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IlI. Financial Condition 39

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Report of the Auditing Committee of the National Academy of Sciences Dear Dr. Alberts: In accordance with Article II, Section 13 of the Bylaws 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 year ended December 3 i, 1999, 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

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Independent Auditors' Report National Academy of Sciences Auditing Committee We have audited the accompanying statement of financial position of the National Academy of Sciences (NAS) as of December 3l, 1999, and the related statements of activities and cash flows for the year 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 31, 1999, and its changes in net assets and its cash flows for the year then ended in conformity with generally accepted accounting ~ principles. KPMG LLP March 3l, 2000 Washington, D.C. 41

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National Academy of Sciences Statement of Financial Position as of December 31, 1999 ($ in thousands) ASSETS Current Assets Cash and cash equivalents Short-term investments (note 3) Accounts receivable - U.S. government Other receivables (note 5) Publications and supplies inventory Bond proceeds held with trustee (note 11) Prepaid expenses and other Total Current Assets Einstein Memorial Property and equipment (note 4) Other assets (note 12) 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 (note 7) Total Current Liabilities Long-Term Liabilities Bonds payable (note 11) Funds held on behalf of others (note 3) Accrued employee benefits (note 12) Other liabilities Total Liabilities Net Assets Unrestricted Temporarily restricted (note 8) Permanently restricted (note 8) Total Net Assets Commitments and Contingencies (notes 11, 12, and 13) Total Liabilities and Net Assets See accompanying notes to the financial statements. 42 $ 97 34,003 31,754 10,333 2,222 92,632 2,387 $173,428 $ 1,723 54,194 11,001 281,438 $521,784 $ 20,667 18,594 5,564 $ 44,825 $129,998 21,710 7,368 710 $204,611 $131,012 112,234 73,927 $317,173 $521,784

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National Academy of Sciences Statement of Activities Year Ended December 31, 1999 ($ 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 $160,167 $ $ $160,167 15,868 10,912 26,780 5,589 15,785 34,932 3,503 4,319 15,785 21,208 3,503 13,724 Net assets released from restrictions 7,852 (7,852) 1,270 Total revenues, gains, and other support $228,702 $ 16,784 $ 1,270 $246,756 EXPENSES Programs (note 9) $192,984 $ $ $192,984 Management end general 26,264 26,264 Fund raising 1,853 1,853 Total Expenses $221,101 $ $ $221,101 Changein net assets $ 7,601 $ 16,784 $ 1,270 $ 25,655 Net assets at beginning of the year 123,411 95,450 72,657 291,518 Net assets at end of the year $131,012 $112,234 $73,927 $317,173 See accompanying notes to the financial statements. 43

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National Academy of Sciences Statement of Cash Flows Year Ended December 31, 1999 ($ in thousands) 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 Loss on sale of property and equipment Net gain on investments Funds received on behalf of others Increase in other receivables Increase in accounts receivable - U.S. government Increase in publications and supplies inventory Decrease in prepaid expenses and other current assets Increase in other assets Increase in accounts payable and accrued expenses Increase in other current liabilities Decrease in deferred revenue Increase in other liabilities Net cash used 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 Proceeds from the issuance of debt Payments on financing agreement Net cash provided by prancing activities 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 $ 25,655 3,795 431 (12,640) (1,767) (96,227) (2,951) (328) (1,669) (2,184) 3,999 34,244 (5,429) 1,858 (53,213) (38,400) 24,879 (34,465) (47,986) 129,998 (28,800) 101,198 (1) 98 $97 $ 2,834

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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 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 engineer- ing research, dedicated to the furtherance of science and its use for the general welfare. The NAS is exempt from federal income taxes under Section 501(c)~3) of the Inter- nal Revenue Code, except for unrelated business 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 interdisciplinary problems facing 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 Engineering and Technical Systems Commission on Geosciences, Environment, and Re- sources Commission on Life Sciences Commission on Physical Sciences, Mathematics, and Applications Office of International Affairs Office of Scientific and Engineering Personnel Board on Agriculture and Natural Resources Transportation Research Board Center for Science, Mathematics, and Engineering 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 position and activity of the IOM are included in the NAS's 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 responsibil- ity for advising the federal government on scientific issues. However, the financial position and activity of the NAE are not included within the NAS financial statements, except to the extent those activities are conducted through the NRC. 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 position and activity of the NAEF are not included within the NAS's 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 equally control TNAC. The financial activity and results of TNAC are not included in the NAS's financial statements. 45

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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- imposed restrictions. Accordingly, net assets of the NAS are classified and reported as follows: Permanently restricted: Net assets subject to donor- imposed 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 restricted by a donor. The NAS holds certain short-term investments for program and operational liquidity requirements. Endowment and trust investments are pooled for long-term investment purposes. 46 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 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 related conditions 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 year ended December 31, 1999, were the Department of Transportation (approximately 21%) and the Department of Defense (approximately 14%~. It is the policy of the NAS to record federal contracts as exchange transactions and recognize revenue as recover- able costs are incurred. 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 of expendi- ture for these grants are recorded as deferred revenue on the statement of financial position.

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Fair Value of Financial Instruments The fair value of bonds payable in the financial statements exceeded their carrying value by approximately $6.9 mil- lion on December 31, 1999. The fair market value of all other financial instruments in the financial statements approximates reported carrying value. Inventories Inventories are stated at the lower of cost or net realizable value and include supplies and both in-process and fin- ished goods for publications. The majority of the NAS's inventory of publications and supplies resides with the National Academy Press (NAP). NAP uses the full absorption costing methodology in pricing finished prod- ucts. This methodology includes all direct printing and related indirect costs. Property and Equipment Depreciation of NAS buildings and equipment is com- puted on a straight-line basis using the following lives: buildings - 40 to 50 years leasehold improvements - lesser of the remaining life of the improvement or the lease term furniture and equipment - 4 to 10 years The Einstein Memorial sculpture is not depreciated. Con- struction in progress is not depreciated until the related assets are placed in service. Use of Estimates The preparation of these financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contin- gent assets and liabilities as of the date of the financial statements. Actual results could differ from those esti- mates. NOTES: INVESTMENTS Short-term investments and endowment and trust invest- ments consisted of the following as of December 31, 1999: Short-term investments Investments reported at fair value: ($ in thousands) 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 $16,895 17,006 102 $34,003 ($ in thousands) $ 3,215 71,910 195,472 $270,597 10,841 $281,438 Vanguard equity funds comprise approximately $133 mil- lion of the total equity investments. Private equity investments represented by limited partner- ship interests comprised $3.8 million of the total invest- ments on December 31, 1999. The NAS had a remaining commitment on December 31, 1999, to provide approxi- mately $7.6 million to these partnerships. Fair value for real estate mortgage investments approxi- mated $42 million on December 31, 1999, estimated by comparative analysis of like location and properties. TNAC, a related entity, invests certain of its assets in the NAS endowment and trust investment pool. TNAC invest- ments participate in the investment pool experience equally with all other funds in this pool. The NAS's obligation to TNAC for these funds held in trust, which totaled $21.7 million as of December 31, 1999, is reported within liabilities as funds held on behalf of others on the statement of financial position. Investment income is reported net of investment expenses of approximately $77,000 for the year ended December 31, 1999, and is comprised of the following: Interest and dividends Net gain on investments ($ in thousands) $22,292 12,640 $34,932 47

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NOTE 4: PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1999, were as follows: Land Furniture and equipment Buildings and improvements Construction in progress (note 11) Leasehold improvements Less: Accumulated depreciation and amortization ($ in thousands) $29,723 26,019 12,983 10,922 6,923 $86,570 32,376 $54,194 The NAS is the custodian of certain property and equip- ment owned by the U.S. government and furnished 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 approximately $356,000 as of December 31, 1999. NOTE 5: CONTRIBUTIONS RECEIVABLE Pledged contributions are included as other receivables in the statement of financial position. Donors have pledged to provide support in future periods as follows: Years Ending December 31 2000 2001 - 2005 Less - discount to estimated net present value ($ in thousands) Totals $4,302 2,040 (175) $6,167 NOTE 6: DEFERRED REVENUE Deferred revenue consisted of the following as of Decem- ber 31, 1999: Advances on private grants and contracts Advances on U.S. government grants and contracts Publication subscriptions NOTE 7: LINE OF CREDIT ($ in thousands) $10,540 5,174 2,880 $18,594 The NAS has a $16.0 million unsecured line of credit from NationsBank with an interest rate of LIB OR plus 0.40%. 48 As of December 31, 1999, the outstanding balance on the line of credit was $2.9 million, included in other current liabilities in the accompanying statement of financial position. Interest expense for the year ended December 31, 1999, was approximately $397,000. NOTE 8: RESTRICTED NETASSETS Temporarily restricted net assets were available for the following purposes as of December 31, 1999: Programs Prizes and awards Woods Hole facility ($ in thousands) $ 83,935 25,392 2,907 $112,234 The income generated by permanently restricted net assets is to be used to support donor-specified programs or general activities of the NAS. As of December 31, 1999, the NAS held the following permanently restricted net assets, classified by the purpose for which the income is to be used: Programs Prizes and awards NOTE 9: PROGRAM EXPENSES ($ in thousands) $70,615 3,312 $73,927 Program expenses for the year ended December 31, 1999, are summarized as follows: ($ in thousands) $41,862 41,626 20,880 10,422 Scientific and Engineering Personnel Transportation Research Board Institute of Medicine Engineering and Technical Systems Behavioral and Social Sciences and Education 14,757 Geosciences, Environment, and Resources Physical Sciences, Mathematics, and Applications International Affairs Commission on Life Sciences Science, Mathematics, and Engineering Education Policy Division National Sciences Resource Center National Academy of Engineering Board on Agriculture and Natural Resources Other 10,883 13,047 6,840 20,260 3,197 3,993 716 2,719 1,041 741 $192,984

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NOTE 10: INDIRECT COSTS The NAS received fixed indirect cost rates for the year ended December 31, 1999, on its federal contracts and grants. The overhead rate was 59.69%, and the general and administrative (G&A) rate was 20.39%. Overhead was applied to direct salaries, accrued leave, fringe ben- efits, and services provided by outside contractors (e.g., temporary personnel agencies, consultants) on NAS prop- erty. G&A was applied to direct costs and overhead less subcontract costs and stipends. Therefore, both the over- head 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 2.89% was applied. Certain other activities, such as off- site work (not performed on NAS property), were assessed at a reduced overhead rate of 43.70%. NOTE 11: BONDS PAYABLE AND BUILDING PROJECT Revenue Bonds In January 1999 the District of Columbia issued $130,960,000 of tax-exempt revenue bonds on behalf of the NAS. The NAS is obligated under these bonds as follows: Senes 1999A revenue bonds, senal, with interest rates ranging from 3.9% to 5%, maturing at venous dates from January 1, 2003 through 2012 Senes 1999A revenue bonds, term Interest rate 5%, Due January 1, 2019 Interest rate 5%, Due January 1, 2028 Senes l999B revenue bonds at a flexible Rate due January 1, 2039 Senes l999C revenue bonds, variable Rate due January 1, 2039 Total bonds at face value Less-unamortized bond discount Total bonds payable The serial and term bonds represent an unsecured general obligation of the NAS. July 1, 1999. Interest on the l999B and l999C bonds is payable monthly. The term bonds maturing on January 1, 2019, and January 1, 2028, are subject to mandatory redemption by operation of sinking fund installments. The installment payments for the term bonds maturing January 1,2019, begin on January 1, 2013, and range from $2.1 to $2.8 million per year through the maturity date. Installment payments for the term bond maturing January 1, 2028, begin on January 1, 2020, and range from $2.9 to $4.3 million per year through the maturity date. Interest expense on the bonds payable for 1999 totaled $4.9 million net of capitalized interest of approximately $391,000. The bond proceeds are held by a Trustee and invested in a guaranteed investment contract. The NAS is reimbursed by the Trustee for expenditures related to the building project. Building Project ($ in thousands) $16,330 17,085 32,545 32,500 32,500 130,960 (962) $129,998 Proceeds from the sale of the bonds will finance the cost of acquiring 44,250 square feet of land located in Washing- ton, D.C., and the construction of an office building and pay certain costs of issuing the bonds. This building will consolidate NAS's program activities into one location. Construction of the building began in the summer of 1999 and has an anticipated completion date of Spring 2002. Interest Rate Swap On October 22, 1999, the NAS entered into a swap agreement, with an effective date of February 1,2000. This swap agreement related to the $66 million face amount of its Series 1999A revenue bonds. The agreement provides for the NAS to receive 4.97100% in interest on a notional amount of $65 million and to pay interest at a floating rate option based on the weekly interest rate resets of tax- exempt variable-rate issues per the BMA Municipal Swap Index. The NAS entered into this swap agreement to manage its exposure to interest rate changes. The fixed-rate debt obligations expose the NAS to variability in the cost recovery stream due to changes in interest rates. The NAS recovers the costs of borrowing through a capital investment incentive rate that is set by the U.S. government and is tied to a variable index. If interest rates increase Interest on the Senes 1999A revenue bond Is payable the capital investment incentive recovery increases. semiannually every January 1 and July 1, commencing on 49

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Conversely, if interest rates decrease, the capital invest- ment incentive recovery decreases. Therefore, the NAS entered into a derivative instrument that ties the fixed-rate debt to a variable index, thereby reducing the risk of variability in the recovery amount. The effects of this swap arrangement are not reflected in the accompanying financial statements as the effective date of the agreement was February 1, 2000. NOTE 12: 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 expense for the year ended December 31, 1999, amounted to $2.9 million. NAS policy is to fund pension benefits as they are earned. NAS normal retirement age is 65, but there is no mandatory age for retirement. Deferred Compensation The NAS holds long-term investments as part of a deferred compensation arrangement for certain employees. The fair value of these investments was approximately $6.26 mil- lion as of December 31, 1999, which are reported in other assets. The related obligation is reported within accrued employee benefits on the statement of financial position. Postretirement Benefits The NAS provides certain health care and life insurance benefits for retired employees. All employees become 50 eligible for these benefits upon reaching normal retirement age while working for the NAS and meet certain service requirements. Benefits for retirees are provided by an insurance company whose premiums are determined on an experience-rated basis. The plan is contributory for em- ployees who retire after January 1, 1990. Employees contribute 25% of the monthly premium. The NAS has elected to recognize the initial postretirement benefit obli- gation over a period of 20 years. The accrued post- retirement benefit obligation is reported within accrued employee benefits on the statement of financial position. The postretirement benefit cost for the year ended Decem- ber 31, 1999, includes the following components: Change in Benefit Obligation: Benefit obligation, Jan. 1, 1999 Service cost Interest cost Actuarial (gain)/loss Benefits paid ($ in thousands) Life Insurance Health Benefits Benefits Total $ 604 $9,989 $10,593 7 324 331 40 677 717 (8) (897) (905) (53) (650) (703) Benefit obligation, Dec. 31, 1999 $ 590 $9,443 $10,033 Change in Plan Assets: Fair value of plan assets, Jan. 1, 1999 $ Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets, Dec. 31, 1999 $ $3,605 $ 3,605 495 495 1,278 1,278 (703) (703) $4,675 $ 4,675 Funded Status: Benefit obligation ($590) ($4,768) ($ 5,358) Unrecognized transition obligation 373 5,879 6,252 Unrecognized net actuarial (gain)/loss 118 (1,515) (1,397) Prepaid (Accrued) benefit cost ($ 99) Components of net periodic benefit cost: Service cost $ 7 Interest cost 40 Expected return on plan assets Amortization of transition obligation 26 Amortization of unrecognized (gains)/ losses 15 Net periodic benefit cost $ 88 ($ 404) ($ $ 324 $ 677 (288) 405 503) 331 717 (288) 431 15 $1,118 $ 1,206 The discount rate used to calculate the accumulated postretirement benefit obligation was 7.5%. The trend rates for growth in health care costs used in calculating the accumulated postretirement benefit obligation were 8.6% for employees under age 65 and 7.6% for employees 65+ during the year ended December 31, 1999, declining gradually to 5.0% for both employee groups. The health

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care cost trend rate assumption has a significant impact on the postretirement benefit costs and obligations. The effect of a 1% change in the assumed health care cost trend rate at December 31,1999, would have resulted in an approximate $1,044,000 increase or a $934,000 decrease in the postretirement benefit obligation and an approxi- mate $147,000 increase or an $112,000 decrease in the 1999 benefit cost. Postemployment Benefits The NAS also provides certain postemployment benefits to former or inactive employees prior to their eligibility for retirement benefits. The liability for these benefits was $614,000 on December 31, 1999. It is calculated on an actuarially determined basis over the years the employees become eligible and is reported in accrued employee benefits on the statement of financial position. The total postemployment benefit gain for the year ended December 31, 1999, was approximately $46,000. NOTE 13: COMMITMENTS AND CONT NGENC ES Leases The NAS is committed to several noncancellable operating leases for office space and equipment. Future minimum rental payments due under noncancelable operating leases are as follows: Year Ending December 31 2000 2001 2002 2003 2004 Thereafter ($ in thousands) $7,638 7,272 6,034 4,488 4,736 13,884 $44,052 Rental expense for the year ended December 31, 1999, amounted to $7.1 million. Under a separate trust agreement, the Trustee, an unrelated third party, holds record legal title to the Green/Harris facility that is currently under lease by the NAS for a portion of its operations. This trust agreement conveys title to the NAS in 2007, should NAS accept title. The NAS is negotiating a contract with a third party to sell its future interest in the property for approximately $42 million. The NAS will enter into another contract to lease back the facility from a third party until 2001 at a monthly rate of $400,000. The NAS is obligated for the remaining lease payments under the original lease agreement with the Trustee, in the amount of $38 million. This obligation will be expensed in NAS's financial statements for the year ending December 31, 2000. Contingencies The NAS receives a portion of its revenues directly or indirectly from federal government grants and contracts, all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through June 30, 1997. A contingency exists, relating to the period July 1, 1997, through December 31, 1999, to refund amounts received, if any, in excess of allowable costs. Management is of the opinion that no material liability will result from future audits. 51

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AS OF JANUARY 1, 2000 OFFICERS Bruce Alberts, President Jack Halpern, Vice-President R. Stephen Berry, Home Secretary Sherwood Rowland, Foreign Secretary Ronald Graham, Treasurer FINANCE COMMITTEE Ronald Graham, Chair Bruce Alberts ELkan R. Blout Mildred Dresselhaus David M. Kipnis Lawrence R. Klein William Rutter Paul A. Samuelson Frederick Seitz IOM Representative: Gail Warden BUDGET AND INTERNAL AFFAIRS COMM ITEE Ronald Graham, Chair John Brauman Ralph E. Gomory Jack Halpern Jane Lubchenco William Rutter AUDITING COMMI7TEE ELkan R. Blout, Chair David M. Kipnis Robert Wurtz FINANC AL MANAGEMENT STAFF Archie L. Turner, Chief Financial Officer Therese Swetnam, Director of Accounting Office 52