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OCR for page 41
IlI. Financial Condition
41
OCR for page 42
Report of the Auditing Committee
of the National Academy of Sciences
Dr. Bruce Alberts, President
National Academy of Sciences
Dear Dr. Alherts:
in accordance with Bylaw V-6 of the National Academy of Sciences, the firm of KPMG, LLP was
retained to conduct an auclit of the accounts of the Treasurer for the year enclect December 3 I, 2002, anti
to report to the Auditing Committee.
The independent accountants have completest 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 ant! recommencts its acceptance in compliance with the
governing bylaw ant! that the opinion of the in~iepenclent accountants be published with the report of
the Treasurer.
Respectfully submitted,
JACK HALPERN, Chair
PURNELL CHOPPER
M. GORDON WOLMAN
National Academy of Sciences
42
OCR for page 43
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, 2002 ant] 2001, ant! the related statements of activities ant! cash
flows for the years then ended. These financial statements are the responsibility of NAS' 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 stanclards 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 clisclosures in the financial statements. An audit
also includes assessing the accounting principles user! and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our auclits 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 NAS as of December 3 l, 2002 and 2001, and its changes in net assets ant! its cash
flows for the years then encled in conformity with accounting principles generally accepted in the
United States of America.
As cliscussecl in note 9 to the financial statements, NAS changed its accounting policy related to
temporarily restricted contributions whose restrictions are met in the same year as received.
April 15, 2003
KPMG, LLP
43
OCR for page 44
NATIONAL ACADEMY OF SCIENCES
Statements of Financial Position
December 3l, 2002 and 2001
($ in thousa,2(lsJ
Assets 2002 2001
Current assets:
Cash and cash equivalents $ 793 337
Short-term investments (note 3) 62,762 68,656
Contracts receivable - U.S. government (note 1 1) 42,461 35,153
Contributions and other receivables (notes 5 and 16) 16,442 20,261
Publications and supplies inventories 2,231 2,151
Bond proceeds held with trustee (note 12) 3,372 37,952
Prepaid expenses and other 2,685 2,771
Total current assets
130,746 167,281
Other assets (note 14) 6,681 6,702
Long-term investments (note 3) 238,587 271,493
Contributions receivable (note 5 and 16) 30,030 19,076
Property and equipment (note 4) 140,971 109,571
Einstein Memorial 1,723 1,723
$548,738 575,846
Liabilities anti Net Assets
Current liabilities:
Accounts payable and accrued expenses
Deferred revenue (note 6)
Other liabilities (note 7 and 12)
Total current liabilities
Bonds payable (note 12)
Funds held on behalf of others (note 3)
Note payable (note 13)
Accrued lease liability (note 12)
Accrued employee benefits (note 14)
Deferred gain (note 12)
Other liabilities
$ 33,025 33,105
28,432 31,927
23,885 7,811
85,342 72,843
128,641
16,975
10,000
16,220
7,744
2,590
70
129,987
19,652
10,000
20,308
7,760
3,198
2,196
Total liabilities 267,582 265,944
Net assets:
Unrestricted
Temporarily restricted (note 8)
Permanently restricted (note 8)
Total net assets
Commitments and contingencies (notes 3, 1 1, 12, 14, and 15)
Total I Abilities and net assets
See accompanying notes to financial statements.
44
74,536
113,420
93,200
99,506
127,518
82,878
281,156 309 902
$548 738 575 846
, ,
OCR for page 45
NATIONAL ACADEMY OF SCIENCES
Statements of Activities
Years ended December 3l, 2002 and 2001
($ in thousf''~rls)
2002
2001
Temporarily Permanently Temporarily Permanently
Unrestricted Restricted Restricted Totals Unrestricted Restricted Restricted Totals
Revenues, Gaines, al other support:
Government c~t~acts and
grants $187,315 187,315 $163,856 163,856
Private co'~t~.~cts arid grants
(note 9) 25,677 15,059 40,736 19,007 14,028 33,035
Other co~trib~tio~s 3,236 268 10,322 13,826 3,977 1,033 3,146 8,156
Fees arid p~blic.~tio~s 16,384 16,384 14,405 14,405
Investment loss (Foote 3) (11,405) (10,045) (21,450) (2,838) (7,040) (9,878)
Other inch (Foote 12) 9,355 9,355 4,731 4,731
Net assets released from
restrictions (quotes 8 and 9) 19,380 (19,380) _ _ 14,397 (14,397)
Total reve~es, gains,
arid othc~ support $249,942 (14,098) 10,322 246,166 217,535 (6,376) 3,146 214,305
Expenses:
Programs (ate l0)
Management arid general
Fundraisii~g
Total exposes
Change in net assets, before
$212,032
59,737
3,143
212,032
59,737
3,143
274,9 12
274,912
175,698
57,225
2,712
175,698
57,225
2,712
235,635
235,635
cumulative effect of change in
accounting principle (24,970) (14,098) 10,322 (28,746) (18,100) (6,376) 3,146 (21,330)
Cumulative effect ot ~ change in
accounting principle (note 12) 2,788
2,788
Change in net assets (24,970) (14,098) 10,322 (28,746) (15,312) (6,376) 3,146 (18,542)
Net assets at begi~i'~g of the year 99,506 127,518 82,878 309,902 114,818
Net assets ate'~clof the year $ 74,536 113,420 93,200 281,156 $ 99,506
See accompanying Ties to financial statements.
133,894 79,732 328,444
127,518 82,878 309,902
45
OCR for page 46
NATIONAL ACADEMY OF SCIENCES
Statements of Cash Flows
Years ended December 31, 2002 and 2001
($ in thous~c'~ds)
2002
2001
Cash flows from operating activities:
Change in net assets
Adjustments to reconcile change in net assets to
net cash flow (used for) provided by operating activities:
Net depreciation and amortization
Loss fin disposal of property and equipment
Bad debt expense
Net loss on investments
Decrease in investments held for others
Amos tization of deferred gain on building sale
Cants ibutions restricted for construction or endowment
Increase in other receivables
(Increase) decrease in contracts receivable - U.S. government
(Incrc~se) decrease in publications and supplies inventories
Decrease (increase) in prepaid expenses and other current assets
Decrease (increase) in other assets
(Decrease) increase in accounts payable and accrued expenses
(Decrease) increase in deferred revenue
Increase in other current liabilities
Decrease in funds held on behalf of others
(Decrease) increase in accrued employee benefits
Decrease in deferred gain
Dense in other liabilities
Nct cash (used for) provided by operations
Cash flows fit om investing activities:
Additions to property and equipment
Withdr`~tl of bond proceeds held with trustee
Sale or n~tturity of investments
Purchase of investments
Nct cash provided by (used for) investing activities
Cash flows lrom financing activities:
Contributions restricted for construction or endowment
Proceeds from bank note
Proceeds from line of credit
Payments on line of credit
Payment. on capital lease liability
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and clash equivalents, beginning of year
Cash and c.~;h equivalents, end of year
Supplemental disclosure of cash flow information:
Interest liquid
See accomp.~ying notes to financial statements.
46
$(28,746)
(18,542)
3,186
144
82
28,677
2,677
(1,391)
(3,288)
(7,217)
(7,308)
(80) 227
86 (204)
21 (730)
(44) 5,720
(3,495) 2,910
3,457 1,321
(2,677) (1,298)
(16) 274
(608) (1,452)
(2,068) (23)
(18,608) 3,812
2,654
733
656
23,376
1,298
(1,452)
(8,780)
(3,022)
146
(36,076)
34,580
192,259
(184,813)
5,950
(44,403)
40,380
237,340
(251,973
(18,656)
3,288
127,282
(113,553)
(3,903)
13,114 15,122
8,780
10,000
38,700
(38,700)
(3,658)
456
337
278
59
793
337
$ 5,762
6,985
OCR for page 47
NATIONA L ACADEMY OF SCIENCES
Notes to
Financial Statements
Decembe' 3], 2002 and 2001
~ ~ ORGANIZATION AND RENTED
ENTITIES
(a) Natzo''n I' Academy of Sciences
The Natio~.~l Academy of Sciences (NAS) was formed
under a chart ter that was passed as an Act of Incorporation
by the United States Congress and signed into law on
March 3, 1863. 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. NAS is exempt
from federal income taxes under Section 50lfc)~3) of the
Internal Revenue Code, except for unrelated business
income.
(b) Natzo'`al Research Council
Most of the activities undertaken by NAS are carried out
through the divisions and boards of the National Research
Council (NIECE, which draw on a wide cross section of the
nation's leading scientists and engineers for advisory
services to government agencies and 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 five
major units responsible for most study activities:
.
.
l~ivi.sion 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'
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. IOM was established as a separate member-
ship organization within NAS. The financial activity and
results of IOM are included in the NAS' financial state-
ments.
(d) National Academy of Engirzeerir~g
The National Academy of Engineering (NAE) was estab-
lished in December 1964 under the charter of NAS as a
related parallel organization, autonomous in its gover-
nance, administration, and in the selection of its members.
NAE shares with NAS the responsibility for advising the
federal government on scientific issues. The financial
activity and results of NAE are not included in NAS'
financial statements, except to the extent those activities
are conducted through NRC.
(be) 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 NAE to raise funds to support its
goals. The financial activity and results of NAEF are not
included in NAS' financial statements. NAS performed
certain fundraising activities on behalf of NAEF. A total of
$4,002,000 and $3,717,000 in 2002 and 2001, respectively,
was collected by NAS on behalf of NAEF. NAS disbursed
$3,479,000 and $3,937,000 to NAEF from these collected
amounts in 2002 and 2001, respectively.
(f) 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 NAS, NRC,
IOM, and NAE. NAS and NAEF are 50/50 joint investors
of TNAC, and therefore share control. The financial posi-
tion and results of TNAC are not consolidated in NAS'
financial statements. NAS utilized the Beckman Center for
meetings in 2002 and 2001 for which TNAC was paid
$256,000 and $312,000, respectively.
47
OCR for page 48
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Basis of Accounting
Net assets, revenues, expenses, gains, and losses are
classified based on the existence or absence of donor-
imposed restrictions. Accordingly, net assets of NAS are
classified and reported as follows:
Permanently restricted: Net assets subject to donor-im-
posed stipulations that t hey be maintained in perpetuity by
NAS. Generally, the donors of these assets permit 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 NAS and/or the passage of time. When a donor restric-
tion expires, temporarily restricted net assets are reclassi-
fied as unrestricted net assets.
Unrestricted: Net assets arising from exchange transac-
tions and unexpended contributions that are not subject to
donor-imposed stipulations.
id) Contributions
Contributions, including unconditional promises to give,
are recognized as revenues in the period received. Condi-
tional promises to give are not recognized until the condi-
tions on which they depend are substantially met.
The net asset restrictions are released through reclassifica-
tion when the funds are used for the donor-specified
purpose (see note 91.
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:
(b) Cash Equivalents Percentage of
NAS revenues
NAS reports as cash equivalents excess cash invested in FederalAgency 2002 2001
Department of Transportation 25% 25%
overnight gox~ernment-backed repurchase agreements.
National Aeronautics and Space Administration 11% 12%
Department of Health and Human Services 13% 11%
Ēc) 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 NAS currently occu-
pies.
NAS holds certain short-term investments for program and
operational liquidity requirements.
Changes in the fair value of investments are reported
within investment income in the statements of activities.
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.
48
It is the policy of 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 NAS is notified of the grant
award. Such grants are classified as temporarily restricted
if use of the grant funds are limited to specific areas of
study, or to be used in future periods (see note 91.
~ Deferred Revenue
For both federal and nonfederal grants and contracts that
are determined to be exchange transactions, revenue is
recognized as the related costs are incurred. Funds re-
ceived in advance of being earned for these grants are
recorded as deferred revenue on the statements of financial
position.
OCR for page 49
(g) Fair Value of Financial Instruments
The carrying value of bonds payable in the financial
statements was less than their fair value by approximately
$3,059,000 and $137,000 on December 31, 2002 and
2001, respectively.
NAS makes limited use of derivative financial instruments
for the purpose of managing interest rate risks. Current
market pricing models are used to estimate fair values of
interest rate swap agreements. The fair market value of all
other financial instruments in the financial statements
approximates reported carrying value.
(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 NAS.
The majority of NAS' publication inventories 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 st~-aight-line basis using the following lives:
Asset Class
Buildings
Building and leasehold improvements
Furniture and equipment
Depreciable Lives
40 to 50 years
Lesser of the remaining life of
the building or estimated
useful life of improvement
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.
~i) 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 disclosures in the financial statements.
Actual results could differ from those estimates.
(k) Reclassif cations
Certain amounts from the prior year have been reclassified
to conform to the current year presentation (see note 9~.
(3) INVESTMENTS
Investments, which are reported at fair value (except as
noted), consisted of the following as of December 31, 2002
and 2001 ($ in thousands):
Short-term investments:
Cash equivalents
Bonds and notes
Equity securities
Total short-term investments
Endowment and trust investments:
Cash equivalents
Bonds and notes
Equity securities
Real estate mortgages - at cost
Other long-term investments:
Cash equivalents
Bonds and notes
Equity securities
2002 2001
$ 9,795 $ 13,498
39,750 41,889
13,217 13,269
62,762 68,656
$1,696 $2,702
42,355 46,739
167,909 190,115
21 1,960 239,556
7,416 8,663
219,376 248,219
1,588 188
17,623 5,801
17,285
19,21 1 23,274
$238,587 $271,493
NAS received proceeds from the sale and leaseback of the
Green/Harris facility of approximately $36 million in 2000
(see note 12). Remaining proceeds are held within other
long-term investments, and are used for payments under
the related obligation to the former landlord. However, in
2002 and 2001, lease payments of approximately $2.7
million and $1.6 million, respectively, were paid from
operating cash.
Vanguard equity funds comprised approximately $76 mil-
lion and $107 million of the total equity securities funds at
December 31, 2002 and 2001, respectively.
Private equity investments, represented by limited partner-
ship interests, comprised approximately $6.7 million and
$6.5 million of the total investments on December 31,
2002 and 2001, respectively. NAS had a remaining com-
mitment at December 31, 2002 and 2001, to provide
approximately $9.1 million and $11.1 million to these
partnerships.
49
OCR for page 50
NAS invests a portion of its endowment in hedge funds,
which totaled approximately $26 million and $22 million
at December 31, 2002, and 2001, respectively, 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 $193,000 and
$74,000, for the years ended December 31, 2002 and 2001,
respectively.
Fair value of the buildings relating to the real estate
mortgage investments approximated $36 million on De-
eember 3 1, 2002 and 2001. NAS pledged its investment i n
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 NAS'
endowment and trust investment pool. TNAC investments
participate in the investment pool experience equally with
all other funds in this pool. NAS' obligation to TNAC for
these funds held in trust, which totaled $17.0 million and
$19.7 million as of December 31, 2002 and 2001, respee-
tively, 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 $534,000 and $401,000 for the
years ended December 31, 2002 and 2001, respectively,
and is comprised of the following ($ in thousands):
(5) CONTRIBUTIONS RECEIVABLE
Contributions not yet collected are reported as eontribu-
tions and other receivables (current) and contributions
receivable (long-term) in the statements of finaceial posi-
tion, and mature as follows ($ in thousands):
Year ending
December 31
2003
2004
2005
2006
2007
Thereafter
Less discount to estimated net present value
Less allowance for uncollectible pledges
Less current portion
Total long-tenn contributions receivable
$ 8,646
4,574
3,173
2,761
700
25,000
44,854
(6,179)
(12)
38,663
(8,633)
$30,030
Contributions pledged during 2002 and 2001 have been
discounted at 3% and 4%, respectively. Contributions
pledged prior to 2001 have been discounted at 5%.
During 2000, 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 121. This contribution was discounted to
its present value using a rate of 5%, and is reported as a
long-term contributions receivable.
2002 2001
Interest and dividends income $ 7,227 $ 13,498 (6) DEFERRED REVENUE
Net (loss) on investments
Total investment loss
(28,677) (23,376)
$(21,450) $ (9,878)
Deferred revenue consisted of the following as of Deeem-
ber 31, 2002 and 2001 ($ in thousands):
2002 2001
(4) PROPERTYAND EQU PMENT Advances from private grants and contract
sponsors $18,738 $22,856
Property and equipment as of December 31, 2002 and Advances from U.S.goven~ment sponsors 5,748 6,028
2001, were as follows ($ in thousands): Publication subscriptions and other 3,946 3,043
Total deferred revenue $28,432 $31,927
2002 2001
Land
Furniture and equipment
Buildings and improvements
Construction in progress (note 12)
Leasehold improvements
Less - accumulated depreciation and
amortization
Total property and equipment, net
50
$ 29,689 $ 29,723
24,484 27,055
106,001 13,31 1
787 70,283
6,840 6,949
167,801 147,321
(26,830) (37,750)
$140,971 $109,571
(7) LINE OF CREDIT
NAS has a $16 million unsecured line of credit from Bank
of America with an interest rate of LIBOR plus 0.40%. The
outstanding balance on the line on Deeember 31, 2002,
and 2001 was approximately $13.7 million and $0, respee-
tively, and is included in other liabilities (current) in the
statements of financial position.
OCR for page 51
Interest expense related to the line for the years ended
December 3 1, 2002 and 2001, was approximately
$1 1 1,000 and $33,000, respectively.
(8) RESTRICTED NETASSETS
Temporarily restricted net assets were available for the
following purposes as of December 31, 2002 and 2001 ($
in thousands):
2002 2001
$ 92,688 $102,876
1 8,979 22,08 1
1,753 2,561
$1 13 420 $127 518
, ,
Sponsored research and advisory programs
Prices and awards
Woods Hole facility
Total temporarily restricted net assets
Temporarily restricted net assets were released from re-
striction for the following purposes during the years ended
December 31, 2002 and 2001 ($ in thousands):
2002 2001
$18,326 $13,291
745 787
309 319
Sponsored research and advisory programs
Prizes and awards
Woods Hole facility
Total temporarily restricted net assets
released from restriction
$19,380 $14,397
The income generated by permanently restricted net assets
is to be used to support donor-specified programs or
general activities of NAS. As of December 31, 2002 and
2001, NAS held the following permanently restricted net
assets, classified by the purpose for which the income is to
be used ($ in thousands):
2002 2001
$89,873 $79,559
3,327 3,319
$93,200 $82,878
Sponsored research and advisory programs
Prizes and awards
Total permanently restricted net assets
(9) CHANGE IN ACCOUNTING FOR
CONTRIBUTIONS
In 2002, NAS adopted a policy to report all contributions
subject to donor-imposed stipulations as temporarily re-
stricted revenue in the year received. Previously, these
contributions were reported as unrestricted revenue if the
restrictions were met in the same year. NAS determined
this change provided a more useful presentation of the
complete population of temporarily restricted contribu-
tions. NAS reclassified approximately $2.1 million on the
2001 statement of activities from unrestricted private con-
tracts and grants revenue to temporarily restricted revenue
and increased the net assets released from restriction by the
same amount to conform to the current year policy.
(10) PROGRAM EXPENSES
Program expenses for the years ended December 31, 2002
and 2001 are summarized as follows ($ in thousands):
2002 200
Policy and Global Affairs
Transportation Research Board
Earth and Life Sciences
Institute of Medicine
Engineenng and Physical Sciences
Behavioral and Social Sciences and Education
National Sciences Resource Center
National Academy of Engineering
NAS and National Academy Press
Total program expenses
$ 59,229 $ 49,186
5 1,736 42,573
26,169 22,014
26,796 21,520
21,314 20,036
18,198 15,685
1,782 552
5,315 3,822
1,493 310
$212 032 $175 698
, ,
(11) RECOVERY OF INDIRECT COSTS
NAS receives indirect cost recovery on its federal contracts
and grants. Overhead is applied to direct salaries, accrued
leave, fringe benefits, and services provided by outside
contractors (e.g., temporary personnel agencies, consult-
ants) on NAS property. G&A is applied to direct costs and
overhead less subcontract costs and stipends. Therefore,
both the overhead 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 admin-
istration rate is applied. Certain off-site work (not Der-
~ . ~ ~ . _
~ ~
formed on NAN property), Is assessed reduced overhead
rates.
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.
NAS has a cumulative net underrecovery of $4.0 million
and $2.9 million as of December 31, 2002 and 2001,
respectively, which is included in the contracts receivable
balance in the statements of financial position.
(~2) BUILDING PROJECT AND
F NANC NG
(a) Building Project Revenue Bonds
In January 1999, the District of Columbia issued
$130,960,000 of tax-exempt revenue bonds on behalf of
51
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NAS. Proceeds from the sale of the revenue bonds
financed the cost of the acquisition of 44,250 square feet of
land and related construction of an office building, as well
as paid certain costs of issuing the bonds. This building
will consolidate NAS' program activities into one location.
Construction began in the summer of 1999, was completed In October 1999, NAS entered into a swap agreement, with
in the summer of 2002 and the facility was occupied in an effective date of February 1, 2000. This swap agreement
July 2002. related to the $66 million face amount of its Series 1999A
revenue bonds. The agreement provides for 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.
NAS entered into this swap agreement to manage its
exposure to interest rate changes. The fixed-rate debt
obligations expose NAS to variability in the cost recovery
stream due to changes in interest rates. 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 invest-
ment incentive recovery increases.
Conversely, if interest rates decrease, the capital invest-
ment incentive recovery decreases. Therefore, NAS en-
tered 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, 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 NAS, which creates credit risk for NAS.
When the fair value of a derivative contract is negative,
NAS owes the counterparty, and therefore, it does not
possess credit risk. NAS minimizes the credit risk in
derivative instruments by entering into transactions with
high-quality counterparties.
In January 2001, 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, NAS
would have received payments during this period having a
net present value (using a 10% discount rate) of $1,952,000.
Consequently, NAS received its three year projected return
immediately, plus a $483,000 market premium.
Beginning January 1, 2004, the variable rate swap transac-
tion becomes effective again with 16 years remaining
under the agreement.
NAS is obligated under these bonds as follows ($ in
thousands):
guaranteed investment contract. The Trustee reimburses
NAS for expenditures related to the building project.
2002 2001
Series 1999A revenue bonds, serial, with interest
rates ranging from 3.9% to 5% maturing at
various dates from January 1, 2003
through 2012.
Series 1999A revenue bonds, term
Interest rate 5%, due January 1, 2019.
Interest rate 5%, due January 1, 2028.
Series l999B revenue bonds, term, at flexible
rates due January 1, 2039.
Series l999C revenue bonds, term, at variable
rates due January 1, 2039.
Total bonds, at face value
Less net unamortized discount
Total bonds payable
Less current portion
Noncurrent bonds payable
$ 16,330
$ 16,330
17,085 17,085
32,545 32,545
32,500
32,500
32.500 32,500
130,960 130,960
(979) (973)
129,981 129,987
(1,340)
$128,641 $129,987
The serial and term bonds represent unsecured general
obligations of NAS.
Interest on all Series 1999A revenue bonds is payable
semiannually every January 1 and July 1, commencing on
July 1, 1999. Interest on the 1999B 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 Janu-
ary 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 2002 and 2001
totaled $4.2 million and $5.3 million, respectively. NAS, in
2002 and 2001, capitalized net interest of approximately
$292,000 and $2,247,000, respectively.
The bond proceeds are held by a Trustee and invested in a
52
(b) Interest Rate Swaps
OCR for page 53
In October 2001, 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, NAS received a cash payment of $1,527,000.
NAS recognized the cash payments of $2,435,000 and
$1,527,000 as other income in the accompanying state-
ment of activities for the year ended December 31, 2001.
On January 1, 2001, NAS adopted Statement of Financial
Accounting Standards No. 133 (SEAS 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 vear enabled Decem-
1 ~ ~ ~ A A ~ ~ ~ ~
ner As, chug, CAN recorded a gain on the change in the
fair value of its derivative instruments in the amount of
approximately $2.5 million which is included as an in-
crease in other income in the accompanying statement of
activities. Likewise, for the year ended December 31,
2001, NAS recorded a loss on the change in fair value of its
derivative instruments in the amount of approximately
$4.9 million which is included as a reduction of other
Income.
(cJ 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 NAS for a portion of
its operations. This trust agreement would have conveyed
title to NAS in 2007. if NAS accepted title. In 2000, NAS
entered into a contract with a third party to sell its future
interest in the property for approximately $36 million.
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 $3.3 million and $4.7 million was
deferred at December 3 1, 2002 and 2001, respectively. The
deferred gain will be fully recognized by 2007. The current
and long-term portions of the deferred gain are reflected as
other current liabilities and deferred gain, respectively,
within the statements of financial position as of Decem-
ber 31, 2002 and 2001.
NAS remains obligated through 2007 for remaining lease
payments, with a present value of approximately $20
million and $24 million as of December 31, 2002 and
2001, 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, 2002 and 2001.
(13) NOTE PAYABLE
During 2001, NAS entered into a loan agreement of $10
million with Bank of America. The note bears interest at
30 day LIBOR plus 50 basis points and is payable
monthly. The note matures on December 31, 2004.
(14) EMPLOYEE BENEP TS
(a) Pension Plans
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
investment vehicle. Participants in this plan vest immedi-
ately. 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, NAS has a voluntary employee contribution
retirement plan that is funded solely by employee contribu-
tions made on a pretax salary-reduction basis under Sec-
tion 403(b) of the Internal Revenue Code. The investment
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, 2002
and 2001, amounted to $8.7 million and $7.0 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
NAS holds long-term investments as part of a deferred
SJ
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compensation arrangement for certain employees. The fair
value of these investments was approximately $4.4 million
and $5.5 million as of December 31, 2002 and 2001, which
are reported within other assets on the statements of financial
position. The related obligation is included in accrued em-
ployee benefits on the statements of financial position.
(c) Postret~rement Benefits
NAS provides certain health care and life insurance ben-
efits for retired employees. All employees may become
eligible for these benefits if they reach normal retirement
age while working for NAS and meet certain service
requirements. An insurance company whose premiums are
2002
determined on an experience-rated basis provides these
benefits for retirees. The plan is contributory for employ-
ees who retire after January 1, 1990. Employees contribute
25% of the monthly premium.
NAS has elected to recognize the initial postretirement
benefit obligation over a period of 20 years. The
accrued postretirement benefit obligation is reported in
accrued employee benefits on the statements of finan-
cial position.
The postret~rement benefit cost for the years ended De-
cember 31, 2002 and 2001 includes the following compo-
nents ($ in thousands):
200
Life Life
insurance Health insurance Health
benefits benefits Total benefits benefits Total
Change in benefits obligations
Benefit obligation, January 1 $ 765 13,128 13,893 $ 603 10,067 10,670
Service cost 9 561 570 8 409 417
Interest cost 51 895 946 50 744 794
Actuarial loss 17 1,225 1,242 174 2,507 2,681
Benefits paid (75) (700) (775) (70) (599) (669)
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
$ 767 15,109 15,876 $ 765 13,128 13,893
75
(75)
4,859
(568)
700
(700)
4,859
(568)
775
(775)
$
70
(70)
5,133
(274)
599
(599)
5,133
(274)
669
(669)
$ 4 291 4 291 $ 4 859 4 859
, . . .
Funded Status
Benefit obligation $ (767) (10,818) (11,585) $ (765) (8,269) (9,034)
Unrecognized translation obligation 296 4,663 4,959 321 5,069 5,390
Unrecognized prior service cost 1 57 58 1 64 65
Unrecognized net actuarial (gain) loss 279 3,986 4,265 284 1,863 2,147
Accrued benefit cost $ (191) (2,112) (2,303) $ (159) (1,273) (1,432)
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Amortization of unrecognized losses
Net periodic cost
54
9
51
26
22
561
895
(389)
405
7
59
570
946
(389)
431
7
$ 8 409
50 744
(41 1)
405
26
417
794
(41 1)
431
81 19 19
$ 108 1538 1646 $ 103 1 147 1250
, . . .
OCR for page 55
The discount rates used to calculate the accumulated
postretirement benefit obligation for the years ended De-
cember 31, 2002 and 2001 were 6.5% and 7.0%, respec-
tively. The trend rates for growth in health care costs used
in calculating the accumulated pos "retirement benefit obli-
gation were 10.5% and 10.1% for retirees under age 65 and
10.1% for retirees age 65 and older during the years ended
December 31, 2002 and 2001, declining gradually to 5.0%.
The health care cost trend rate assumption has a significant
impact on the postretirement benefit costs and obligations.
The effect of a 1% change in the assumed health care cost
trend rate at December 31, 2002, would have resulted in an
approximate $1,777,000 increase or $1,490,000 decrease
in the postretirement benefit obligation and an approxi-
mate $223,000 increase or $183,000 decrease in the 2002
benefit expense.
The effect of a 1% change in the assumed health care cost
trend rate at December 31, 2001, would have resulted in an
approximate $1,554,000 increase or $1,307,000 decrease
in the postretirement benefit obligation and an approxi-
mate $173,000 increase or $147,000 decrease in the 2001
benefit expense.
(d) Poste~nployment Benefits
NAS also provides certain postemployment benefits to
former or inactive employees prior to their eligibility for
retirement benefits. The liability for these benefits was
$976,000 and $610,000 on December 31, 2002 and 2001,
respectively. It is calculated on an actuarially determined
basis and is recorded in accrued employee benefits on the
statements of financial position. The total postemployment
benefit expense for the years ended December 31, 2002
and 2001 was approximately $205,000 and $122,000,
respectively.
(15) COMM TMENTS AND
CONTINGENCIES
(a) Leases
NAS is committed to several noncancelable operating
leases for office space and equipment. Future minimum
rental payments due under noncancelable operating leases
are as follows ($ in thousands):
Years Ending
December 31:
2003
2004
2005
2006
2007
Thereafter
Minimum rentals
$ 2,966
2,810
2,783
2,744
1,984
1,058
$14 345
Rental expense amounted to $6.2 million and 7.6 million
for the years ended December 31, 2002 and 2001, respec-
tively.
(b) Contingencies
NAS receives a portion of its revenues directly or indi-
rectly 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, 1999. A contingency exists relating to
unexamined periods to refund any amounts received in
excess of allowable costs. Management is of the opinion
that no material liability will result from future audits.
(c) Litigation
NAS is a defendant in several lawsuits. The extent of
possible liability that may result from these lawsuits
cannot be reasonably estimated. While the ultimate out-
come of the litigation is uncertain, NAS' management
believes that it has strong legal positions, intends to
vigorously defend its actions, and has concluded that the
probable outcomes will not have a materially adverse
impact on the organization.
(76) SUBSEQUENT EVENT
In February 2003, NAS signed a grant agreement to
receive approximately $40 million over 15 years from a
private grantor. The funds will be restricted for use in the
Future Initiatives program. The Future Initiatives program
is a national effort to catalyze a broad-based increase of
interdisciplinary inquiry, focusing on opportunities at the
interface of science, engineering, and health research.
55
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OFFICERS
Bruce Alberts, NAS President
James S. Langer, NAS Vice -President
R. Stephen Berry, NAS Home Secretary
Michael T. Clegg, 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
Edward Shortliffe: IOM Representative
BUDGETAND INTERNAL AFFAIRS COMMITTEE
Ronald Graham, Chai
Joel E. Cohen
Robert C. Dynes
James S. Langer
Cherry A. Murray
Gerald M. Rubin
AUDITING COMMITTEE
Jack Halpern, Chair
Purnell W. Choppin
M. Gordon Wolman
FINANCIAL MANAGEMENT STAFF
Archie L. Turner, Chief Financial Officer
Linda White, Director of Finance
Mun Lim, Controller (January-October 2002)
Didi Salmon, Controller (November-December 2002)
56
Representative terms from entire chapter:
financial statements
