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Treasurer's Statement To the Council of the National Academy of Sciences: 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, 1997. . The Academy adopted, on July 1, 1996, the provisions of Statements of Financial Accounting Standards (SEAS) No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. These standards are issued by the Financial Accounting Standards Board (FASB), which has oversight responsibility for financial accounting and reporting of profit and non- profit organizations. These new standards provide guidelines for reporting investments in equity securi- ties with readily determinable fair values and all invest- ments in debt securities. The effects of these new stan- dards are displayed in the audited financial statements (Exhibits A, B. and C) and related footnote 2. Details about the market value and cost for the Endowment and Trust Investment Funds are presented at Schedule 2. This statement was issued to resolve certain inconsis- tent accounting practices for non-for-profit organiza- tions in order to increase comparability and under- standability. Market value information about investments provides a more relevant measure of the ability of the organization's assets to support operations than the previously used cost-based information. The Finance Committee must continually decide whether to hold an investment or to sell the investment and redirect resources to other investments or other uses. Market value reports information useful in evaluating these decisions in dynamic market conditions. Further, reporting unrealized changes in market value provides information about risks inherent in investing activities and enhances the credibility of financial statements. We have been successful in strengthening our finan- cial management tools and analytical review of pro- gram and indirect expense activity. FY97 was the first full year of using our new financial system. The Bud- get System and the Encumbrance System are now fully integrated into the financial system. In FY98 we will implement the Fixed Asset System. An integrated report writer is available to all users with access to the financial system. This allows users to download financial, budget, and contract data from the system to spreadsheet and database files. Progress is being made on the development of a Project Task Man- agement System, which will provide project manage- ment capabilities, and a Project Financial Management System, which will provide a link between the project management system and the financial system. As with any new tool, users benefit from training, so we are developing a financial management training course to assist current and new staff in the program units. . . The Council of the NAS has identified as an important objective the consolidation of our program activity to a single location, preferably one nearer to our main building on Constitution Avenue than our current facilities are. We have thus begun the process of iden- tifying potential sites that might satisfy the many requirements necessary for making such a move. A favorable real estate market combined with our ability to use tax-exempt financing make this an opportune time to explore the possibility of acquiring a new NRC facility. The cost of the facility would be recoverable through our indirect rates. We would not be required to use NRC funds, 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 FY97 was one of continued financial stability and improved reporting capability. The following are the financial highlights of f seal year 1997: Endowment and Trust Investment Pool . As Treasurer, with advice from the Finance Commit- tee, I am responsible for prudent management of the Endowment and Trust Investment Fund of the NAS. The investment strategy concentrates on enhancing total return while preserving the principal and protect- ing against the effects of inflation.

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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 3-year average market value of Endowment and Trust Investment Fund. Included in the total market value of the Endowment and Trust Investment Pool as of June 30, 1997, are the amounts of $35.7 million, $17.9 million, and $5.7 million for the Institute of Medicine (IOM), TNAC, and Woods Hole Endowment funds, respectively. TNAC denotes The National Academies' Corporation (Beckman Center), which is equally owned by the National Academy of Sciences and the National Acad- emy of Engineering Fund (see Explanatory Note 1, page 454. All Endowment and Trust Funds are pooled for investment purposes. A detailed analysis of the funds in the Endowment and Trust Investment Pool is sum- marized in Schedules 1 and 1-A (pages 8 and 18~. Figure 1: Overview of Current Investment Structure Market Value on Target Range June 30, 1997 From To Dollar Percent of Amount Portfolio (in thousands) U.S. Large Cap Funds20% Small Cap Funds10% Non-U.S. Developed Mkts5% Non-U.S. Emerging Mkts0% Private Commitments0% U.S. Fixed Income15% Non-U.S. Fixed Income0% Mortgages Cash Total . . 2 ss% 25% 20% 7% 10% 65% 20% 0% 25% 42% 15% 13% 3% 1% 17% 2% 6% 2% 97,918 33,624 29,552 6,582 1,256 39,296 5,603 13,061 4,956 23 1,848 During FY95 the Finance Committee adopted a poli- cy of the NAS to give long-term structure to its asset allocation strategy (see Figure 1~. The market value of the National Academy of Sci- ences' Endowment and Trust Investment Pool increased by $37.6 million (19.4%) during FY97. Starting at $194.2 million on June 30, 1996, the mar- ket value reached $231.8 million on June 30, 1997. Market value of the Endowment and Trust Investment Pool for the last 3 years at June 30 is displayed below. Details are provided at Schedule 2 on page 26. ($ in thousands) FY97 FY96 FY95 Cash and Fixed Income Securities $ 62,916$ 59,568$ 56,739 Equity Securities168,932134,635115,220 $ 231,848$ 194,203$ 171,959 Also included in the market value, shown as cash and fixed income securities for FY97, are two real estate mortgages totaling $13.1 million for two office build- ings located in Georgetown. (See Schedule 2A on page 27.) . A total return of 22.7% was realized from the Endow- ment and Trust Investment Pool in FY97, compared with our target benchmark composite of 18.8% for the same period. Dividends and interest from investments during FY97 were $12.9 million. Short-Term Investment Pool . Short-term investments of general, private, and endowment and trust funds amounted to $26.9 million on June 30, 1997. These funds are held in short-term investments for program and operational liquidity requirements. During the year, net interest revenue of $1.1 million was earned from this class of invest- ments. At June 30, 1997, the Academy's short-term . . . Instruments were earning Interest at varying rates, from a low of 4.65% to a high of 6.03%. Contributions . A task force comprised of two representatives each from the NAS, NAE, and IOM Councils developed recommendations for a proposed 5-year capital cam- paign for the three organizations. The recommenda- tions were endorsed by all three Councils. The major objectives of the campaign will be to raise money for renovation of the headquarters building on Constitu- tion Avenue and a number of endowment and program support objectives of the NAS, NAE, IOM, and NRC. The NAS successfully completed a fund-raising cam- paign for the J. Erik Jonsson Woods Hole Center. The . .. . . Objective was to meet the terms of a $750,000 match

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. . ing grant ($500,000 in endowment and $250,000 in renovation funds) from the Brown Foundation of Houston, Texas, by March 15, 1997. The Jonsson Center is now fully endowed at the $4 million level and the much-needed renovations for the Center already are under way. The main house at the Center, at the Brown Foundation's request, has been named after NAS member, Norman Hackerman. The Elkan Blout Society was created in 1993 to rec- ognize members and friends of the NAS who make planned gifts to the NAS to help build future endow- ment resources of the organization. Twenty-six Acad- emy members and friends have become Elkan Bout Society members to date, making legacy gifts such as bequests and life income gifts such as charitable remainder trust and charitable gift annuities. During the 1997 Annual Meeting, a series of estate planning seminars were offered to members and the response from more than 300 people who attended the seminar was positive. The NAS Financial Advisor newsletter is another estate planning tool the NAS provides its members. The Presidents' Circle, which now has some 100 indi- vidual members from business and industry, continues to serve as a strong support group for the NAS and the IOM. Its primary purpose is to increase public under- standing of the two organizations and how their work benefits the nation. Members contributed a total of $2.3 million in unrestricted, program, and endowment funds in FY97. The NAE is participating as of July 1, 1997 (FY98). The Academy Industry Program (AIP) of the Nation- al Research Council received contributions in FY97 totaling $350,000. These funds cover the costs of operating the AIP and provide support for self-initiat- ed studies and activities of the NRC. The AIP, since 1983, has served as a bridge between the NRC and industry, providing avenues for discussion and dia- logue on issues of mutual interest. The NAS Annual Fund was established in 1995 to pro- vide individuals with the opportunity to support prior- ity programs of the NAS Council that rely on private contributions for support. In FY97, unrestricted con- tributions to the Annual Fund from NAS members and others provided nearly $230,000. These funds were used to support Beyond Discovery: The Path from Research to Human Benefit series and Teaching Evo- lution and the Nature of Science. The Prometheus Society, established to recognize individuals who con- tribute $1,000 or more to the Annual Fund, had 119 members during FY97. 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, amount of the honorarium, and any other administrative changes. Expenditures 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 1A and 1B on pages 18 and 22 for details of these funds.) . . The Management Review Committee periodically reviews NRC administrative and financial operations to ensure quality improvements. We have been suc- cessful in containing the growth of indirect costs through proactive policy decisions and incentives for decreasing expenses. These containment measures also have had the positive effect of limiting indirect cost rate increases and smoothing fluctuations of indi- rect expenditures. The Academy owns certain of the facilities used in its operations and leases space in others. Square Feet Leased Owned Main Building Beckman Center Woods Hole Green/Harris 225,471 Other Facilities 139,6903,262 365,161173,300 109,626 48,000 12,412 Assessed Value $68.1 million $ 12.3 million $1.4 million Not available Most of the facilities are occupied by offices. The Beckman Center and Woods Hole facilities are con- ference centers in Irvine, CA, and Woods Hole, MA, respectively. The assessed values are based on tax records for all facilities. 3

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· The new financial and information system was sue- NuclearRegulatoryCommission218,043 · ~ . . ^^, · Smithsonian Institution10 560 cessfully Implemented on July ~ Ado, on its target ' Social Security Administration313,897 date and below budget. u.s. Postal Service26,867 U.S. Treasury513,925 General Description of Revenue Sources Veterans Administration 1,342,290 TOTAL $ 144,539,476 NRC activities conducted in response to requests of the U.S. government are financed through cost-reimbursable nonfee contracts and grants. The General Fund of the Academy pays PRIVATE AND NONFEDERAL SOURCES for expenses as Hey are incurred. Invoices are then submit- (GRANTS AND CONTRACTS) a, American Public Transit Association $ 50,000 ted to federal government agencies for reimbursement. come Amtrak 50,000 agencies of Me U.S. government provide for advance pay- Association of Amencan Railroads 50,000 ment to the Academy. Revenue is equal to the expense Robert C.ByrdInstitute 125,000 incurred for these govemment-sponsored activities. The California Wellness Foundation 50,000 amount reimbursed by the U.S. government agencies in FY97 Carnegie Corporation of New York 1,899,384 , ~ . . ~ . _ . ~ . . . ~The Annie E Casev Foundation 137 623 was ~ ,144.5 balloon. thee Figure ~ below. On tne other nana The Commonwealth Fund 224 031 activities supported by private nonfederal agencies are usual- . ' Charles E. Culpeper Foundation 58,960 ly financed by grants and agreements that provide for the Digital Equipment Corporation 60,000 funds to be paid to the Academy in a lump sum or fixed incre- Exxon Education Foundation 209,894 mental payments in advance of the expense being incurred. Ford Foundation 6,578,487 These funds are available for expenditure on these projects William T. Grant Foundation 218,452 German-American Academic Council 328,932 during the current year arid frequently also In subsequent The Greenwall Foundation 156 204 years. (See revenue detail in Figure 2.) . . ' Howard Hughes Medical Institute 1,262,596 ILSI Research Foundation 99,015 The Robert Wood Johnson Foundation 1,249,138 FIGURE 2: Revenue in Fiscal Year 1997 by Source The Henry J. Kaiser Foundation 108,311 U.S. GOVERNMENT AGENCIES William Keck Foundation 106,202 (GRANTS AND CONTRACTS) W. K. Kellogg Foundation 268,384 Agency for International Development1,852,971 The Esther A. & Joseph Klingenstein Fund, Inc. 62,500 Defense Logistics Agency20,848 John D. & Catherine T. MacArthur Foundation 656,230 Defense Mapping Agency67,979 McKnight Foundation 52,688 Defense SpecialWeapons1,593,554 Lucille P. Markey Charitable Trust 63,248 Defense Supply Service2,165,164 Andrew W. Mellon Foundation 503,889 Department of Agriculture1,205,371 Merck Company Foundation 75,450 Department of Commerce5,817,753 Motorola, Inc. 110,000 Department of Defense National Asphalt Paving Association 50,000 Department of the Air Force3 158 252 ~ ' ' National Water Research Institute 113,858 Department of the Army12,862,503 Department of the Navy7,932,076 Open Society Institute 125,865 Department of Education2,867,787 David and Lucite Packard Foundation 64,500 Department of Energy9,913,834 The Pew Charitable Trusts 1,008,715 Department of Health and Human Services13,492,300 ROB Technology, Inc. 343,387 Department of the Interior1,249,143 Charles H. Revson Foundation 66,434 Department of Justice74,867 Rockefeller Foundation 256,855 Department of Labor583,034 The Spencer Foundation 50,000 Department of State1,050,977 Alfred P. Sloan Foundation 583,628 Department of Transportation37 661 007 ' ' Texas Instruments Inc. 52,000 Commission on Immigration Reform476 087 ' ~' Burrou~hsWellcome Company 69,805 Environmental Protection Agency5,364,339 ~ Executive Office of the President333,111 Various state governments 5,670,203 Federal Emergency Management Agency237,082 Robert W. Woodruff Foundation 500,000 National Aeronautics and Space Administration18,900,389 Other grants and contracts National Science Foundation13,202,230 (less than $45,000 per donor) 741,383 National Security Agency31,236 TOTAL PRIVATE AND NONFEDERAL GRANTS AND CONTRACTS $ 23,868,664 4

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PRIVATE AND NONFEDERAL SOURCES Amoco Corporation AT & T Bell Laboratories Bristol-Meyers Company Chevron U.S.A., Inc. Citibank, N.A. Ford Motor Company GTE Foundation General Electric Foundation Hoffman-LaRoche, Inc. Honda of America MEG, Inc. Intel Foundation International Bank for Reconstruction & Development International Brain Research Organization Johnson & Johnson Family of Companies Lucent Technologies Massachusetts Health Data Consortium, Inc. Microsoft Corporation Milliken and Company Mitchell Energy & Development Corporation Monsanto Company National Academy of Engineering Fund National Pork Producers Council Nissan Research & Development, Inc. Norfolk Southern Railway Company Northern Telecom Northwestern University Ortho Pharmaceutical Corporation Pfizer, Inc. Procter and Gamble Fund Roadway Express, Inc. SEMATECH Silicon Valley Group, Inc. SmithKline Beecham Pharmaceuticals Stanford University Texaco Foundation Washington University Xerox Corporation Other Contributors (less than $10,000 per donor) TOTAL PRIVATE AND NONFEDERAL SOURCES GRAND TOTAL PRIVATE AND NONFEDERAL Expenses in 15,000 25,000 35,500 20,000 25,000 25,000 45,000 25,000 20,000 12,500 60,000 67,110 15,000 30,000 25,000 25,000 100,000 35,000 225,000 5 1,500 1,593,326 15,000 25,000 25,000 70,000 12,500 75,000 80,000 60000 15,000 25,000 15,000 11,000 12,500 15,000 12,500 47,500 238,894 $ 3,229,830 $ 27,098,494 · As shown in Figure 3, the total direct program expense for the NAS, NRC, and IOM for the FY97 from government and private funds amounted to $131.8 million, a decrease of 2.3% from the previous year. Expenses related to publication activities were $11.1 million for the fiscal year, an increase of 9% over the prior year. Administrative and other expenses were $53.3 million for the fiscal year, an increase of 1 1. 1% from the previous year. The increase in admin FIGURE 3: Ten-Year History of NRC Expense by Purpo~ 250,000 200,000 50,000 U) o .c 1 00,000 dig 50,000 o oo al oo 0 ~a, ~_ _ _ _ 1 ~ ~ 1 _ _ _ , _ _ _ 1 o ~CM CO ~CO ~a, ~a) al ~cat _ ~m_ _ _ _ YEARS ENDING JUNE 30 0 Admin & Other 0 Publications Activities Total Administrative and Other Grand Total 0 Nongovernment-Funded Activities Government Contracts and Grants 113,249 21,682 134,931 10,287 145,218 47,954 Specific figures for FY95 and FY96 as shown graphically above Government Contracts and Grants Nongovernment-Funded Activities Total Direct Program Expense Publications Activities ($ in thousands) FY96 FY97 109,197 22,619 131,816 11,131 142,947 53,288 193,172 196,235 istrative and other includes an increase of $2.3 million in indirect expenses and $2.9 million in general fund expenditures for FY97. Combined expenses totaled $196.2 million for FY97. Included in the total expenses for FY97 was $7.0 million related to classified activities, which is about the same as last year. . During the course of operating the programs of the Academy complex, individual projects have, from time to time, incurred expenses in excess of contract and grant revenue allocated to them. In the 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 that are in danger of reaching an overrun sta- tus, thus protecting the integrity of the Academy's Endowment and Trust Investment Fund. as

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· 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 associat- ed with the annual meeting of the Academy. In order 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 endow- ment is 5% of the 3-year average market value. Journal Publications . ($ in thousands) . The Academy entered into an agreement with the Uni- versity of Texas at Dallas ("UTD") for UTD to become the publisher of Issues in Science and Tech- nology ("Issues"~. The current agreement is effective for a period of 3 years, ending June 1999, under which the Academy pays UTD $100,000 per year. All costs and operational expenses associated with Issues are the responsibility of UTD. Related Entities . Financial results of the Proceedings of the National Academy of Sciences are included in the publications line of the statement of activities in Exhibit B on a fis- cal year basis. However, the financial operation of the journal is more accurately reflected on a calendar year basis, because the business cycle of a Proceedings fol- lows the subscription period, from January to Decem- ber. Therefore, a financial summary for the Proceed- ings is shown below for the calendar years ended December 31, 1996, and 1995. ~995 ~996 Conclusion There are many financial transactions exchanged between the member organizations of the Academy complex. The National Research Council (NRC) serves as the clearinghouse for these transactions. It is important to note, however, that only the financial activity and results of the NAS, NRC, and IOM are included in these financial statements. The financial activity of the National Academy of Engineering, the National Academy of Engineering Fund, and the National Academies' Corporation (Beckman Center) are audited and reported separate- ly. Financial information for NAE and NAEF is avail- able upon request from the NAE Finance Office; information for the Beckman Center is available from the NAS Accounting Office. Revenue: · The financial statements and schedules that follow Subscriptions$ 3,6743,841 reflect the sound financial condition of the National Page charges1,2961,495 Academy of Sciences as of June 30, 1997, and the Other1,305892 TotalRevenue$ 6,275$ 6,228 results of operation for the fiscal year then ended. Expense: · I would like to take this opportunity to commend all Printing$ 3,7033,893 the staff and members who over the past year have Other2,2862,086 contributed so much to the achievements of the Acad Total Expense$ 5,989$ 5,979 emy. We are enthusiastically looking forward to an Net$ 287$ 249 even more exciting and productive future for our Academy in the coming year. . 6 It is the Academy's policy to close any surplus or deficit to the indirect cost pool in the following fiscal year. Thus, when revenues exceed expenses, the net reduces the indirect cost rate. Conversely, when expenses exceed revenues, the net loss increases the indirect cost rates. Respectfully submitted, RONALD GRAHAM, Treasurer