Consolidated Financial Statements As of December 31, 2002 Together with Independent Auditors Report

Transcription

1 Consolidated Financial Statements As of December 31, 2002 Together with Independent Auditors Report

2 AARP Consolidated Financial Statements As of December 31, 2002 Table of Contents Page Number Independent Auditors Report 1 Consolidated Statement of Financial Position 2 Consolidated Statement of Activities 3 Consolidated Statement of Cash Flows 4 Notes to Consolidated Financial Statements 5-19

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4 AARP Consolidated Statement of Financial Position As of December 31, 2002 (in thousands) Current assets: Cash and cash equivalents $ 238,326 Investments committed to current operating reserves (Note 6) 52,948 Investments committed to current portion of deferred membership dues and postretirement health benefits (Note 6) 163,206 Investments committed to insurance premiums payable (Note 6) 314,233 Accounts receivable, net of allowance for doubtful accounts of $1,455 (Note 7) 26,847 Federal and other program grant receivables 6,343 Prepaid expenses and other current assets 25,995 Noncurrent assets: Total current assets 827,898 Investments committed to non-current operating reserves (Note 6) 20,585 Investments committed to noncurrent portion of deferred membership dues and postretirement health benefits (Note 6) 183,046 Deferred tax asset (Note 4) 1,193 Property and equipment, net (Note 8) 239,992 Other noncurrent assets 4,074 Current liabilities: Total assets $ 1,276,788 Accounts payable and accrued expenses $ 62,753 Insurance premiums payable (Note 2) 452,253 Federal and other program grant commitments 5,359 Current portion of deferred membership dues 162,773 Current portion of postretirement health benefits liability (Note 12) 1,389 Other current liabilities 883 Noncurrent liabilities: Net assets: Total current liabilities 685,410 Notes payable (Note 9) 198,988 Deferred membership dues, net of current portion 115,967 Postretirement health benefits liability, net of current portion (Note 12) 64,776 Accrued pension liability (Note 11) 31,653 Other noncurrent liabilities 2,361 Commitments and contingencies (Note 16) - Unrestricted: Total liabilities 1,099,155 Undesignated 162,462 Board designated (Note 15) 14,268 Total unrestricted net assets 176,730 Temporarily restricted 903 Total net assets 177,633 Total liabilities and net assets $ 1,276, See accompanying notes to financial statements. -2-

5 AARP Consolidated Statement of Activities For the Year Ended December 31, 2002 (in thousands) Operating revenues: Unrestricted Temporarily Restricted Membership dues $ 186,312 $ 186,312 Royalties 217, ,656 Publications advertising 76,444 76,444 Federal & other grant revenues (Note 10) 60,899 60,899 Member service and program income 20,955 20,955 Member list access fees 17,944 17,944 Investment income (Note 6) 46,270 46,270 Other operating income 9,294 9,294 Net assets released from restrictions 418 $ (418) Operating expenses: Total operating revenues 636,192 (418) 635,774 Program services: Programs and field services 162, ,790 Publications 141, ,524 Member services 128, ,037 Legislation and research 56,449 56,449 Total program services 488, ,800 Supporting activities: 2002 Membership development 40,218 40,218 Management and general 86,856 86,856 Total supporting activities 127, ,074 Total operating expenses 615, ,874 Total Change in net assets from operations 20,318 (418) 19,900 Other income (expenses): Investment (loss) income from sinking fund (1,305) (1,305) Income taxes (Note 4) (3,691) (3,691) Change in net assets 15,322 (418) 14,904 Net assets, beginning of year as restated (Note 3-unaudited) 161,408 1, ,729 Net assets, end of year $ 176,730 $ 903 $ 177,633 See accompanying notes to financial statements

6 AARP Consolidated Statement of Cash Flows For the Year Ended December 31, 2002 (in thousands) 2002 Cash flows from operating activities: Change in net assets $ 14,904 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 27,020 Provision for uncollectible accounts (1,221) Net realized and unrealized gains on investments (14,205) Deferred income taxes (704) Amortization of premium (discount) on investments 443 Changes in operating assets and liabilities: Decrease in accounts receivable, federal and other program grant receivables 687 Increase in prepaid expenses and other current assets (2,691) Increase in other noncurrent assets (1,320) Increase in accounts payable, accrued expenses and federal and other program grant commitments 6,488 Increase in deferred membership dues 31,262 Increase in other current liabilities 228 Increase in postretirement health benefits liability 512 Increase in accrued pension liability 10,395 Increase in other noncurrent liabilities 2,128 Total adjustments 59,022 Net cash provided by operating activities 73,926 Cash flows from investing activities: Capital expenditures for property and equipment (15,235) Proceeds from sale and maturities of investments 16,207,093 Purchases of investments (16,169,656) Net cash provided by investing activities 22,202 Net increase in cash and cash equivalents 96,128 Cash and cash equivalents, beginning of year as restated (Note 3-unaudited) 142,198 Cash and cash equivalents, end of year $ 238,326 Supplemental disclosures: Cash paid for interest $ 13,066 Cash paid for income taxes $ 3,495 See accompanying notes to financial statements

7 AARP Notes to Consolidated Financial Statements December 31, Description of Organizations and Activities AARP AARP was organized in 1958 as a District of Columbia not-for-profit corporation for the purpose of promoting the interests of older persons. AARP is qualified as a tax-exempt social welfare organization under Section 501(c)(4) of the Internal Revenue Code ( IRC ). The mission of AARP is to meet the needs and promote the interests of persons 50 and older through education, advocacy and service programs designed to enhance the quality of life for all while promoting independence, dignity, and purpose of older persons. The programs and activities of AARP and its affiliates include education, advocacy, research, social welfare activities, and charitable programs serving the needs of older persons. AARP s programs, activities and operations are managed and supported primarily from its National Headquarters in Washington, D.C. AARP and its affiliates also have local offices in 53 states and U.S. territories, a membership processing center located in Lakewood, California, and an advertising sales office in New York. AARP Services, Inc. AARP Services, Inc. (ASI) is a wholly owned taxable subsidiary of AARP, and was incorporated in Delaware in December AARP contracts with ASI for specific services, including new product development, marketing services, quality control services and AARP Webplace design and maintenance. In addition to the fees it receives from AARP for these services, ASI receives fee income for its program management and member list access services from third parties. ASI contracts with AARP to obtain specific administrative support services, including finance, human resources, information technology, printing, and facility services. ASI is billed by AARP for the direct and indirect costs of these support services. AARP Properties LLC AARP Properties LLC ( Properties LLC ) is a single member limited liability company incorporated in Delaware, the sole member of which is AARP. Properties LLC was incorporated in September 2000 to acquire and subsequently provide all property management services for the AARP headquarters building located in Washington, D.C. Properties LLC receives rental income from AARP, AARP affiliates, and unrelated third-party tenants. For tax purposes, the activities of Properties LLC are attributed to AARP as its sole member. AARP Financial Services Corp

8 AARP Financial Services Corp. ( FSC ) is a wholly owned taxable subsidiary of AARP, and was incorporated in Delaware in September FSC provides administrative oversight of the taxable activities related to parking garage operations at the AARP headquarters building, in its capacity as the sole member of AARP FSC LLC (see below). AARP FSC LLC AARP FSC LLC ( FSC LLC ) is a single member limited liability company incorporated in Delaware, the sole member of which is FSC. FSC LLC was incorporated in August 2000 to acquire and subsequently provide management services for the parking garage portion of the AARP headquarters building located in Washington, D.C. FSC LLC receives parking fee income from the ownership and operation of the parking garage. For tax purposes, the activities of FSC LLC are attributed to FSC as its sole member. AARP Foundation The AARP Foundation ( Foundation ) was organized in 1961 as a District of Columbia not-forprofit corporation to engage in the study and discussion of the needs and problems of aging persons, and the development and management of related grant supported assistance programs. The Foundation is a non-partisan, tax-exempt charitable organization, qualified under Section 501(c)(3) of the Internal Revenue Code (IRC). The Foundation receives grants from the Federal government, corporations, and foundations to support programs administered from its national office in Washington, D.C. (see Note 10). The Foundation s Board of Directors is composed of five members appointed by the AARP Board of Directors. AARP Andrus Foundation The AARP Andrus Foundation ( Andrus ) was organized in 1968 as a Delaware not-for-profit corporation for the purpose of advancing and supporting the causes of aging persons through charitable activities and scientific research. Andrus solicits donations from AARP members and other outside contributors. Andrus is qualified as a tax-exempt charitable organization under Section 501(c)(3) of the IRC. The Andrus Board of Trustees is composed of thirteen members, seven of which are current AARP Board members selected by the President of AARP and approved by the AARP Board of Directors; and six are elected by the current Andrus Board of Trustees. Operating from its national office in Washington, D.C., Andrus primary activity is providing grant funding to research institutions to conduct projects relating to aging and aged persons. During 2002, the Andrus Board of Trustees approved a resolution to dissolve Andrus, and merge its operations and activities with the AARP Foundation. The merger was completed in March Legal Counsel for the Elderly - 6 -

9 Legal Counsel for the Elderly ( LCE ) was incorporated in the District of Columbia in 1980 for the purpose of providing free legal assistance and education to the elderly, primarily in the District of Columbia. LCE publishes manuals, conducts seminars on issues affecting the elderly, and operates legal services and long-term care ombudsman programs. LCE qualifies as a taxexempt charitable organization under Section 501(c) (3) of the IRC. Funding for LCE is obtained from contributions, grants and publication sales. AARP Insurance Plan The AARP Insurance Plan (the Plan ) is a grantor trust established by an Agreement and Declaration of Trust for the purpose of making certain types of insurance available to AARP members. Insurance premiums are collected directly from participants, and are forwarded to third party insurance carriers after deducting Plan expenses, royalties, and service fees (see further details in Notes 2 and 5). The Plan is administered by a Board of Trustees ( Trustees ) appointed by the Board of Directors of AARP. 2. Summary of Significant Accounting Policies Basis of Presentation These consolidated financial statements are prepared on the accrual basis of accounting, and include the accounts of AARP Inc., AARP Services, Inc., AARP Properties LLC, AARP Financial Services Corp., AARP FSC LLC, AARP Foundation, AARP Andrus Foundation, Legal Counsel for the Elderly, and the AARP Insurance Plan (collectively, AARP ). All significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements do not include the operations and accounts of approximately 3,100 local chapters of AARP that are organized and operated as separate entities. AARP neither controls nor derives beneficial economic interest from these organizations, as defined by accounting principles generally accepted in the United States. AARP summarizes the costs of providing and managing its various programs and other activities on a functional basis in the accompanying consolidated statements of activities. Accordingly, certain operating costs are allocated among the program services and supporting activities that benefit from them based on specific identification or reasonable allocation methodologies. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and disclosures in the financial statements. Although actual results could differ from these estimates, management does not believe that such differences will be material

10 Cash Equivalents Investments with original maturities of three months or less are reported as cash equivalents. Cash equivalents as of December 31, 2002 include $125,046,000 of short-term investments held by the AARP Insurance Plan, which are committed to payment of insurance premiums payable (see notes 2 and 5). Accounts Receivable AARP reserves for estimated uncollectible accounts based on the aging of outstanding accounts receivable and management s estimate of their net realizable values. Investments Investments in debt securities, private sector funds, certain equity securities and derivative financial instruments with readily determinable fair values are measured and reported at fair value. Classification of current and non-current investments on the accompanying consolidated statement of financial position is determined by management based on maturities of the investments and intentions for use of the funds. Changes in fair value are recorded as investment income in the accompanying consolidated statement of activities. Property and Equipment Property and equipment are stated at cost. Computer software is composed of external and certain qualifying internal costs incurred related to software development. Management periodically evaluates whether events or circumstances have occurred indicating that the carrying amount of long-lived assets may not be recovered. If the sum of the undiscounted expected future cash flows is less than the carrying amount of an asset, AARP recognizes an impairment loss based on the amount by which the carrying amount of the asset exceeds the fair value of the asset. Depreciation and amortization are calculated using the straight-line method over the lesser of the estimated useful lives of the assets or the lease term. The lives used range from three to thirty years. Maintenance and repair costs are expensed as incurred. Membership Dues Membership dues are deferred upon receipt and recognized as earned income ratably over the membership term of one, two or three years. Royalty Income AARP receives royalties from certain third-party providers of benefit programs made available to members, in return for the rights to use AARP s brand name, logo, and member mailing list in marketing such programs. These royalties are recognized as income when earned

11 Advertising Income AARP sells advertising space in its major publications, which are provided to members without additional charge as part of their membership benefits. Advertising revenue is recognized as earned, in the month of the issue date. Member Service and Program Income AARP receives service fees from providers of member programs, for consulting, marketing and quality control services. These fees are recognized as earned. This revenue category also includes contributions received in support of charitable program activities ($3,917,000 in 2002). Contributions are recognized as revenue when received or pledged by the donor. Contributions received with restrictions for time or for use on a specific program are reported as temporarily restricted. When the time or program use restrictions are met, the temporarily restricted net assets are reclassified to unrestricted net assets and are included in net assets released from restrictions in the accompanying statements of activities. For those restricted contributions where the contribution is received and the restriction is met during the same year, the contributions are reported as unrestricted. AARP and its members benefit from the efforts of many volunteers. These in-kind contributions by volunteers are not recorded as revenue in the consolidated financial statements, because they do not meet the requirements for recognition under accounting principles generally accepted in the United States. Travel and subsistence costs incurred by these volunteers in carrying out their duties are reimbursed by AARP and are therefore included as an expense in the accompanying consolidated statements of activities. Member List Access Fees Member list access fees are received from third parties who use the AARP member mailing list in approved direct mail marketing campaigns, and are recognized as earned. Member Insurance Program AARP makes certain types of insurance available to its members through a grantor trust called the AARP Insurance Plan (the Plan ). Agreements between AARP, ASI, the Plan, United HealthCare Corporation ( United ) and the Metropolitan Life Insurance Company ( MetLife ) make Medicare supplement health insurance coverage and long-term care insurance coverage available to AARP members under the Plan. A separate agreement with The Hartford Fire Insurance Company ( Hartford ) provides for member services, payment processing, and accounting services. The Plan collects insurance premiums from participating members, and is required to remit such payments to United and MetLife within a contractually specified period of time. The portion of premiums collected from insured members that are subsequently remitted to carriers are separately invested in short-term securities, and recorded with an offsetting liability Insurance Premiums Payable

12 AARP retains a negotiated percentage of the total premium collected to pay the operating expenses of the Plan, as royalties for the use of its brand name and logo, access to the member list, and as fees for quality control services provided in support of the program. These sources of compensation to AARP are reported as royalty income, member list access fees, and member service and program income in the Statement of Activities. Federal and Other Program Grants Federal and other program grant revenues are recognized to the extent that qualifying expenditures under the program agreements with federal agencies or other program providers are incurred. Amounts recorded as federal and other program grant receivables are for program grant expenses incurred in advance of the receipt of funds. Funds received in advance of incurred program grant expenses are recorded as deferred grant revenue, until such time as the funds are used to pay for qualified incurred expenses. Income Taxes AARP accounts for income taxes in accordance Statement of Financial Accounting Standards ( SFAS ) No. 109, Accounting for Income Taxes. AARP s taxable subsidiaries, ASI and FSC, are subject to income taxes. AARP s not-for-profit affiliates currently pay no income taxes because qualifying expenses are in excess of unrelated business income. Financial Instruments At December 31, 2002, the carrying value of financial instruments such as cash and cash equivalents, notes receivable, accounts receivable, and accounts payable approximated their fair value, based on the short-term maturities or floating interest rates of these instruments. The market values of investments reported in the consolidated statements of financial position represent estimated fair value and are based on redemption values or quotes obtained from various fund managers at year-end. Measure of Operating Results AARP considers all activities to be operating activities except for any required provision for federal and state income taxes, investment income earned on debt sinking funds, restructuring charges, and the effect of changes in accounting principles. The change in net assets excluding these items is reported as Change in Net Assets from Operations on the statement of activities. 3. Restatement Member Insurance Program (Unaudited)

13 In conjunction with the preparation of these 2002 consolidated financial statements, management re-evaluated its previous policy of disclosing the financial results of the AARP Insurance Plan (the Plan ) only in a Note to the Financial Statements (see Note 5), and determined that this policy was not in compliance with the requirements of AICPA Statement of Position 94-3, Reporting of Related Entities by Not-For-Profit Organizations and standard industry practices. The revised policy now requires that the accounts of the Plan be included in the consolidated financial statements of AARP, in addition to the Note disclosures that have been included in all previous years. This restatement resulted in adjustments of certain line items on the Statement of Financial Position as of December 31, 2001, as shown in the comparison that follows. The restatement had no impact on total net assets as of December 31, 2001, or on the change in net assets reported in the Statement of Activities for the year ended December 31, A summary of the impact on previously reported asset, liability and net asset balances is as follows: (In thousands) As of December 31, 2001 Asset, liability, and net asset captions As Reported As Restated Cash and cash equivalents $ 33,994 $ 142,198 Investments committed to insurance premiums payable - 335,593 Accounts receivable, net 30,963 30,206 Prepaid expenses and other current assets 18,322 23,325 Accounts payable and accrued expenses 64,595 67,429 Insurance premiums payable - 445,209 Unrestricted net assets 158, ,408 Temporarily restricted net assets 4,321 1, Income Taxes The significant components of the provision for income taxes are as follows for the year ended December 31, 2002: (In thousands) 2002 Current: Federal income tax $ 3,308 State income tax 1,087 Current income tax expense 4,395 Deferred: Federal income tax (526) State income tax (178) Deferred income tax benefit (704) Total income tax expense $ 3,

14 The significant components of deferred income tax assets at December 31, 2002 are as follows: (In thousands) 2002 Deferred income tax assets: Employee benefits $ 498 Accrued start-up expenses 183 Depreciation 66 Allowance for bad debt 21 Deferred revenue 446 Total deferred income tax assets 1,214 Deferred income tax liability: Property tax expense (21) Net deferred income tax assets $ 1, Member Insurance Program As described in Note 2, the insurance programs made available to members are administered by the AARP Insurance Plan. For the year ended December 31, 2002, the Plan processed $4,162,000,000 of premium payments from member participants. AARP retained and recognized $123,283,000 of royalty income for the use of its brand name and logo, $10,794,000 for member list access fees, and $893,000 for quality control services. AARP also earns investment income on the premiums received from members for the period until the contractually required date such premiums must be forwarded to United and MetLife. In 2002, $26,708,000 of short term investment income was earned on these funds and is included in investment income on the accompanying consolidated statement of activities. 6. Investments Reported investment values are based on or derived from quoted prices as reported to AARP by its investment custodial bank. The private sector funds are comprised of fixed income securities and are managed by PIMCO. AARP s investments by type of security and by management intention are as follows at December 31, 2002 (at market value):

15 (In thousands) 2002 U.S. government and agency obligations $ 49,223 Mortgage-backed securities 63,666 Bond fund and other 165,103 Private sector funds: U.S. government portfolio 88,093 Mortgage portfolio 188,257 Corporate portfolio 94,299 Municipal portfolio 5,665 International portfolio 24,363 Short term fund 3,000 Asset backed fund 9,581 Real Return Fund 9,594 Private emerging markets bond fund 16,841 Book value wrapper contract 16,333 Total investments $ 734,018 Investments committed to: Current operating reserves $ 52,948 Non-current operating reserves 20,585 Insurance premiums payable 314,233 Current portion of deferred membership dues and postretirement health benefits 163,206 Non-current portion of deferred membership dues and postretirement health benefits 183,046 Total investments $ 734,018 The synthetic Book Value Wrapper Contract ( BV Wrapper ) with AIG Financial Products Corporation and AEGON Institutional Markets was entered into to provide a higher degree of predictability for overall investment returns, and to reduce the short-term impact of significant fluctuations in the financial markets. The BV Wrapper has two components a portfolio of investment securities and a third-party book value put feature. The agreement establishes, on a quarterly basis, a specific guaranteed return based on the nature of the underlying portfolio, historical gains and losses of the portfolio and certain other factors. AARP retains legal title to the underlying investment portfolio and controls investment related risks by setting investment guidelines. As of December 31, 2002, the market value of the investment portfolio underlying the BV Wrapper was $217,107,000, and the value of the BV Wrapper as a whole was $233,439,000. The market value of the investment portfolio as determined by AARP s investment managers, and the market value of the BV Wrapper as determined by AIG and AEGON, have been netted to determine the reported ( book ) value of the total position. The associated net gain amounted to $11,631,000 for the year ended December 31, 2002, and is included as a component of investment income in the accompanying statement of activities. Investment income, excluding the return on the Board-approved sinking fund (see Note 9), for the year ended December 31 was comprised of:

16 (In thousands) 2002 Interest income $ 14,502 Dividends 15,959 Realized loss (10,784) Unrealized gain in market value 26,593 Net investment income $ 46, Accounts Receivable Accounts receivable as of December 31 are as follows: (In thousands) 2002 Royalties, member list fees and other programs $ 10,773 Publication advertising 6,724 Interest and dividends 1,697 Other 9,108 Gross accounts receivable 28,302 Allowance for doubtful accounts (1,455) Total accounts receivable, net $ 26, Property and Equipment Property and equipment as of December 31 are as follows: (In thousands) 2002 Land $ 41,942 Buildings and improvements 165,188 Furniture and equipment 68,085 Computer software 19,288 Leasehold improvements 4,743 Less: Accumulated depreciation (59,254) Property and equipment, net $ 239, Notes Payable On May 1, 2001, AARP issued unsecured fixed rate debentures and unsecured variable rate notes in the amounts of $125,000,000 and $75,000,000 respectively, for permanent financing of the AARP Headquarters Building

17 The fixed rate debentures carry an interest rate of 7.5%, and mature on May 1, Interest is payable semi-annually in May 1 and November 1 of each year. The variable rate notes also mature on May 1, 2031, and carry an interest rate which is revalued each week to establish the accurate market rate for their respective note rating. Interest on the variable rate notes is payable monthly in arrears. As of December 31, 2002, the variable rate notes had an interest rate of 2.10%. Based on the borrowing rates currently available to AARP for fixed rate bonds with similar terms and average maturities, the fair value of the $125,000,000 fixed rate debentures is approximately $160,000,000. In 2001, three interest rate swap agreements ( Swaps ), each covering $25,000,000 of the variable rate notes, were executed to manage the variability of the interest expense associated with the floating rate debt. Under the Swap agreements, AARP pays fixed annual rates of 5.40%, 5.42%, and 3.61%, and receives an amount based on the notional amount of each Swap at an interest rate equal to the current U.S. Dollar London Interbank Offered Rate ( LIBOR ). The terms of the swaps provide for net receipt or payment on the first of each month. The Swaps are reported at their fair value on the accompanying statement of financial position, and changes in the fair value are recorded as a component of interest expense on the accompanying statement of activities. The net interest accrual, which is the difference between the monthly fixed payment on the Swap and the variable receipt from the Swap counter-party is recorded as interest expense together with the interest expense on the fixed rate debt in the accompanying statement of activities. As of December 31, 2002, the Swaps are valued at a loss of $(4,569,000). Total interest expense incurred for the year ended December 31, 2002 was $16,061,000. In 2001, the AARP Board of Directors authorized the creation and funding of a Sinking Fund for the purpose of payment of notes and bonds. The designated funding in 2002 and thereafter is $3,600,000 per year, to be paid on or about January 1 of each year. The balance in the Sinking Fund as of December 31, 2002 was $12,801,000, and the Sinking Fund assets are included in investments on the accompanying consolidated Statement of Financial Position. The net loss for the Sinking Fund investments for the year ended December 31, 2002 was ($1,305,000). 10. Federal and Other Grant Programs AARP administers numerous grants received from various Federal agencies and private organizations. The two largest grant programs are discussed below. Senior Community Service Employment Program ( SCSEP ) provides temporary, subsidized employment for persons 55 and older whose income is at or below 125%, the federal poverty level. The Department of Labor, under the authority of the Older Americans Act of 1965, has renewed this program annually since The current commitment expires in June

18 Tax Counseling for the Elderly ( Tax-Aide ) provides volunteer assistance for federal income tax preparation to low- and moderate-income older persons throughout the country. In the 2002 tax season, approximately 1,700,000 older persons were assisted. The current commitment expires in September The continuation of grant programs for fiscal year 2003 and beyond is subject to granting of funds by each sponsoring agency. Included in amounts billed to sponsoring agencies are funds paid to enrollees, facility costs, office expenses, other general and administrative costs, and indirect costs charged to each program on a predetermined rate. Final indirect cost rates through 2001 have been approved by the Department of Labor. In 2002, indirect costs were charged in accordance with a predetermined rate approved by the Department of Labor. Federal and other program grant expenses are also funded from nonfederal contributions, including contributions from AARP. In 2002, AARP funded program expenses totaling $18,515, Defined Benefit Pension Plan AARP and certain affiliates participate in a multiple-employer noncontributory defined benefit pension plan called the AARP and Retired Persons Services ( RPS ) Employees Pension Trust (the Plan ). The employers independently determine benefits to be provided and are responsible for the resulting cost. The Plan covers all employees after they meet the eligibility service requirements. Plan assets, administrative expenses, and expected contributions have been allocated to the participating AARP affiliates in proportion to the related projected benefit obligation. The general funding policy is to contribute an amount equal to or greater than the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as actuarially determined, calculated on a level percentage of payroll costs basis, but not greater than the maximum deductible limit for taxable entities. Effective December 31, 2002, RPS discontinued its participation in the Plan, which was renamed the AARP Employees Pension Plan. There were no employer contributions to the Plan in The net periodic pension expense for the year ended December 31, 2002 was $11,066,000. A pension curtailment gain of $2,397,000 was also recognized in 2002 as a result of an employee separation plan implemented in conjunction with a 2001 cost containment program. The following sets forth the funded status of the Plan and accrued pension liability shown in the accompanying consolidated statements of financial position at December 31:

19 (In thousands) 2002 Change in benefit obligation: Benefit obligation at beginning of year $ (162,858) Service cost (7,745) Interest cost (11,582) Actuarial gain (12,145) Termination loss (1,538) Curtailment gain 2,492 Benefits paid 4,469 Benefit obligation at end of year $ (188,907) Change in plan assets: Fair value at beginning of year $ 144,622 Actual return on plan assets (11,150) Benefits paid (4,469) Fair value at end of year $ 129,003 Funded status: $ (59,904) Unrecognized net actuarial loss 31,639 Unrecognized prior service cost 1,935 Additional liability (5,323) Accrued pension liability $ (31,653) Assumptions used in the actuarial valuation as of December 31 are as follows: 2002 Discount rate 6.50% Expected long-term rate of return on plan assets 8.50% Future salary increases 4.00% 12. Postretirement Health Benefits Substantially all employees of AARP s affiliates may become eligible for continuing health care benefits after retirement if they meet minimum age and service requirements while working for the AARP affiliates. Health care benefits are provided through the AARP Employees Welfare Plan (the Welfare Plan ). The net postretirement health benefits expense for the Welfare Plan for the year ended December 31, 2002 was $2,346,000. A post-retirement health benefits curtailment gain of $486,000 was also recognized in 2002 as a result of an employee separation plan implemented in conjunction with a 2001 cost containment program

20 The actuarial benefit obligation and the accrued liability for post-retirement health benefits at December 31 were as follows: (In thousands) 2002 Actuarial present value of benefit obligation $ 42,163 Accrued postretirement health benefits $ 66,165 The weighted-average discount rate used in the actuarial valuation was 6.5 percent in For measurement purposes, the health care cost trend rate is 7.2 percent for 2003 (the rate is assumed to decrease gradually to 5.5 percent through 2008 and remain level thereafter). Actual postretirement health care costs paid by the Welfare Trust were approximately $1,645,000 in Retiree health benefits are paid as covered expenses are incurred. Based upon the actuarial analysis set out above, AARP has committed investments of $66,165,000 at December 31, 2002 for postretirement health benefit liabilities. This obligation is based upon AARP s current policy, and such amounts have not been contributed to the Welfare Plan, and therefore the related investment income has remained available for the general operations of AARP. 13. Health Care Benefits The AARP Employees Welfare Trust ( Welfare Trust ) was established to provide certain health care benefits for active employees. The Welfare Trust receives contributions from participating affiliate employers and employees to fund expected costs of the Welfare Trust. For the year ended December 31, 2002, expenses for the Welfare Trust for current health care benefits were $11,141, Defined Contribution Plan Effective January 1, 1998, AARP and certain affiliates participate in a multiple-employer defined contribution plan through the AARP and RPS Employees 401(k) Plan (the 401(k) Plan ). RPS and its subsidiaries are the other non-affiliated participating employers in the 401(k) Plan. To participate in the 401(k) Plan, an employee must be at least 18 years of age, and have been employed for a minimum of one month of consecutive service with the affiliates. Effective January 1, 2001, AARP implemented an employer contribution to the 401(k) Plan, which matches 100% of employee contributions up to 3% of employee compensation, and 50% of employee contributions for the next 2% of employee compensation, up to the maximum limit allowed by law. For the year ended December 31, 2002, AARP employer contributions to this plan totaled approximately $3,415, Board Designated Unrestricted Net Assets

21 As of December 31, 2002, Board designated net assets included the Sinking Fund created for the purposes of payment of notes and bonds (see Note 9), and the original principal amount of an unrestricted contribution received in Commitments and Contingencies Leases AARP leases offices, information centers, and warehouse facilities in 90 locations in the U.S. and its territories under long-term operating leases with various lease terms. Total rent expense incurred under long-term operating leases was $14,911,000 in Future minimum lease payments, exclusive of additional operating costs at December 31, 2002, are: In thousands 2003 $ 15, , , , , and thereafter $ 22,322 86,207 Other Matters In the normal course of business, AARP is involved in various claims and lawsuits. Management believes that at December 31, 2002 any liability that results from settling these claims will not materially impact AARP s financial position or changes in its net assets