Free PDF AccessFree Resources |
||||||||||||||||
|
||||||||||||||||
|
||||||||||||||||
|
| ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 39
IlI. Financial Condition
39
OCR for page 40
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 3l, 2001, 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
M. GORDON WOLMAN
National Academy of Sciences
40
OCR for page 41
Independent Auditors' 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, 2001 and 2000, 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 fairly, in all material respects, the
financial position of the NAS as of December 31, 2001 and 2000, 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, 2000 have been
restated. As discussed in note 12 to the financial statements, the NAS adopted the provisions of
Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities, in 2001.
April 19, 2002
KPMG, LLP
41
OCR for page 42
NATIONAL ACADEMY OF SCIENCES
Statements of Financial Position
December 31, 2001 and 2000
($ in thousands)
Assets
Current assets:
2001
2000
Cash and cash equivalents
Short-term investments (note 4)
Contracts receivable - U.S. government (note 11)
Contributions and other receivables (note 6)
Publications and supplies inventories
Bond proceeds held with trustee (note 12)
Prepaid expenses and other
Total current assets
Einstein Memorial
Property and equipment (note 5)
Other assets (note 14)
Long-term investments (note 4)
Contributions receivable (note 6)
Liabilities and Net Assets
Current liabilities:
$ 13,664
52,025
38,015
11,473
2,151
37,952
2,771
59
49,481
35,298
13,444
2,378
78,332
2,567
158,051
181,559
1.723
109,571
6,808
274,797
24,895
1,723
68,560
5,972
300,709
23,527
$575,845 582,050
Accounts payable and accrued expenses (note 11)
Deferred revenue (note 7)
Other liabilities (note 12)
Total current liabilities
Bonds payable (note 12)
Funds held on behalf of others (note 4)
Note payable (note 13)
Accrued lease liability (note 12)
Accrued employee benefits (note 14)
Deferred gain (note 12)
Other liabilities
Total liabilities
Net assets:
Unrestricted (note 3)
Temporarily restricted (note 9)
Permanently restricted (note 9)
Total net assets
Commitments and contingencies (notes 8, 11, 12, 14 and 15)
Total liabilities and net assets
See accompanying notes to financial statements.
42
$ 33,105
31,927
7,810
27,410
29,017
7,733
72,842
64,160
129,987
19,652
10,000
20,308
7,760
3,198
2,196
129,992
20,950
24,045
7,486
4,650
2,323
265,943
253,606
99,506
127,518
82,878
114,818
133,894
79,732
309,902
328,444
$575,845
582,050
OCR for page 43
NATIONAL ACADEMY OF SCIENCES
Statements of Activities
Years ended December 31, 2001 and 2000
($ in thousands)
2001
2000
Temporarily Permanently Temporarily Permanently
Unrestricted Restricted Restricted Totals Unrestricted Restricted Restricted Totals
Revenues, gains, and other support:
Government contracts and
grants $163,856 163,856 165,729 165,729
Private contracts and grants 21,147 11,888 33,035 20,524 11,429 31,953
Other contributions 3,977 1,033 3,146 8,156 5,568 22,939 5,805 34,312
Fees and publications 14,405 14,405 14,911 14,911
Investment income (note 4) (2,838) (7,040) (9,878) 6,141 (393) 5,748
Otherincome(notel2) 4,731 — — 4,731 5,511 — — 5,511
Net assets released from
restriction (note 9) 12,257 (12,257) 12,315 (1235)
Total revenues, gains,
and other support $217,535 (6,376) 3,146 214,305 230,699 21,660 5,805 258,164
Expenses:
Change in net assets, before
Programs (note 10) $175,698 175,698 179,488 179,488
Management and general 57,225 57,225 54,446 54,446
Fundraising 2,712 2,712 3,433 3,433
Total expenses 235,635 235,635 237,367 237,367
cumulative effect of change in
accounting principle (18,100) (6,376) 3,146 (21,330) (6,668) 21,660 5,805 20,797
Cumulative effect of a change in
accounting principle (note 12) 2,788 2,788
Change in net assets (note 3) (15,312) (6,376) 3,146 (18,542) (6,668) 21,660 5,805 20,797
Net assets at beginning of the year,
as restated (note 3) 114,818 133,894 79,732 328,444 121,486 112,234 73,927 307,647
Net assets at end of the year $ 99,506 127,518 82,878 309,902 114,818 133,894 79,732 328,444
See accompanying notes to financial statements.
43
OCR for page 44
NATIONAL ACADEMY OF SCIENCES
Statements of Cash Flows
Years ended December 31, 2001 and 2000
($ in thousands)
Cash flows from operating activities:
2001
2000
Change in net assets $~18,542) 20,797
Adjustments to reconcile change in net assets to net cash flow used for
operating activities:
Depreciation and amortization 2,654 3,406
Loss (gain) on disposal of property and equipment 733 (548)
Bad debt expense 656 37
Net loss on investments 23,376 20,128
Amortization of deferred gain on building sale (1,452)
Decrease in funds held on behalf of others 1,298 760
Contributions restricted for construction and permanent endowment (8,780) (1,535)
Increase in other receivables (53) (28,530)
Increase in contracts receivable - U.S. government (2,717) (3,848)
Decrease (increase) in publications and supplies inventories 227 (156)
Decrease in bond proceeds held with trustee 40,380 14,300
Increase in prepaid expenses and other current assets (204) (180)
Increase in other assets (836) (34)
Increase in accounts payable and accrued expenses 5,720 4,339
(Decrease) increase in other current liabilities (131) 232
Increase in deferred revenue 2,910 10,423
(Decrease) increase in other liabilities (1,047) 971
Net cash provided by operations 44,192 40,562
Cash flows from investing activities:
Purchase of property and equipment (44,403) (17,956)
Sale or maturity of investments 237,340 35,276
Purchase of investments (238,646) (90,913)
Net cash used for investing activities (45,709) (73,593)
Cash flows from financing activities:
Contributions restricted for construction and permanent endowment 8,780 1,535
Proceeds from bank note 10,000
Proceeds from line of credit 38,700 55,646
Payments on line of credit (38,700) (58,596)
Proceeds from Green/Harris sale-leaseback 36,210
Payments on lease liability (3,658) (1,802)
Net cash provided by financing activities 15,122 32,993
Net increase (decrease) in cash and cash equivalents 13,605 (38)
Cash and cash equivalents, beginning of year 59 97
Cash and cash equivalents, end of year 13,664 59
Supplemental disclosure of cash flow information:
Interest paid $ 6,985 6,733
See accompanying notes to financial statements.
44
OCR for page 45
NATIONAL ACADEMY OF SCIENCES
Notes to
Financial Statements
December 31, 2001 and 2000
(1) ORGANIZATION AND RELATED
ENTITIES
(a) 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 sci-
ence 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 busi-
ness income.
(b) National Research Council
Most of the activities undertaken by the NAS are carried
out through the divisions, offices, and boards of the
National Research Council (NRC), which draw on a wide
cross section of the nation's leading scientists and engi-
neers 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 5 major units responsible for most
study activities:
Division of Behavioral and Social Sciences and
Education;
Division on Earth and Life Studies;
Division on Engineering and Physical Sciences;
Policy and Global Affairs Division; and
Transportation Research Board.
NRC activities are under the control of the NAS gover-
nance structure, and therefore are included in the NAS's
financial statements.
(c) 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 profes-
sional 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 mem-
bership organization within the NAS. The financial activ-
ity and results of the IOM are included in the NAS
financial statements.
(d) National Academy of Engineering
The National Academy of Engineering (NAE) was estab-
lished 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.
(e) National Academy of Engineering Fund
The National Academy of Engineering Fund (NAEF) is a
separately incorporated not-for-profit organization estab-
lished 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 sepa-
rately 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, located in Irvine, California, 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 position and results of TNAC are not consoli-
dated in the NAS's financial statements.
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Basis of Accounting
Net assets and revenues, expenses, gains, and losses are
classified based on the existence or absence of donor-
imposed restrictions. Accordingly, net assets of the NAS
are classified and reported as follows:
45
OCR for page 46
Permanently restricted: Net assets subject to donor-im-
posed 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-im-
posed 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 transac-
tions and unexpended contributions that are not subject to
donor-imposed stipulations.
(bJ Cash Equivalents
The NAS reports as cash equivalents excess cash invested
in overnight government-backed repurchase agreements.
Cash equivalents also include money market funds in
short-term investment accounts.
(c) Investments
Equity and debt securities are reported at fair value, based
on quoted market prices. Investments in real estate mort-
gages are recorded at cost and consist of mortgages on the
principal administrative facilities that the NAS currently
occupies.
Changes in the fair value of investments are reported
within investment income in the statement of activities.
The NAS holds certain short-term investments for pro-
gram and operational liquidity requirements.
Certain investments are pooled for long-term investment
purposes. Investments in the 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 additional funds are contributed or
withdrawn.
(d) Contributions
revenue.
The net asset restrictions are released through reclassification
when the funds are used for the donor-specified purpose.
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 consid-
ered met in the period in which the assets are acquired or
placed in service.
(e) Contracts and Grants
Major NAS activities are performed under cost-reimburs-
able contracts with the U.S. government. Federal sponsors
who individually accounted for more than 10% of NAS
revenues are summarized below:
Years ended December 31,
Federal Agency
Transportation
NASA
DHHS
Energy
2001 2000
25%
2%
11%
25%
11%
11%
11%
It is the policy of the NAS to record federal contracts as
exchange transactions, recognizing revenue as recoverable
-
costs are incurred.
Revenues from non-federal grants qualifying as contribu-
tions are recorded when the NAS is notified of the grant
award. Such grants are classified as temporarily restricted
if use of the grant funds is limited to specific areas of
study, or to be used in future periods.
~ Deferred Revenue
For both federal and non-federal grants and contracts that are
determined to be exchange transactions, revenue is recog-
nized as the related costs are incurred. Funds received in
advance of being earned for these grants are recorded as
deferred revenue on the statement of financial position.
(gJ Fair Value of Financial Instruments
The carrying value of bonds payable in the financial
statements was less than their fair value by approximately
$137,000 on December 31, 2001 and exceeded their fair
.. . . value by approximately $28 000 on December 31 2000.
Contnbut~ons, Including unconditional promises to give, ' '
are recognized as revenues in the period received. Condi- NAS makes limited use of derivative financial instruments
tional promises to give are not recognized until the condi- for the purpose of managing interest rate risks. Current
lions on which they depend are substantially met. Contri- market pricing models are used to estimate fair values of
buttons subject to donor-imposed stipulations that are met interest rate swap agreements. The fair market value of all
in the same year as received are reported as unrestricted other financial instruments in the financial statements
approximates reported carrying value.
46
OCR for page 47
(h) Inventories
Inventories are stated at the lower of cost or net realizable
value and include supplies, and both work-in-process and
finished goods related to the publication activities of the
NAS. The majority of the NAS's inventories of publica-
tions and supplies reside with the National Academy Press
(NAP). NAP uses the full absorption costing methodology
in pricing finished products. This methodology includes
direct printing and related indirect costs.
(i) Property and Equipment
Depreciation of NAS buildings and equipment is com-
puted 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. Con-
struction-in-progress is not depreciated until the related
assets are placed in service.
a' Use of Estimates
The preparation of these financial statements in confor-
mity 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.
(k) Reclassircahons
Certain amounts from the prior year have been reclassified
to conform to the current year presentation.
(3) RESTATEMENT OF FINANCIAL
STATEMENTS
During 2001, NAS determined that receivables related to
the cumulative indirect cost under-recovery for one operat-
ing unit had been incorrectly recorded, and were required
to be written off. This adjustment has been recorded by
restatement of the net assets of the NAS as of January 1,
2000. The total write-off amounted to approximately $3.1
million, of which $265,000 related to the year ended
December 31, 2000 and the remainder of $2.8 million
related to years prior to 2000.
A summary of the effects of the restatement is as follows
($ in thousands):
January 1 unrestricted net assets, as previously
reported $115,083 124,349
Write-off of unbilled indirect cost under-recovery (265) (2,863)
January 1 unrestricted net assets, as restated $114,818 121,486
2001 2000
The effects on change in unrestricted net assets for the year
ended December 31, 2000 is as follows ($ in thousands):
Change in unrestricted net assets, as previously reported: $(6,403)
Recognition of 2000 write-off of receivables (265)
Change in unrestricted net assets for the year ended
December 31, 2000, as restated $(6,668)
(4) INVESTMENTS
Investments, reported at fair value (except as noted) con-
sisted of the following as of December 31, 2001 and 2000
($ in thousands):
Short-term investments:
Cash equivalents
Bonds and notes
Treasury securities
Equity securities
Escrow
Endowment and trust investments:
Cash equivalents
Bonds and notes
Equity securities
Other long-term investments:
Escrow:
Cash equivalents
Bonds and notes
Equity securities
Total long-term investments
2001
2000
113 108
40,686
16,860
11,226 27,812
4,701
52,025 49,481
2,702 1,791
46,739 73,235
190,115 188,764
239,556 263,790
8,663 9,711
248,219 273,501
246 1,358
7,004 9,124
19,328 16,726
26,578 27,208
$274,797 300,709
The NAS received proceeds from the sale and leaseback of
the Green/Harris facility of approximately $36 million in
2000 (see note 12~. These proceeds were placed in an
47
OCR for page 48
escrow account held to cover payments under the lease (5) PROPERTY AND EQUIPMENT
obligation to the former landlord. In 2000, the amount
required to fund the lease payments for 2001 has been
included in the short-term investment balance above, with
the remaining balance classified as other long-term invest-
ments. During 2001, payments of $3.5 million were made
from the escrow account and payments of $1.6 million
were made from operating cash.
Vanguard equity funds comprised approximately $107
million and $123 million of the total equity securities
funds at December 31, 2001 and 2000, respectively.
Private equity investments, represented by limited partner-
ship interests comprised approximately $6.5 million and $8.0
million of the total investments on December 31, 2001 and
2000, respectively. NAS had a remaining commitment on
December 31, 2001 and 2000, to provide approximately
$11.1 million and $12.5 million to these partnerships.
During 2001, the NAS invested in hedge funds which
totaled approximately $22 million at December 31, 2001,
and are included in endowment and trust equity securities
above. The unrealized gain on these funds, which is
included as a component of investment income in the
accompanying statement of activities, was approximately
$74,000 for the year ended December 31, 2001.
Fair value of the buildings relating to the real estate
mortgage investments approximated $36 million on De-
cember 31, 2001 and 2000. The NAS pledged its invest-
ment in the real estate mortgages as collateral on its
commitment under the operating lease for the Green/
Harris facility during 2000 (see note 15~.
TNAC, a related entity, invests certain of its assets in the
NAS endowment and trust investment pool. TNAC invest-
ments 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 $19.7 million and $21.0 million as of December 31,
2001 and 2000, respectively, is reported as funds held on
behalf of others within the statements of financial position.
Investment income (loss) is reported net of investment
expenses of approximately $401,000 and $91,000 for the
years ended December 31, 2001 and 2000, respectively,
and is comprised of the following ($ in thousands):
200~ 2000
Interest and dividends income
Net gain (loss) on investments
48
$ 13,498 25,876
(23,376) (20,128)
$ (9,878) 5,748
Property and equipment as of December 31, 2001 and
2000, were as follows ($ in thousands):
2001
$ 29,723
27,055
13,311
70,283
6,949
147,321
2000
Land
Furniture and equipment
Buildings and improvements
Construction in progress (note 12)
Leasehold improvements
Less - accumulated depreciation and
amortization
(6) CONTRIBUTIONS RECEIVABLE
29,723
26,623
13,004
27,732
6,949
104,031
(37,750) (35,471)
$109,571 68,560
Contributions not yet collected are reported as other
receivables (current and long-term) in the statements of
financial position, and mature as follows ($ in thousands):
Years ending
December 31
2002
2003
2004
2005
2006
Thereafter
Less - discount to estimated net present value
Less - allowance for uncollectible pledges
Less - current portion
$ 6,497
2,832
1,571
1,111
700
25,699
38,410
(7,018)
(12)
31,380
(6,485)
$24,895
Contributions pledged during 2001 have been discounted
at 4%. Contributions pledged prior to 2001 have been
discounted at 5%.
During 2000, the NAS was named the beneficiary of a $25
million charitable remainder trust for the purpose of
establishing a science museum at its new headquarters
facility (see note 12~. This contribution was discounted to
its present value using a rate of 5%, and is reported as a
long-term contributions receivable.
(7) DEFERRED REVENUE
Deferred revenue consisted of the following as of Decem-
ber 31, 2001 and 2000 ($ in thousands):
OCR for page 49
Advances from private grants arid contract
sponsors
Advances from U.S. government sponsors
Publication subscriptions and other
(8) [INK OF CREDIT
$22,856
6,028
3,043
$31,927 29,017
19,826
6,549
2,642
The NAS has an $11.0 million unsecured line of credit
from Bank of America with an interest rate of LIB OR plus
0.40%. There were no outstanding balances on the line on
December 31, 2001 and December 31, 2000.
Interest expense for the years ended December 31, 2001
and 2000, was approximately $33,000 and $143,000,
respectively.
(9) RESTRICTED NETASSETS
Temporarily restricted net assets were available for the
following purposes as of December 31, 2001 and 2000
($ in thousands):
2001
$102,876
22,081
2,561
$127,518 133,894
2000
Sponsored research and advisory programs
Prizes arid awards
Woods Hole facility
106,119
24,530
3,245
Temporarily restricted net assets were released from re-
striction for the following purposes during the years ended
December 31, 2001 and 2000 ($ in thousands):
2001 2000
Sponsored research and advisory programs
Prizes arid awards
Woods Hole facility
$11,151
787
319
$12,257 12,315
11,237
779
299
The income generated by permanently restricted net assets
is to be used to support donor-specified programs or
general activities of the NAS. As of December 31, 2001
and 2000, the NAS held the following permanently re-
stricted net assets, classified by the purpose for which the
income is to be used ($ in thousands):
2001 2000
Sponsored research and advisory programs
Prizes arid awards
$79,559
3,319
$82,878 79,732
76,415
3,317
2001 2000 (10) PROGRAM EXPENSES
Program expenses for the years ended December 31, 2001
and 2000, are summarized as follows ($ in thousands):
2001 2000
Policy arid Global Affairs
Transportation Research Board
Earth arid Life Sciences
Institute of Medicine
Engineenng arid Physical Sciences
Behavioral and Social Sciences arid Education
National Sciences Resource Center
National Academy of Engineenng
Prizes, awards, and other
$ 49,186 48,251
42,573 43,938
22,014 26,674
21,520 20,607
20,036 19,798
15,685 15,089
552 564
3,822 2,996
310 1,571
$175,698 179,488
(11) RECOVERY OF INDIRECT COSTS
The NAS receives indirect cost recovery on its federal
contracts and grants. The negotiated overhead rates were
62.00% and 59.60%, and the general and administrative
(G&A) rates were 16.81% and 20.38%, respectively, for
the years ended December 31, 2001 and 2000.
Overhead is 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 is applied to direct costs and overhead less
subcontract costs and stipends. Therefore, both the over-
head and G&A rates are applied to projects incurring direct
salaries and other direct costs such as travel. If a program
does not require direct salaries, such as a travel grant
program, a subcontract/flow-through administration rate
of 3.07% and 2.80% was applied for the years ended
December 31, 2001 and 2000, respectively.
Certain off-site work (not performed on NAS property), was
assessed reduced overhead rates of 36.92% and 43.64% for
the years ended December 31, 2001 and 2000, respectively.
NAS bills for indirect cost recovery throughout the year
based on pre-negotiated rates, as noted above. At the end
of each year, NAS compares actual expenses incurred in
each of its cost pools to the amounts recovered based on its
billing rates. The difference is recorded as its indirect cost
carryforward. If NAS overrecovers on its indirect costs
during the year, a liability is recorded. If NAS
underrecovers, a receivable balance is recorded.
The NAS recognized a cumulative net underrecovery of
$2.9 million as of December 31,2001, which is included in
the contracts receivable balance in the statements of finan-
cial position. The NAS recognized a net overrecovery of
49
OCR for page 50
$1.1 million as of December 31, 2000, included in the
accounts payable balance in the statements of financial
. .
position.
(12) BUl[DINGPROJECTAND
FINANCING
(a) 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):
Senes 1999A revenue bonds, senal, with interest
rates ranging from 3.9% to 5%, maturing at
venous dates from January 1, 2003
through 2012.
Senes 1999A revenue bonds, term
Interest rate 5%, due January 1, 2019.
Interest rate 5%, due January 1, 2028.
Senes l999B revenue bonds at a flexible rate
due January 1, 2039.
Senes l999C revenue bonds, variable rate
due January 1, 2039.
Total bonds, at face value
Less - net unamortized discount
Total bonds payable
2001 2000
$ 16,330 16,330
17,085 17,085
32,545 32,545
32,500 32,500
32,500 32,500
130,960 130,960
(973) (968)
$129,987 129,992
The serial and term bonds represent unsecured general
obligations 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 l999B and l999C 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 2001 and 2000
totaled $5.3 million and $6.0 million, respectively. NAS,
in 2001 and 2000, capitalized interest of approximately
$2,247,000 and $1,498,000, 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.
50
(b) Building Project
Proceeds from the sale of the revenue bonds described
above will finance the cost of the acquisition of 44,250
square feet of land and related construction of an office
building, as well as pay certain costs of issuing the bonds.
This building will consolidate NAS's program activities
into one location. Construction began in the summer of
1999 and has an anticipated completion date of summer
2002.
(c) Interest Rate Swaps
In October 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 revenue bonds. The agreement provides for
the NAS to receive 4.97% 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 invest-
ment 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 recovery increases.
Conversely, if interest rates decrease, the capital invest-
ment incentive recovery decreases. Therefore, the NAS
entered into a derivative instrument that ties the fixed-rate
debt to a variable index to manage fluctuations in cash
flows resulting from interest rate risk. By using derivative
financial instruments to hedge exposures to changes in
interest rates, the NAS exposes itself to credit risk and
market risk. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When
the fair value of a derivative contract is positive, the
counterparty owes the NAS, which creates credit risk for
the NAS. When the fair value of a derivative contract is
negative, the NAS owes the counterparty, and therefore, it
does not possess credit risk. The NAS minimizes the credit
risk in derivative instruments by entering into transactions
with high-quality counterparties.
During 2000, the NAS received payments of $2,971,000
from Bank of America based on the 5.17% fixed rate, and
paid $2,126,000 based on an average variable rate of
3.88% resulting in $845,000 gain which is reflected as
OCR for page 51
other income in the statement of activities for the year
ended December 31, 2000.
In January 2001, the NAS amended the October 1999
agreement by assuming 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 period having a net present value (using a 10%
discount rate) of $1,952,000. Consequently, the NAS
received its three year projected return immediately, plus a
$483,000 market premium.
Beginning January 1, 2004, the variable rate swap transac-
tion becomes effective again with 16 years remaining
under the agreement.
In October 2001, the NAS further amended the agreement
for the 2004-2020 period by agreeing to give up the benefit
of any 30-day period during which the BMA index falls
below 2.25% and stays there for the entire 30 days. Each
time this occurs, the rate on the swap portfolio reverts to
the fixed rate of 5.1 % for that month only. In exchange for
the opportunity to benefit from interest rates below the
2.25% floor, the NAS received a cash payment of
$1,527,000. The NAS recognized the cash payments of
$2,435,000 and $1,527,000 as other income in the accom-
panying statement of activities for the year ended Decem-
ber 31, 2001.
On January 1, 2001, NAS adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities." SEAS
133 requires all derivatives to be recorded at fair value.
Adoption of this standard resulted in recording a cumula-
tive effect of a change in accounting principle gain as of
January 1, 2001 of approximately $2.8 million and a
corresponding derivative asset. For the year ended Decem-
ber 31, 2001, the NAS recorded a loss on the change in the
fair value of its derivative instruments in the amount of
approximately $4.9 million which is included as a reduc-
tion of other income in the accompanying statement of
activities. Prior to the adoption of SEAS 133, the differen-
tial to be paid or received for interest rate swaps was
accrued and recognized in other income.
(d) 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 15.
The sale-leaseback transaction resulted in a gain of $6.8
million, of which $4.7 million and $6.1 million was
deferred at December 31, 2001 and 2000, respectively. The
deferred gain will be fully recognized by 2007.
The NAS remains obligated through 2007 for remaining
lease payments, with a present value of approximately $24
million and $28 million as of December 31, 2001 and
2000, respectively, 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 statements
of financial position as of December 31, 2001 and 2000.
(13) NOTE PAYABLE
During 2001, the NAS entered into a loan agreement of
$10 million with Bank of America. The note bears interest
at 30 day LIB OR plus 50 basis points and is payable
monthly. The note matures on December 31, 2004.
(/4) EMPLOYEE BENEFITS
(a) Pension Plans
The NAS has an insured, noncontributory, defined contri-
bution pension plan covering substantially all of its em-
ployees. 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 contribu-
tion retirement plan that is funded solely by employee
contributions made on a pretax salary-reduction basis
51
OCR for page 52
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, 2001
and 2000, amounted to $7.0 million and $6.4 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.
(by 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 $5.5 m~l-
lion and $6.0 million as of December 31, 2001 and 2000,
which are reported in other assets. The related obligation is
included in accrued employee benefits on the statements of
financial position.
2001
(c) Postretirement Benefits
The NAS provides certain health care and life insurance
benefits for retired employees. All employees may become
eligible for these benefits if they reach normal retirement
age while working for the NAS and meet certain service
requirements. An insurance company whose premiums are
determined on an expenence-rated basis provides these
benefits for retirees. The plan is contributory for employ-
ees who retire after January 1,1990. Employees contribute
25% of the monthly premium.
The NAS has elected to recognize the initial postretirement
benefit obligation over a period of 20 years. The accrued
postretirement benefit obligation is reported in accrued
employee benefits on the statements of financial position.
The postretirement benefit cost for the years ended
December 31, 2001 and 2000, includes the following
components ($ in thousands):
2000
Life Life
insurance Health insurance Health
benefits benefits Total benefits benefits Total
Change in benefits obligations
Benefit obligation, January 1 $ 603 10,067 10,670 590 9,443 10,033
Service cost 8 409 417 7 306 313
Interest cost 50 744 794 42 685 727
Actuarial (gain) loss 174 2,507 2,681 20 270 290
Benefits paid (70) (599) (669) (56) (637) (693)
Benefits obligation, December 31
Change in plan assets
Fair value of plan assets, January 1
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets, December 31
Funded Status
Benefit obligation
Unrecognized translation obligation
Unrecognized prior service cost
Unrecognized net actuarial (gain) loss
Prepaid (accrued) benefit cost
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of unrecognized (gains) losses
Net periodic cost
52
765 13,128 13,893 603 10,067 10,670
70
(70)
4,859 4,859 5,133 5,133
5,133
(274)
599
(599)
5,133
(274)
669
(669)
56
(56)
4,675
458
637
(637)
4,675
458
693
(693)
(765)
321
284
(159) (1,273) (1,432) (126) (725) (851)
(8,269)
5,069
64
1,863
(9,034)
5,390
65
2,147
(603)
347
130
(4,934)
5,474
(1,265)
(5,537)
5,821
(1,135)
8
50
26
19
409
744
(411)
405
417 7 306
794 42 685
(411) (374)
431 26 405
19 7 (63)
26
313
727
(374)
431
(56)
$ 103 1,147 1,250 82 959 1,041
OCR for page 53
OCR for page 54
AS OF JANUARY 1, 2002
OFFICERS
Bruce Alberts, NAS President
James S. Langer, NAS Vice-President
R. Stephen Berry, NAS Home Secretary
F. Sherwood Rowland, NAS Foreign Secretary
Ronald L. Graham, NAS 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.: TOM Representative
BUD GET AND INTERNAL AFFAIRS COMMITTEE
Ronald Graham, Chair
John Brauman
Purnell Choppin
Robert C. Dynes
James Langer
Jane Lubchenco
AUDITING COMMITTEE
Jack Halpern, Chair
Purnell Choppin
M. Gordon Wolman
FINANCIAL MANAGEMENT STAFF
Archie L. Turner, Chief Financial Officer
Linda White, Director of Finance
Mun Lim, Controller
54
Representative terms from entire chapter:
financial statements
