LAMBDA LEGAL DEFENSE AND EDUCATION FUND, INC.

Transcription

1 LAMBDA LEGAL DEFENSE AND EDUCATION FUND, INC. Financial Statements (Together with Independent Auditors Report) For the Year Ended October 31, 2011 (With Restated Comparative Totals For October 31, 2010)

2 FINANCIAL STATEMENTS (Together with Independent Auditors' Report) FOR THE YEAR ENDED (With Restated Comparative Totals for October 31, 2010) CONTENTS Page Independent Auditors' Report... 1 Statement of Financial Position... 2 Statement of Activities... 3 Statement of Functional Expenses... 4 Statement of Cash Flows... 5 Notes to Financial Statements

3

4 STATEMENT OF FINANCIAL POSITION AS OF (With Restated Comparative Totals for October 31, 2010) Restated ASSETS Cash (Note 12) $ 524,981 $ 395,060 Pledges receivable, net - individuals (Note 2K) 397, ,460 Grants receivable - foundations and corporations (Note 2K) 137, ,000 Bequests receivable, net (Notes 2H and 4) 5,970,786 7,126,215 Prepaid expenses and other assets 456, ,814 Property and equipment, net (Notes 2D and 6) 702, ,332 Investments (Notes 2E, 5 and 13) 5,785,603 5,773,446 Assets held for gift annuities (Notes 2G, 5 and 13) 1,292,115 1,170,502 Beneficial interest in trusts (Note 14) 1,196,851 1,044,450 TOTAL ASSETS $ 16,463,942 $ 16,506,279 LIABILITIES Accounts payable and accrued expenses $ 588,064 $ 465,634 Accrued payroll and vacation 416, ,876 Deferred income (Note 2L) 16,320 3,045 Deferred rent (Note 2M) 229,231 57,972 Liabilities under gift annuities (Notes 2G and 13) 768, ,881 TOTAL LIABILITIES 2,019,040 1,589,408 COMMITMENTS (Note 8) NET ASSETS (Note 2C) Unrestricted 6,443,476 6,050,419 Temporarily restricted (Notes 9 and 14) 7,721,324 8,586,350 Permanently restricted 280, ,102 TOTAL NET ASSETS 14,444,902 14,916,871 TOTAL LIABILITIES AND NET ASSETS $ 16,463,942 $ 16,506,279 The accompanying notes are an integral part of these financial statements. -2-

5 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED (With Restated Comparative Totals for October 31, 2010) For the Year Ended October 31, 2011 Total Temporarily Permanently Total 2010 Unrestricted Restricted Restricted 2011 Restated PUBLIC SUPPORT AND REVENUE: Special events revenue $ 3,739,521 $ 352,362 $ - $ 4,091,883 $ 3,499,303 Less: direct special event expenses (567,791) - - (567,791) (531,882) Net revenues from special events 3,171, ,362-3,524,092 2,967,421 Grants from foundations and corporations (Note 2B) 1,096, ,794-1,534,132 1,889,050 Contributions and memberships (Note 2B) 4,341, ,680-4,503,285 4,390,125 Bequests (Note 2H) 1,223, ,069-1,745,560 2,253,705 Donated services (Notes 2F and 10) 4,841, ,841,613 5,847,162 Attorney fees (Note 2J) 245, ,266 43,682 Revenue under gift annuities (Note 2G) 60, ,560 33,513 Investment activity (Note 5) 38, , ,895 Change in value of gift annuities (Note 2G) (33,597) - - (33,597) (8,656) Change in value of beneficial interest in trusts (Note 14) - (65,194) - (65,194) 52,195 Other revenue (Note 8) 10, ,339 29,377 Loss on disposal of property and equipment (9,273) - - (9,273) - Net assets released from restrictions (Note 9) 2,297,755 (2,297,755) TOTAL PUBLIC SUPPORT AND REVENUE 17,284,512 (888,992) - 16,395,520 17,625,469 EXPENSES: Program Services: Legal 8,677, ,677,460 9,293,781 Educational 4,485, ,485,493 4,143,102 Total program services 13,162, ,162,953 13,436,883 Supporting Services: Management and general 1,375, ,375,555 1,252,272 Fundraising 2,118, ,118,968 1,801,944 Special events 210, , ,054 Total supporting services 3,704, ,704,536 3,256,270 TOTAL EXPENSES 16,867, ,867,489 16,693,153 CHANGE IN NET ASSETS BEFORE ADJUSTMENT CONCURRENT WITH IMPLEMENTATION OF NEW YORK PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT ('NYPMIFA") 417,023 (888,992) - (471,969) 932,316 Transfer due to the adoption of NYPMIFA (Note 9) (23,966) 23, CHANGE IN NET ASSETS 393,057 (865,026) - (471,969) 932,316 Net assets - beginning of year, as previously reported 6,050,419 8,586, ,102 14,916,871 13,847,387 Recognition of Beneficial Interest in Trusts (Note 14) ,168 Net assets - beginning of year, as restated 6,050,419 8,586, ,102 14,916,871 13,984,555 NET ASSETS - END OF YEAR $ 6,443,476 $ 7,721,324 $ 280,102 $ 14,444,902 $ 14,916,871 The accompanying notes are an integral part of these financial statements. -3-

6 STATEMENT OF FUNCTIONAL EXPENSES FOR THE YEAR ENDED (With Comparative Totals for October 31, 2010) Program Services For the Year Ended October 31, 2011 Supporting Services Total Management Total Program and Special Supporting Total Total Legal Educational Services General Fundraising Events Services Salaries $ 2,453,986 $ 2,024,532 $ 4,478,518 $ 674,846 $ 981,595 $ - $ 1,656,441 $ 6,134,959 $ 5,699,606 Payroll taxes and employee benefits (Note 7) 856, ,985 1,563, , , ,708 2,146,642 1,793,950 Total Salaries and Related Costs 3,310,935 2,731,517 6,042, ,773 1,324,376-2,239,149 8,281,601 7,493,556 Occupancy (Note 8) 365, , ,092 78, , , , ,834 Professional services 9,735 55,403 65,138 72,930 89,338 86, , , ,551 Travel and meetings 97, , ,492 27,057 38,823 81, , , ,834 Office supplies 26,263 22,512 48,775 5,482 8,129-13,611 62,386 80,737 Insurance 40,801 34,972 75,773 8,743 12,629-21,372 97,145 89,823 Equipment rental and repairs 25,877 22,181 48,058 5,545 8,010-13,555 61,613 54,766 Telecommunications 69,341 59, ,776 14,829 21,463-36, , ,956 Dues and subscriptions 19,760 8,339 28,099 3,150 4,867-8,017 36,116 34,928 Credit card and bank charges (Note 5) , , , ,927 Donated services (Notes 2F and 10) 4,545, ,584 4,719,122 57,658 64, ,491 4,841,613 5,847,162 Postage 21,808 28,633 50,441 3,099 16,970 14,041 34,110 84,551 85,556 Printing and outreach , , ,002 28, ,395 1,233,646 1,163,796 Recruitment and training 9,202 4,000 13,202 5,563 4,692-10,255 23,457 16,561 Direct case expenses 93,360-93, , ,221 Direct special event expenses , , , ,882 Bad debt , ,652 31,652 15,100 Depreciation and amortization 40,881 35,041 75,922 8,760 12,654-21,414 97,336 71,845 Subtotal 8,677,460 4,485,493 13,162,953 1,375,555 2,118, ,804 4,272,327 17,435,280 17,225,035 Less: expenses deducted directly from revenues on the statement of activities (567,791) (567,791) (567,791) (531,882) TOTAL EXPENSES $ 8,677,460 $ 4,485,493 $ 13,162,953 $ 1,375,555 $ 2,118,968 $ 210,013 $ 3,704,536 $ 16,867,489 $ 16,693,153 The accompanying notes are an integral part of these financial statements. -4-

7 LAMDBA LEGAL DEFENSE AND EDUCATION FUND, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED (With Comparative Totals for October 31, 2010) CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ (471,969) $ 932,316 Adjustments to reconcile change in net assets to net cash (provided) used by operating activities: Depreciation and amortization 97,336 71,845 Loss on disposition of property and equipment 9,273 - Change in value of gift annuities 33,597 8,656 Change in value of beneficial interest in trusts 65,194 (52,195) Change in discount on bequest receivable (181,688) (221,036) Net realized and unrealized (gain) loss on investments and gift annuities 11,027 (71,211) Donated investments (436,729) (238,376) Donated property and equipment - (61,165) Bad debt expense 31,652 15,100 Subtotal (842,307) 383,934 Changes in operating assets and liabilities: (Increase) decrease in assets: Pledges receivable - individuals (320,460) (82,590) Grants receivable - foundations and corporations 167,500 (205,000) Bequest receivable 1,337,117 1,436,750 Prepaid expenses and other assets (46,852) (31,823) Increase (decrease) in liabilities: Accounts payable and accrued expenses 122,430 21,743 Accrued payroll and vacation 46,914 21,854 Deferred income 13,275 (1,635) Deferred rent 171,259 27,550 Net Cash Provided by Operating Activities 648,876 1,570,783 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investment sales 6,952,915 3,778,582 Purchase of investments (6,660,983) (5,234,725) Purchase of property and equipment and leasehold improvements (635,449) (55,595) Net Cash Used in Investing Activities (343,517) (1,511,738) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on annuities and trusts (78,975) (74,083) Recognition of current year beneficial interest in trusts (217,595) - Proceeds from issuance of annuities 121,132 46,487 Net Cash Used in Financing Activities (175,438) (27,596) NET INCREASE IN CASH 129,921 31,449 Cash - beginning of year 395, ,611 CASH - END OF YEAR $ 524,981 $ 395,060 The accompanying notes are an integral part of these financial statements. -5-

8 NOTE 1 ORGANIZATION AND NATURE OF ACTIVITIES The Lambda Legal Defense and Education Fund, Inc. ( Lambda Legal ) is a national organization committed to achieving full recognition of the civil rights of lesbians, gay men, bisexuals, transgender people and those with HIV through impact litigation, education and public policy work. Founded in 1973, Lambda Legal is a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code, and has been held to be a publicly supported organization and not a private foundation. Funding is primarily from contributions, bequests, special events and donated services. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Lambda Legal's financial statements have been prepared on the accrual basis of accounting. Lambda Legal adheres to accounting policies generally accepted in the United States of America ( U.S. GAAP ). B. Lambda Legal reports gifts of cash and other assets as temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Accordingly, even if a restriction is fulfilled in the same time period in which the contribution is received, Lambda Legal reports the support as temporarily restricted, as well as released from restrictions. C. Lambda Legal maintains its net assets under the following three classes: Unrestricted net assets that are neither permanently nor temporarily restricted by donorimposed stipulations. Temporarily Restricted net assets resulting from contributions and other inflows of assets whose use by Lambda Legal is limited by donor-imposed stipulations that either expire by the passage of time or can be fulfilled and removed by actions of Lambda Legal pursuant to those stipulations. When such stipulations end or are fulfilled, such temporarily restricted net assets are reported in the statement of activities as net assets released from restrictions. Permanently Restricted net assets resulting from contributions and other inflows of assets whose use by Lambda Legal is limited by donor-imposed stipulations that neither expire by the passage of time nor can be fulfilled or otherwise removed by actions of Lambda Legal. D. Property and equipment is stated at cost less accumulated depreciation or amortization. These amounts do not purport to represent replacement or realizable values. Contributed fixed assets are stated at fair value at the date of gift. Lambda Legal has established a $1,000 threshold above which assets are capitalized. Purchases below $1,000 are expensed at the time of acquisition. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful lives or the term of the lease. All other properties and equipment s are depreciated on a straight-line basis over the estimated useful lives of the assets. E. Investments are stated at their fair values, which are generally determined by quoted market prices. Realized and unrealized gains and losses are recognized as changes in net assets in the period in which they occur, and investment income is recognized as revenue in the period earned. F. Lambda Legal records contributed items at their fair value on the date of receipt. Lambda Legal also receives contributed services that are an integral part of its operations. Such services are only recorded as contributions in-kind (at their fair value). Donated services received are estimated at $4,841,613 and $5,847,162 for the years ended October 31, 2011 and 2010, respectively, and are reflected as donated services in both income and expense in the accompanying financial statements. -6-

9 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) G. Lambda Legal has a gift annuity plan whereby donors may contribute assets in exchange for the right to receive a fixed-dollar annual return of the gift assets during their lifetimes. Payments begin in accordance with the timing stipulated in the gift annuity contracts. The difference between the original annuity amount invested and the discounted liability for future payments, determined on an actuarial basis, is recognized as contribution income at the date of the gift. The actuarial liability is revalued annually and any surplus or deficiency is recognized as a change in value in the statement of activities. Lambda Legal was the recipient of 5 deferred gift annuities. Each annuity is summarized in the table below. Amount Received Fiscal Year Received Payments Commencing in Annual Payment Lambda Legal Obligated To Make Payments Until 1) $ 20,000 10/31/2005 September 2015 $ 1,940 donors death 2) $ 10,116 10/31/2009 October 2015 $ 648 donors death, and thereafter to a beneficiary until his death 3) $ 50,000 10/31/2009 December 2014 $ 3,300 donors death 4) $ 10,000 10/31/2009 October 2013 $ 650 donors death, and thereafter to a beneficiary until his death 5) $ 9,779 10/31/2009 April 2013 $ 626 donors death, and thereafter to a beneficiary until his death For each of the above deferred gift annuities, if the donor and/or beneficiary die before the date in which payments are scheduled to commence, Lambda Legal is released from all obligations Lambda Legal s entire gift annuity program has a recorded asset amounting to $1,292,115 and a liability of $768,635 as of October 31, Contribution income of $60,560 and $33,513 for the years ended October 31, 2011 and 2010, respectively, is included in the accompanying statement of activities. H. Legacies and bequests are recognized when Lambda Legal is notified that all disputes are resolved and funds are forthcoming. Accordingly, bequests are accrued when wills have passed through probate and legal counsel has confirmed amounts held on behalf of Lambda Legal. It is Lambda Legal s practice to discount bequests receivable due in more than one year to its present value using a risk free rate of return, unless the value is immaterial. The amortization of the bequest discount is reflected as additional contribution revenue. Lambda Legal received a generous bequest in fiscal year 2008 further discussed in Note 4. I. Lambda Legal s split-interest agreements with donors consist primarily of irrevocable charitable remainder trusts held by third parties. Charitable remainder unitrust gifts are time-restricted contributions not available to Lambda Legal until after the death of the donor and other beneficiaries, who, while living, receive payouts from the trust based on a fixed percentage of the market value of the invested funds each year as stated in the trust agreements. The trust agreements, in certain instances, allow for the beneficiaries to receive additional distributions, which may substantially reduce the value of expected future cash flows. Lambda Legal recognizes as assets and contributions to temporarily restricted net assets the fair value of the trusts based on the present value of the estimated expected future cash flows from the trusts' assets. The carrying value of the assets is adjusted to fair value at the end of the year. Distributions received by Lambda Legal are unrestricted for general purposes. J. Attorney fees are agreed upon fees in amounts corresponding to the value of the time spent by attorneys and can include reimbursement of actual expenses incurred while litigating matters on behalf of Lambda Legal s clients. -7-

10 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) K. Pledges and grants are recorded as revenue when the pledge or grant is made. It is Lambda Legal s practice to discount pledges and grants receivable due in more than one year to present value unless the value is immaterial. Pledges and grants receivable are all scheduled to be collected in the next fiscal year. Historically, Lambda Legal has not experienced significant bad debt losses. Lambda Legal bases its allowance for doubtful accounts on its historical loss experience considering the age of the receivables. Pledges and grants receivable are written off against the allowance for doubtful accounts when all reasonable collection efforts have been exhausted. Lambda Legal has determined that an allowance of approximately $35,000 and $29,000 was necessary as of October 31, 2011 and 2010, respectively, for pledges and no allowance was necessary for grants. L. Lambda Legal also receives cash in advance of special events that are to be held after the statement of financial position date. It is Lambda Legal s policy to record the contribution portion of the events as income when received and the exchange portion as deferred income until earned. M. As described in Note 8, Lambda Legal has lease agreements for the rental of offices in a number of locations. In addition, it leases certain software under a multiyear agreement expiring in Under the terms of the various lease agreements, the lessors have provided free rent periods and/or other pricing concessions to Lambda Legal. In conformity with U.S. GAAP, Lambda Legal has recorded an adjustment to rent expense to reflect the difference between the rent paid and the average rent to be paid over the terms of the leases which amounted to $172,336 and ($1,076) and recorded such amounts as an increase in occupancy expense and a decrease in direct case expense, respectively. Straight-lining of rent gives rise to a timing difference that is reflected as deferred rent in the accompanying statement of financial position. N. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. O. The October 31, 2011 financial statements include certain prior-year summarized comparative information in total but not in detail for the statements of activities and functional expenses. In addition, certain notes to the financial statements do not contain full detail for October 31, As a result, the October 31, 2010 comparative information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such October 31, 2010 information should be read in conjunction with Lambda Legal s financial statements for the year ended October 31, 2010, from which the summarized information was derived. P. Fair value measurements are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy prioritizes observable and unobservable inputs used to measure fair value into three levels, as described in Note 13. During the year ended October 31, 2011, Lambda Legal adopted the applicable provisions of Accounting Standards Update ( ASU ), Fair Value Measurement (Topic 820), and Improving Disclosure about Fair Value Measurements. ASU modified existing disclosures to require disclosures by asset or liability class when providing fair value measurement disclosures, as disclosed in Note 13. Q. Lambda Legal follows the provisions of FASB ASC 740, Income Taxes, which provides standards for establishing and classifying any tax provisions for uncertain tax positions. Lambda Legal is no longer subject to federal or state and local income tax examinations by tax authorities for years before R. Management has evaluated events subsequent to the date of the statement of financial position through February XX, 2012, the date the financial statements were available to be issued. No events have occurred subsequent to the statement of financial position date through February XX, 2012 that would require adjustment or disclosure in the financial statements. -8-

11 NOTE 3 CONDITIONAL PLEDGES LAMBDA LEGAL DEFENSE AND EDUCATION FUND, INC. Lambda Legal received a $40,000 conditional pledge during the year ended October 31, In order to receive the payment, Lambda Legal must first raise $40,000 in support from new sources or in increased contributions from current sources for Lambda Legal s Fair Courts Project. NOTE 4 BEQUESTS RECEIVABLE Bequests receivable consist primarily of a generous bequest from the Estate of Ric Weiland. As of October 31, 2011, the net bequest receivable associated with this contribution amounted to approximately 90% of total receivables. Equal quarterly disbursements of the Weiland Estate commenced in March of 2008 and are scheduled to continue for an eight year period. During the year ended October 31, 2009, Lambda Legal was notified of an additional distribution to be made over the same period. As of October 31, 2011 and 2010, bequests receivable are scheduled to be received as follows: Amount due in less than one year $ 1,571,116 $ 1,459,906 Amount due in one to five years 4,707,059 6,155,387 6,278,175 7,615,293 Less discount (at 3.23% and 2.56%) (307,389) (489,078) NOTE 5 INVESTMENTS AND ASSETS HELD FOR GIFT ANNUITIES Investments consist of the following as of October 31, 2011 and 2010: $ 5,970,786 $ 7,126, Money market funds $ 2,613,486 $ 5,477,538 Equity Mutual Fund 540,592 - U.S. government bonds and agency securities 2,607,731 - Corporate bonds and corporate bond mutual fund 23, ,908 $ 5,785,603 $ 5,773,446 Certain investments are subject to market volatility that could substantially change their carrying value in the near term. Assets held for gift annuities consist of the following as of October 31, 2011 and 2010: Money market funds $ 40,347 $ 44,716 Equities and equity mutual funds 508, ,581 Corporate bonds 194, ,996 U.S. government bonds and agency securities 548, ,209 $ 1,292,115 $ 1,170,502 Investment activity for investments held consists of the following for the years ended October 31, 2011 and 2010: Interest and dividends $ 34,711 $ 19,358 Unrealized (loss) gain on investments (6,883) 11,220 Realized (loss) gain on investment sales (26,768) 398 $ 1,060 $ 30,976-9-

12 NOTE 5 INVESTMENTS AND ASSETS HELD FOR GIFT ANNUITIES (Continued) Investment activity for assets held for gift annuities consists of the following for the years ended October 31, 2011 and 2010: Interest and dividends $ 15,053 $ 37,326 Unrealized gain (loss) on investments 14,544 (16,441) Realized gain on investment sales 8,080 76,034 $ 37,677 $ 96,919 Total investment activity $ 38,737 $ 127,895 Lambda Legal incurred investment management fees of $13,146 and $11,538 during the years ended October 31, 2011 and 2010, respectively. The fees are reflected as credit card and bank charges in the accompanying statement of functional expenses. NOTE 6 PROPERTY AND EQUIPMENT Property and equipment consists of the following as of October 31, 2011 and 2010: Estimated Useful Lives Furniture, fixtures and equipment $ 836,326 $ 864, years Leasehold improvements 495, , years Total cost 1,332,308 1,342,098 Less: accumulated depreciation and amortization (630,136) (1,168,766) Net book value $ 702,172 $ 173,332 Depreciation and amortization expense amounted to $97,336 and $71,845 for the years ended October 31, 2011 and 2010, respectively. During the year ended October 31, 2011, Lambda Legal wrote off primarily leasehold improvements totaling $645,241, and having a net book value of $9,273. This resulted in a loss on disposal amounting to $9,273. The write off was a result of Lambda Legal consolidating their New York City office to one floor. NOTE 7 PENSION PLAN Lambda Legal maintains a qualified defined contribution pension plan covering all eligible employees after one year of service. Employees vest over a multiyear period. Lambda Legal makes discretionary contributions to this plan based on an approval by the Board of Directors. During the years ended October 31, 2011 and 2010, Lambda Legal contributed on average 10% and 8%, respectively, of the participating employees salaries, which amounted to approximately $507,000 and $388,000, respectively. NOTE 8 COMMITMENTS Lambda Legal has lease agreements for the rental of its New York, Los Angeles, Chicago, Dallas and Atlanta offices and for its legal subscription plan. Minimum annual rentals related to the above leases are as follows for years ended subsequent to October 31, 2011: 2012 $ 488, , , , ,951 Thereafter 7,710,973 $ 11,010,

13 NOTE 8 COMMITMENTS (Continued) Rent expense amounted to approximately $729,000 and $602,000 for the years ended October 31, 2011 and 2010, respectively. Other revenue in the accompanying statement of activities includes rental income from subleases amounting to $6,440 and $14,620 for the years ended October 31, 2011 and 2010, respectively. NOTE 9 NET ASSETS As of October 31, 2011, temporarily restricted net assets of $7,721,324 are time restricted for future fiscal years. Net assets were released from restrictions during the year ended October 31, 2011 by incurring expenses or the passage of time, thus satisfying the restricted purposes as follows: Marriage $ 198,486 Fair Court 130,000 Federal Protections of LGBT Rights 125,000 Youth in out of home care 25,050 Other 83,626 Period ended October 31, ,735,593 $ 2,297,755 Lambda Legal has adopted reasonable and prudent investment policies for endowment assets that attempt to achieve favorable investment returns without exposure to undue risk that would threaten the preservation and growth of endowment principal. The portfolio is invested by external investment managers based on a diversified total-return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). Lambda Legal recognizes that NYPMIFA permits the Board of Directors to appropriate for expenditure all earnings of endowment funds (both realized and unrealized) with a presumption of prudence to a ceiling of 7% annually based on a quarterly rolling five-year average of the endowment s market value. The Board is currently reviewing its endowment spending policy to ensure it is consistent with its objective of preservation and growth of principal, and therefore for the years ended October 31, 2011 and October 31, 2010, Lambda Legal has not appropriated any endowment funds for expenditure. In accordance with NYPMIFA, any unappropriated earnings on endowment funds that would otherwise be considered unrestricted by the donor should be reflected as temporarily restricted until appropriated by the Board of Directors. Accordingly, all investment earnings on the endowment since inception have been reclassified as temporarily restricted net assets in a manner consistent with the standards prescribed by NYPMIFA. -11-

14 NOTE 9 NET ASSETS (Continued) Changes in endowment net assets for year ended October 31, 2011 are as follows: Unrestricted Temporarily Restricted Permanently Restricted Total 2011 Transfer due to adoption of NYPMIFA unappropriated earnings prior to November 1, 2010 $ (23,966) $ 23,966 $ - $ - Investment activity: Unrealized and realized gain on investments Total investment activity Change in endowment net assets (23,966) 24, Endowment net assets, beginning of year , ,102 Endowment net assets, end of year $ (23,966) $ 24,018 $ 280,102 $ 280,154 Endowment net assets of $280,154 are included with investments in the statement of financial position as of October 31, From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor requires Lambda Legal to retain as a fund of perpetual duration. In accordance with Lambda Legal s policy noted at Note 2C, deficiencies of this nature are reported in either temporarily restricted or unrestricted net assets. The deficiencies may result from unfavorable market fluctuations that occur in the economy as a whole that may affect the amount that is required to be retained permanently. Lambda Legal has not incurred such deficiencies in its endowment funds as of October 31, NOTE 10 DONATED SERVICES Some of the program services provided by Lambda Legal are furnished by lawyers and other professionals who, working under the supervision and guidance of Lambda Legal staff members, perform their services free of cost. The total amount of donated services for the years ended October 31, 2011 and 2010 amounted to $4,841,613 and $5,847,162, respectively. NOTE 11 ALLOCATION OF JOINT COSTS Lambda Legal incurred joint costs of $443,950 (other than donated services) for informational materials and activities that were included in fundraising appeals. Of these costs, $150,672 was allocated to program expenses and $293,278 was allocated to fundraising. NOTE 12 CONCENTRATIONS Cash accounts that potentially subject Lambda Legal to a concentration of credit risk include cash accounts with various financial institutions that exceeded the Federal Deposit Insurance Corporation ( FDIC ) insurance limits by approximately $271,000 and $138,000 as of October 31, 2011 and 2010, respectively. In 2010, the FDIC insurance limit was permanently increased to $250,000 and, beginning December 31, 2010 through December 31, 2012, deposits held in noninterest-bearing accounts are fully insured, regardless of the amount in the account, at all FDIC-insured institutions. -12-

15 NOTE 13 FAIR VALUE MEASUREMENTS In determining fair value, Lambda Legal utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible in its assessment of fair value. The fair value hierarchy defines three levels as follows: Level 1: Valuations based on quoted prices (unadjusted) in an active market that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Valuations based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data. Level 3: Valuations based on unobservable inputs are used when little or no market data is available. The fair value hierarchy gives lowest priority to Level 3 inputs. Investments in money market funds and corporate equities are valued using market prices in active markets (Level 1). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Investments in corporate obligations and U.S. government bonds and notes are valued using quoted prices in inactive markets (Level 2). Level 2 instruments valuations are obtained from similar assets or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data. Mutual funds are valued at the net asset value ( NAV ) of shares held by Lambda Legal at year end based upon quoted market prices determined in an active market. Financial assets and liabilities are carried at fair value at October 31, 2011 are classified as Level 1 and Level 2 in the table as follows: -13-

16 NOTE 13 FAIR VALUE MEASUREMENTS (Continued) Total ASSETS AT FAIR VALUE: Level 1 Level Investments: Cash and cash equivalents $ 2,613,486 $ - $ 2,613,486 U.S. Treasury bonds 2,580,490-2,580,490 Municipal Maryland bonds 27,241-27,241 Fixed income corporate bonds 13,794-13,794 Mutual Funds: Large blend and value 389, ,578 International 99,075-99,075 Corporate bond mutual funds - 10,000 10,000 Mid cap blend 51,939-51,939 Total Investments 5,775,603 10,000 5,785,603 Assets held for gift annuities: Cash and cash equivalents 40,347-40,347 U.S. treasury bonds 342, ,363 Federal home mortgage bonds 205, ,940 Fixed income corporate bonds 194, ,530 International 10,978-10,978 Equities: International equities 48,561-48,561 Mutual Funds: Large blend and value 194, ,628 Large growth 176, ,129 International 56,433-56,433 Small growth and value 16,650-16,650 Mid cap blend 5,556-5,556 Total Assets Held for Gift Annuities: 1,292,115 10,000 1,292,115 TOTAL ASSETS AT FAIR VALUE $ 7,067,718 $ 10,000 $ 7,077,718 LIABILITIES AT FAIR VALUE: Liabilities under gift annuities $ - $ 768,635 $ 768,635 TOTAL LIABILITIES AT FAIR VALUE $ - $ 768,635 $ 768,

17 NOTE 13 FAIR VALUE MEASUREMENTS (Continued) Financial assets and liabilities are carried at fair value at October 31, 2010 are classified as Level 1 and Level 2 in the table as follows: Total ASSETS AT FAIR VALUE: Level 1 Level Investments: Cash and cash equivalents $ 5,477,538 $ - $ 5,477,538 Corporate bond mutual funds - 10,000 10,000 Mutual Funds: Franklin floating bank loan 285, ,908 Total Investments 5,763,446 10,000 5,773,446 Assets held for gift annuities: Cash and cash equivalents 49,668-49,668 U.S. treasury bonds 309, ,480 Federal home mortgage bonds 133, ,763 Fixed income corporate bonds 246, ,843 International 10,242-10,242 Mutual Funds: Large blend and value 188, ,802 Large growth 181, ,366 International 28,456-28,456 Small growth and value 15,887-15,887 Mid cap blend 5,995-5,995 Total Assets Held for Gift Annuities 1,170,502-1,170,502 TOTAL ASSETS AT FAIR VALUE $ 6,933,948 $ 10,000 $ 6,943,948 LIABILITIES CARRIED AT FAIR VALUE: Liabilities under gift annuities $ - $ 692,881 $ 692,881 TOTAL LIABILITIES AT FAIR VALUE $ - $ 692,881 $ 692,881 NOTE 14 BENEFICIAL INTERESTS IN TRUSTS Lambda Legal has been named a beneficiary in charitable trusts, six of which provide Lambda Legal current information. The first trust is a Charitable Remainder Trust, from which upon the death of the recipient named in the trust, $675,000 will be distributed among five other organizations and Lambda Legal will receive any remaining balance. The second trust is a Charitable Remainder Annuity Trust from which a beneficiary is currently receiving 8.5% of the initial net-fair market value of the assets that passed into trust as finally determined for federal tax purposes. Subsequent to this beneficiary passing, Lambda Legal is named to receive 33.3% of the balance of the trust. The third trust is a Charitable Remainder UniTrust from which a beneficiary is currently receiving 8% of the initial net-fair market value of the assets of such trust valued on the first business day of such taxable year. Subsequent to this beneficiary passing, Lambda Legal is named to receive 100% of the balance of the trust. -15-

18 NOTE 14 BENEFICIAL INTERESTS IN TRUSTS (Continued) The fourth trust is a Charitable Remainder Trust from which beneficiaries are currently receiving income earned quarterly during their lifetime. Subsequent to all beneficiaries passing, Lambda Legal is named to receive 25% of the balance of the trust. The fifth trust is a Charitable Remainder UniTrust from which a beneficiary is currently receiving income quarterly. The trust will terminate in 2016 or upon the beneficiary s death, whichever comes first. Lambda Legal is named to receive 20% of the balance of the trust. The sixth trust is a Charitable Remainder Trust from which beneficiaries are currently receiving income earned quarterly during their lifetime. Subsequent to all beneficiaries passing, Lambda Legal is named to receive 30% of the balance of the trust. Lambda Legal has been notified by various trusts that they are named as a beneficiary. Subsequent to the issuance of Lambda Legal s 2010 financial statements, management became aware that an amount of an asset related to the present value of the beneficial interest in the trusts was not recorded. As a result, an asset was established and temporarily restricted net assets were restated as of October 31, 2010, which is the first period in which complete information was available. Statement of Financial Position As Previously Reported As Restated Difference Beneficial interest in trusts $ 907,282 $ 1,044,450 $ 137,168 Temporarily restricted net assets 8,449,182 8,586,350 (137,168) -16-