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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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Suggested Citation:"III. Financial Condition." National Academy of Sciences. 2002. Report of the Treasurer to the Council for the Year Ended December 31, 2001. Washington, DC: The National Academies Press. doi: 10.17226/10408.
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III. Financial Condition 39

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, 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

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

NATIONAL ACADEMY OF SCIENCES Statements of Financial Position December 31, 2001 and 2000 ($ in thousands) Assets 2001 2000 Current assets: Cash and cash equivalents $ 13,664 59 Short-term investments (note 4) 52,025 49,481 Contracts receivable – U.S. government (note 11) 38,015 35,298 Contributions and other receivables (note 6) 11,473 13,444 Publications and supplies inventories 2,151 2,378 Bond proceeds held with trustee (note 12) 37,952 78,332 Prepaid expenses and other 2,771 2,567 Total current assets 158,051 181,559 Einstein Memorial 1,723 1,723 Property and equipment (note 5) 109,571 68,560 Other assets (note 14) 6,808 5,972 Long-term investments (note 4) 274,797 300,709 Contributions receivable (note 6) 24,895 23,527 $575,845 582,050 Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses (note 11) $ 33,105 27,410 Deferred revenue (note 7) 31,927 29,017 Other liabilities (note 12) 7,810 7,733 Total current liabilities 72,842 64,160 Bonds payable (note 12) 129,987 129,992 Funds held on behalf of others (note 4) 19,652 20,950 Note payable (note 13) 10,000 — Accrued lease liability (note 12) 20,308 24,045 Accrued employee benefits (note 14) 7,760 7,486 Deferred gain (note 12) 3,198 4,650 Other liabilities 2,196 2,323 Total liabilities 265,943 253,606 Net assets: Unrestricted (note 3) 99,506 114,818 Temporarily restricted (note 9) 127,518 133,894 Permanently restricted (note 9) 82,878 79,732 Total net assets 309,902 328,444 Commitments and contingencies (notes 8, 11, 12, 14 and 15) Total liabilities and net assets $575,845 582,050 See accompanying notes to financial statements. 42

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 Other income (note 12) 4,731 — — 4,731 5,511 — — 5,511 Net assets released from restriction (note 9) 12,257 (12,257) — — 12,315 (12,315) — — Total revenues, gains, and other support $217,535 (6,376) 3,146 214,305 230,699 21,660 5,805 258,164 Expenses: 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 Change in net assets, before 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

NATIONAL ACADEMY OF SCIENCES Statements of Cash Flows Years ended December 31, 2001 and 2000 ($ in thousands) 2001 2000 Cash flows from operating activities: 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

NATIONAL ACADEMY OF SCIENCES policies, cooperates with the major scientific and profes- sional societies in the field, identifies qualified individuals Notes to to serve on study groups in other organization units, and disseminates information to the public and the relevant Financial Statements professions. The IOM was established as a separate mem- December 31, 2001 and 2000 bership organization within the NAS. The financial activ- ity and results of the IOM are included in the NAS financial statements. (1) ORGANIZATION AND RELATED ENTITIES (d) National Academy of Engineering (a) National Academy of Sciences The National Academy of Engineering (NAE) was estab- lished in December 1964 under the charter of the National The National Academy of Sciences (NAS) was formed Academy of Sciences as a related parallel organization, under a charter that was passed as an Act of Incorporation autonomous in its governance, administration, and in the by the United States Congress and signed into law on selection of its members. The NAE shares with the NAS March 3, 1863. The NAS operates as a private cooperative the responsibility for advising the federal government on society of distinguished scholars engaged in scientific or scientific issues. The financial activity and results of the engineering research, dedicated to the furtherance of sci- NAE are not included in the NAS financial statements, ence and its use for the general welfare. The NAS is except to the extent those activities are conducted through exempt from federal income taxes under Section 501(c)(3) the NRC. of the Internal Revenue Code, except for unrelated busi- ness income. (e) National Academy of Engineering Fund (b) National Research Council The National Academy of Engineering Fund (NAEF) is a separately incorporated not-for-profit organization estab- Most of the activities undertaken by the NAS are carried lished and controlled by the NAE to raise funds to support out through the divisions, offices, and boards of the its goals. The financial activity and results of the NAEF National Research Council (NRC), which draw on a wide are not included in the NAS financial statements. cross section of the nation’s leading scientists and engi- neers for advisory services to government agencies and the (f) The National Academies’ Corporation Congress. To respond effectively to both the disciplinary concerns of the research community and the complex The National Academies’ Corporation (TNAC) was sepa- interdisciplinary problems facing American society, the rately incorporated in 1986 as a not-for-profit corporation NRC is organized into 5 major units responsible for most for the purpose of constructing and maintaining a study study activities: and conference facility. This facility, the Arnold and Mabel Beckman Center, located in Irvine, California, operates to • Division of Behavioral and Social Sciences and expand and support the general activities of the NAS, Education; NRC, IOM, and NAE. The NAS and the NAEF are 50/50 • Division on Earth and Life Studies; joint investors of TNAC, and therefore share control. The • Division on Engineering and Physical Sciences; financial position and results of TNAC are not consoli- • Policy and Global Affairs Division; and dated in the NAS’s financial statements. • Transportation Research Board. NRC activities are under the control of the NAS gover- (2) SUMMARY OF SIGNIFICANT nance structure, and therefore are included in the NAS’s ACCOUNTING POLICIES financial statements. (a) Basis of Accounting (c) Institute of Medicine Net assets and revenues, expenses, gains, and losses are The Institute of Medicine (IOM), established in 1970, classified based on the existence or absence of donor- conducts studies of policy issues related to health and imposed restrictions. Accordingly, net assets of the NAS medicine. The IOM issues position statements on these are classified and reported as follows: 45

Permanently restricted: Net assets subject to donor-im- The net asset restrictions are released through reclassification posed stipulations that they be maintained in perpetuity by when the funds are used for the donor-specified purpose. the NAS. Generally, the donors of these assets permit the Gifts of land, buildings, and equipment are reported as NAS to use all or part of the income earned on related unrestricted net assets unless explicit donor stipulations investments for general or specific purposes. specify how the donated assets must be used. Temporary Temporarily restricted: Net assets subject to donor-im- restrictions on gifts to acquire long-lived assets are consid- posed stipulations that may or will be met either by actions ered met in the period in which the assets are acquired or of the NAS and/or the passage of time. When a donor placed in service. restriction expires, temporarily restricted net assets are reclassified as unrestricted net assets. (e) Contracts and Grants Unrestricted: Net assets arising from exchange transac- Major NAS activities are performed under cost-reimburs- tions and unexpended contributions that are not subject to able contracts with the U.S. government. Federal sponsors donor-imposed stipulations. who individually accounted for more than 10% of NAS revenues are summarized below: (b) Cash Equivalents Years ended December 31, Federal Agency 2001 2000 The NAS reports as cash equivalents excess cash invested Transportation 25% 25% in overnight government-backed repurchase agreements. NASA 12% 11% Cash equivalents also include money market funds in DHHS 11% 11% short-term investment accounts. Energy — 11% It is the policy of the NAS to record federal contracts as (c) Investments exchange transactions, recognizing revenue as recoverable Equity and debt securities are reported at fair value, based costs are incurred. on quoted market prices. Investments in real estate mort- Revenues from non-federal grants qualifying as contribu- gages are recorded at cost and consist of mortgages on the tions are recorded when the NAS is notified of the grant principal administrative facilities that the NAS currently occupies. award. Such grants are classified as temporarily restricted if use of the grant funds is limited to specific areas of Changes in the fair value of investments are reported study, or to be used in future periods. within investment income in the statement of activities. (f) Deferred Revenue The NAS holds certain short-term investments for pro- gram and operational liquidity requirements. For both federal and non-federal grants and contracts that are determined to be exchange transactions, revenue is recog- Certain investments are pooled for long-term investment nized as the related costs are incurred. Funds received in purposes. Investments in the pool are administered as an advance of being earned for these grants are recorded as open-end investment trust, with shares of the pool funds deferred revenue on the statement of financial position. expressed in terms of participating capital units (PCU). PCU values are used to determine equity among funds in (g) Fair Value of Financial Instruments the pool whenever additional funds are contributed or withdrawn. The carrying value of bonds payable in the financial statements was less than their fair value by approximately (d) Contributions $137,000 on December 31, 2001 and exceeded their fair value by approximately $28,000 on December 31, 2000. Contributions, 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 tions on which they depend are substantially met. Contri- market pricing models are used to estimate fair values of butions 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 revenue. approximates reported carrying value. 46

(h) Inventories December 31, 2000 and the remainder of $2.8 million related to years prior to 2000. Inventories are stated at the lower of cost or net realizable value and include supplies, and both work-in-process and A summary of the effects of the restatement is as follows finished goods related to the publication activities of the ($ in thousands): NAS. The majority of the NAS’s inventories of publica- tions and supplies reside with the National Academy Press 2001 2000 (NAP). NAP uses the full absorption costing methodology January 1 unrestricted net assets, as previously reported $115,083 124,349 in pricing finished products. This methodology includes Write-off of unbilled indirect cost under-recovery (265) (2,863) direct printing and related indirect costs. January 1 unrestricted net assets, as restated $114,818 121,486 (i) Property and Equipment Depreciation of NAS buildings and equipment is com- The effects on change in unrestricted net assets for the year puted on a straight-line basis using the following lives: ended December 31, 2000 is as follows ($ in thousands): • Buildings – 40 to 50 years • Building and leasehold improvements – lesser of Change in unrestricted net assets, as previously reported: $(6,403) Recognition of 2000 write-off of receivables (265) the remaining life of the building or estimated Change in unrestricted net assets for the year ended useful life of improvement December 31, 2000, as restated $(6,668) • Furniture and equipment – 4 to 10 years The Einstein Memorial sculpture is not depreciated. Con- struction-in-progress is not depreciated until the related (4) INVESTMENTS assets are placed in service. Investments, reported at fair value (except as noted) con- (j) Use of Estimates sisted of the following as of December 31, 2001 and 2000 ($ in thousands): The preparation of these financial statements in confor- 2001 2000 mity with accounting principles generally accepted in the Short-term investments: United States of America requires management to make Cash equivalents $ 113 108 certain estimates and assumptions. These estimates and Bonds and notes 40,686 — assumptions may affect the reported amounts of assets and Treasury securities — 16,860 liabilities and disclosure of contingent assets and liabilities Equity securities 11,226 27,812 Escrow — 4,701 as of the date of the financial statements. Actual results 52,025 49,481 could differ from those estimates. Endowment and trust investments: Cash equivalents 2,702 1,791 (k) Reclassifications Bonds and notes 46,739 73,235 Equity securities 190,115 188,764 Certain amounts from the prior year have been reclassified 239,556 263,790 to conform to the current year presentation. Real estate mortgages – at cost 8,663 9,711 248,219 273,501 Other long-term investments: Escrow: (3) RESTATEMENT OF FINANCIAL Cash equivalents 246 1,358 STATEMENTS Bonds and notes 7,004 9,124 Equity securities 19,328 16,726 During 2001, NAS determined that receivables related to 26,578 27,208 the cumulative indirect cost under-recovery for one operat- Total long-term investments $274,797 300,709 ing unit had been incorrectly recorded, and were required to be written off. This adjustment has been recorded by The NAS received proceeds from the sale and leaseback of restatement of the net assets of the NAS as of January 1, the Green/Harris facility of approximately $36 million in 2000. The total write-off amounted to approximately $3.1 2000 (see note 12). These proceeds were placed in an million, of which $265,000 related to the year ended 47

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 Property and equipment as of December 31, 2001 and included in the short-term investment balance above, with 2000, were as follows ($ in thousands): 2001 2000 the remaining balance classified as other long-term invest- Land $ 29,723 29,723 ments. During 2001, payments of $3.5 million were made Furniture and equipment 27,055 26,623 from the escrow account and payments of $1.6 million Buildings and improvements 13,311 13,004 were made from operating cash. Construction in progress (note 12) 70,283 27,732 Leasehold improvements 6,949 6,949 Vanguard equity funds comprised approximately $107 147,321 104,031 million and $123 million of the total equity securities Less – accumulated depreciation and funds at December 31, 2001 and 2000, respectively. amortization (37,750) (35,471) $109,571 68,560 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 (6) CONTRIBUTIONS RECEIVABLE December 31, 2001 and 2000, to provide approximately $11.1 million and $12.5 million to these partnerships. Contributions not yet collected are reported as other receivables (current and long-term) in the statements of During 2001, the NAS invested in hedge funds which financial position, and mature as follows ($ in thousands): totaled approximately $22 million at December 31, 2001, Years ending and are included in endowment and trust equity securities December 31 above. The unrealized gain on these funds, which is 2002 $ 6,497 included as a component of investment income in the 2003 2,832 accompanying statement of activities, was approximately 2004 1,571 $74,000 for the year ended December 31, 2001. 2005 1,111 2006 700 Fair value of the buildings relating to the real estate Thereafter 25,699 mortgage investments approximated $36 million on De- 38,410 Less – discount to estimated net present value (7,018) cember 31, 2001 and 2000. The NAS pledged its invest- Less – allowance for uncollectible pledges (12) ment in the real estate mortgages as collateral on its 31,380 commitment under the operating lease for the Green/ Less – current portion (6,485) Harris facility during 2000 (see note 15). $24,895 TNAC, a related entity, invests certain of its assets in the Contributions pledged during 2001 have been discounted NAS endowment and trust investment pool. TNAC invest- at 4%. Contributions pledged prior to 2001 have been ments participate in the investment pool experience discounted at 5%. equally with all other funds in this pool. The NAS’s obligation to TNAC for these funds held in trust, which During 2000, the NAS was named the beneficiary of a $25 totaled $19.7 million and $21.0 million as of December 31, million charitable remainder trust for the purpose of 2001 and 2000, respectively, is reported as funds held on establishing a science museum at its new headquarters behalf of others within the statements of financial position. facility (see note 12). This contribution was discounted to its present value using a rate of 5%, and is reported as a Investment income (loss) is reported net of investment long-term contributions receivable. 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): 2001 2000 (7) DEFERRED REVENUE Interest and dividends income $ 13,498 25,876 Net gain (loss) on investments (23,376) (20,128) Deferred revenue consisted of the following as of Decem- $ (9,878) 5,748 ber 31, 2001 and 2000 ($ in thousands): 48

2001 2000 (10) PROGRAM EXPENSES Advances from private grants and contract sponsors $22,856 19,826 Program expenses for the years ended December 31, 2001 Advances from U.S. government sponsors 6,028 6,549 and 2000, are summarized as follows ($ in thousands): Publication subscriptions and other 3,043 2,642 2001 2000 $31,927 29,017 Policy and Global Affairs $ 49,186 48,251 Transportation Research Board 42,573 43,938 Earth and Life Sciences 22,014 26,674 (8) LINE OF CREDIT Institute of Medicine 21,520 20,607 Engineering and Physical Sciences 20,036 19,798 The NAS has an $11.0 million unsecured line of credit Behavioral and Social Sciences and Education 15,685 15,089 National Sciences Resource Center 552 564 from Bank of America with an interest rate of LIBOR plus National Academy of Engineering 3,822 2,996 0.40%. There were no outstanding balances on the line on Prizes, awards, and other 310 1,571 December 31, 2001 and December 31, 2000. $175,698 179,488 Interest expense for the years ended December 31, 2001 and 2000, was approximately $33,000 and $143,000, (11) RECOVERY OF INDIRECT COSTS respectively. The NAS receives indirect cost recovery on its federal contracts and grants. The negotiated overhead rates were 62.00% and 59.60%, and the general and administrative (9) RESTRICTED NET ASSETS (G&A) rates were 16.81% and 20.38%, respectively, for Temporarily restricted net assets were available for the the years ended December 31, 2001 and 2000. following purposes as of December 31, 2001 and 2000 Overhead is applied to direct salaries, accrued leave, fringe ($ in thousands): benefits, and services provided by outside contractors 2001 2000 (e.g., temporary personnel agencies, consultants) on NAS Sponsored research and advisory programs $102,876 106,119 property. G&A is applied to direct costs and overhead less Prizes and awards 22,081 24,530 subcontract costs and stipends. Therefore, both the over- Woods Hole facility 2,561 3,245 head and G&A rates are applied to projects incurring direct $127,518 133,894 salaries and other direct costs such as travel. If a program does not require direct salaries, such as a travel grant Temporarily restricted net assets were released from re- program, a subcontract/flow-through administration rate striction for the following purposes during the years ended of 3.07% and 2.80% was applied for the years ended December 31, 2001 and 2000 ($ in thousands): December 31, 2001 and 2000, respectively. 2001 2000 Sponsored research and advisory programs $11,151 11,237 Certain off-site work (not performed on NAS property), was Prizes and awards 787 779 assessed reduced overhead rates of 36.92% and 43.64% for Woods Hole facility 319 299 the years ended December 31, 2001 and 2000, respectively. $12,257 12,315 NAS bills for indirect cost recovery throughout the year based on pre-negotiated rates, as noted above. At the end The income generated by permanently restricted net assets of each year, NAS compares actual expenses incurred in is to be used to support donor-specified programs or each of its cost pools to the amounts recovered based on its general activities of the NAS. As of December 31, 2001 billing rates. The difference is recorded as its indirect cost and 2000, the NAS held the following permanently re- carryforward. If NAS overrecovers on its indirect costs stricted net assets, classified by the purpose for which the during the year, a liability is recorded. If NAS income is to be used ($ in thousands): underrecovers, a receivable balance is recorded. 2001 2000 Sponsored research and advisory programs $79,559 76,415 The NAS recognized a cumulative net underrecovery of Prizes and awards 3,319 3,317 $2.9 million as of December 31, 2001, which is included in $82,878 79,732 the contracts receivable balance in the statements of finan- cial position. The NAS recognized a net overrecovery of 49

$1.1 million as of December 31, 2000, included in the (b) Building Project accounts payable balance in the statements of financial Proceeds from the sale of the revenue bonds described position. above will finance the cost of the acquisition of 44,250 square feet of land and related construction of an office (12) BUILDING PROJECT AND building, as well as pay certain costs of issuing the bonds. FINANCING This building will consolidate NAS’s program activities (a) Revenue Bonds into one location. Construction began in the summer of 1999 and has an anticipated completion date of summer In January 1999, the District of Columbia issued $130,960,000 of tax-exempt revenue bonds on behalf of 2002. the NAS. The NAS is obligated under these bonds as (c) Interest Rate Swaps follows ($ in thousands): 2001 2000 In October 1999, the NAS entered into a swap agreement, Series 1999A revenue bonds, serial, with interest with an effective date of February 1, 2000. This swap rates ranging from 3.9% to 5%, maturing at agreement related to the $66 million face amount of its various dates from January 1, 2003 Series 1999A revenue bonds. The agreement provides for through 2012. $ 16,330 16,330 the NAS to receive 4.97% in interest on a notional amount Series 1999A revenue bonds, term Interest rate 5%, due January 1, 2019. 17,085 17,085 of $65 million and to pay interest at a floating rate option Interest rate 5%, due January 1, 2028. 32,545 32,545 based on the weekly interest rate resets of tax-exempt Series 1999B revenue bonds at a flexible rate variable-rate issues per the BMA Municipal Swap Index. due January 1, 2039. 32,500 32,500 Series 1999C revenue bonds, variable rate The NAS entered into this swap agreement to manage its due January 1, 2039. 32,500 32,500 exposure to interest rate changes. The fixed-rate debt Total bonds, at face value 130,960 130,960 obligations expose the NAS to variability in the cost Less – net unamortized discount (973) (968) recovery stream due to changes in interest rates. The NAS Total bonds payable $129,987 129,992 recovers the costs of borrowing through a capital invest- ment incentive rate that is set by the U.S. government and The serial and term bonds represent unsecured general is tied to a variable index. If interest rates increase, the obligations of the NAS. capital investment incentive recovery increases. Interest on the Series 1999A revenue bond is payable Conversely, if interest rates decrease, the capital invest- semiannually every January 1 and July 1, commencing on ment incentive recovery decreases. Therefore, the NAS July 1, 1999. Interest on the 1999B and 1999C bonds is entered into a derivative instrument that ties the fixed-rate payable monthly. debt to a variable index to manage fluctuations in cash The term bonds maturing on January 1, 2019 and January flows resulting from interest rate risk. By using derivative 1, 2028 are subject to mandatory redemption by operation financial instruments to hedge exposures to changes in of sinking fund installments. The installment payments for interest rates, the NAS exposes itself to credit risk and the term bonds maturing January 1, 2019, begin on January market risk. Credit risk is the failure of the counterparty to 1, 2013 and range from $2.1 to $2.8 million per year perform under the terms of the derivative contract. When through the maturity date. Installment payments for the the fair value of a derivative contract is positive, the term bond maturing January 1, 2028, begin on January 1, counterparty owes the NAS, which creates credit risk for 2020, and range from $2.9 to $4.3 million per year through the NAS. When the fair value of a derivative contract is the maturity date. negative, the NAS owes the counterparty, and therefore, it Interest expense on the bonds payable for 2001 and 2000 does not possess credit risk. The NAS minimizes the credit totaled $5.3 million and $6.0 million, respectively. NAS, risk in derivative instruments by entering into transactions in 2001 and 2000, capitalized interest of approximately with high-quality counterparties. $2,247,000 and $1,498,000, respectively. During 2000, the NAS received payments of $2,971,000 The bond proceeds are held by a Trustee and invested in a from Bank of America based on the 5.17% fixed rate, and guaranteed investment contract. The Trustee reimburses paid $2,126,000 based on an average variable rate of the NAS for expenditures related to the building project. 3.88% resulting in $845,000 gain which is reflected as 50

other income in the statement of activities for the year title to the NAS in 2007, if NAS accepted title. In 2000, the ended December 31, 2000. NAS entered into a contract with a third party to sell its future interest in the property for approximately $36 In January 2001, the NAS amended the October 1999 million. The NAS also entered into another contract in agreement by assuming responsibility for the fixed rate 2000 to lease back the entire facility until 2002 (at a payments for the period 2001-2003 in exchange for an monthly rate of $400,000) and a portion of the facility immediate cash payment of $2,435,000. Based on 1999 from 2003 to 2007 (at a monthly rate of $200,000). These results, the NAS would have received payments during amounts are included in future minimum rental payments this period having a net present value (using a 10% summarized in note 15. discount rate) of $1,952,000. Consequently, the NAS received its three year projected return immediately, plus a The sale-leaseback transaction resulted in a gain of $6.8 $483,000 market premium. million, of which $4.7 million and $6.1 million was deferred at December 31, 2001 and 2000, respectively. The Beginning January 1, 2004, the variable rate swap transac- deferred gain will be fully recognized by 2007. tion becomes effective again with 16 years remaining under the agreement. The NAS remains obligated through 2007 for remaining lease payments, with a present value of approximately $24 In October 2001, the NAS further amended the agreement million and $28 million as of December 31, 2001 and for the 2004-2020 period by agreeing to give up the benefit of any 30-day period during which the BMA index falls 2000, respectively, under the original lease agreement with the Trustee. The current and long-term portions of this below 2.25% and stays there for the entire 30 days. Each obligation are reflected as other current liabilities and time this occurs, the rate on the swap portfolio reverts to the fixed rate of 5.1% for that month only. In exchange for accrued lease liability, respectively, within the statements of financial position as of December 31, 2001 and 2000. 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- (13) NOTE PAYABLE panying statement of activities for the year ended Decem- During 2001, the NAS entered into a loan agreement of ber 31, 2001. $10 million with Bank of America. The note bears interest On January 1, 2001, NAS adopted Statement of Financial at 30 day LIBOR plus 50 basis points and is payable Accounting Standards No. 133 (SFAS 133), “Accounting monthly. The note matures on December 31, 2004. for Derivative Instruments and Hedging Activities.” SFAS 133 requires all derivatives to be recorded at fair value. (14) EMPLOYEE BENEFITS Adoption of this standard resulted in recording a cumula- tive effect of a change in accounting principle gain as of (a) Pension Plans January 1, 2001 of approximately $2.8 million and a corresponding derivative asset. For the year ended Decem- The NAS has an insured, noncontributory, defined contri- ber 31, 2001, the NAS recorded a loss on the change in the bution pension plan covering substantially all of its em- fair value of its derivative instruments in the amount of ployees. The plan is intended to qualify under Section approximately $4.9 million which is included as a reduc- 401(a) of the Internal Revenue Code and uses Teachers tion of other income in the accompanying statement of Insurance and Annuity Association/College Retirement activities. Prior to the adoption of SFAS 133, the differen- Equities Fund (TIAA/CREF) group retirement annuity tial to be paid or received for interest rate swaps was contracts as the investing vehicle. Participants in this plan accrued and recognized in other income. vest immediately. The NAS has received a favorable determination letter from the IRS on the qualification of (d) Sale-leaseback of Green/Harris Facility this plan under Section 401(a) of the Internal Revenue Code. In 1999, under a separate trust agreement, the Trustee, an unrelated third party, held record legal title to the Green/ In addition, the NAS has a voluntary employee contribu- Harris facility that was under lease by the NAS for a portion tion retirement plan that is funded solely by employee of its operations. This trust agreement would have conveyed contributions made on a pretax salary-reduction basis 51

under Section 403(b) of the Internal Revenue Code. The (c) Postretirement Benefits investing vehicles under this voluntary plan are retirement The NAS provides certain health care and life insurance annuity contracts issued by TIAA/CREF and mutual funds benefits for retired employees. All employees may become offered by the Vanguard Group, Inc. eligible for these benefits if they reach normal retirement Pension expense for the years ended December 31, 2001 age while working for the NAS and meet certain service and 2000, amounted to $7.0 million and $6.4 million, requirements. An insurance company whose premiums are respectively. NAS policy is to fund pension benefits as determined on an experience-rated basis provides these they are earned. NAS normal retirement age is 65, but benefits for retirees. The plan is contributory for employ- there is no mandatory age for retirement. ees who retire after January 1, 1990. Employees contribute 25% of the monthly premium. (b) Deferred Compensation The NAS has elected to recognize the initial postretirement The NAS holds long-term investments as part of a deferred benefit obligation over a period of 20 years. The accrued compensation arrangement for certain employees. The fair postretirement benefit obligation is reported in accrued value of these investments were approximately $5.5 mil- employee benefits on the statements of financial position. lion and $6.0 million as of December 31, 2001 and 2000, which are reported in other assets. The related obligation is The postretirement benefit cost for the years ended included in accrued employee benefits on the statements of December 31, 2001 and 2000, includes the following financial position. components ($ in thousands): 2001 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 31 765 13,128 13,893 603 10,067 10,670 Change in plan assets Fair value of plan assets, January 1 — 5,133 5,133 — 4,675 4,675 Actual return on plan assets — (274) (274) — 458 458 Employer contributions 70 599 669 56 637 693 Benefits paid (70) (599) (669) (56) (637) (693) Fair value of plan assets, December 31 — 4,859 4,859 — 5,133 5,133 Funded Status Benefit obligation (765) (8,269) (9,034) (603) (4,934) (5,537) Unrecognized translation obligation 321 5,069 5,390 347 5,474 5,821 Unrecognized prior service cost 1 64 65 — — — Unrecognized net actuarial (gain) loss 284 1,863 2,147 130 (1,265) (1,135) Prepaid (accrued) benefit cost (159) (1,273) (1,432) (126) (725) (851) Components of net periodic benefit cost Service cost 8 409 417 7 306 313 Interest cost 50 744 794 42 685 727 Expected return on plan assets — (411) (411) — (374) (374) Amortization of transition obligation 26 405 431 26 405 431 Amortization of unrecognized (gains) losses 19 — 19 7 (63) (56) Net periodic cost $ 103 1,147 1,250 82 959 1,041 52

The discount rates used to calculate the accumulated (15) COMMITMENTS AND postretirement benefit obligation for the years ended De- CONTINGENCIES cember 31, 2001 and 2000 were 7.0% and 7.25%, respec- (a) Leases tively. The trend rates for growth in health care costs used in calculating the accumulated postretirement benefit obli- The NAS is committed to several noncancelable operating gation were 10.1% and 8.6% for retirees under age 65 and leases for office space and equipment. Future minimum 10.1% and 7.6% for retirees age 65 and older during the rental payments due under noncancelable operating leases years ended December 31, 2001 and 2000, declining are as follows ($ in thousands): gradually to 5.0% for both retiree groups. Years Ending December 31 Minimum rentals The health care cost trend rate assumption has a significant 2002 $6,536 impact on the postretirement benefit costs and obligations. 2003 2,962 The effect of a 1% change in the assumed health care cost 2004 2,796 trend rate at December 31, 2001, would have resulted in an 2005 2,779 approximate $1,554,000 increase or $1,307,000 decrease 2006 2,740 in the postretirement benefit obligation and an approxi- Thereafter 2,947 $20,760 mate $173,000 increase or $147,000 decrease in the 2001 benefit expense. Rental expense amounted to $7.6 million for the years ended December 31, 2001 and 2000. The effect of a 1% change in the assumed health care cost trend rate at December 31, 2000, would have resulted in an (b) Contingencies approximate $1,215,000 increase or $1,067,000 decrease in the postretirement benefit obligation and an approxi- The NAS receives a portion of its revenues directly or mate $139,000 increase or $103,000 decrease in the 2000 indirectly from federal government grants and contracts, benefit expense. all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through December 31, 1999. A contingency exists relating (d) Postemployment Benefits to unexamined periods to refund any amounts received in excess of allowable costs. Management is of the opinion The NAS also provides certain postemployment benefits that no material liability will result from future audits. to former or inactive employees prior to their eligibility for retirement benefits. The liability for these benefits was (c) Litigation $610,000 and $479,000 on December 31, 2001 and 2000, The NAS is a defendant in several lawsuits. The extent of respectively. It is calculated on an actuarially determined possible liability that may result from these lawsuits basis and is recorded in accrued employee benefits on the cannot be reasonably estimated. While the ultimate out- statement of financial position. The total postemployment come of the litigation is uncertain, the NAS’s management benefit expense for the years ended December 31, 2001 believes that it has strong legal positions, intends to and 2000 was approximately $122,000 and $46,000, re- vigorously defend its actions, and has concluded that the spectively. probable outcomes will not have a materially adverse impact on the organization. 53

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.: IOM Representative BUDGET 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

Report of the Treasurer to the Council for the Year Ended December 31, 2001 Get This Book
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