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Treasurer's Statement The Kavli Foundation made a 10-year, $5 million grant to support the Academy's important Frontiers of Science symposia, which bring together To the Council of the National Academy of outstanding young scientists for 2 days of Sciences: interdisciplinary presentations and discussion. The symposia -- renamed the Kavli Frontiers of Science This report, "Treasurer's Report to the Council of the of the National Academy of Sciences during the grant National Academy of Sciences," presents the financial period -- provide opportunities for promising position and results of operations as well as a review of researchers to explore the latest science at its the endowment and trust activities of our Academy for the frontiers, to exchange information informally about year ended December 31, 2005. their own work, and to foster future interdisciplinary collaborations. The program now includes the original U.S. symposium as well as bilateral symposia with Germany, Japan, China, and India. NAS Highlights The Kavli Foundation grant provides a solid financial foundation for the program over the next decade, Development Office Programs enabling broader dissemination of the content of each symposium, and strengthening opportunities for The Academy's fundraising program has continued to continued connections between participants over the develop the "culture of philanthropy" created among years. members and friends during the National Academies' successful Shaping the Future campaign, which closed in One of the membership's most significant philanthropic 2004. Support from members, friends, and philanthropic endeavors in 2005 was the Bruce Alberts Fund for organizations will be extremely important as the NAS Science Education, honoring Bruce's tenure as President moves to address the formidable challenges facing the and his leadership of initiatives to improve science and science enterprise and makers of science policy in the mathematics education in our nation's schools. Building coming years. on $1.1 million in gifts and pledges received in 2004, contributions in 2005 totaled $634,233 from 254 donors, In 2005, the Academy received new gifts and pledges primarily NAS members. The fund will be a vehicle for totaling $11.4 million, much of which is represented by underwriting the Academies' current science education two significant commitments: programs and for ensuring our ongoing capacity to address new issues and challenges in science education. Daniel E. Koshland continued his support of the Notable among the Alberts Fund support were gifts from Marian Koshland Science Museum (KSM) with an Academy members Roy Vagelos, Corey Goodman, Carl endowment gift of $5 million, made in honor of Wieman, David Goeddel, Robert Haselkorn, James Bruce Alberts' service as NAS President, to support Watson, and Keith Yamamoto. the Museum's science education programs. By using engaging, interactive exhibits to bring to life studies By the end of 2005 it became apparent that the Academies conducted by the National Academies -- on issues would meet the $20 million match challenge associated ranging from climate change to infectious disease -- with the George and Cynthia Mitchell Endowment for the Museum is proving to be a unique and successful Sustainability Science. The Mitchells established the vehicle for communicating with the many sectors of endowment in 2002 with an initial $10 million gift to the public. Dan's latest gift (over and above the $30 support National Academies studies and projects in the million he contributed to launch and endow the Mu- emerging field of sustainability science and technology. seum) will enable the KSM to expand its educational An additional $10 million endowment gift from the programs with schools and travel its exhibits to other Mitchells was contingent on the Academies raising $20 museums across the country. million in expendable and endowment support for sustainability projects by December 31, 2006. Meeting 1

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the challenge will provide us with an endowment base of medical capacity in selected developing countries; solve $20 million, offering enduring support for sustainable practical urban problems; reduce threats to urban development programs. sustainability; and add to the knowledge base for the benefit of all rapidly growing cities. In addition, grants Other notable member giving includes significant from the W. P. Carey, Alfred P. Sloan, and Richard contributions from Y.W. Kan to support the Committee Lounsbery foundations provide support for the Committee on Human Rights and from Johanna Levelt Sengers to on Human Rights. support the InterAcademy Council's (IAC) Women in Science program focused on increasing the number of One of the key goals of the Development program has women in scientific careers worldwide. been to enhance the institution's recognition and celebration of its donors. To that end, in early 2005 the NAS members continue to provide much needed annual Academies created the Einstein Society, which support for Academy activities through the Annual Fund acknowledges donors who have made cumulative gifts of appeal. In fact, 2005 represented an historical high for $100,000 or more. Each Einstein Society member member participation -- more than 26 percent. receives a statuette replica of the Einstein memorial that Members' unrestricted annual gifts provide support for sits on the front lawn of the NAS headquarters building in continuing activities and give the Academy flexibility to Washington, DC. At year-end, there were 92 members of respond to significant issues as they arise. Notable among this new recognition society, 17 of whom were NAS this year's contributions were those from Bruce Alberts, members. The Academy is also very grateful to the Elwyn Berlekamp, and William Golden. The importance members of the longstanding NAS Elkan Blout Society of such giving was especially clear in 2005 with the (EBS), which recognizes cumulative lifetime giving of release of the Rising Above the Gathering Storm report, $20,000 or more; the EBS now has 54 members and those which was made possible wholly by past philanthropic ranks continue to grow. And, through the new Heritage giving. Society, we are recognizing members who have provided for the future of the National Academies through estate- Members of the Presidents' Circle (PC) continued their based gifts such as bequest intentions and charitable gift tradition of strong philanthropic support for the National annuities. NAS members currently represent more than Academies. The PC -- composed primarily of current and half of the Heritage Society's 46 members, each of whom retired business executives actively interested in science, receives a striking medallion. engineering, and medicine -- provided more than $4 million in gifts and pledges in 2005. Their support was In 2006, the NAS will work to enhance further its directed toward our programs in science education, stewardship and recognition of the members and friends communication and dissemination, and outreach to who have contributed generously to advance the disadvantaged minority students exploring careers in Academy's mission and activities. science, engineering, and medicine. PC members' gifts also provide important unrestricted funds that enable the Academies to respond to emerging needs and challenges. Endowment and Trust Investment Pool Notable for their strong philanthropic support in 2005 were PC members Jack Anderson, Barbara Barrett, Diane With the assistance of the Finance Committee, I am Bernstein, Malin Burnham, Fletcher Byrom, James responsible for the prudent management of the endow- McConnell Clark, Jerome Grossman, Jill Kramer, Burton ment and trust fund portfolio. The goal of the endowment McMurtry, George Mitchell, Ralph O'Connor, Peter is to provide stable support for the NAS General Fund, O'Donnell, Jillian Sackler, and Sara Lee Schupf. NAS Trust and Award activities, and the Presidents' initiatives within the NRC program. To achieve this goal, The National Academies received grants from more than the NAS Council, acting on the recommendation of the 60 private and corporate foundations during 2005. Finance Committee, has adopted a spending limitation Notable among these, a grant from the Gordon and Betty designed to maintain the purchasing power of the Moore Foundation will help plan a broad-based initiative endowment over time by reinvesting a portion of the to build the indigenous scientific, engineering, and annual total investment return. The spending limitation caps annual spending at 5 percent of the three-year 2

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average market value of the participating funds in the the NAS return is 8.9%, compared with the market investment pool. composite benchmark of 8.0%. Each year, the investment performance of the NAS During the year, the Chronicle of Higher Education and portfolio is compared to a composite market benchmark the Chronicle of Philanthropy produced a joint report on portfolio for the year. The benchmark portfolio is a the Endowment Performance of Nonprofit Organizations composite index consisting of the Standard and Poor's 500 (excluding universities) for 2003 and 2004. These reports Index (35 percent), the Russell 2000 Index (15 percent), both show that the NAS portfolio performance is in the the EAFE Index (15 percent), the Emerging Markets top 16% when compared to other endowment funds. This Index (5 percent), the Lehman Aggregate (25 percent), is an impressive record for the Finance Committee and and the Non U.S. dollar Fixed Income Index (5 percent), shows the Committee members' strong commitment to and was developed to reflect the target asset allocation the stewardship of the NAS Endowment. within the NAS portfolio. The next chart presents the investment structure adopted Market values of the Endowment and Trust Investment by the NAS Finance Committee in 1995 for its asset Pool, after withdrawals, for the years ended December 31, allocation strategy and compares this target to the 2005 and 2004, are displayed in the following chart: portfolio allocation at December 31, 2005. ($ in thousands) Overview of Current Investment Structure 2005 2004 Percent Cash and Fixed-Income Securities $ 56,661 $ 40,904 of Target Portfolio Equity Securities 294,900 280,964 Fixed- Total $ 351,561 $ 321,868 Income: U.S. Fixed 15.0% 6.5% U.S. High Yield 5.0% 1.4% At the beginning of 2005, the NAS endowment consisted Non-U.S. Fixed 0.0% 1.5% of $321.9 million in assets. During the year, the Equities: U.S. Large Cap Funds 30.0% 20.3% Endowment received contributions of $10.8 million, U.S. Small-Mid Cap Funds 15.0% 17.7% withdrew funds for programs of $15.2 million, and earned Non-U.S.Stocks -- Developed 15.0% 18.7% an investment gain of $34.1 million, resulting in an Non-U.S. Stocks -- Emerging 5.0% 8.1% ending asset balance of $351.6 million. For the year, the Hedge Funds 10.0% 12.0% portfolio returned 10.7% versus 6.9% for the benchmark Private Commitments 5.0% 3.3% described above. The relative performance advantage for Real Estate 0.0% 4.6% 2005 was attributable to several factors. One factor was Cash Equivalents 0.0% 5.9% the solid returns from the hedge funds, the non-US Total 100.0% 100.0% equities, and the emerging market funds. In addition, the new real estate allocation, which totaled 4.6% at year-end, and the gradual shift away from index funds toward funds See Schedule 2-A on page 23 for details of that are more actively managed, contributed to the above- investments by asset class. average performance. The relatively small allocation to fixed income (9.4%) has proven to be beneficial as total Included in the $351.6 million total market value of returns from this asset class were less than 3%. During the Endowment and Trust Investment Pool as of 2004, the portfolio returned 14.0% versus 12.8% for the December 31, 2005, are the amounts of $55.1 benchmark. million, $22.6 million, and $7.2 million for the IOM, TNAC, and Woods Hole Endowment Funds, NAS' portfolio has consistently outperformed the market respectively. TNAC denotes The National benchmarks. For the five years ending 12/31/05, the NAS Academies' Corporation (Beckman Center), which is return is 6.3%, compared to the market composite equally owned by the National Academy of Sciences benchmark of 5.1% and for the ten years ending 12/31/05, and the National Academy of Engineering Fund (see note 1 to the Financial Statements). 3

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Withdrawals of $11.7 million were made to fund the The 2005 NAS General Fund activity is summarized as President's Committee, NAS General Fund's activity, follows: and prizes and awards for the current period. Additional withdrawals of $3.5 million were made to ($ in thousands) fund IOM, Woods Hole, and TNAC activity. Revenue: Unrestricted Endowment $ 4,228 Woods Hole Endowment 283 Prize and Award Trust Funds Annual Giving from Members 246 Membership Dues 150 Annual Meeting Several award trust funds have existed for more than 156 Capital Investment Incentive 371 100 years, while others were established more Short-Term Investment Interest, recently. The Home Secretary oversees the Royalties, etc. 29 nomination process that selects award recipients and Unexpended Fund Balances 124 recommends to the Council (subject to legal and Total Revenue $ 5,587 financial review) changes in the award cycle, amounts of the honoraria, and any other Expenses: administrative changes. Development Office $ 1,450 Member Services: Annual Meeting 555 Other 200 NAS General Fund Programs/Projects: Office of Exhibitions & Cultural Programs 303 The NAS General Fund accounts for the activities of the Public Understanding of Science 97 Council, the Officers, and the Members. The primary Local High School Project 12 funding for these activities is received from the NAS Frontiers of Science 700 Unrestricted Endowment, based on the 5% spending rule. Committee on International Security & Arms Control 140 Sackler Colloquia 375 For fiscal year 2005, the General Fund revenue totaled Koshland Science Museum 315 $5.6 million and expenditures totaled $6.7 million, Biographies of Women Scientists for resulting in a $1.1 million deficit. Comparable figures for Middle School Students 125 fiscal year 2004 were $6.1 million in revenues, $6.3 Committee on Women in Science & million in expenditures, resulting in a deficit of $235,000. Engineering 25 InterAcademy Council 98 The NAS Reserve is the accumulation of prior year Woods Hole 254 Foreign Meetings 103 surpluses, and one of the anticipated and appropriate uses NAS Officers 66 of the NAS Reserve is to provide a cushion for ongoing President's Office 256 operation during periods of revenue shortfalls. The fiscal NAS Executive Office 295 year 2005 General Fund budget was approved with an NRC Operations 639 anticipated deficit of $929,000. This deficit was primarily Interest Expense 396 due to the General Fund providing some funding to two International Council for Science 60 programs, the Frontiers of Science and the Koshland ISSUES Support 227 Other Science Museum. The 2005 budget was approved with 19 Total Expenses the understanding that the deficit would be covered by the $ 6,710 existing balance in the NAS Reserve. The remaining Deficit -- NAS Reserve $ (1,123) balance of the NAS Reserve at December 31, 2005 is $2.2 million. The NAS Council has approved a balanced budget for fiscal year 2006. 4

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Journal Publications Center. The District proposes to develop this site and provide leasing and ownership options to the NAS. The Financial results of the Proceedings of the National terms of this arrangement are currently under negotiation. Academy of Sciences are shown below for the years ended December 31, 2005, and December 31, 2004: The staff presently in the Green building in Georgetown will be relocated to the existing space in the Keck Center ($ in thousands) and NAS Building and to a small amount of rented space 2005 2004 near the Keck Center, if needed. Revenue: Subscriptions $ 6,737 $ 6,982 Author charges 4,357 4,744 Other 147 89 Total $ 11,241 $ 11,815 NRC Highlights Expense: Revenues Printing $ 5,858 $ 6,139 Other 5,259 5,110 The two main sources of revenue for the NRC are the Total $ 11,117 $ 11,249 U.S. government and private / nonfederal entities. The total contract and grant revenue from both of these Net $ 124 $ 566 sources totaled $236.4 million in 2005 and $218.4 million in 2004. Facilities U.S. Government Contracts and Grants NAS owns the following facilities: NRC activities conducted in response to requests from a broad range of U.S. government agencies are funded The Keck Center of the National Academies at 500 Fifth St., NW in Washington, D.C. through cost-reimbursable non-fee contracts and grants. The total amount reimbursed by the U.S. government The National Academy of Sciences Building at 2101 Constitution Ave., NW in Washington, D.C. agencies in the year ended December 31, 2005 was $179.9 million (see chart below and the Statement of Jonsson Study Center at 314 Quisset Dr. in Woods Hole, Massachusetts. Activities), and in the year ended December 31, 2004 was $176.4 million. Arnold and Mabel Beckman Center at 100 Academy Drive in Irvine, California (jointly owned with the U.S. Government Revenues by Agency ($ in thousands) National Academy of Engineering through The Agency for International Development $ 1,003 National Academies Corporation). Department of Agriculture 1,088 Department of Commerce 8,110 NAS is leasing the following facilities: Department of Defense: Department of the Air Force 4,993 The Cecil and Ida Green Office Building at 2001 Department of the Army 11,920 Department of Defense 1,318 Wisconsin Ave. in Washington, D.C. Department of the Navy 11,924 National Academy Press Printing Facility at 8700 United States Marine Corp 337 Spectrum Drive in Landover, Maryland. Department of Education 1,313 Department of Energy 7,766 We continue to explore the facility options available to Department of Health and Human Services 24,182 the Academy, so that when the Green Building lease Department of Homeland Security 995 expires in the middle of 2007, the staff currently there Department of Housing and Urban Development 656 Department of the Interior 2,732 may be relocated to adequate office space. Currently, Department of Justice 666 senior management is in discussions with District of Department of State 3,322 Columbia agencies regarding the possibility of developing Department of Transportation 51,107 space that is over the fire station adjacent to the Keck (continued on next page) 5

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U.S. Government Revenues by Agency (continued) Expenses Department of the Treasury 279 Election Assistance Commission 67 The NRC programs include funding from Govern- Environmental Protection Agency 7,236 898 ment and private sources. Almost all contracts and Executive Office of the President General Accounting Office 293 grants are cost-reimbursable agreements. Therefore, General Services Administration 42 even if the revenues and expenses are not equal in National Aeronautics and Space Administration 20,922 any one given year, the revenues and expenses will National Geospatial Intelligence Agency 106 be the same over the life of the award. National Science Foundation 17,252 National Security Agency 253 As in many universities and nonprofit institutions, Nuclear Regulatory Commission 187 Smithsonian Institution 15 managing indirect cost expenditures for funding of Social Security Administration 1,749 necessary support services while keeping these costs U.S. Postal Service 24 in reasonable proportion to program expenditures Veterans Administration 4,766 continues to be a challenge. Historically, NRC Adjustment to Indirect Cost Receivable & Other (7,650) management has successfully maintained a relatively Total U.S. Government Agencies $ 179,871 steady relationship between program and support costs, i.e., the growth rate of indirect costs was In the past ten years, the basic core of NRC pro- approximately equal to the growth rate of direct grams, which is represented by the Government con- costs. In 2005, total indirect expenses were $59.4 tracts and grants, has experienced relatively small million compared to an approved budget of $63.0 percentage changes from one year to the next. In million. As the 2006 program revenues are expected 2005, the NRC programs funded by the government to remain consistent with the prior year, the NAS increased 2.0%. In 2004, the government funded Council authorized a 2005 indirect expense budget of programs had decreased 4.4% from the previous year. $65.0 million in order to maintain the desired relationship between indirect and direct costs. This Private/Nonfederal Contracts and Grants budget includes a 3.0 percent increase in the base salary compensation structure in order to maintain a Private sponsors supplemented government projects and competitive position in the marketplace for hiring and provided for new initiatives by funding $56.5 million of retaining staff. awards in 2005, compared with $42.0 million in 2004. The private and nonfederal revenues were received in the form of Contracts and Grants ($44.6M) and other Related Entities contributions ($11.9M). (See Statement of Activities.) There are many financial transactions exchanged The private contracts and grants increased from $34.8 between the member organizations of the National million in 2004 to $44.6 million in 2005. This was Academies. The NRC serves as the clearinghouse for primarily due to the $5 million Kavli contribution these transactions. However, it is important to note and an additional contribution by Dr. Koshland to- that only the financial activity and results of the ward the Koshland Science Museum, both of which NAS, NRC, and IOM are included in these financial are described on page 1 of this report. statements. The other contributions revenue increased from $7.2 million in 2004 to $11.9 million in 2005. This in- The financial activity and results of the National crease is primarily attributable to the fund drive for Academy of Engineering, the National Academy of development of sustainability science and the corre- Engineering Fund, and the National Academies sponding matching gift from the George and Cynthia Corporation (Beckman Center) are audited and Mitchell Foundation. reported separately. Financial information for the NAE and the NAEF is available on request from the NAE Finance Office; information for the Beckman Center is available from the NAS Controller's Office. 6

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Overall Financial Condition Conclusion The results of operations, per the NAS Statement of The NAS and NRC continued to show their strength and Activities, are summarized as follows: stability during 2005. The NRC program experienced a modest amount of growth and the indirect expenses were 2005 2004 well under control. With regard to the NAS, the Total Revenues $ 302.8 $ 285.8 Total Expenses 266.0 254.4 endowment outperformed the benchmark again this year, Change in Net Assets $ 36.8 $ 31.4 the General Fund was able to provide a necessary cushion for ongoing operations, and the NAS continued to enjoy important financial support from members, friends, and Each year, the overall financial condition of the NAS can philanthropic organizations. As has been the case for a be reviewed by taking into account the increase or number of years, our internal and external auditing decrease in the net assets of the organization. During programs continue to disclose no material weaknesses. 2004 and 2005, the NAS has been able to increase its net assets, due in large part to the favorable results from the In conclusion, NAS continues to be in sound financial Endowment investments and from generous gifts from condition, which allows the institution to respond to the donors. many opportunities and challenges presented by an ever- changing external environment. Ronald L. Graham Treasurer 7

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