III. Financial Condition



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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 III. Financial Condition

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 Report of the Auditing Committee of the National Academy of Sciences Dr. Bruce Alberts, President National Academy of Sciences Dear Dr. Alberts: In accordance with Bylaw V-6 of the National Academy of Sciences, the firm of KPMG LLP was retained to conduct an audit of the accounts of the Treasurer for the year ended December 31, 2000, and to report to the Auditing Committee. The independent accountants have completed their audit of the financial statements and have submitted their report, a copy of which is attached, concerning financial statements to which they refer. The Auditing Committee has reviewed the report and recommends its acceptance in compliance with the governing bylaw and that the opinion of the independent accountants be published with the report of the Treasurer. Respectfully submitted, JACK HALPERN, Chair PURNELL CHOPPIN ROBERT WURTZ National Academy of Sciences

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 Independent Auditor's Report The Auditing Committee National Academy of Sciences: We have audited the accompanying statements of financial position of the National Academy of Sciences (NAS) as of December 31, 2000 and 1999, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the NAS's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairy, in all material respects, the financial position of the NAS as of December 31, 2000 and 1999, and its changes in net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in note 3 to the financial statements, the net assets as of January 1, 1999 have been restated. May 25, 2001

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 NATIONAL ACADEMY OF SCIENCES Statements of Financial Position December 31, 2000 and 1999 ($ in thousands) Assets 2000 1999 Current assets:     Cash and cash equivalents $ 59 $ 97 Short-term investments (note 4) 49,481 34,003 Accounts receivable - U.S. government 35,298 31,754 Contributions receivable and other (note 6) 15,512 6,878 Publications and supplies inventory 2,378 2,222 Bond proceeds held with trustee (note 12) 78,332 92,632 Prepaid expenses and other 2,567 2,387 Total current assets $183,627 $169,973 Einstein Memorial $1,723 $1,723 Property and equipment (note 5) 68,560 54,194 Other assets (note 13) 5,972 5,938 Long–term investments (note 4) 300,709 281,438 Contributions receivable (note 6) 23,527 1,865   $584,118 $515,131 Liabilities and Net Assets     Current liabilities:     Accounts payable and accrued expenses $ 26,350 $ 20,777 Deferred revenue (note 7) 29,017 18,594 Other liabilities (note 8 and note 14) 7,733 5,464 Total current liabilities $ 63,100 $ 44,835 Bonds payable (note 12) $129,992 $129,998 Funds held on behalf of others (note 4) 20,950 21,710 Accrued lease liability (note 12) 24,045 — Accrued employee benefits (note 13) 7,486 7,368 Deferred gain (note 12) 4,650 — Other liabilities 2,323 710 Total liabilities $252,546 $204,621 Net assets:     Unrestricted (note 3) $117,946 $124,349 Temporarily restricted (note 9) 133,894 112,234 Permanently restricted (note 9) 79,732 73,927 Total net assets $331,572 $310,510 Commitments and contingencies (note 11, note 12, note 13, and note 14)     Total liabilities and net assets $584,118 $515,131 See accompanying notes to financial statements.

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 NATIONAL ACADEMY OF SCIENCES Statements of Activities Years ended December 31, 2000 and 1999 ($ in thousands)   2000 1999   Unrestricted Temporarily restricted Permanently restricted Total Unrestricted Temporarily restricted Permanently restricted Total Revenues, gains, and other support:                 Government contracts and grants $165,994 $ — $ — $165,994 $160,167 $ — $ — $160,167 Private contracts and grants 20,524 16,429 — 36,953 15,868 10,912 — 26,780 Other contributions 5,568 17,939 5,805 29,312 4,319 — 1,270 5,589 Fees and publications 14,911 — — 14,911 15,785 — — 15,785 Investment income (note 4) 6,141 (393) — 5,748 21,208 13,724 — 34,932 Other 5,511 — — 5,511 3,503 — — 3,503 Net assets released from restrictions (note 9) 12,315 (12,315) — — 7,852 (7,852) — — Total revenues, gains, and other support $230,964 $ 21,660 $ 5,805 $258,429 $228,702 $ 16,784 $ 1,270 $246,756 Expenses:                 Programs (note 10) $203,791 $ — $ — $203,791 $192,984 $ — $ — $192,984 Management and general 29,913 — — 29,913 27,628 — — 27,628 Fund raising 3,663 — — 3,663 1,853 — — 1,853 Total expenses $237,367 $ — $ — $237,367 $222,465 $ — $ — $222,465 Change in net assets $ (6,403) $ 21,660 $ 5,805 $ 21,062 $ 6,237 $ 16,784 $ 1,270 $ 24,291 Net assets at beginning of the year, as restated (note 3) 124,349 112,234 73,927 310,510 118,112 95,450 72,657 286,219 Net assets at end of the year $117,946 $133,894 $79,732 $331,572 $124,349 $112,234 $73,927 $310,510 See accompanying notes to financial statements.

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 NATIONAL ACADEMY OF SCIENCES Statements of Cash Flows December 31, 2000 and 1999 ($ in thousands) Assets 2000 1999 Cash flows from operating activities:     Change in net assets $ 21,062 $ 24,291 Adjustments to reconcile change in net assets to net cash flow used for operating activities:     Depreciation and amortization 3,406 3,795 Loss (gain) on sale of property and equipment (548) 431 Write-off of travel advances — 1,364 Bad debt expense 37 — Net (gain) loss on investments 20,128 (12,640) Funds received on behalf of others 760 (1,767) Increase in other receivables (30,333) (2,141) Increase in accounts receivable - U.S. government (3,544) (2,951) Increase in publications and supplies inventory (156) (328) Decrease (increase) in bond proceeds held with trustee 14,300 (92,632) Increase in prepaid expenses and other current assets (180) (1,669) Increase in other assets (34) (2,825) Increase in accounts payable and accrued expenses 5,573 3,286 Increase in other current liabilities 232 8,294 Increase (decrease) in deferred revenue 10,423 (5,429) Increase in other liabilities 971 1,858 Net cash used by operating activities $ 42,097 $(79,063) Cash flows from investing activities:     Purchase of property and equipment $(17,956) $(38,400) Sale or maturity of investments 35,276 24,879 Purchase of investments (90,913) (34,465) Proceeds from sale of Green/Harris facility 36,210 — Net cash used for investing activities $(37,383) $(47,986) Cash flows from financing activities:     Proceeds from the issuance of debt $ — $129,998 Proceeds from line of credit 55,646 25,850 Payments on line of credit (58,596) (28,800) Payments on lease liability (1,802) — Net cash provided by financing activities $ (4,752) $127,048 Net decrease in cash and cash equivalents (38) (1) Cash and cash equivalents, beginning of year 97 98 Cash and cash equivalents, end of year $ 59 $ 97 Supplemental disclosure of cash flow information:     Interest paid on obligations $ 6,733 $ 2,834 See accompanying notes to financial statements.

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 NATIONAL ACADEMY OF SCIENCES Notes to Financial Statements December 31, 2000 and 1999 (1) ORGANIZATION AND RELATED ENTITIES National Academy of Sciences The National Academy of Sciences (NAS) was formed under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on March 3, 1863. The NAS operates as a private cooperative society of distinguished scholars engaged in scientific or engineering research, dedicated to the furtherance of science and its use for the general welfare. The NAS is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code, except for unrelated business income. National Research Council Most of the activities undertaken by the NAS are carried out through the commissions, offices, and boards of the National Research Council (NRC), which draw on a wide cross section of the nation's leading scientists and engineers for advisory services to government agencies and the Congress. To respond effectively to both the disciplinary concerns of the research community and the complex interdisciplinary problems facing American society, the NRC is organized into 10 major units that are responsible for most study activities—Commission on Behavioral and Social Sciences and Education; Commission on Engineering and Technical Systems; Commission on Geosciences, Environment, and Resources; Commission on Life Sciences; Commission on Physical Sciences, Mathematics, and Applications; Office of International Affairs; Office of Scientific and Engineering Personnel; Board on Agriculture and Natural Resources; Transportation Research Board; and Center for Science, Mathematics, and Engineering Education. NRC activities are under the control of the NAS governance structure, and therefore are included in the NAS's financial statements. Institute of Medicine The Institute of Medicine (IOM), established in 1970, conducts studies of policy issues related to health and medicine. The IOM issues position statements on these policies, cooperates with the major scientific and professional societies in the field, identifies qualified individuals to serve on study groups in other organization units, and disseminates information to the public and the relevant professions. The IOM was established as a separate membership organization within the NAS. The financial activity and results of the IOM are included in the NAS financial statements. National Academy of Engineering The National Academy of Engineering (NAE) was established in December 1964 under the charter of the National Academy of Sciences as a related parallel organization, autonomous in its governance, administration, and in the selection of its members. The NAE shares with the NAS the responsibility for advising the federal government on scientific issues. The financial activity and results of the NAE are not included in the NAS financial statements, except to the extent those activities are conducted through the NRC. National Academy of Engineering Fund The National Academy of Engineering Fund (NAEF) is a separately incorporated not-for-profit organization established and controlled by the NAE to raise funds to support its goals. The financial activity and results of the NAEF are not included in the NAS financial statements. The National Academies' Corporation The National Academies' Corporation (TNAC) was separately incorporated in 1986 as a not-for-profit corporation for the purpose of constructing and maintaining a study and conference facility. This facility, the Arnold and Mabel Beckman Center, is located in Irvine, California, and operates to expand and support the general activities of the NAS, NRC, IOM, and NAE. The NAS and the NAEF are 50/50 joint investors of TNAC, and therefore share control. The financial activity and results of TNAC are not included in the NAS's financial statements. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor-

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000   imposed restrictions. Accordingly, net assets of the NAS are classified and reported as follows: Permanently restricted: Net assets subject to donor-imposed stipulations that they be maintained in perpetuity by the NAS. Generally, the donors of these assets permit the NAS to use all or part of the income earned on related investments for general or specific purposes. Temporarily restricted: Net assets subject to donor-imposed stipulations that may or will be met either by actions of the NAS and/or the passage of time. When a donor restriction expires, temporarily restricted net assets are reclassified as unrestricted net assets. Unrestricted: Net assets arising from exchange transactions and unexpended contributions that are not subject to donor-imposed stipulations. Cash Equivalents The NAS considers excess cash that is invested in overnight government-backed repurchase agreements to be cash equivalents. Investments Equity and debt securities are reported at fair value, based on quoted market prices. Investments in real estate mortgages are recorded at cost and consist of mortgages on the principal administrative facilities that the NAS currently occupies. Changes in the fair value are recognized in the statement of activities. Net gains or losses on investments are reported as changes in unrestricted net assets unless otherwise specified by the donor. The NAS holds certain short-term investments for program and operational liquidity requirements. Certain long–term investments are pooled for long-term investment purposes. Investments in this pool are administered as an open-end investment trust, with shares of the pool funds expressed in terms of participating capital units (PCU). PCU values are used to determine equity among funds in the pool whenever new money is contributed or withdrawals are made. Income earned that is not reinvested does not affect the PCU value. Contributions Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until the conditions on which they depend are substantially met. Contributions subject to donor-imposed stipulations that are met in the same year as received are reported as unrestricted revenue. Gifts of land, buildings, and equipment are reported as unrestricted net assets unless explicit donor stipulations specify how the donated assets must be used. Temporary restrictions on gifts to acquire long-lived assets are considered met in the period in which the assets are acquired or placed in service. Contracts and Grants Major portions of NAS activities are performed under cost-reimbursable contracts with the U.S. government. The largest concentrations in federal contracts in terms of earned revenue for the year ended December 31, 2000, were the Department of Transportation (approximately 25 percent), Health and Human Services (approximately 11 percent), Department of Energy (approximately 11 percent), and NASA (approximately 11 percent), and for the year ended December 31, 1999 were the Department of Transportation (approximately 21 percent), and the Department of Defense (approximately 14 percent). It is the policy of the NAS to record federal contracts as exchange transactions and recognize revenue as recoverable costs are incurred. Revenue from grants qualifying as contributions is recorded at the time the NAS is notified of the grant award. Such grants are classified as temporarily restricted if the use of the grant funds is limited to specific areas of study or restricted to be used in future periods. The net asset restrictions are released when the funds are used for the donor-specified purpose. Deferred Revenue For grants or contracts that are determined to be exchange transactions, revenue is recognized as the related costs are incurred. Funds received in advance for these grants are recorded as deferred revenue on the statement of financial position. Fair Value of Financial Instruments The fair value of bonds payable in the financial statements exceeded their carrying value by approximately $28,000 and $5.2 million on December 31, 2000 and 1999, respectively.

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000   The fair market value of all other financial instruments in the financial statements approximates reported carrying value. Inventories Inventories are stated at the lower of cost or net realizable value and include supplies, work in process, and finished goods for the publication activities of the NAS. The majority of the NAS's inventory of publications and supplies reside with the National Academy Press (NAP). NAP uses the full absorption costing methodology in pricing finished products. This methodology includes all direct printing and related indirect costs. Property and Equipment Depreciation of NAS buildings and equipment is computed on a straight-line basis using the following lives: Buildings – 40 to 50 years Building and leasehold improvements-lesser of the remaining life of the building or estimated useful life of improvement Furniture and equipment – 4 to 10 years The Einstein Memorial sculpture is not depreciated. Construction-in-progress is not depreciated until the related assets are placed in service. Use of Estimates The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. (3) RESTATEMENT OF FINANCIAL STATEMENTS During 2000, NAS determined that certain travel advances, which had been incorrectly recorded as recoverable, were required to be written off. This adjustment has been recorded by restatement of the net assets of the NAS as of January 1, 1999. The total write-off of travel advances amounted to approximately $6.7 million, of which $1.4 million related to the year ended December 31, 1999 and the remainder of approximately $5.3 million related to years prior to 1999. A summary of the effects of the restatement is as follows ($ in thousands):   2000 1999 January 1 unrestricted net assets, as previously reported $131,012 123,411 Write–off of travel advances (6,663) (5,299) January 1 unrestricted net assets, as restated $124,349 118,112 The effects on change in unrestricted net assets for the year ended December 31, 1999 is as follows (in thousands): Change in unrestricted net assets, as previously reported $7,601 Recognition of 1999 write–off of travel advances (1,364) Change in unrestricted nets assets for the year ended December 31, 1999, as restated $6,237 (4) INVESTMENTS Investments, reported at fair value (except as noted) consisted of the following as of December 31, 2000 and 1999 ($ in thousands):   2000 1999 Short-term investments:     Vanguard admiral fund $ 13,882 $ 16,895 Vanguard fixed-income securities 13,930 17,006 NASA Federal Credit Union 108 102 Treasury Securities 16,860 — Escrow:     Cash equivalents 25 — Bonds and notes 1,718 — Equity securities 2,958 —   $ 49,481 $ 34,003 Endowment and trust investments:     Cash equivalents $ 1,791 $ 3,215 Bonds and notes 73,235 71,910 Equity securities 188,764 195,472   263,790 270,597 Real estate mortgages - at cost 9,711 10,841   $273,501 $281,438 Other long-term investments:     Cash equivalents $ 1,358 $ — Bonds and notes 9,124 — Equity securities 16,726 —   $ 27,208 $ — Total long–term investments $300,709 $281,438

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 The NAS received proceeds from the sale of the Green/ Harris facility of approximately $36 million in 2000 (see note 12). These proceeds were placed in an escrow account that is being used to make payments under the lease obligation to the former landlord. The amount required to fund the lease payments for 2001 has been included in the short-term investment balance above and the remaining balance is classified as other long-term investments. Vanguard equity funds comprised approximately $123 million and $133 million of the total equity securities funds at December 31, 2000 and 1999, respectively. Private equity investments, represented by limited partnership interests comprised approximately $8.0 million and $3.8 million of the total investments on December 31, 2000 and 1999, respectively. NAS had a remaining commitment on December 31, 2000 and 1999, to provide approximately $11.9 million and $7.6 million to these partnerships. Fair value of the buildings relating to the real estate mortgage investments approximated $36 million on December 31, 2000 and 1999. The NAS pledged its investment in the real estate mortgages as collateral on its commitment under the operating lease for the Green/ Harris facility during 2000 (see note 12). TNAC, a related entity, invests certain of its assets in the NAS endowment and trust investment pool. TNAC investments participate in the investment pool experience equally with all other funds in this pool. The NAS's obligation to TNAC for these funds held in trust, which totaled $21.0 million and $21.7 million as of December 31, 2000 and 1999, respectively, is reported as funds held on behalf of others within the statements of financial position. Investment income is reported net of investment expenses of approximately $91,000 and $77,000 for the years ended December 31, 2000 and 1999, respectively, and is comprised of the following ($ in thousands):   2000 1999 Interest and dividends income $25,876 22,292 Net gain (loss) on investments (20,128) 12,640   $5,748 34,932 (5) PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2000 and 1999, were as follows ($ in thousands):   2000 1999 Land $ 29,723 $ 29,723 Furniture and equipment 26,623 26,019 Buildings and improvements 13,004 12,983 Construction in progress (note 12) 27,732 10,922 Leasehold improvements 6,949 6,923   $104,031 $ 86,570 Less accumulated depreciation and amortization (35,471) (32,376)   $ 68,560 $54,194 (6) CONTRIBUTIONS RECEIVABLE Pledged contributions are included as other receivables (current and long-term) in the statements of financial position. Donors have pledged to provide support in the following future periods ($ in thousands): Years ending December 31   2001 $ 9,868 2002 2,098 2003 1,456 2004 910 2005 710 Thereafter 26,400   $41,442 Less – discount to estimated net present value at 5% (8,047)   $33,395 Less – current portion (9,868)   $23,527 During 2000, the NAS was named the beneficiary of a $25 million charitable remainder trust for the purpose of establishing a science museum at its new facility. This contribution was discounted to its present value using a rate of 5 percent, and is included in long–term contributions receivable. (7) DEFERRED REVENUE Deferred revenue consisted of the following as of December 31, 2000 and 1999 ($ in thousands):   2000 1999 Advances from private grants and contracts $19,826 $10,540 Advances on U.S. government grants and contracts 6,549 5,174 Publication subscriptions and other 2,642 2,880   $29,017 $18,594

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 (8) LINE OF CREDIT The NAS has an $11.0 million unsecured line of credit from Bank of America with an interest rate of LIBOR plus 0.40 percent. There was no outstanding balance on the line of credit on December 31, 2000. There was an outstanding balance of $2.9 million at December 31, 1999, which is included in other current liabilities in the accompanying statement of financial position. Interest expense for the years ended December 31, 2000 and 1999, was approximately $143,000 and $397,000, respectively. (9) RESTRICTED NET ASSETS Temporarily restricted net assets were available for the following purposes as of December 31, 2000 and 1999 ($ in thousands):   2000 1999 Programs $106,721 $ 83,935 Prizes and awards 24,530 25,392 Woods Hole facility 2,643 2,907   $133,894 $112,234 Temporarily restricted net assets were released from restriction for the following purposes during the years ended December 31, 2000 and 1999 ($ in thousands):   2000 1999 Programs $11,286 $7,552 Prizes and awards 779 66 Woods Hole facility 250 234   $12,315 $7,852 Permanently restricted net assets are invested in perpetuity. The income generated by these assets is to be used to support donor-specified programs or general activities of the NAS. As of December 31, 2000 and 1999, the NAS held the following permanently restricted net assets, classified by the purpose for which the income is to be used (in thousands):   2000 1999 Programs $76,415 $70,615 Prizes and awards 3,317 3,312   $79,732 $73,927 (10) PROGRAM EXPENSES Program expenses for the years ended December 31, 2000 and 1999 are summarized as follows ($ in thousands):   2000 1999 Scientific and Engineering Personnel $ 39,788 $ 41,862 Transportation Research Board 49,024 41,626 Institute of Medicine 24,343 20,880 Engineering and Technical Systems 11,587 10,422 Behavioral and Social Sciences and Education 11,166 14,757 Geosciences, Environment, and Resources 10,337 10,883 Physical Sciences, Mathematics, and Applications 12,212 13,047 International Affairs 7,555 6,840 Commission on Life Sciences 18,451 20,260 Science, Mathematics, and Engineering Education 6,924 3,197 Policy Division 5,024 3,993 National Sciences Resource Center 645 716 National Academy of Engineering 3,505 2,719 Board on Agriculture and Natural Resources 1,340 1,041 Other 1,890 741   $203,791 $192,984 (11) INDIRECT COSTS The NAS received fixed indirect cost rates for the years ended December 31, 2000 and 1999, on its federal contracts and grants. The overhead rate was 59.60 percent and 59.69 percent, and the general and administrative (G&A) rate was 20.38 percent and 20.39 percent for the years ended December 31, 2000 and 1999, respectively. Overhead was applied to direct salaries, accrued leave, fringe benefits, and services provided by outside contractors (e.g., temporary personnel agencies, consultants) on NAS property. G&A was applied to direct costs and overhead less subcontract costs and stipends. Therefore, both the overhead and G&A rates were applied to projects incurring direct salaries and other direct costs such as travel. If a project did not require direct salaries, such as a travel grant program, a subcontract/flow-through administration rate of 2.80 percent and 2.89 percent was applied for the years ended December 31, 2000 and 1999, respectively. Certain other activities, such as off-site work (not performed on NAS property), were assessed at a reduced overhead rate of 43.64 percent and 43.70 percent for the years ended December 31, 2000 and 1999, respectively.

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 (12) BUILDING PROJECT AND FINANCING Revenue Bonds In January 1999, the District of Columbia issued $130,960,000 of tax-exempt revenue bonds on behalf of the NAS. The NAS is obligated under these bonds as follows (in thousands):   2000 1999 Series 1999A revenue bonds, serial, with interest rates ranging from 3.9 percent to 5 percent, maturing at various dates from January 1, 2003 through 2012. $ 16,330 $ 16,330 Series 1999A revenue bonds, term     Interest rate 5 percent, due January 1, 2019. 17,085 17,085 Interest rate 5 percent, due January 1, 2028. 32,545 32,545 Series 1999B revenue bonds at a flexible rate due January 1, 2039. 32,500 32,500 Series 1999C revenue bonds, variable rate due January 1, 2039. 32,500 32,500 Total bonds at face value 130,960 130,960 Less net unamortized bond discount (968) (962) Total bonds payable $129,992 129,998 The serial and term bonds represent an unsecured general obligation of the NAS. Interest on the Series 1999A revenue bond is payable semiannually every January 1 and July 1, commencing on July 1, 1999. Interest on the 1999B and 1999C bonds is payable monthly. The term bonds maturing on January 1, 2019, and January 1, 2028, are subject to mandatory redemption by operation of sinking fund installments. The installment payments for the term bonds maturing January 1, 2019, begin on January 1, 2013, and range from $2.1 to $2.8 million per year through the maturity date. Installment payments for the term bond maturing January 1, 2028, begin on January 1, 2020, and range from $2.9 to $4.3 million per year through the maturity date. Interest expense on the bonds payable for 2000 and 1999 totaled $6.0 million and $4.9 million net of capitalized interest of approximately $1,498,000 and $391,000, respectively. The bond proceeds are held by a Trustee and invested in a guaranteed investment contract. The Trustee reimburses the NAS for expenditures related to the building project. Building Project Proceeds from the sale of the bonds will finance the cost of the acquisition of 44,250 square feet of land located in Washington, D.C., and the construction of an office building and pay certain costs of issuing the bonds. This building will consolidate NAS's program activities into one location. Construction of the building began in the summer of 1999 and has an anticipated completion date of Spring 2002. Interest Rate Swap On October 22, 1999, the NAS entered into a swap agreement, with an effective date of February 1, 2000. This swap agreement related to the $66 million face amount of its Series 1999A revenues bonds. The agreement provides for the NAS to receive 4.97 percent in interest on a notional amount of $65 million and to pay interest at a floating rate option based on the weekly interest rate resets of tax-exempt variable-rate issues per the BMA Municipal Swap Index. The NAS entered into this swap agreement to manage its exposure to interest rate changes. The fixed-rate debt obligations expose the NAS to variability in the cost recovery stream due to changes in interest rates. The NAS recovers the costs of borrowing through a capital investment incentive rate that is set by the U.S. government and is tied to a variable index. If interest rates increase, the capital investment incentive recover increases. Conversely, if interest rates decrease, the capital investment incentive recovery decreases. Therefore, the NAS entered into a derivative instrument that ties the fixed-rate debt to a variable index, thereby reducing the risk of variability in the recovery amount. During the first year of this agreement, the NAS received payments of $2,971,000 from Bank of America based on the 5.17 percent fixed rate, and paid $2,126,000 based on an average variable rate of 3.88 percent, resulting in a $845,000 gain which is reflected as other income in the statement of activities for the year ended December 31, 2000. On January 31, 2001, the NAS amended this agreement by agreeing to resume responsibility for the fixed rate payments for the period 2001–2003 in exchange for an immediate cash payment of $2,435,000. Based on 1999 results, the NAS would have received payments during this

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 period having a net present value (using a 10 percent discount rate) of $1,952,000. Consequently, the NAS received its three year projected return immediately, plus a $483,000 market premium. The immediate cash payment of $2,435,000 and the market premium of $483,000 are not reflected within the December 31, 2000 financial statements. Beginning January 1, 2004, the variable rate swap transaction becomes effective again with 16 years remaining under the agreement. Sale/leaseback of Green/Harris Facility In 1999, under a separate trust agreement, the Trustee, an unrelated third party, held record legal title to the Green/ Harris facility that was under lease by the NAS for a portion of its operations. This trust agreement would have conveyed title to the NAS in 2007, if NAS accepted title. In 2000, the NAS entered into a contract with a third party to sell its future interest in the property for approximately $36 million. The NAS also entered into another contract in 2000 to lease back the entire facility until 2002 at a monthly rate of $400,000 and a portion of the facility from 2003 to 2007 at a monthly rate of $200,000. These amounts are included in future minimum rental payments summarized in note 14. This sale/lease back transaction resulted in a gain of $6.8 million of which $6.1 million was deferred. The current portion of the deferred gain of $1.5 million is reflected within other current liabilities, while the long-term portion of $4.6 million is reflected as deferred gain in the accompanying statement of financial position. The NAS remains obligated through 2007 for remaining lease payments, whose present value is approximately $28 million, under the original lease agreement with the Trustee. The current and long-term portions of this obligation are reflected as other current liabilities and accrued lease liability, respectively, within the statement of financial position as of December 31, 2000. (13) EMPLOYEE BENEFITS Pension Plans The NAS has an insured, noncontributory, defined contribution pension plan covering substantially all of its employees. The plan is intended to qualify under Section 401(a) of the Internal Revenue Code and uses Teachers Insurance and Annuity Association/College Retirement Equities Fund (TIAA/CREF) group retirement annuity contracts as the investing vehicle. Participants in this plan vest immediately. The NAS has received a favorable determination letter from the IRS on the qualification of this plan under Section 401(a) of the Internal Revenue Code. In addition, the NAS has a voluntary employee contribution retirement plan that is funded solely by employee contributions made on a pretax salary-reduction basis under Section 403(b) of the Internal Revenue Code. The investing vehicles under this voluntary plan are retirement annuity contracts issued by TIAA/CREF and mutual funds offered by the Vanguard Group, Inc. Pension expense for the years ended December 31, 2000 and 1999, amounted to $6.4 million and $5.9 million, respectively. NAS policy is to fund pension benefits as they are earned. NAS normal retirement age is 65, but there is no mandatory age for retirement. Deferred Compensation The NAS holds long-term investments as part of a deferred compensation arrangement for certain employees. The fair value of these investments were approximately $5.97 million and $5.94 million as of December 31, 2000 and 1999, which are reported in other assets. The related obligation is included in accrued employee benefits on the statements of financial position. Postretirement Benefits The NAS provides certain health care and life insurance benefits for retired employees. All employees may become eligible for these benefits if they reach normal retirement age while working for the NAS and meet certain service requirements. An insurance company whose premiums are determined on an experience-rated basis provides these benefits for retirees. The plan is contributory for employees who retire after January 1, 1990. Employees contribute 25 percent of the monthly premium. The NAS has elected to recognize the initial postretirement benefit obligation over a period of 20 years. The accrued postretirement benefit obligation is reported in accrued employee benefits on the statements of financial position. The postretirement benefit cost for the years ended December 31, 2000 and 1999, includes the following components ($ in thousands):

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000     2000 1999   Life insurance benefits Health benefits Total Life insurance benefits Health benefits Total Change in benefits obligations             Benefit obligation, January 1 $ 590 $ 9,443 $10,033 $604 $9,989 $10,593 Service cost 7 306 313 7 324 331 Interest cost 42 685 727 40 677 717 Actuarial (gain)/loss 20 270 290 (8) (897) (905) Benefits paid (56) (637) (693) (53) (650) (703) Benefits obligation, December 31 $ 603 $10,067 $10,670 $590 $9,443 $10,033 Change in plan assets             Fair value of plan assets, January 1 — 4,675 4,675 — 3,605 3,605 Actual return on plan assets — 458 458 — 495 495 Employer contributions 56 637 693 — 1,278 1,278 Benefits paid (56) (637) (693) — (703) (703) Fair value of plan assets, December 31 $ — $ 5,133 5,133 $— 4,675 4,675 Funded Status             Benefit obligation $(603) $(4,934) $(5,537) $(590) $(4,768) $(5,358) Unrecognized translation obligation 347 5,474 5,821 373 5,879 6,252 Unecognized net actuarial (gain)/loss 130 (1,265) (1,135) 118 (1,515) (1,397) Prepaid/(accrued) benefit cost $(126) (725) (851) $(99) (404) (503) Components of net periodic benefit cost             Service cost 7 306 313 7 324 331 Interest cost 42 685 727 40 677 717 Expected return on plan assets — (374) (374) — (288) (288) Amortization of transition obligation 26 405 431 26 405 431 Amortization of unrecognized (gains)/losses 7 (63) (56) 15 — 15 Net periodic cost $ 82 959 1,041 $88 1,118 1,206 The discount rates used to calculate the accumulated postretirement benefit obligation for the years ended December 31, 2000 and 1999 were 7.25 percent and 7.5 percent, respectively. The trend rates for growth in health care costs used in calculating the accumulated postretirement benefit obligation were 8.6 percent for retirees under age 65 and 7.6 percent for retirees age 65 and older during the years ended December 31, 2000 and 1999, declining gradually to 5.0 percent for both retiree groups. The health care cost trend rate assumption has a significant impact on the postretirement benefit costs and obligations. The effect of a 1 percent change in the assumed health care cost trend rate at December 31, 2000, would have resulted in an approximate $1,215,000 increase or $1,067,000 decrease in the postretirement benefit obligation and an approximate $139,000 increase or $103,000 decrease in the 2000 benefit cost. The effect of a 1 percent change in the assumed health care cost trend rate at December 31, 1999, would have resulted in an approximate $1,044,000 increase or a $934,000 decrease in the postretirement benefit obligation and an approximate $174,000 increase or an $112,000 decrease in the 1999 benefit cost. Postemployment Benefits The NAS also provides certain postemployment benefits to former or inactive employees prior to their eligibility for retirement benefits. The liability for these benefits was $479,000 and $614,000 on December 31, 2000 and 1999, respectively. It is calculated on an actuarially determined

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 basis over the years the employees became eligible and is recorded in accrued employee benefits on the statement of financial position. The total postemployment benefit expense for the years ended December 31, 2000 and 1999 was approximately $46,000 and $77,000, respectively. (14) COMMITMENTS AND CONTINGENCIES Leases The NAS is committed to several noncancellable operating leases for office space and equipment. Future minimum rental payments due under noncancelable operating leases are as follows ($ in thousands): Years ending December 31 Minimum rentals 2001 $ 7,668 2002 6,536 2003 2,962 2004 2,796 2005 2,778 Thereafter 5,714   $28,454 Rental expense for the years ended December 31, 2000 and 1999, amounted to $7.6 and $7.1 million, respectively. Contingencies The NAS receives a portion of its revenues directly or indirectly from federal government grants and contracts, all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through December 31, 1998. A contingency exists, relating to the period July 1, 1997, through December 31, 2000, to refund amounts received, if any are in excess of allowable costs. Management is of the opinion that no material liability will result from future audits. Litigation The NAS is a defendant in a lawsuit alleging employment discrimination. While the ultimate outcome of the litigation is uncertain, the NAS 's management believes that it has a strong legal position and intends to vigorously defend its actions. The extent of possible liability that may result from this lawsuit cannot be reasonably estimated.

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REPORT OF THE TREASURER TO THE COUNCIL OF THE NATIONAL ACADEMY OF SCIENCES: For the Year Ended December 31, 2000 AS OF JANUARY 1, 2001 OFFICERS Bruce Alberts, President Jack Halpern, Vice -President R. Stephen Berry, Home Secretary Sherwood Rowland, Foreign Secretary Ronald Graham, Treasurer FINANCE COMMITTEE Ronald Graham, Chair Bruce Alberts Elwyn R. Berlekamp Elkan R. Blout David M. Kipnis Lawrence R. Klein William Rutter Paul A. Samuelson Joseph B. Martin, M.D.: IOM Representative BUDGET AND INTERNAL AFFAIRS COMMITTEE Ronald Graham, Chair John Brauman Purnell Choppin Jack Halpern Jane Lubchenco William Rutter AUDITING COMMITTEE Jack Halpern, Chair Purnell Choppin Robert Wurtz FINANCIAL MANAGEMENT STAFF Archie L. Turner, Chief Financial Officer Linda White, Director of Finance