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Treasurer's Statement To the Council of the National Academy of S. clences: . . . This report, "Treasurer's Report to the Council of the National Academy of Sciences," presents the financial position and results of operations, as well as a review of the endowment and trust activities of our Academy for the fiscal year ended June 30, 1998. At its April 1998 annual meeting, the Academy ap- proved a change to the fiscal year for which financial information is reported. This will be the last Treas- urer's Report based on a fiscal year of July 1 through June 30; the new fiscal year will be January 1 through December 31. To reflect this change, we will report results early in 1999 for the six-month transition period, July 1, 1998 - December 31, 1998 (FY99T). This change will make possible budget planning based on more timely information. A significant number of new awards are received in the final month of the federal fiscal year, which ends on September 30. As a result, estimates of program expenditures for the period July through June are not firm until October. By this time, more than 25% of the fiscal year has elapsed; thus, the indirect spending plan (which is linked to the estimates of program levels) previously had to be approved months before there was any certainty that these funds could be recovered. The NAS Constitution and Bylaws have been amended to reflect this change. During the past year the Academy has been addressing the technical issues related to the year 2000 problem ("Y2K"~. The Office of Information Technology Ser- vices, working closely with the National Academy Press and the Office of the Chief Financial Officer, expects to have all NRC mission-critical systems Y2K compliant by December 31, 1998, when final testing and remediation will be performed. NRC mission- critical systems are those that support key NRC functions with the highest financial, legal, or contrac- tual exposure. Our environment is relatively uncom- plicated in that our major systems (payroll, account- ing, e-mail) are "off-the-shelf" with no major in-house modifications. Most of our standard applications and technical infrastructure are new and Y2K compliant. . . . The Academy successfully faced a major challenge to its independent process during this past fiscal year. Under the amended requirements to the Federal Advi- sory Committee Act, the institution must now provide certain information to keep the public informed of studies conducted by committees of the NRC, NAS, NAE, and IOM. Institutional policy has always re- quired the collation of project information for records storage at the conclusion of a project; the new compli- ance requirements call for some of that information to be maintained in a public access file, available through our website. We have had to allocate re- sources (staff and technology) to support this require- ment but do not expect a significant ongoing incre- mental financial impact. The Council of the NAS has identified as an important objective the consolidation of program activity in one location, preferably one nearer to our main building on Constitution Avenue than where our current facili- ties are located. We have identified a potential site that will satisfy the many requirements necessary for making such a move and are in the final stages of acquiring it. A favorable real estate market combined with our ability to use tax-exempt financing make this an opportune time to build a new NRC facility. The cost of the facility would be recoverable through our indirect rates. We would not be required to use NAS funds or to pledge or use the NAS endowment directly or indirectly, nor would we need to make an equity contribution from the endowment. I would like to thank the Council, the Committee on Budget and Internal Affairs, the Finance Committee, and the NRC Management Review Committee for their continued input and support. I believe that FY98 was one of continued financial stability and improved reporting capability. The following are the financial highlights of fiscal year 1998: Endowment and Trust Investment Pool . As Treasurer, with the assistance of the Finance Committee, I am responsible for prudent management of the Endowment and Trust Investment Funds of the NAS. The investment strategy concentrates on en- hancing total return with diligence toward preserving the principal and protecting against the effects of inflation. 1

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. The Finance Committee periodically reviews the spending rate policy for income from the NAS invest- ment portfolio. The current recommendation, which was approved by the NAS Council in fiscal year 1993, limits annual expenditures to 5% of the Endowment and Trust Investment Funds, averaged over the pre- ceding three years. Included in the total market value of the Endowment and Trust Investment Pool as of June 30, 1998, are the amounts of $42.6 million, $20.4 million, and $6.6 million for the IOM, TNAC, and Woods Hole Endow- ment Funds, respectively. TNAC denotes The Na- tional Academies' Corporation (Beckman Center), which is equally owned by the National Academy of Sciences and the National Academy of Engineering Fund (see Note 1, page 45~. All Endowment and Trust Investment Funds are pooled for investment purposes. A detailed analysis of the funds in the Endowment and Trust Investment Pool is summarized in Schedules 1 and 1-A (pages 8 and 18~. TABLE 1: Overview of Current Investment Structure Target Market Value on Range June 30, 1998 Percent Dollar of Amount (in From To Portfolio thousands) 15% 65% 0% 20% Fixed-Income: U.S. Fixed Non-U.S. Fixed Mortgages (at cost) Equities: U.S. Large Cap Funds Small Cap Funds Non-U.S. Developed Markets Non-U.S. Emerging Markets Private Commitments Cash Equivalents Total . 20% 55% 10% 25% 5% 20% 0% 7% 0% 10% 0% 25% 24% 2% 5% 35% 15% 16% 2% 0% 1% During FY95 the Finance Committee adopted a policy of the NAS to give long-term structure to its asset allocation strategy (see Table 1~. The market value of the NAS Endowment and Trust Investment Pool increased by $31.4 million (13.5%) during FY98. Starting at $231.8 million on June 30, 1997, the market value reached $263.2 million on June 30, 1998. Market value of the Endowment and Trust Investment Pool for the past 3 years on June 30 is displayed below: ($ in thousands) FY98 FY97 FY96 $ 82,104 $ 62,916 $ 59,568 181,089 168,932 134,635 $263,193 $231,848 $194,203 Cash and Fixed-Income Securities Equity Securities Total 2 Also included in the market value, shown as cash and fixed-income securities for FY97 are two real estate mortgages totaling $12.2 million for two office build- ings located in Georgetown. (See Schedule 2A on page 27.) . A total return of 18.3% was realized from the invest- ment pool in FY98, compared with our benchmark composite of 13.8% for the same period. Dividends and interest from investments during FY98 were $15.1 million. Details are provided in Schedule 2. Short-Term Investment Pool . $ 61,897 Contributions 5,350 12,233 93,000 39,672 41,584 5,550 1,283 2,624 $263,193 . . Short-term investments of general, private, and en- dowment and trust funds amounted to $34.1 million on June 30, 1998. These funds are held in short-term investments for program and operational liquidity requirements. During the year, interest revenue net of refunds to sponsors of $2.0 million was earned from this class of investments. On June 30, 1998, the Academy's short-term instruments were earning inter- est at varying rates, the current yield on June 30,1998, ranged from 5.32% to 5.98%. (Details are provided in Schedule 3 on page 28.) The development offices of the NAS, NAE, and IOM were unified this year, leading the way for the collabo- ration of the institutions on the joint capital campaign. Functioning now as one, the development office serves all of our needs in developing private support from individuals, corporations, and foundations to build endowment, sustain and increase project sup- port, and provide unrestricted contributions for core needs and independent studies of the NAS, NAE, and IOM. The Elkan Blout Society was created in 1993 to recognize members and friends of the NAS who make planned gifts to the NAS to help build future endow- ment resources for the institution. Twenty-seven Academy members and friends have become Elkan Blout Society members to date, making legacy gifts such as bequests and life income gifts such as a charitable remainder trust and charitable gift annu- ities. The NAS Financial Advisor is provided to NAS members as an estate planning tool.

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. The IOM Society similarly honors members and friends of the Institute of Medicine who plan major gifts and legacies to endow the IOM's work. Ten individuals and couples have been inducted since the society was established in July 1997. As with the NAS, privately donated endowment underwrites self- initiated investigations that frequently lie beyond the horizon of present-day governmental concerns. For example, before America was prepared to take action on AIDS, the IOM independently outlined the scope of the crisis and the framework for a national re- sponse. Planned gifts to the IOM through charitable bequests, trusts, annuities, and life insurance, as well as current gifts of assets such as appreciated real estate, securities, and personal property, endow ongo- ing, independent work of the IOM that enhances the nation's health and well-being. The Presidents' Circle, which now has 109 individual members from business and industry, continues to serve as a strong support group for the NAS, NAE, and IOM. It was a pleasure for the NAS and the IOM to welcome the NAB as a sponsor of The Presidents' Circle, effective July 1,1997. Its primary purpose is to increase public understanding of the Academy com- plex and how its work benefits the nation. Members contributed a total of $298,000 in unrestricted funds and $563,489 in program funds, pledge payouts, and contributions to endowment in FY98. The NAS Annual Fund was established in 1995 to provide individuals with the opportunity to support priority programs of the NAS Council that rely on private contributions for support. In FY98 unrestricted contributions to the Annual Fund from NAS members and others provided nearly $200,000. These funds were used to support Teaching Evolution and the air . ~ ~ 1 vature of Science and programs of the Office of Public Understanding of Science to encourage quality science programming on television and the develop- ment of a new World Wide Web site providing science experiments for high school students. The Prometheus Society, established to recognize individuals who con- tribute $1,000 or more to the Annual Fund, had 121 members during FY98. The Academy Industry Program (AIP) of the National Research Council received contributions totaling $241,000. These funds cover the cost of operating the AIP and provide support for the self-initiated studies and activities of the NRC. The AIP conducted two forums in FY98, one on imaging and visualization and another on new materials research. Prize and Award Trust Funds . Several award trust funds have existed for more than 100 years, while others have been more recently established. The Home Secretary oversees the nomi- nation process that selects award recipients and rec- ommends to the Council (subject to legal and financial review) changes in the award cycle, amounts of the honoraria, and any other administrative changes. Ex- penditures from the award funds are limited by the 5% spending rate policy recommended by the Finance Committee and approved by the Council. (See Sched- ules 1 and 1-A on pages 8 and 18 for details of these funds.) Operations . . Leased Owned 109,626 48,000 12,412 The Management Review Committee periodically re- views NRC administrative and financial operations to ensure quality improvements. We have been success- ful in limiting the growth of indirect costs through proactive policy decisions and incentives. These con- tainment measures also have had the positive effect of limiting indirect cost rate increases and smoothing fluctuations of indirect expenditures. The Academy owns certain of the facilities used in its operations and leases space in others. Square Feet Assessed Value $68.1 million $12.3 million $1.4 million Main Building Beckman Center Woods Hole Green/Harris Other facilities 225,471 139,690 3,262 365,161 173,300 Not available Most of the facilities are occupied by offices. The Beckman Center and Woods Hole facilities are confer- ence centers in Irvine, CA, and Woods Hole, MA, respectively. The assessed values are based on tax records for all facilities. General Description of Revenue Sources . NRC activities conducted in response to requests of the U.S. government are financed through cost-reim

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. ~ ~ During the course of operating the programs of the AcademY complex. individual projects have, from ume to ume, Incurred expenses in excess of contract and grant revenue allocated to them. In aggregate, these overruns normally amount to less than $100,000 on an annual basis. During FY95, the Management Review Committee established a review process for projects in danger of reaching an overrun status, thus protecting the integrity of the Academy's Endowment and Trust Investment Funds. Certain necessary and appropriate expenditures are not allowable as charges to the Indirect Cost Pool or as direct charges to government contracts and grants. These expenditures include such items as Academy- sponsored initiatives, expenses of Academy members and officers not allowable as an indirect cost, fund- raising activities, contract and grant overruns, costs disallowed by federal auditors, and expenses associ- ated with the annual meeting of the Academy. To meet these budgeted expenditures, we use interest earnings on short-term investments and an allocation from the unrestricted endowment pool. The current approved spending rate from the unrestricted endowment is 5% of the 3-year average market value. Journal Publications Financial results of the Proceedings of the National Academy of Sciences are included in the publications line of the statement of activities in Exhibit B on a fiscal year basis. However, the financial operations are better reflected on a calendar year basis since the business cycle of a Proceedings subscription begins in January and ends in December. Therefore, a financial summary of the results of the Proceedings is shown below for the calendar years ended December 31, 1997, and 1996: 1997 ($ in thousands) 1996 Revenue: Subscriptions Page charges Other Total Revenue Expenses: Printing Other Total Expenses . year. Thus, when revenues exceed expenses, the net reduces the indirect cost rate. Conversely, when ex- penses exceed revenues, the net loss increases the indirect cost rates. The Academy entered into an agreement with the University of Texas at Dallas (UTD) for it to become the publisher of Issues in Science and Technology (Issues). The current agreement is effective for a period of 3 years, ending June 1999, by which the Academy pays UTD $100,000 per year. All costs and operational expenses associated with Issues are the responsibility of UTD. Related Entities . . There are many financial transactions exchanged be- tween the member organizations of the Academy complex. The NRC serves as the clearinghouse for these transactions. However, it is important to note that only the financial activity and results of the NAS, NRC, and IOM are included in these financial state- ments. The financial activity and results of the National Academy of Engineering, the National Academy of Engineering Fund, and the National Academies' Cor- poration (Beckman Center) are audited and 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 avail- able from the NAS Accounting Office. Conclusion . . $3,741 1,866 219 $3,841 1,495 892 $5,826$6,228 $3,750 2,041 $3,893 2,086 $5,791 $5,979 The financial statements and schedules that follow reflect the sound financial condition of the National Academy of Sciences as of June 30, 1998, and the results of operation for the fiscal year then ended. I would like to take this opportunity to commend all staff and members who over the past year have contributed so much to the achievements of the Acad- emy. We are enthusiastically looking forward to an even more exciting and productive future for our Academy in the coming year. Net $ 35 $ 249 Respectfully submitted, . It is the Academy's policy to close any surplus or deficit to the indirect cost pool in the following fiscal RONALD GRAHAM, Treasurer s

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