable - Headquarters building 0 0 0 0 0 0 Current portion of revolving notes payable 100,000 0 0 100,000 0 100,000

Total current liabilities 5,263,632 54,917 72,367 5,390,916 43,272 5,347,644

Deferred membership dues and other fees - Long-term 753,350 0 0 753,350 0 753,350 Long-term portion of revolving notes payable 1,500,000 0 0 1,500,000 0 1,500,000

Total liabilities 7,516,982 54,917 72,367 7,644,266 43,272 7,600,994

Net assets:Unrestricted:

General/undesignated funds 3,422,394 518,342 569,721 4,510,457 0 4,510,457 Board-designated funds 2,123,933 0 0 2,123,933 0 2,123,933

Total unrestricted net assets 5,546,327 518,342 569,721 6,634,390 0 6,634,390

Temporarily restricted 44,705 91,539 494,671 630,915 0 630,915

Total net assets 5,591,032 609,881 1,064,392 7,265,305 0 7,265,305

TOTAL LIABILITIES AND NET ASSETS 13,108,014$ 664,798$ 1,136,759$ 14,909,571$ 43,272$ 14,866,299$



Consolidating Statement of ActivitiesYear Ended June 30, 2009

National NSPEEngineers Week Educational

NSPE Foundation Foundation Subtotal Eliminations Total

Revenue:Membership dues 3,535,140$ 0$ 0$ 3,535,140$ 0$ 3,535,140$ License and examination fees 4,169,014 0 0 4,169,014 0 4,169,014 Rental income 617,168 0 0 617,168 0 617,168 Investment return 149,993 74,587)( 44,872)( 30,534 0 30,534 Contributions and grants 16,150 1,589,198 52,818 1,658,166 0 1,658,166 Publications, advertising and promotional items 543,412 100,056 0 643,468 0 643,468 Administrative and other fees 2,486,032 0 0 2,486,032 386,099 2,099,933

Total revenue 11,516,909 1,614,667 7,946 13,139,522 386,099 12,753,423

Expenses:Program services:

NICET 3,949,699 0 0 3,949,699 0 3,949,699 Membership benefits and services 3,488,958 0 0 3,488,958 0 3,488,958 State and chapter relations 1,525,525 0 0 1,525,525 0 1,525,525 Interest groups 954,666 0 0 954,666 0 954,666 Governance 412,693 0 0 412,693 0 412,693 Competence, professionalism and advocacy 178,166 0 0 178,166 0 178,166 Engineers Week programs 0 1,737,923 0 1,737,923 265,642 1,472,281

Scholarships and grants 0 0 77,899 77,899 2,253 75,646 Total program service expenses 10,509,707 1,737,923 77,899 12,325,529 267,895 12,057,634

Supporting services and administration 781,105 249,996 21,126 1,052,227 118,204 934,023

Total expenses 11,290,812 1,987,919 99,025 13,377,756 386,099 12,991,657

Change in net assets 226,097$ 373,252)($ 91,079)($ 238,234)($ 0$ 238,234)($


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