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Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
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Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
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Page 40
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
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Page 41
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 42
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 43
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 44
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 45
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 46
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 47
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 48
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 49
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
×
Page 50
Suggested Citation:"III. Financial Condition." National Research Council. 1999. Report of the Treasurer to the Council For the Six Months Ended December 31, 1998. Washington, DC: The National Academies Press. doi: 10.17226/9626.
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Page 51

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IlI. Financial Condition 39

Report of the Auditing Committee of the National Academy of Sciences Dear Dr. Alberts: In accordance with Bylaw V-6 of the National Academy of Sciences, the firm of KPMG LLP was retained to conduct an audit of the accounts of the Treasurer for the six months ended December 3l, 199S, and to report to the Auditing Committee. The independent accountants have completed their audit of the financial statements and have submitted their report, a copy of which is attached, concerning financial statements to which they refer. The Auditing Committee has reviewed the report and recommends its acceptance in compliance with the governing bylaw and that the opinion of the independent accountants be published with the report of the Treasurer. Respectfully submitted ELKAN R. BLOUT, Chair DAVID M.KIPNIS ROBERT WURTZ National Academy of Sciences Auditing Committee Dr. Bruce Alberts, President National Academy of Sciences Washington, D.C. 40

Independent Auditors' Report National Academy of Sciences Auditing Committee We have audited the accompanying statement of financial position of the National Academy of Sci- ences (NAS) as of December 3l, 199S, and the related statements of activities and cash flows for the six months then ended. These financial statements are the responsibility of the NAS's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for · ~ our oplmon. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the National Academy of Sciences as of December 3l, 199S, and its changes in net assets and its cash flows for the six months then ended in conformity with generally accepted ac- counting principles. KPMG LLP March 26, 1999 Washington, D.C. 41

EXHIBIT A Statement of Financial Position of the National Academy of Sciences as of December 3l, 1998 ($ in thousands) ASSETS Current Assets Cash and cash equivalents Short-term investments (note 3) Accounts receivable - U.S. government Other receivables (note 5) Inventories of publications and supplies Prepaid expenses and other Total Current Assets Einstein Memorial Property and equipment (note 4) Other assets (note 10) Endowment and Trust Investment Pool (note 3) Total Assets LIABILITIES AND NET ASSETS Current Liabilities Accounts payable and accrued expenses Deferred revenue (note 6) Other liabilities Total Current Liabilities Long-Term Liabilities Funds held on behalf of others (note 3) Accrued employee benefits (note 10) Other liabilities (note 12) Total Liabilities Net Assets Unrestricted Temporarily restricted (note 7) Permanently restricted (note 7) Total Net Assets Total Liabilities and Net Assets See accompanying notes to the financial statements. 42 $ 98 34,274 28,803 6,738 1,894 718 $ 72,525 $ 1,723 18,490 10,347 257,174 $360,259 $ 16,668 24,023 120 $ 40,811 $ 19,864 7,557 509 $ 68,741 $123,411 95,450 72,657 $291,518 $360,259

EXHIBIT B Statement of Activities of the National Academy of Sciences Six Months Ended December 3l, 1998 ($ in thousands) Temporarily Permanently Unrestricted Restricted Restricted Totals REVENUES, GAINS, AND OTHER SUPPORT Government contracts and grants Private contracts and grants Other contributions Fees and publications Investment income (note 3) Other Net assets released from restrictions Total revenues, gains, and other support $ 84,347 9,365 2,528 7,283 213 984 2,579 $ 84,347 4,249 13,614 2,769 7,283 (1,644) 984 241 (1,857) (2,579) $107,299 $ (187) $ 241 $107,353 EXPENSES Programs (note 8)$100,348$ $ $100,348 Management and general7,1767,176 Fund raising550550 Total Expenses$108,074$ $ $108,074 Change in net assets $ (775) $ (187) $ 241 $ (721) Net assets at beginning of the year Net assets at end of the year See accompanying notes to the financial statements. 124,186 95,637 72,416 $123,411 $95,450 $72,657 $291,518 43

EXHIBIT C Statement of Cash Flows of the National Academy of Sciences Six Months Ended December 3l, 1998 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation and amortization Gain on sale of securities Unrealized loss on securities Loss on sale of property and equipment Increase in accounts receivable - U.S. government Increase in other receivables Increase in inventories of publications and supplies Decrease in prepaid expenses and other current assets Increase in other assets Increase in accounts payable and accrued expenses Decrease in other current liabilities Increase in deferred revenue Increase in other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment Sale or maturity of investments Purchase of investments Net cash used by investing activities CASH FLOWS USED BY FINANCING ACTIVITIES: Payments on financing agreement Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Supplemental data Interest paid on obligations See accompanying notes to the financial statements. 44 ($ in thousands) $ (721) 1,881 (4,026) 15,454 7 (2,496) (1,269) (20) 254 (3,570) 652 (102) 3,595 1,460 11,099 (3,992) 24,260 (29,869) (9,601) (1,500) $ (2) 100 $ 98 $ 67

Notes to the Financial Statements NOTE 1: ORGANIZATION AND RELATED ENTITIES National Academy of Sciences The National Academy of Sciences (NAS) was formed under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on March 3, 1863. The 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. The NAS is exempt from federal income taxes under Section 501(c)~3) of the Internal Revenue Code, except for unrelated busi- ness income. National Research Council Most of the activities undertaken by the NAS are carried out through the commissions, offices, and boards of the National Research Council (NRC), which draw on a wide cross section of the nation's leading scientists and engi- neers for advisory services to government agencies and the Congress. To respond effectively to both the disciplinary concerns of the research community and the complex ~. · ~. ~ ~ r ntermsc~p~nary problems lacing American society, the NRC is organized into 10 major units that are responsible for most study activities Commission on Behavioral and Social Sciences and Education; Commission on Engineer- ing and Technical Systems; Commission on Geosciences, Environment, and Resources; Commission on Life Sci- ences; Commission on Physical Sciences, Mathematics, and Applications; Office of International Affairs; Office of Scientific and Engineering Personnel; Board on Agricul- ture and Natural Resources; Transportation Research Board; and Center for Science, Mathematics, and Engi- neering Education. The financial activity and results of the NRC are included in the NAS's financial statements. Institute of Medicine The Institute of Medicine (IOM), established in 1970, conducts studies of policy issues related to health and medicine. It issues position statements on these policies, cooperates with the major scientific and professional soci- eties 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. The IOM was established as a separate membership organiza- tion within the NAS. The IOM's Policy Division is respon- sible to the Executive Office of the National Research Council. The financial activity and results of the IOM are included in the NAS financial statements. National Academy of Engineering The National Academy of Engineering (NAE) was estab- lished in December 1964 under the charter of the National Academy of Sciences as a related parallel organization, autonomous in its administration and in the selection of its members. The NAE shares with the NAS the responsibility for advising the federal government on scientific issues. The financial activity and results of the NAE are not included in the NAS financial statements. 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 the NAE to raise funds to support its goals. The financial activity and results of the NAEF are not included in the NAS financial statements. 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, is located in Irvine, California, and operates to expand and support the general activities of the NAS, NRC, IOM, and NAE. The NAS and the NAEF are 50/50 joint investors of TNAC. The financial activity and results of TNAC are not included in the NAS's financial statements. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor 45

imposed restrictions. Accordingly, net assets of the NAS are classified and reported as follows: Permanently restricted: Net assets subject to donor-im- posed stipulations that they be maintained in perpetuity by the NAS. Generally, the donors of these assets permit the 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 the NAS and/or the passage of time. When a donor restriction expires, temporarily restricted net assets are reclassified as unrestricted net assets. Unrestricted: Net assets arising from exchange transac- tions and unexpended contributions that are not subject to donor-imposed stipulations. Contributions subject to donor-imposed stipulations that are met in the same year as received are reported as unrestricted revenue. Cash and Cash Equivalents The NAS considers excess cash that is invested in over- night government-backed repurchase agreements and de- mand deposits to be cash equivalents. 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 the NAS currently occupies. Changes in the fair value are recognized in the statement of activities. Net gains or losses on investments are reported as changes in unrestricted net assets unless otherwise specified by the donor. The NAS holds certain short-term investments for pro- gram and operational liquidity requirements. Endowment and trust investments are pooled for long-term investment purposes. Investments in this 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 46 used to determine equity among funds in the pool when- ever new money is contributed or withdrawals are made. Income earned that is not reinvested does not affect the PCU value. 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. 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. Contracts and Grants A major portion of NAS activities are performed under cost-reimbursable contracts with the U.S. government. The largest concentrations in federal contracts in terms of earned revenue for the six months ended December 31, 1998, were the Department of Energy (approximately 19%) and the Department of Transportation (approxi- mately 16%~. It is the policy of the NAS to record federal contracts as exchange transactions and recognize revenue as recover- able costs are incurred. The costs associated with U.S. government contracts are subject to audit by the Defense Contract Audit Agency, which has completed its examina- tions through June 30, 1996. Revenue from grants qualifying as contributions is re- corded at the time the NAS is notified of the grant award. Such grants are classified as temporarily restricted if the use of the grant funds is limited to specific areas of study or restricted to be used in future periods. The net asset restrictions are released when the funds are used for the donor-specified purpose. Deferred Revenue For both grants and contracts that are determined to be exchange transactions, revenue is recognized as the related costs are incurred. Funds received in advance for these grants are recorded as deferred revenue on the statement of financial position.

Inventories Inventories are stated at the lower of cost or net realizable value and include supplies, work in process, and finished goods for the publication activities of the NAS. The majority of the NAS's inventory of publications and supplies reside with the National Academy Press (NAP). NAP uses the full absorption costing methodology in pricing finished products. This methodology includes all direct printing and related indirect costs. Property and Equipment Depreciation of NAS buildings and equipment is com- puted on a straight-line basis using the following lives: · buildings 40 to 50 years · building and leasehold improvements lesser of the remaining life of the building or estimated useful life of improvement · furniture and equipment ~ to 10 years Improvements to leased facilities are amortized over the remaining life of the lease. The Einstein Memorial sculp- ture is not depreciated. Use of Estimates The preparation of these financial statements in confor- mity with generally accepted accounting principles re- quires management to make certain estimates and assump- tions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. NOTE 3: INVESTMENTS Short-term investments and endowment and trust invest- ments consisted of the following as of December 31, 1998: Short-term investments Investments reported at fair value: Vanguard Admiral Fund Vanguard Fixed-Income Securities NASA Federal Credit Union Endowment and trust investments Investments reported at fair value: Cash equivalents Bonds and notes Equity securities Real estate mortgage - at cost ($ in thousands) $ 7,477 73,405 164,502 $245,384 1 1,790 $257,174 Vanguard equity funds comprise approximately $110 mil ---O ~ - - -1 --- -.~ lion of the total equity securities funds. Private equity investments, represented by limited partner- ship interests comprised $2.2 million of the total invest _ ~ ~ ~ . ~ . . meets on December 31, lam. NAG had a remaining commitment on December 31, 1998, to provide approxi- mately $4.2 million to these partnerships. Fair value for real estate mortgage investments approxi- mated $24 million on December 31, 1998, estimated by comparative analysis of like location and properties. TNAC utilizes the NAS endowment and trust investment pool as a means to invest certain assets. These TNAC investments participate in the investment pool experience along with all other funds in this pool. Earnings allocated to the TNAC investments are reinvested with the original investments. The NAS's obligation to TNAC for these funds held in trust, which totaled $19.9 million as of December 31, 1998, is reported as funds held on behalf of others on the statement of financial position. Investment income is reported net of investment expenses of approximately $40,000 for the six months ended De- cember 31, 1998, and is comprised of the following: Interest and dividend income Net losses on investments ($ in thousands) $17,161 17,013 100 $34,274 ($ in thousands) $ 9,784 (1 1,428) ($ 1,644) 47

NOTE 4: PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1998, were as follows: Land Buildings arid improvements Furniture arid equipment Leasehold improvements Less: Accumulated depreciation and amortization ($ in thousands) $ 2,510 12,936 28,526 6,882 $50,854 32,364 $18,490 The NAS is the custodian of certain property and equip- ment that is owned by the U.S. government and is fur- nished to the NAS for work under government contracts. The cost of these assets, which is not reflected in the accompanying statement of financial position, was ap- proximately $416,000 as of December 31, 1998. NOTE 5: CONTRIBUTIONS RECEIVABLE Pledged contributions are included as other receivables in the statement of financial position. Donors have pledged to provide support in the following future periods: Years Ending December 31 1999 2000 - 2004 ($ in thousands) Totals $3,513 1,132 $4,645 NOTE 6: DEFERRED REVENUE Deferred revenue consisted of the following as of Decem- ber 31, 1998: Advances from private contracts Advances on U.S. government grants and contracts Subscription publications NOTE 7: RESTRICTED NETASSETS ($ in thousands) $15,930 3,731 4,362 $24,023 Temporarily restricted net assets were available for the following purposes as of December 31, 1998: Programs Prizes arid awards Woods Hole facility 48 ($ in thousands) $71,123 21,811 2,516 $95,450 Permanently restricted net assets are invested in perpetuity. The income generated by these assets is to be used to support donor-specified programs or general activities of the NAS. As of December 31, 1998, the NAS held the following permanently restricted net assets, classified by the purpose for which the income is to be used: Programs Prizes and awards NOTE 8: PROGRAM EXPENSES ($ in thousands) $69,345 3,312 $72,657 Program expenses for the six months ended December 31, 1998 are summarized as follows: Scientific arid Engineering Personnel Transportation Research Board Institute of Medicine Engineering arid Technical Systems Behavioral arid Social Sciences and Education Geosciences, Environment, and Resources Physical Sciences, Mathematics, and Applications International Affairs :ommlss~on on Life Sciences Science, Mathematics, arid Engineering Education Policy Division National Sciences Resource Center National Academy of Engineering Board on Agriculture and Natural Resources Other NOTE 9: INDIRECT COSTS ($ in thousands) $22,592 19,810 8,321 5,915 7,519 5,225 5,990 3,127 15,546 1,775 1,604 455 1,520 503 446 $100,348 The NAS received fixed indirect cost rates for the six months ended December 31, 1998, on its federal contracts and grants. The overhead rate was 63.13%, and the general and administrative (G&A) rate was 22.31%. Overhead was applied to direct salaries, accrued leave, fringe benefits, and services provided by outside contractors (e.g., tempo- rary personnel agencies, consultants) on NAS property. G&A was applied to direct costs and overhead less sub- contract costs and stipends. Therefore, both the overhead and G&A rates were applied to projects incurring direct salaries and other direct costs such as travel. If a project did not require direct salaries, such as a travel grant program, a subcontract/flow-through administration rate of 2.18% was applied. Certain other activities, such as off-site

work (not performed on NAS property), were assessed at a reduced overhead rate of 43.45%. NOTE 10: EMPLOYEE BENEF TS Pension Plans The NAS has an insured, noncontributory, defined contri- bution pension plan covering substantially all of its em- ployees. 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 investing vehicle. Employees under this plan vest immediately. The 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, the NAS has a voluntary employee contribu- tion retirement plan that is funded solely by employee contributions made on a pretax salary-reduction basis under Section 403(b) of the Internal Revenue Code. The investing vehicles under this voluntary plan are retirement annuity contracts issued by TIAA/CREF and mutual funds offered by the Vanguard Group, Inc. Pension expenses for the six months ended December 31, 1998, amounted to $2.9 million. NAS policy is to fund pension benefits as they are earned. NAS normal retire- ment age is 65, but there is no mandatory age for retire- ment. Deferred Compensation The NAS holds long-term investments as part of a deferred compensation arrangement for certain employees. The fair value of these investments was approximately $6.36 mil- lion as of December 31, 1998, which are reported in other assets. The related obligation is included as accrued em- ployee benefits on the statement of financial position. Postretirement Benefits The NAS provides certain health care and life insurance benefits for retired employees. All employees may become eligible for these benefits if they reach normal retirement age while working for the NAS and meet certain service requirements. These benefits for retirees are provided by an insurance company whose premiums are determined on an experience-rated basis. The plan is contributory for employees who retire after January 1, 1990. Employees contribute 25% of the monthly premium. The NAS has elected to recognize the initial postretirement benefit obli- gation over a period of 20 years. The accrued postretirement benefit obligation is reported as accrued employee benefits on the statement of financial position. The postretirement benefit cost for the six months ended December 31, 1998, includes the following components: Change in Benefit Obligation: Benefit obligation, July 1, 1998 Service cost Interest cost Actuarial (gain)/loss Benefits paid 20 73 (23) Benefit obligation, Dec. 31, 1998 $604 Funded Status: Benefit obligation Plan assets Unrecognized transition obligation Unrecognized net actuarial gain Accrued benefit cost Components of net periodic cost Service cost Interest cost Amortization of unrecognized transition obligation Expected return on plan assets ($ in thousands) Life InsuranceHealth BenefitsBenefitsTotal $531$9,656$10,187 144147 362382 142215 (315)(338) $9,989$10,593 ($604) ($9,989) ($10,593) 3,6053,605 193(464)(271) 3986,2856,683 ($ 13)($ 563) ($576) $ 3$144 20362 13 203 (135) $36$574 $147 382 216 (135) $610 The discount rate used to calculate the accumulated postretirement benefit obligation was 7.00%. The trend rates for growth in health care costs used in calculating the accumulated postretirement benefit obligation were 9.4% for employees under age 65 and 8.3% for employees 65+ during the six months ended December 31,1998, declining gradually to 5.0% for both employee groups. The health care cost trend rate assumption has a significant impact on the postretirement benefit costs and obligations. Postemployment Benefits The NAS also provides certain postemployment benefits to former or inactive employees prior to their eligibility for 49

retirement benefits. The liability for these benefits was $614,000 on December 31, 1998. It is calculated on an actuarially determined basis over the years the employees become eligible and is recorded in accrued employee benefits on the statement of financial position. The total postemployment benefit expense for the six months ended December 31, 1998, was approximately $77,000. NOTE 11: NOTES PAYABLE AND LINE OF CREDIT NAEF Loans The NAS has a long-term loan of $50,000 from the NAEF for the acquisition of equipment. This loan is to be repaid in equal installments at an interest rate determined by the Secretary of the Treasury in accordance with P.L. 92-41 (6.00% as of December 31, 1998~. The loan obligation is included in other liabilities as of December 31, 1998. Total interest expense was approximately $2,000 for the six months ended December 31, 1998. Line of Credit The NAS has a $7.0 million unsecured line of credit from NationsBank with an interest rate of LIB OR (LIB OR is the London Interbank Offered Rate, a widely used index) plus 0.40%. There was no outstanding balance on the line of credit on December 31, 1998. Total interest expense for the six months ended December 31, 1998, was approximately $65,000. NOTE 12: COMMITMENTS AND CONT NGENC ES Leases The NAS is committed to several noncancellable operating leases for office space and equipment. In 2007 the NAS may exercise a five-year renewal option on the Green/ Harris facility lease. If the NAS should exercise the option, the annual rentals will be based on the then-market rental rates for comparable office space in Washington, D.C. Provided that the NAS exercises its renewal option, title to 50 the property will pass to the NAS at the end of the five-year option period. Future minimum rental payments due under noncancelable operating leases are as follows: Year Ending December 31 1999 ($ in thousands) Minimum Rentals $ 6,157 4,953 4,713 4,677 4,633 16,102 2000 2001 2002 2003 Thereafter $41,235 Rental expense for the six months ended December 31, 1998, amounted to $3.5 million. Year 2000 NAS is addressing the readiness of computer systems on which it relies for processing beyond January 1, 2000. NAS has developed parts of an overall plan to accomplish its Year 2000 (Y2K) objectives and is in the process of formalizing an organization-wide project plan, including detailed contingency arrangements. Failure to correct a material Y2K problem could result in an interruption or a failure of certain business activities. Due to uncertainty inherent in Y2K issues, NAS is unable to determine at this time whether Y2K issues will have a significant impact on NAS operations. However, manage- ment believes that a significant impact is unlikely due to extensive preparations that NAS is making for this transi- tion. NOTE 13: SUBSEQUENT EVENT - BOND OFFERING In February 1999 the District of Columbia issued $65.0 million of fixed-rate and $65.0 million of variable-rate tax- exempt revenue bonds on behalf of the NAS. The bonds mature at various dates through the year 2039, with yields ranging from 3.89 to 5.21%. These bonds were sold to finance the costs of acquiring land located at 500 5th Street, N.W, Washington, D.C., and planned construction thereon of an office building for use by the NAS.

AS OF JANUARY 1, 1999 OFFICERS Bruce Alberts, President Jack Halpern, Vice-President Peter H. Raven, Home Secretary Sherwood Rowland, Foreign Secretary Ronald Graham, Treasurer FINANCE COMM ITEE Ronald Graham, Chair Bruce Alberts Elkan R. Blout Mildred Dresselhaus David M. Kipnis Lawrence R. Klein William Rutter Paul A. Samuelson Frederick Seitz TOM Representative: Gail Warden BUDGET AND INTERNAL AFFAIRS COMMITTEE Ronald Graham, Chair Marye Anne Fox Ralph E. Gomory Jack Halpern David M. Kipnis William Rutter AUDITING COMM ITEE Elkan R. Blout, Chair David M. Kipnis Robert Wurtz FINANCIAL MANAGEMENT STAFF Archie L. Turner, Chief Financial Officer Therese Swetnam, Director of Accounting Office 51

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