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Arthritis Foundation, Pacific Region, Inc.

FINANCIAL STATEMENTS

December 31, 2014

(with Independent Auditors' Report Thereon)

Arthritis Foundation, Pacific Region, Inc.

FINANCIAL STATEMENTS

December 31, 2014 (with Independent Auditors' Report Thereon)

TABLE OF CONTENTS

Pages

Independent Auditors' Report 1

Financial Statements

Statement of Financial Position 2

Statement of Activities 3

Statement of Functional Expenses 4

Statement of Cash Flows 5

Notes to Financial Statements 6 - 20

Arthritis Foundation, Pacific Region, Inc.NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF ORGANIZATION

Arthritis Foundation, Pacific Region, Inc. (the Region) (formerly known as the Southern CaliforniaChapter of the Arthritis Foundation) is the leading, volunteer-driven not-for-profit health organizationserving those with arthritis by charter of the Arthritis Foundation, Inc. (the Foundation). The Regionserves communities in Hawaii, Nevada, Arizona, the Inland Empire, Los Angeles, Ventura and OrangeCounties, the San Fernando Valley, San Diego, San Luis Obispo, Santa Barbara, the Greater Sacramentoarea, and the Central Valleys.

The mission of the Region is to improve lives through leadership in the prevention, control and cure ofarthritis and related diseases. Arthritis is the nation's leading cause of disability, and affects 53 millionadults and 300,000 children. The Region fulfills its mission through funding research to improve livesand find a cure, providing public health education and evidence-based exercise programs, and pursuingpublic policy and legislation (advocacy). The Region provides community-based services such as landand water-based exercise classes, self-help education courses, free literature, summer camps for childrenwho have juvenile arthritis, professional education and physician referrals. The Region also fundsresearch, advances public policy issues and collaborates with key public and private groups to affectpositive change for people living with arthritis, The many services offered to people with arthritis andtheir families help offset the physical and emotional impact of the disease. The Region's volunteers and itspaid professional staff support fundraising programs, which help the Region support both research andprogram efforts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Region have been prepared utilizing the accrual basis of accounting.

Accounting

To ensure observance of certain constraints and restrictions placed on the use of resources, the accountsof the Region are maintained in accordance with the principles of net assets accounting. This is theprocedure by which resources for various purposes are classified for accounting and reporting purposesinto net asset classes that are in accordance with specified activities or objectives. Accordingly, allfinancial transactions have been recorded and reported by net asset class as follows:

Unrestricted: Net assets that are not subject to donor-imposed stipulations. These generally result from revenuesgenerated by receiving unrestricted contributions, providing services, and receiving income frominvestments less expenses incurred in providing program related services, raising contributions, andperforming administrative functions.

Temporarily Restricted: Net assets subject to donor-imposed stipulations that may or will be met either by actions of theRegion and/or passage of time. The Region has $6,780,158 of temporarily restricted net assets atDecember 31, 2014.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Permanently Restricted: These net assets are received from donors who stipulate that resources are to be maintainedpermanently, but permit the Region to expend all of the income (or other economic benefits)derived from the donated assets. The Region has $19,493,505 of permanently restricted net assetsat December 31, 2014.

Revenues are reported as increases in unrestricted net assets unless the use of the related assets is limitedby donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains andlosses on investments and other assets or liabilities are reported as increases or decreases in unrestrictednet assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporaryrestrictions on net assets (i.e. the donor-stipulated purpose has been fulfilled and/or the stipulated timeperiod has elapsed) are reported as reclassifications between the applicable classes of net assets haselapsed) are reported as reclassifications between the applicable classes of net assets.

Operating results in the statement of activities reflect all transactions increasing and decreasing net assetsexcept those that the Region defines as non-operating. Non-operating includes all endowment returns inexcess of the spending policy, unrealized gains and losses from operating accounts, unrealized gains andlosses on beneficial interest in perpetual trusts, changes in valuation of split interest agreements, andtransfer of the net assets from other regions / chapters.

Fair Value of Financial Instruments

The estimated fair value amounts for specific groups of financial instruments are presented within thefootnotes applicable to such items. Accounts receivable, and accounts payable are stated at cost, whichapproximates fair value, due to their short term maturity.

Cash and Cash Equivalents

Cash accounts at each institution are insured by the Federal Deposit Insurance Corporation up to$250,000. At December 31, 2014, the Region had approximately $671,427 of uninsured cash and cashequivalents. The Region has not experienced any losses in such accounts and believes it is not exposed toany significant credit risk on cash and cash equivalents. Cash equivalents are highly liquid investmentswith an original maturity of three months or less at the date of purchase. Because of the short maturity ofthese financial instruments, the carrying value approximates the fair value. For financial statementpurposes, the Region considers all highly liquid investments with an initial maturity of less than threemonths when purchased, to be cash and cash equivalents. The carrying value of cash and cashequivalents at December 31, 2014 approximates its fair value.

Investments

Investments in equity securities with readily determinable fair values and all investments in debtsecurities are stated at fair value. The cost assigned to investments received by gift is the fair value at thedate the gift is received. Purchase and sales of securities are reflected on a trade-date basis. Gains andlosses on sales of securities are based on average historical value (cost of securities if purchased or thefair market value at the date of gift if received by donation). Dividend and interest income is recorded onthe accrual basis. In accordance with the policy of stating investments at fair value, the net change inunrealized appreciation or depreciation for the year is reflected in the statement of activities. Marketvalues of such investments and credit ratings of bond issuers are routinely reviewed by the Board ofDirectors.

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The various investments in stocks, securities, mutual funds, and other investments are exposed to avariety of uncertainties, including interest rate, market, and credit risks. Due to the level of riskassociated with certain investments, it possible that changes in the values of these instruments couldoccur in the near term. Such changes could materially affect the amounts reported in the financialstatements of the organization.

The Region utilizes the net asset value ("NAV") reported by each of the alternative funds as a practicalexpedient for determining the fair value of the investment. These investments are redeemable at NAVunder the original terms of the subscription agreements and operations of the underlying funds. However,it is possible that these redemption rights may be restricted or eliminated by the funds in the future inaccordance with the underlying fund agreements. Due to the nature of the investments held by thesefunds, changes in market conditions and the economic environment may significantly impact the NAV ofthe funds and, consequently, the fair value of the Region's interests in the funds. Furthermore, changes tothe liquidity provisions of the funds may significantly impact the fair value of the Region's interest in thefunds.

Contribution Receivables

Receivables are recorded when billed or accrued and represent claims against third parties that willbe settled in cash. The carrying value of receivables, net of the allowance for doubtful accounts, if any,represents their estimated net realizable value. The allowance for doubtful accounts, if any, is estimatedbased on historical collection trends, type of customer, the age of outstanding receivables and existingeconomic conditions. If events or changes in circumstances indicate that specific receivable balances maybe impaired, further consideration is given to the collectability of those balances and the allowance isadjusted accordingly. Past due receivable balances are written off when internal collection efforts havebeen unsuccessful in collecting the amount due. At December 31, 2014, management has determinedthat an allowance for doubtful accounts of $12,000 is adequate.

Bequests Receivable

The Region has been named a beneficiary in a number of bequests. Bequests are not recognized assupport until all of the following conditions are met: the demise of testator, the amount of the bequest isknown, the Region is certain that, based on the estate's net assets, the amount bequeathed is realizable andthe probate court has declared the will valid. At December 31, 2014, management has determined that anallowance for doubtful accounts of $88,000 is adequate.

Certain gifts have not been recorded in the accompanying financial statements because donors' wills havenot yet been declared valid by the probate court and/or the value of the amounts to be received is not yetdeterminable. The Region will record and report all such gifts as the value is determined.

Split Interest Agreements

The Region receives certain planned gift donations that benefit not only the Foundation but also anotherbeneficiary designated by the donor. These contributions are generally gifts to be received by the Regionin the future and are reported in contributions receivable.

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Beneficial Interest in Charitable Remainder Trusts

The Region has been designated as the beneficiary of assets held in charitable remainder trustsadministered by other trustees. The Region recognizes temporarily restricted contribution revenue and, asan asset, the present value of the estimated future benefits to be received when the trust assets aredistributed. Adjustments to the receivable to reflect the revaluation of the present value of the estimatedfuture payments to the lifetime beneficiaries are recognized in the statement of activities as a change invalue of beneficial interest in charitable remainder trusts. The carrying values of certain trusts have notyet been determined. Accordingly, such assets have not been recorded in the accompanying financialstatements.

Beneficial Interest in Perpetual Trusts

Donors have established and funded trusts, which are administered by organizations other than theRegion. Under the terms of the trusts, the Region has the irrevocable right to receive all or a portion of theincome earned on the trust assets either in perpetuity or for the life of the trust. The Region does notcontrol the assets held by outside trusts. Annual distributions from the trusts are reported as investmentincome. Adjustments to the beneficial interest to reflect changes in the fair value are reflected in thestatement of activities as a change in value of beneficial interest in perpetual trusts. The carrying valuesof certain trusts have not yet been determined. Accordingly, such assets have not been recorded in theaccompanying financial statements.

Long-Lived Assets

The Region reviews long-lived assets for impairment whenever events or changes in circumstancesindicate that the book value of the assets may not be recoverable. An impairment loss is recognizedwhen the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in whichcase a write-down is recorded to reduce the related asset to its estimated fair value. No impairmentlosses were recognized on long-lived assets during the year ended December 31, 2014.

Deferred Revenue

Conditional grants, which are paid in advance, are deferred and recognized as contribution revenue inthe period when the condition is met.

Contributed Goods and Services

Contributed goods are reflected as contributions in the accompanying statement of activities at theirestimated value at date of receipt. Contributed services are reflected in the statement of activities at thefair value of the services received. The contributions of services are recognized if the services received(a) create or enhance non-financial assets or (b) require specialized skills that are provided by individualspossessing those skills and would typically need to be purchased if not provided. For the year endedDecember 31, 2014, the Region recognized $91,871 of contributed services for various programs, as wellas $246,195 of contributed goods for special events and programs, for a total of $338,066 of contributedgoods and services.

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In addition, the Region receives services from a large number of volunteers who give significant amountsof their time to the Region's programs, fundraising campaigns, and management. No amount have beenreflected for these types of donated services, as they do not meet the criteria for recognition.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs for the year ended December 31,2014 were $98,947.

Contributions

Contributions, including unconditional promises to give, are recorded at the date of pledge. Bequests arerecorded as revenue at the time an unassailable right to the gift has been established and the proceeds aremeasurable in amount.

Research Awards and Grants

Research awards and grants are charged against operations when authorized by the Region's Boardof Directors. The actual payment of the grant may not necessarily occur in the year of authorization.

Income Taxes

The Region is a not-for-profit corporation and has been recognized as exempt from federal income taxeson related income under Section 501(c)3 of the Internal Revenue Code (IRC) and the corresponding stateprovisions. The Region engages in certain activities unrelated to the mission of the Organization forwhich it is responsible for payment of unrelated business income tax. Deferred tax assets and liabilitiesare measured based on enacted tax laws and rates expected to apply to taxable income in the years inwhich temporary differences are expected to be recorded or settled. Income taxes did not have a materialimpact on the financial position or results of operations of the Region as of and for the years endedDecember 31, 2014.

The Region's policy is to record a liability for any tax position taken that is beneficial to the Region,including any interest and penalties, when it is more likely than not the position taken will be overturnedby a taxing authority upon examination. Management believes there are no such positions as ofDecember 31, 2014 and, accordingly, no liability has been accrued.

The Region files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In thenormal course of business, the Region is subject to examination by federal, state, and local jurisdictions,where applicable. As of December 31, 2014, the tax years that remain subject to examination by the majortax jurisdictions under the statute of limitations are 2009 through 2014.

Functional Allocation

The costs of providing the Region's various programs and supporting services have been summarized on afunctional basis. Accordingly, certain costs have been allocated among the programs and supportingservices benefited by a method that best measures the relative degree of benefit. The Region uses timeestimates to allocate indirect costs.

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Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that affect certain reported amounts anddisclosures. Accordingly, actual results could differ from those estimates.

Comparative Totals

The financial statements include certain prior year summarized comparative information in total but notby net assets class. Such information does not include sufficient detail to constitute a presentation inconformity with accounting principles generally accepted in the United States of America. Accordingly,such information should be read in conjunction with the Region's financial statements for the yearended December 31, 2013 from which the summarized information was derived.

Reclassification

For comparability, certain December 31, 2013 amounts have been reclassified, where appropriate, toconform to the financial statement presentation used at December 31, 2014.

3. INVESTMENTS

Investments at December 31, 2014, consist of the following:

Common stocks $ 5,151,441Domestic equity mutual funds 2,184,980Fixed income mutual funds 2,803,473International equity mutual funds 2,271,250Alternative investments 774,406Other - principally money market and other mutual funds 815,643

Total Investments $ 14,001,193

Investment income is comprised of the following for the year ended December 31, 2014:

Investment Income from Perpetual Trusts $ 1,450,130Interest and Dividends 286,997Realized and Unrealized Gains 214,446

Total Operating and Non-Operating Investment Returns $ 1,951,573

4. FAIR VALUE MEASUREMENTS

The Region has implemented an accounting standard for those assets (and liabilities) that are re-measuredand reported at fair value at each reporting period. This standard establishes a single authoritativedefinition of fair value, sets out a framework for measuring fair value based on inputs used, and requiresadditional disclosures about fair value measurements. This standard applies to fair value measurements

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4. FAIR VALUE MEASUREMENTS (Continued)already required or permitted by existing standards.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active marketsfor identical assets (or liabilities). Fair values determined by Level 2 inputs utilize data points that areobservable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3inputs are unobservable data points for the asset (or liability) and include situations where there is little, ifany, market activity for the asset (or liability).

The following table presents information about the Region's assets that are measured at fair value on arecurring basis at December 31, 2014 and indicates the fair value hierarchy of the valuation techniquesutilized to determine such fair value:

Fair Value Measurements Using

Year EndedDecember 31,

2014

Quoted Pricesin Active

Markets forIdentical Assets

(Level 1)

SignificantOther

ObservableInputs

(Level 2)

SignificantUnobservable

Inputs(Level 3)

Common stocks:Financial services industry $ 885,892 $ 885,892 $ - $ -Healthcare industry 529,769 529,769 - -Other 3,735,780 3,735,780 - -

Domestic equity mutual funds:Other 2,184,980 1,586,256 598,724 -

Fixed income mutual funds:Other 2,803,473 740,976 2,062,497 -

International equity mutual funds:Other 2,271,250 1,092,847 1,178,403 -

Alternative investments 774,406 - 774,406 -Other - principally money market andother mutual funds 815,643 815,643 - -

Total investments 14,001,193 9,387,163 4,614,030 -Beneficial Interest in: - - - -

Charitable Remainder Trusts 2,813,517 - - 2,813,517Perpetual Trusts 12,550,287 - - 12,550,287

Total Assets at Fair Value $ 29,364,997 $ 9,387,163 $ 4,614,030 $ 15,363,804

The fair values of marketable securities within Level 1 and Level 2 inputs were obtained based onquoted market prices at the closing of the last business day of the fiscal year.

The fair values of beneficial interests within Level 3 inputs were determined as described in Note 2.

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4. FAIR VALUE MEASUREMENTS (Continued)

Fair Value Measurements UsingSignificantly Unobservable Inputs (Level 3)

TemporarilyRestricted

PermanentlyRestricted

Beneficial Interest inCharitable

Remainder TrustsBeneficial Interestin Perpetual Trusts Total

Beginning Balance $ 2,753,896 $ 12,561,763 $ 15,315,659Change in Value of Beneficial

Interest - Net Unrealized Gains(Losses) 59,621 393,153 452,774

Additions - 1,282,827 1,282,827Distributions - (1,687,456) (1,687,456)

ENDING BALANCE $ 2,813,517 $ 12,550,287 $ 15,363,804

5. NOTES RECEIVABLE

The Region has an $82,650 mortgage note receivable with an 8% interest rate, interest only payable at$710 per month through June 2010. Although this note receivable is overdue, it is secured by land andtherefore no allowance has been provided.

6. BENEFICIAL INTEREST IN CHARITABLE REMAINDER TRUSTS

The Region is the beneficiary of twelve charitable remainder trusts administered by other trustees. Assetsheld in charitable remainder trusts totaled $2,813,517 at December 31, 2014 representing the portion ofthe net present value of the charitable remainder trusts for which the Region is the designatedbeneficiary.

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7. SPLIT INTEREST AND BENEFICIAL INTEREST IN PERPETUAL TRUSTS

The Region is the beneficiary of eight trusts whose assets are not in the possession of the Region. TheRegion has legally enforceable rights or claims to such assets, including annual income as follows:

16.67% Interest in a 1969 perpetual trust; income received during the year endedDecember 31, 2014 was $1,057,379. A portion of the assets in this trust are oil andgas royalties, the carrying value has been recorded at a 30% discount. $ 4,843,281

100% interest in a 2007 perpetual trust; income was received during the year endedDecember 31, 2014 was $168,277. 3,560,457

20% interest in a 1975 perpetual trust; income received during the year endedDecember 31, 2014 was $30,308. 1,339,754

25% interest in a 1977 perpetual trust; income received during the year endedDecember 31, 2014 was $6,071. 1,197,006

15% interest in a 1978 perpetual trust; income was received during the year endedDecember 31, 2014 was $16,678.

627,451

50% interest in a 1988 perpetual trust; income received during the year endedDecember 31, 2014 was $6,888. 537,564



TOTAL BENEFICIAL INTEREST IN PERPETUAL TRUSTS $ 12,550,287

8. ACCRUED EXPENSES AND OTHER LIABILITIES

Accounts payable, accrued expenses and other liabilities at December 31, 2014 consist of the following:

Accrued Pension Liability (Note 14) $ 737,597Deferred Revenue 369,419Other Accrued Expenses 245,931Accrued Vacation 221,095Accrued Payroll 54,506State Unemployment Accrual 126,295

TOTAL ACCRUED EXPENSES AND OTHER LIABILITIES $ 1,754,843

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9. COMMITMENTS AND CONTINGENCIES

(A) OPERATING LEASES

The Region leases real property and equipment under non-cancelable operating leases that expire throughFebruary 2019.

The following is a schedule of future minimum lease payments on non-cancelable operating leases:

Years Ending December 31,2015 $ 308,3622016 290,2232017 261,6542018 88,5792019 45,509Total $ 994,327

Rental expense for the year ended December 31, 2014 was $410,394 and is included in occupancyexpense in the statement of functional expenses.

(B) LEGAL PROCEEDINGS

In the ordinary course of conducting its business, the Region may become involved in various lawsuits.Some of these proceedings may result in judgments being assessed against the Region which, from timeto time, may have an impact on changes in net assets. The Region is not aware of any proceedings,individually or in the aggregate, that would have a material effect on the accompanying financialstatements.

(C) RESEARCH AWARDS AND GRANTS

The Region has commitments for research awards and grants for future years. The terms of researchawards and grants are from one to three years with continuation of grants subject to certain performancerequirements. At December 31, 2014, total commitments of $15,000 are expected to be paid within oneyear.

10. NET ASSETS

Temporarily restricted net assets at December 31, 2014 are available for the following purposes:

Specific Programs Conducted by the Region $ 2,559,070Charitable Remainder Trusts 2,813,517Research 1,047,571Time Restriction 360,000Total Temporarily Restricted Net Assets $ 6,780,158

Permanently restricted net assets consist of the following at December 31, 2014:

Perpetual Trusts $ 12,550,287Other 6,943,216Total Permanently Restricted Net Assets $ 19,493,503

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10. NET ASSETS (Continued)

Net assets released from restrictions consist of the following for the year ended December 31, 2014:

Programs $ 586,915Research 200,470Net Assets Released From Temporary Restriction $ 787,385

Contributing to the ending unrestricted balance of $3,942,902 is $183,631 due to the National Office. Partof this due to National Office liability is for amounts due from pledges and bequests receivable andcharitable remainder trusts. Therefore a substantial portion of the due to National Office liability is notpayable until future years upon the payment of liquidation of such pledges and bequests receivable andcharitable remainder trusts.

The net liability due National Office at December 31, 2014 consists of the following:

Current Payable Relating to Unrestricted NetAssets $ (773,139)

Long-term Liability Relating to TemporarilyRestricted Net Assets 956,770

Total Due to National Office $ 183,631

11. ENDOWMENTS

The Region's endowment consists of funds established for a variety of purposes. Its endowment consistsof donor-restricted endowment funds. Endowment funds are established by donor-restricted gifts andbequests to either provide a permanent endowment, which is to provide a permanent source ofincome to the Region, or a term endowment, which is to provide income for a specified period to theRegion (See Note 10). Beneficial interests in charitable remainder trusts and perpetual trusts administeredby outside trustees are not considered part of the Region's endowments.

The Region's management understands California's adoption of the Uniform Prudent Management ofInstitutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as ofthe gift date of the donor restricted endowment funds absent explicit donor stipulations to the contrary.The Region classifies as permanently restricted net assets (a) the original value of gifts donated to thepermanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c)accumulations to the permanent endowment made in accordance with the direction of applicable donorgift instrument at the time the accumulation is added to the fund. The remaining portion of donor-restricted endowment fund in excess of the original fair value that is not classified in permanentlyrestricted net assets is classified as temporarily restricted net assets until those amounts are appropriatedfor expenditure in a manner consistent with the standard of prudence prescribed by UPMIFA. Inaccordance with UPMIFA, the Region considers the following factors in making a determination toappropriate or accumulated donor- restricted endowment funds:

1) The duration and preservation of the fund2) The purpose of the Region and the donor-restricted endowment fund3) General economic conditions4) The possible effects of inflation and deflation5) The expected total return from income and the appreciation of investments

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11. ENDOWMENTS (Continued)

6) Other resources of the Region7) The investment policy of the Region

If the market value of any fund classified as permanently restricted at year-end is below the amountdetermined to be permanently restricted the deficit which cannot be funded from temporarily restrictedunspent earnings of the fund are reported as a reduction in unrestricted net assets.

The primary long-term financial objective for the Arthritis Foundation’s endowments is to preserve thereal (inflation-adjusted) purchasing power of endowment assets and income after accounting forendowment spending, inflation and costs of portfolio management. Performance of the overallendowment against this objective is measured over rolling periods of one, three and five years. Theendowments shall be managed to optimize the long run total rate of return on invested assets, assuming aprudent level of risk. The goal for this rate of return is one that funds the Arthritis Foundation’s existingspending policy and allows sufficient reinvestment to grow the endowment principal at a rate that exceedsinflation (as measured by the Consumer Price index). Over the short term, the return for each element ofthe endowment portfolio should match or exceed each of the returns for the broader capital markets inwhich assets are invested.

The Region's policy requires that the endowment assets will be governed by a spending policy that seeksto distribute a specific payout rate of the endowment base to support the Foundation’s programs. Theendowment base will be defined as a three-year moving average of the market value of the totalendowment portfolio (calculated as of the last day of December for the prior three years). The distributionor payout rate will be calculated at a specific fixed percentage of the base. Such a policy will allow for agreater predictability of spendable income for budgeting purposes and for gradual steady growth for thesupport of operations by the for the support of operations by the endowments. In addition, this policywill minimize the probability of invading the principal over the long term. Spending in a given year willreduce the unit value of each endowment element by the payout percentage. In no case will fundsdesignated as True Endowment be reduced below their initial unit value. In the case of short-termdeclines in the market value of the endowment pool of funds, the overall spending rate may be calculatedbelow designated payout percentage in order to maintain the original unit value of certain elements of thetrue endowment. Growth of the unit values over time should allow for spending of principal, withoutdrawing from the original corpus of a particular gift.

The endowment will be divided into three broad asset classes: equity fund, fixed income fund and cash ornear-cash fund. The purpose of dividing the endowment fund in this way is to ensure that the optimallong-term return is achieved given the Arthritis Foundation’s risk preference. The endowment will bediversified both by asset class (equity, fixed income and cash) and within asset class (large capitalizationstocks, small capitalization stocks, Treasury bonds, corporate bonds, etc). The purpose of diversificationis to provide reasonable assurance that no single security or class of securities will have adisproportionate impact on the total endowment and to reduce the overall risk and volatility of the entireportfolio. The total endowment will be monitored on a continual basis for consistency of investmentphilosophy, return relative to objectives, and asset allocation with respect to target percentages.

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11. ENDOWMENTS (Continued)

Endowment Net AssetComposition by Type of Fund atDecember 31, 2014 Unrestricted

TemporarilyRestricted

PermanentlyRestricted Total

Donor-Restricted $ - $ - $ 6,943,216 $ 6,943,216

Changes in Endowment NetAssets for the Year EndedDecember 31, 2014Endowment Net Assets -

Beginning of Year $ - $ - $ 6,943,216 $ 6,943,216Investment Income - - 29,026 29,026Addition of Endowment Assets

Donor-restricted - - - -Appropriation of Endowment

Assets for Expenditure - - - -Released from Restrictions - - (29,026) (29,026)Endowment Net Assets - End of

Year $ - $ - $ 6,943,216 $ 6,943,216

12. RELATED PARTY TRANSACTIONS

The Region is required to share 27%, 35%, or 45% of unrestricted public support and bequests (lesscertain allowances) to the Arthritis Foundation, Inc., National Office (the “National Office”). For the yearended December 31, 2014 share expense was $3,770,162. The Region is also allocated a portion ofcertain contributions received by the National Office which for the year ended December 31, 2014 was$1,989,459. The Region reimburses the National Office for a portion of costs associated with ArthritisToday, the Organization’s magazine, its direct mail program, computer system support, financial services,and educational and promotional materials which totaled approximately $892,782.

The Region paid an outside legal firm, in which a Board member serves as a partner, $21,728 for legalservices rendered. The services were approved by the Board of Directors and the legal fees areconsidered reasonable with reference to similar services offered by unrelated legal firms.

13. JOINT COSTS

The Region incurred joint costs of $507,971 during the year ended December 31, 2014 for informationalmaterials and activities that included fundraising appeals, such as the Region's direct mail. Joint costs forthe year ended December 31, 2014 were allocated as follows:

Public Health Education $ 355,580Fundraising 152,391Total Joint Costs $ 507,971

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14. PENSION PLANS

The Region has a defined benefit pension plan (the Plan) covering substantially all of itsemployees as of 2008, the year the plan was frozen. Benefits are based on years of service andcompensation. Contributions are determined in accordance with the Plan's provisions. The Plan wasfrozen effective December 31, 2008 and as a result, no benefits accrue after that date.

The Plan's funded status as of December 31, 2014 is recorded as follows:

Actuarial Present Value of Benefit Obligations:

Accumulated Benefit Obligation $ 1,798,026

Plan Assets at Fair Value $ 1,060,429Projected Benefit Obligation 1,798,026Total Accrued Pension Liability $ 737,597

Net periodic pension costs for the year ended December 31, 2014 includes the following components:

Interest Cost $ 84,116Expected Return on Plan Assets (29,463)Amortization of Actuarial Loss 32,645

Net Periodic Pension Cost $ 87,298

Benefits Paid $ (25,188)

The actuarial assumptions used were:

Discount Rate %5.25Rate of Future Compensation Increase Not ApplicableExpected Long-Term Rate of Return on Plan

Assets %2.75

The Plan is utilizing a market-related value of assets to determine expected return, realizing 20% of theaccumulated total of the past five years of gains and losses.

The investment strategy of the Region has the following objectives: To achieve a balanced return of current income and appropriate growth of principal. To achieve returns in excess of the rate of inflation plus spending over the investment horizon in

order to preserve the purchasing power of Plan assets. To preserve capital and minimize costs.

Risk control is an important element in the investment of Plan assets and is achieved through a diversifiedtarget allocation.

No employer contributions are expected during the year ended December 31, 2014. No plan assets areexpected to be returned to the employer during the year ended December 31, 2014.

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14. PENSION PLANS (Continued)

Benefits expected to be paid as of December 31, 2014 are:

Year Ending December 31,2015 $ 45,4482016 44,2562017 42,9752018 49,6652019 42,113

Five Years Thereafter 310,890

$ 535,347

The Plan is funded in accordance with the Employee Retirement Income Security Act of 1974. Planassets are 100% invested in mutual funds (89% in debt security funds and 11% in short-term funds) atDecember 31, 2014.

In addition, the Region adopted a 401(k) Retirement Plan (the Plan), which meets the requirements of theEmployee Retirement Income Security Act (ERISA). The Plan covers all eligible employees of theRegion. As adopted, the plan called for the Region to match $1.00 for every $1.00 contributed to the planup to 3% of an eligible employee's salary, and for the Region to match $.50 for every $1.00 contributed tothe plan up to an additional 2% of an eligible employee’s salary; the maximum employer match under the plan would be 4%. Effective January 1, 2010, the Region amended the plan to eliminate the requirement for an employer matching contribution for plan participants, leaving the Region theoption to, at its discretion make employer matching contributions. There were no contributions to theplan for the year ended December 31, 2014. In 2014, the Region amended its plan again to reinstate therequirement for employer matching contributions for plan participants effective January 1, 2015 asoriginally adopted. 15. SUBSEQUENT EVENT

Subsequent events have been evaluated through March 20, 2015, which is the date the financialstatements were available to be issued.

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