Consolidated Financial Statements Together with Report of Independent Certified Public Accountants AARP FOUNDATION. December 31, 2013 and 2012

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1 Consolidated Financial Statements Together with Report of Independent Certified Public Accountants AARP FOUNDATION

2 TABLE OF CONTENTS Report of Independent Certified Public Accountants 1-2 Consolidated Financial Statements: Consolidated Statements of Financial Position as of 3 Consolidated Statements of Activities for the years ended 4 Consolidated Statements of Cash Flows for the years ended Supplementary Information: Consolidated Schedule of Functional Expenses for the year ended December 31, 2013, with comparative totals for the year ended December 31, Page

3 Audit Tax Advisory Grant Thornton LLP 1250 Connecticut Ave. NW, Suite 400 Washington, DC T F REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors AARP Foundation: We have audited the accompanying consolidated financial statements of AARP Foundation and affiliate (collectively, the Foundation ), which comprise the consolidated statements of financial position as of, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AARP Foundation and affiliate as of, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Supplementary information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as of and for the years ended, taken as a whole. The accompanying consolidated schedule of functional expenses for the year ended December 31, 2013, with comparative totals for the year ended December 31, 2012, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures. These additional procedures included comparing and reconciling the information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America established by the American Institute of Certified Public Accountants. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Washington, D.C. March 26,

5 Consolidated Statements of Financial Position As of (In thousands) ASSETS Cash and cash equivalents (Note 2) $ 7,166 $ 9,929 Contributions receivable, net (Notes 2 and 5) 2,078 1,164 Grants receivable (Notes 2 and 6) 9,389 4,133 Due from affiliates (Note 7) Prepaid expenses and other assets 3,389 2,212 Investments (Notes 2 and 3) 78,214 80,625 Program related investments, net (Notes 2 and 4) 2, Charitable gift annuity investments (Notes 2 and 3) 7,673 7,715 Property and equipment, net (Notes 2 and 8) 22,371 16,897 Total assets $ 132,899 $ 123,088 LIABILITIES Accounts payable and accrued expenses $ 19,950 $ 17,012 Deferred revenue (Note 2) 2,072 1,779 Due to affiliates (Note 7) 2,010 2,569 Charitable gift annuities payable (Note 2) 4,775 5,116 Bonds payable (Note 9) 25,000 25,000 Total liabilities 53,807 51,476 Commitments and contingencies (Notes 7, 12, 13, 14 and 17) NET ASSETS Unrestricted: Undesignated (Note 2) 33,235 32,343 Board designated quasi-endowment (Notes 2 and 16) 18,101 16,154 Board designated operating reserves (Notes 2 and 16) 25,736 22,419 Total unrestricted 77,072 70,916 Temporarily restricted (Notes 2 and 15) 2, Total net assets 79,092 71,612 Total liabilities and net assets $ 132,899 $ 123,088 The accompanying notes are an integral part of these consolidated financial statements

6 Consolidated Statements of Activities For the years ended (In thousands) The accompanying notes are an integral part of these consolidated financial statements. Temporarily Temporarily Unrestricted restricted Total Unrestricted restricted Total OPERATING REVENUE: Grant revenue (Notes 2 and 10) $ 85,816 $ - $ 85,816 $ 89,849 $ - $ 89,849 Contributions (Notes 2 and 7) 52,675 2,062 54,737 49, ,599 In-kind contributions (Notes 2 and 7) 44,459-44,459 57,675-57,675 Investment income designated for operations (Note 3) 2,607-2,607 2,472-2,472 Other 1,378-1,378 2,318-2,318 Net assets released from restrictions (Note 15) 738 (738) - 2,080 (2,080) - Total operating revenue 187,673 1, , ,685 (1,772) 201,913 EXPENSES Program services (Notes 1 and 11): SCSEP 97,286-97, , ,389 Tax-Aide 10,108-10,108 9,792-9,792 Legal advocacy 5,562-5,562 5,213-5,213 Impact areas and other programs 39,853-39,853 35,001-35,001 Total program services 152, , , ,395 Supporting services: Fundraising (Note 11) 21,295-21,295 16,733-16,733 Management and general 13,183-13,183 15,241-15,241 Total supporting services 34,478-34,478 31,974-31,974 Total expenses 187, , , ,369 Change in net assets from operations 386 1,324 1,710 5,316 (1,772) 3,544 OTHER CHANGES IN NET ASSETS Investment income in excess of amounts designated for operations (Note 3) 6,050-6,050 5,633-5,633 Change in value of charitable gift annuities (280) - (280) (348) - (348) Change in net assets 6,156 1,324 7,480 10,601 (1,772) 8,829 Net assets, beginning of year 70, ,612 60,315 2,468 62,783 Net assets, end of year $ 77,072 $ 2,020 $ 79,092 $ 70,916 $ 696 $ 71,

7 Consolidated Statements of Cash Flows For the years ended (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 7,480 $ 8,829 Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities: Depreciation Write-down of leasehold improvements Amortization of debt issuance costs Net realized and unrealized gains on investments (7,009) (6,743) Change in value of program related investments 1, Change in value of charitable gift annuities Changes in operating assets and liabilities: Contributions receivable, net (914) 925 Grants receivable (5,256) (380) Due from affiliates 264 1,764 Prepaid expenses and other assets (1,177) 72 Accounts payable and accrued expenses 1,801 2,759 Deferred revenue 293 (992) Due to affiliates (559) 777 Charitable gift annuities payable (621) (675) Net cash (used in) provided by operating activities (3,537) 7,680 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (5,124) (260) Disbursement of program related investments (3,500) - Purchase of investments (1,820) (13,176) Proceeds from sales and maturities of investments 11,218 1,139 Net cash provided by (used in) investing activities 774 (12,297) Net decrease in cash and cash equivalents (2,763) (4,617) Cash and cash equivalents, beginning of year 9,929 14,546 Cash and cash equivalents, end of year $ 7,166 $ 9,929 Cash paid for interest $ 25 $ 50 Supplemental disclosure at cash flow information: $1,120 of purchases of property and equipment included within accounts payable and accrued expenses. The accompanying notes are an integral part of these consolidated financial statements

8 1. DESCRIPTION OF ORGANIZATION AND PROGRAMS AARP Foundation was organized in 1961 as a District of Columbia not-for-profit corporation. AARP Foundation is dedicated to serving vulnerable people aged 50 and older by creating solutions that help them secure the essentials food, housing, income and personal connection. AARP Foundation is a nonprofit organization qualified under Section 501(c)(3) of the Internal Revenue Code (IRC) and is therefore exempt from federal income taxes on its charitable operations. In addition, AARP Foundation is a public charity as defined in Section 509(a)(1) of the IRC. AARP Foundation receives funding principally from federal and state governments, AARP, Inc., foundations, corporations, and individuals. AARP Foundation s Board of Directors is composed of members appointed by AARP, Inc. s Board of Directors. The AARP Institute (the Institute ), an affiliate of AARP Foundation, was organized in 1963 as a District of Columbia not-for-profit corporation. The Institute is a nonprofit organization qualified under Section 501(c)(3) of the IRC and is therefore exempt from federal income taxes on its charitable operations. In addition, the Institute is a supporting organization as defined in Section 509(a)(3) of the IRC. All intercompany accounts and transactions between the Foundation and the Institute have been eliminated in consolidation. The Foundation works to win back opportunity for struggling Americans 50+ by being a force for change on the most serious issues they face today: housing, hunger, income and isolation. By coordinating responses to these issues on all four fronts at once, and supporting them with vigorous legal advocacy, the Foundation serves the unique needs of those 50+ while working with local organizations nationwide to reach more people and make resources go further. During the years ended, the Foundation s programs were as follows: The Senior Community Service Employment Program (SCSEP) provides direct services to adults seeking training and employment. SCSEP provides subsidized assignments and job training for persons 55 and older whose income is at or below 125% of the federal poverty level. SCSEP is primarily funded by the U.S. Department of Labor. Department of Labor revenue represented approximately 36% of the Foundation s operating revenue for each of the years ended December 31, 2013 and The current federal grant to the Foundation expires on June 30, Tax-Aide provides volunteer services for federal and state income tax preparation assistance to low and moderate income persons throughout the country, with special attention to those 60 and older. The Tax-Aide program is primarily funded by the Foundation and the Internal Revenue Service. The current federal grants to the Foundation expire on June 30, 2014 and September 30, 2014, respectively. Legal Advocacy - AARP Foundation Litigation advocates for the rights of Americans 50+ in courts nationwide, representing their interests on state and federal laws about age discrimination, consumer and financial fraud, employee benefits, investor protection, health and long-term care, housing and benefits for struggling people

9 Impact Areas and Other Programs include the Foundation s work in four focus areas: Hunger, Housing, Isolation and Income. The Foundation s Hunger Impact Area is dedicated to ending hunger among older Americans (50+). The Housing Impact Area is focused on providing solutions to low-income, 50+ households living in unaffordable and/or inadequate housing. The Foundation's Isolation Impact Area seeks to identify individuals who are isolated or are at risk for isolation as well as understand the environmental factors that may put individuals at risk. The Income Impact Area provides quality employment services, income support and education. Other Programs include initiatives in care giving, nursing, investor protection and crisis relief. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These consolidated financial statements include the accounts of AARP Foundation and the Institute (collectively, the Foundation ). The Foundation prepares its financial statements using the accrual basis of accounting in accordance with U.S. GAAP. The Foundation summarizes the costs of providing its various programs and other activities on a functional basis in the accompanying consolidated statements of activities. Accordingly, certain costs are allocated among program and supporting services based on specific identification or allocation methodologies. Net assets and changes in net assets are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Foundation are classified and reported as follows: Unrestricted net assets that are not subject to donor-imposed stipulations including amounts designated by the Board of Directors to function as quasi-endowment and operating reserves. Temporarily restricted net assets subject to donor-imposed stipulations that will be met by actions of the Foundation and/or the passage of time. Measure of Operations All activities, except for investment income or loss in excess of amounts designated for operations and the change in value of charitable gift annuities, are reported as change in net assets from operations. Cash and Cash Equivalents Cash consists of cash on deposit with banks. Cash equivalents represent money market funds or short-term investments with original maturities of three months or less from the date of purchase. Cash and cash equivalents managed by the Foundation s investment managers as part of its long-term investment strategy are included in investments. Concentrations of Credit Risk Financial instruments that potentially subject the Foundation to concentrations of credit risk consist principally of cash and cash equivalents and investments in U.S. treasury securities, fixed income funds, equity funds and similar interests. The Foundation maintains its cash and cash equivalents in various bank accounts and money market funds that, at times, may exceed federally insured limits. The Foundation s cash and cash equivalent accounts have been placed with high credit quality financial institutions. The Foundation has not experienced, nor does it anticipate, any losses with respect to such accounts. Cash held at individual institutions that exceeded federally insured limits, totaled $210,659 and $1,174,154 at, respectively

10 Investments Investments are measured and reported at fair value. Changes in fair value are reported as investment income or loss in the consolidated statement of activities. The fair value of debt and equity securities with a readily determinable fair value is based on quotations obtained from national security exchanges as of the measurement date. The fair value of non-u.s Treasury debt securities is determined by a nationally recognized independent pricing service (pricing service). Purchases and sales of securities are reflected on a trade-date basis. Gains and losses on sales of securities are based on average cost and are recorded in the consolidated statement of activities in the period in which the securities are sold. Interest is recorded when earned. Dividends are accrued as of the ex-dividend date. All investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the fair values of investment securities will occur in the near term and such changes could materially affect the amounts reported in the consolidated statement of financial position. Program Related Investments In accordance with Section 4944 of the Internal Revenue Code (Code), the Foundation is permitted to make investments that further some aspect of its charitable mission. As such, the Foundation began making program related investments in The Foundation s program related investments include programmatic loans that are anticipated to have lower-than-market returns on a risk-adjusted basis and are recognized at the present value of future cash flows. Each loan is monitored individually and a reserve is recorded in circumstances when recoverability is determined by management to be in doubt. Charitable Gift Annuities The Foundation has entered into a number of charitable gift annuity (CGA) agreements with its donors. Under the terms of these agreements, the donor contributes assets to the Foundation in exchange for a promise by the Foundation to pay a fixed amount for a specified period of time (usually the donor s lifetime) to the donor or to individuals or organizations designated by the donor. At the inception of a CGA agreement, the excess of the fair value of assets received over the present value of annuity payments to be made to the donor or stated beneficiary is recognized as a charitable contribution. Subsequent changes to the present value of annuity payments are reported as change in value of charitable gift annuities on the consolidated statement of activities. The Foundation s CGAs are valued using the Ann2000 mortality table. Discount rates used range from 1.2% to 14.4%. The assets held for all charitable gift annuities are reported in charitable gift annuity investments on the statements of financial position and stated at fair value. Liabilities for the expected annuity payments are reported at the estimated present value of future cash outflows, based on appropriate discount rates and mortality tables. The Foundation invests the charitable gift annuities in accordance with relevant state laws

11 The AARP Board of Directors has committed that AARP, Inc. will assume the Foundation s charitable gift annuity liabilities in the event the Foundation was unable to fulfill its obligations. The value of this guaranty has been deemed immaterial to the accompanying consolidated financial statements. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Management periodically evaluates whether events or circumstances have occurred indicating that the carrying amount of long-lived assets may not be recovered. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are 26 years for office space, 10 years for building improvements, and 3 years for equipment. Land is not subject to depreciation. Maintenance and repair costs are expensed as incurred. Grant Revenue Grant revenue is recognized to the extent allowable expenses are incurred. Amounts reported as grants receivable represent grant expenses incurred in advance of the receipt of funds. Grant funds received in advance are reported as deferred revenue. Contributions The Foundation reports contributions as revenue when received or pledged by the donor. The Foundation reports contributions as temporarily restricted revenue if such gifts are restricted by the donor to a specific program and/or include an explicit or implied time restriction. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as net assets released from restrictions. Gifts whose donor-stipulated purposes are met in the same year as received are reported as unrestricted revenue. In-kind Contributions The Foundation s contributed services primarily consist of services donated by AARP, Inc. (see Note 7) and the fair value of supervisory salaries donated to SCSEP. These contributed services are recorded at their estimated fair values as both revenue and expenses in the consolidated statement of activities. Donated supervisory salaries of $24,280,000 and $41,942,000 have been recognized for the years ended, respectively. Over 35,000 volunteers provide tax preparation assistance under the Tax-Aide program. The Foundation has concluded that these donated services do not meet the requirements for recognition as contributed services under U.S. generally accepted accounting principles. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of revenues and expenses and disclosures in the financial statements. Actual results could differ from these estimates

12 Fair Value Measurements Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value should be based on the assumptions market participants would use when pricing an asset or liability and a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets (observable inputs) and the lowest priority to an entity s assumptions (unobservable inputs). The Foundation groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1 Unadjusted quoted market prices for identical assets or liabilities in active markets as of the measurement date. Level 2 Other observable inputs, either directly or indirectly, including: Quoted prices for similar assets/liabilities in active markets; Quoted prices for identical or similar assets in non-active markets; Inputs other than quoted prices that are observable for the asset/liability; and, Inputs that are derived principally from or corroborated by other observable market data. Level 3 Unobservable inputs that cannot be corroborated by observable market data. At, the carrying value of financial instruments such as cash equivalents, contributions and grants receivable, accounts payable and bonds payable approximated their fair value, based on the short-term maturities or floating interest rates of these instruments. The fair value of investments is discussed in Note 3. Income Taxes The Foundation is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code and has been classified by the Internal Revenue Service as an organization that is not a private foundation. Under provisions of the Internal Revenue Code Section 501(c)(3), and applicable state regulations, the Foundation is exempt from taxes except for unrelated business income. For financial statement purposes, the Foundation is required to record a liability for any material tax position taken which does not meet the minimum thresholds of more likely than not to be successful under regulatory challenge. No provision for income taxes has been recorded in 2013 and 2012, since management believes there is no material unrelated business income or material uncertain tax positions requiring the recognition of a liability. Reclassifications Certain reclassifications were made to the 2012 financial statements in order to conform to the 2013 presentation

13 Subsequent Events The Foundation has evaluated subsequent events through the date the consolidated financial statements were issued, March 26, The Foundation is not aware of any material subsequent events which would require recognition or disclosure in the accompanying consolidated financial statements. 3. INVESTMENTS AND CHARITABLE GIFT ANNUITY INVESTMENTS The Foundation s investments include shares in AARP s managed investment pools ( AARP pools ). The AARP pools consist of funds invested by AARP Inc., AARP Foundation, AARP Services, Inc., AARP Insurance Trust and Legal Counsel for the Elderly. The pools were established to enable the participating organizations to invest on a coordinated basis, with a view to achieving long-term capital growth through investments in a diversified portfolio, and to reduce investment costs. The AARP pools consist of investments in treasury securities, equity securities, fixed income funds and institutional mutual funds. Each of these respective investment vehicles have readily determinable fair values or are fair valued at a net asset value per share, redeemable in a time frame of 60 days or less. The Foundation has the ability to redeem its investment within the AARP pools on demand with no redemption restrictions. The Foundation s participation is governed by the Foundation s board-approved investment policies. The composition of the Foundation s pro rata share of the AARP pools in which it maintains a discreet ownership interest as of December 31, 2013 is as follows (in thousands): Level 1 Level 2 Total AARP Unitized Investment Pool International pool $ - $ 15,045 $ 15,045 Long-term fixed pool - 33,956 33,956 Large-mid cap pool - 14,680 14,680 Small cap pool - 2,460 2,460 Short-term fixed income pool - 4,427 4,427 Real assets pool - 2,292 2,292 Emerging market pool - 4,389 4,389 Enhanced cash pool Sub-total - Foundation's share of AARP pools - 78,212 78,212 Other Foundation Investments U.S. treasury securities Mortgage-backed fixed income securities U.S. corporate fixed income securities 2,318-2,318 Commodities fund International equity securities 1,909-1,909 Emerging market equity securities Large-mid cap equity securities 2,066-2,066 Small cap equity securities Total $ 7,501 $ 78,386 $ 85,

14 The composition of the Foundation s pro rata share of the AARP pools in which it maintains a discreet ownership interest as of December 31, 2012 is as follows (in thousands): Level 1 Level 2 Total AARP Unitized Investment Pool International pool $ - $ 12,111 $ 12,111 Long-term fixed pool - 31,479 31,479 Large-mid cap pool - 13,498 13,498 Small cap pool - 2,063 2,063 Short-term fixed income pool - 4,389 4,389 Real assets pool - 2,318 2,318 Emerging market pool - 4,451 4,451 Enhanced cash pool - 6,215 6,215 Sub-total - Foundation's share of AARP pools - 76,524 76,524 Other Foundation Investments U.S. treasury securities Mortgage-backed fixed income securities U.S. corporate fixed income securities 6,510-6,510 International equity securities 1,641-1,641 Emerging market equity securities Large-mid cap equity securities 2,445-2,445 Small cap equity securities Total $ 11,636 $ 76,704 $ 88,340 Income and gains/losses related to the Foundation s investment in the AARP pools are allocated based upon the Foundation s pro rata shares. Investment income for the years ended is summarized as follows (in thousands): Interest and dividends $ 1,648 $ 1,362 Net realized and unrealized gains 7,009 6,743 Total $ 8,657 $ 8, PROGRAM RELATED INVESTMENTS, NET Program related investments presented in the consolidated statements of financial position represent various below-market-rate loans with outstanding principal balances totaling approximately $3,714,000 and $214,000 as of, respectively. The interest rate on these programmatic loans was 2% for each of the years ended, respectively. The loans are individually monitored to determine the net realizable value based on an evaluation of recoverability. As of December 31, 2013 and 2012, the Foundation has not received a return of any principal amounts loaned

15 Loans receivable, at the present value of expected cash flows, are scheduled for collection as of December 31, 2013 as follows (in thousands): 2017 $ ,625 3,714 Less: present value discount (1,095) Total program related investments, net $ 2,619 Management has reviewed the collectability of all programmatic loans and has concluded that all are fully collectible. Consequently, no allowance for uncollectible loans has been recorded for the years ended, respectively. As of December 31, 2013, the Foundation had a total of six (6) loans outstanding at an average face amount of approximately $619,000 and an average carrying amount of approximately $437, CONTRIBUTIONS RECEIVABLE Contributions receivable as of are expected to be received as follows (in thousands): Within one year $ 1,089 $ 638 Between two and five years Thereafter Total $ 2,078 $ 1, GRANTS RECEIVABLE Grants receivable consist of amounts due from the following sources as of (in thousands): U.S. Department of Labor $ 8,285 $ 3,312 Internal Revenue Service - 3 Other 1, Total $ 9,389 $ 4,

16 7. RELATED-PARTY TRANSACTIONS Contributions AARP, Inc. made cash contributions to the Foundation totaling approximately $14,680,000 and $15,750,000 for the years ended, respectively, and contributed donated services valued at approximately $19,899,000 and $15,509,000 for the years ended December 31, 2013 and 2012, respectively. AARP Services, Inc. (ASI), a wholly-owned taxable subsidiary of AARP, Inc., made a cash contribution of $40,000 for the year-ended December 31, In 2013, the Foundation temporarily occupied office space donated by AARP, Inc. and ASI. As a result, the Foundation recorded in-kind contributions of approximately $240,000 and $16,000 from AARP, Inc. and ASI, respectively. AARP, Inc. and ASI contributions represented approximately 18% and 15% of the Foundation s total operating revenue for each of the years ended, respectively. Postretirement Health Benefits Obligation The Foundation participates in the AARP postretirement health benefit program and the AARP Employees Welfare Plan. A 1997 resolution by the AARP, Inc. Board of Directors stated AARP, Inc. s intent to assume responsibility for postretirement health benefits relating to the Foundation s employees. AARP, Inc. currently funds these benefits as claims are received from eligible Foundation retirees. Office Space Under a continuing operations agreement associated with the Foundation s office space located within the AARP headquarters building, certain shared facilities costs are billed to the Foundation by AARP, Inc., including utilities, maintenance, security and building management. These costs were approximately $583,000 and $520,000 for the years ended, respectively. During the years ended, a portion of the Foundation s office space was occupied by Legal Counsel for the Elderly (LCE), an affiliate of AARP. LCE is exempt from federal taxation under Section 501(c)(3) of the IRC. LCE vacated the Foundation-owned premises on March 31, For the years ended, LCE made cash payments of $57,000 and $353,000, respectively, for occupying this space. Grants to AARP The Foundation has awarded grants to AARP, Inc. to further the Foundation s charitable purposes. Expenses of approximately $7,370,000 and $9,299,000 have been recognized for the years ended, respectively. Approximately $1,771,000 and $2,285,000 of the recognized amounts remained unpaid as of, respectively, and are included as a component of due to affiliates in the accompanying consolidated statements of financial position

17 Consulting Expenses The Foundation has engaged ASI to perform certain consulting services relating to quality control for the AARP Foundation Pre-Paid Debit Card by Green Dot, a low-cost debit card targeted to low income users. In addition, ASI performed certain business development services for the Foundation in relation to potential institutional partners. The Foundation s related expenses for services provided by ASI totaled approximately $490,000 and $541,000 for the years ended, respectively. Insurance premiums The Foundation purchases certain insurance coverage from Andrus Insurance Fund, LLC, an affiliate of AARP, Inc. The Foundation s related insurance expense for the coverage purchased for the years ended totaled approximately $955,000 and $2,074,000, respectively. Due to/from Affiliates Amounts reported as due to or from affiliates, included in the accompanying consolidated statements of financial position, arise principally from the activities described above, and are typically settled on a monthly basis. 8. PROPERTY AND EQUIPMENT, NET Property and equipment, net, is summarized as follows at (in thousands): Land $ 4,440 $ 4,440 Building and improvements 22,660 18,446 Equipment 1, ,846 23,130 Accumulated depreciation (6,475) (6,233) Property and equipment, net $ 22,371 $ 16, BONDS PAYABLE On October 21, 2004, the Foundation issued 30-year District of Columbia Variable Rate Revenue Bonds, Series 2004, in the amount of $25,000,000 to finance the purchase of office space in the AARP headquarters building. The face value of the bonds is repayable in full on October 20, The bonds bear interest at a rate determined by the Remarketing Agent based upon market conditions of reselling the bonds in a secondary market sale. Accrued interest is payable monthly. The rates on December 31, 2013 and 2012, respectively, were 0.05% and 0.1%. Total interest expense incurred for the years ended totaled approximately $26,000 and $51,000, respectively. The Foundation may elect at any time to convert to a fixed interest rate

18 The Foundation has obtained a letter of credit to secure repayment of the bonds. The letter of credit constitutes an irrevocable obligation to pay the bond trustee up to an amount equal to the sum of the principal amount of the bonds outstanding, plus an amount equal to interest for 35 days on the principal amount of the bonds outstanding. The Foundation s letter of credit expires October 1, AARP, Inc. has entered into a Standby Bond Purchase Agreement with the Foundation and the issuer of the letter of credit to purchase all bonds in the event the Foundation defaults on the bonds under the terms and conditions of the agreement. 10. GRANT REVENUE Grant revenue from the following sources was recognized for the years ended (in thousands): U.S. Department of Labor $ 67,851 $ 72,495 Internal Revenue Service 6,458 5,544 U.S. Department of Health and Human Services U.S. Department of Agriculture State agencies Corporations and foundations 10,428 10,611 Total $ 85,816 $ 89,849 The Foundation anticipates that the U.S. Department of Labor and Internal Revenue Service grants will be renewed. The continuation of grant-funded programs beyond the expiration dates of current agreements is subject to future funding decisions by sponsoring agencies. 11. ALLOCATION OF JOINT COSTS In 2013 and 2012, the Foundation conducted direct mail campaigns that included requests for contributions, as well as program components. The costs associated with the development and dissemination of such mailings are allocated amongst the functional expense categories benefited, particularly impact areas and other programs, on a basis of the extent of content attributable to each respective function. These joint costs were allocated as follows (in thousands): Fundraising $ 7,327 $ 6,401 Program services 2,832 1,466 Total $ 10,159 $ 7,

19 12. EMPLOYEE HEALTH CARE BENEFITS The Foundation participates with other AARP affiliates in the AARP Employees Welfare Plan, which provides certain health care and other welfare benefits to active employees. The Welfare Plan receives contributions from all participating entities to provide benefits, based on expected costs of providing these benefits. Expenses incurred by the Foundation for health care benefits totaled $2,702,000 and $2,492,000 for the years ended, respectively. The total estimated liability, including incurred but not reported claims, at totaled approximately $214,000 and $282,000, and is included as a component of accounts payable and accrued expenses in the accompanying consolidated statements of financial position. 13. DEFINED-BENEFIT PENSION PLAN The Foundation participates with other AARP affiliates in the AARP Employees Pension Plan (the Plan ), a single employer, non-contributory defined-benefit pension plan sponsored by AARP, Inc. The Plan covers all Foundation employees after they meet specified eligibility requirements. All actuarially determined liabilities and assets relating to accrued pension are recorded on the books of AARP, Inc. Contributions to the Plan will be recorded as expenses in the year in which the contributions are due. There were no employer contributions by the Foundation to the Plan in 2013 and The Foundation will not be required to make a contribution to the pension plan in DEFINED-CONTRIBUTION PLAN The Foundation participates in a single-employer defined-contribution plan called the AARP Employees 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 continuous service with the Foundation. The Foundation makes contributions to the 401(k) Plan for its employees, matching employee contributions at 100% of the first 3%, and 50% of the next 2% of employee compensation up to the maximum limits allowed by law. Employer contributions totaled approximately $797,000 and $819,000 for the years ended December 31, 2013 and 2012, respectively

20 15. TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are available for the following purposes as of December 31, 2013 and 2012 (in thousands): Purpose-restricted: Hunger $ - $ 262 Housing Isolation Other programs Total purpose-restricted Time-restricted 1, Total $ 2,020 $ 696 Net assets were released from donor-imposed restrictions by incurring expenses satisfying the restricted purposes specified by the donors during 2013 and 2012, as follows (in thousands): Purpose-restricted releases: Hunger $ 262 $ 1,064 Housing 191 1,000 Isolation Other programs Total purpose-restricted 738 2,080 Time-restricted releases - - Total $ 738 $ 2, BOARD-DESIGNATED NET ASSETS Quasi-endowment The Foundation Board has established a board-designated quasi-endowment fund, and has adopted a policy under which certain contributions are designated to the fund. Assets of the quasi-endowment fund are invested in a broadly diversified portfolio spread over multiple asset classes. The Board also adopted a spending policy, which permits an annual transfer to operating funds of up to 5% of the previous 12 quarters average quasi-endowment fund balance

21 The transactions affecting the board-designated quasi-endowment are summarized as follows (in thousands): Board-designated quasi-endowment, January 1 $ 16,154 $ 14,790 Interest and dividends Realized and unrealized gains 2,091 1,292 Designations Appropriation for spending (718) (646) Board-designated quasi-endowment, December 31 $ 18,101 $ 16,154 Operating Reserve The Foundation Board has designated a portion of unrestricted net assets as an operating reserve, designed to provide funds to ensure the continued operation of the Foundation in the event of an unexpected interruption in revenue streams. The level of this operating reserve is determined annually based on a formula approved by the Board. 17. CONTINGENCIES The Foundation is a party to various claims and potential legal actions. Management believes, based upon advice of counsel, that the disposition of these matters will not have a significant effect on the consolidated financial position, changes in net assets or cash flows of the Foundation. The Foundation receives a substantial portion of its revenue from government grants, which are subject to audit by various federal and state agencies. The ultimate determination of amounts received under these grants generally is based upon allowable costs reported to and audited by the governments or their designees. The liabilities, if any, arising from such compliance audits cannot be determined at this time. In the opinion of management, adjustments resulting from such audits, if any, will not have a significant effect on the consolidated financial position, changes in net assets or cash flows of the Foundation. The Foundation leases office space in a number of states to facilitate the local delivery of its programs, under short-term operating leases with various lease terms. Total rent incurred under operating leases was approximately $1,887,000 and $1,841,000 for the years ended, respectively

22 Consolidated Schedule of Functional Expenses For the year ended December 31, 2013, with comparative totals for the year ended December 31, 2012 (In thousands) Program Services Impact Supporting Services Areas & Total Total Legal Other Program Management Supporting Total Total SCSEP Tax-Aide Advocacy Programs Services Fundraising and General Services Expenses Expenses Expenses: Enrollee wages and benefits $ 52,097 $ - $ - $ - $ 52,097 $ - $ - $ - $ 52,097 $ 57,870 In-kind supervisory salaries 24, , ,280 41,942 In-kind services from AARP and others 5, ,681 10,709 3,402 5,788 9,190 19,899 15,734 Compensation and temporary labor 10,014 1,773 3,561 6,160 21,508 3,428 3,648 7,076 28,584 27,781 Printing and postage ,010 4,862 8, ,922 13,784 10,539 Promotion ,355 1, ,423 3,778 6,226 Volunteers 8 4, , ,520 4,979 Meetings and travel , ,053 2,377 1,996 Occupancy 1, , ,861 2,430 Telecommunications , , Office supplies and equipment 1,014 1, , ,282 2,896 Consulting and professional services ,767 4,517 1, ,088 6,605 4,834 Data processing ,904 2,020 Depreciation and amortization Insurance and taxes Interest Grant awards and contributions ,559 18, ,581 16,058 Miscellaneous , ,194 2, Total expenses $ 97,286 $ 10,108 $ 5,562 $ 39,853 $ 152,809 $ 21,295 $ 13,183 $ 34,478 $ 187,287 $ 198,369 This schedule should be read in conjunction with the Report of Independent Certified Public Accountants and the accompanying consolidated financial statements and notes thereto