Notes to Financial Statements
June 30, 2002 and 2001

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(2) Applied Physics Laboratory (APL)
The APL is engaged in research and development work principally under an omnibus contract with the Naval Sea Systems Command of the United States Navy (NAVSEA). Revenues and expenses under the contract with NAVSEA and contracts with other agencies of the United States Government represent substantially all of the revenues and expenses of the APL. The omnibus contract and other contracts define reimbursable costs and provide for fees to the University. The omnibus contract also requires that a portion of the fees earned by the University thereunder be retained and used for various APL-related purposes.

The current contract with NAVSEA continues until September 30, 2007, subject to extension at the option of NAVSEA to September 30, 2012. University management expects that a contractual relationship with the United States Navy will continue after expiration of the current contract.

In accordance with an agreement between the United States Government and the University, the APL has been designated a national resource. Under the agreement, if the University should determine that it can no longer sponsor the APL or the Secretary of the Navy should determine that the Navy can no longer contract with the University with respect to the APL, the University will establish a charitable trust to provide for the continued availability of the APL. The trust would be administered by five trustees and the corpus would consist of the University’s interest in the APL facilities, including land to the extent necessary, and the balances in the University’s APL stabilization, contingency and research fund on the date the trust is established, less certain costs. Upon termination of the trust, the corpus, in whole or in part, would be returned to and held and used by the University for such educational or research purposes and in such manner as the trustees and University agree.

The APL stabilization, contingency and research fund is included in unrestricted net assets and was approximately $214,784,000 and $205,981,000 at June 30, 2002 and 2001, respectively, including net investments in property and equipment of $101,385,000 and $92,390,000, respectively. At June 30, 2002, APL purchase and subcontract commitments were approximately $71,000,000.

(3) Accounts Receivable
Accounts receivable, net, are summarized as follows at June 30 (in thousands):

	2002	2001
Reimbursement of costs incurred under grants and contracts	$ 123,922	110,060
Affiliated institutions, primarily Johns Hopkins Hospital	14,099	15,993
Students	6,080	4,980
Others	37,850	30,594
Total research and training, less allowances of $14,608 in 2002 and $23,783 in 2001	181,951	161,627
Medical services to patients, less allowances of $58,950 in 2002 and $46,470 in 2001	38,857	33,871
	$ 220,808	195,498

(4) Contributions Receivable
Contributions receivable, net, are summarized as follows at June 30 (in thousands):

	2002	2001
Unconditional promises scheduled to be collected in:
Less than one year	$   68,390	66,613
One year to five years	141,877	139,918
Over five years	30,153	34,346
	240,420	240,877
Less unamortized discount and allowance for uncollectible contributions	35,038	39,101
	$ 205,382	201,776

At June 30, 2002 and 2001, approximately 57% of the gross contributions receivable were due from ten donors. Approximately 44% and 66% of contribution revenues for 2002 and 2001, respectively, were from ten donors. At June 30, 2002, the University had also received bequest intentions of approximately $206,833,000 and certain other conditional promises to give. These conditional promises to give are not recognized as assets and, if they are received, they will generally be restricted for specific purposes stipulated by the donors, primarily endowments for faculty support, scholarships or general operating support of a particular department or division of the University.

(5) Investments
Investments are summarized as follows at June 30 (in thousands):

	2002	2001
Cash and short-term investments	$      50,765	103,017
United States Government and agency obligations	391,734	329,098
Other debt securities	419,955	352,225
Common and preferred stocks	1,017,885	1,075,899
Limited partnership and similar interests	255,800	259,405
Mortgages and notes receivable and other investments	118,544	125,422
	$2,254,683	2,245,066

Investments are professionally managed, primarily by outside investment organizations, subject to direction and oversight by a committee of the Board of Trustees. The Board has established investment policies and guidelines which cover asset allocation and performance objectives and impose various restrictions and limitations on the managers. These restrictions and limitations are specific to each asset classification and cover concentrations of market risk (at both the individual issuer and industry group levels), credit quality of fixed-income and short-term investments, use of derivative securities, investments in foreign securities and various other matters.

Investment income (loss) is summarized as follows for the years ended June 30 (in thousands):

	2002	2001
Dividend and interest income	$     71,574	78,036
Net realized gains (losses)	(22,706)	66,995
Net unrealized loss	(139,536)	(163,010)
Decrease in interests in perpetual trusts	(8,623)	(1,423)
Investment management fees	(7,236)	(7,311)
Equity in earnings of non-consolidated subsidiaries	3,659	–
	$(102,868)	(26,713)

Investment income (loss) is classified in the statements of activities as follows for the years ended June 30 (in thousands):

	2002	2001
Operating	$     124,322	109,846
Nonoperating	(227,190)	(136,559)
	$(102,868)	(26,713)

At June 30, 2002 and 2001, assets of endowment and similar funds, including cash, cash equivalents and investments, amounted to $1,637,529,000 and $1,760,356,000, respectively. Substantially all assets of endowment and similar funds and certain other assets are combined in a common investment pool known as the Endowment Investment Pool (EIP). Purchases and disposals of shares in the EIP are made based on the market value per share at the end of the quarter during which the transaction takes place. At June 30, 2002 and 2001, assets of the EIP, including cash and cash equivalents and investments, amounted to $1,689,717,000 and $1,819,555,000, respectively.

At June 30, 2002 and 2001, other investments include $83,472,000 and $89,498,000, respectively, of investments held by the University under deferred compensation agreements. Such amounts approximate the University’s related liabilities to employees which are included in obligations under deferred compensation agreements and other long-term liabilities. At June 30, 2002 and 2001, investments having a fair value of $9,449,000 and $9,270,000, respectively, were pledged as security for the payment of unemployment claims. At June 30, 2002, commitments for purchases of investments were approximately $82,804,000.

(6) Investment in Plant Assets
Investment in plant assets, net, is summarized as follows at June 30 (in thousands):

	2002	2001
Land	$      35,346	35,346
Land improvements	33,228	16,176
Buildings and leasehold improvements	1,096,857	1,014,379
Equipment	386,855	358,808
Library collections	134,273	124,294
Construction in progress	117,285	85,451
	1,803,844	1,634,454
Less accumulated depreciation and amortization
	$1,006,623	908,404

(7) Debt
Debt is summarized as follows at June 30 (in thousands):

	2002	2001
Bonds payable	$  398,771	292,941
Notes payable	166,275	181,776
Commercial paper revenue notes	97,691	80,000
	$662,737	554,717

Bonds payable, all of which were issued by Maryland Health and Higher Educational Facilities Authority (MHHEFA), consist of the following at June 30 (in thousands):

	2002	2001
Revenue Bonds of 1983, 6.00% to 9.88%, due July 2013, net of unamortized discount of $863 and $1,100	$    8,692	8,455
Refunding Revenue Bonds of 1997, 4.50% to 5.625%, due July 2027, net of unamortized discount of $225 and $230	13,775	14,035
Refunding Revenue Bonds of 1998, 5.125% to 6.00%, due July 2020, including unamortized premium of $489 and $533	166,814	174,173
Revenue Bonds of 1999, 6%, due July 2039, net of unamortized discount of $2,043	–	75,762
Refunding Revenue Bonds of 2001A, 4.00% to 5.00%, due July 2013, including unamortized premium of $552 and $616	20,032	20,516
Refunding Revenue Bonds of 2001B, 5.00% to 5.30%,due July 2041, net of unamortized discount of $1,401	84,374	–
Revenue Bonds of 2002A, 5.00%, due July 2032, net of unamortized discount of $1,641	105,084	–
	$398,771	292,941

The bonds payable outstanding at June 30, 2002, are unsecured general obligations of the University. The loan agreements generally provide for semi-annual payments of interest and annual payments of principal, except that no principal payments are due on the Refunding Revenue Bonds of 2001B or the Revenue Bonds of 2002A prior to maturity. The loan agreement relating to the Revenue Bonds of 1983 provides for limitations on the amount of indebtedness the University may incur.

The proceeds of the Refunding Revenue Bonds of 2001B were used to advance refund the Revenue Bonds of 1999. The University recognized a debt extinguishment loss of approximately $8,443,000 on this transaction.

Certain MHHEFA revenue bonds were advance refunded in 1988 using proceeds of an issue of bonds that was later refinanced. The net proceeds were irrevocably placed in trust pursuant to escrow agreements and used to purchase government securities which are payable as to principal and interest at such times and in such amounts as to pay all principal and interest on the refunded bonds. Accordingly, these bonds are considered to have been extinguished and neither the debt ($33,135,000 at June 30, 2002) nor the irrevocable trusts are included in the balance sheet.

Notes payable consist of the following at June 30 (in thousands):

	2002	2001
MHHEFA note due May 2004	$       3,013	3,139
MHHEFA note due November 2015	45,848	47,841
MHHEFA note due November 2020	16,990	17,428
MHHEFA note due February 2025	4,710	13,740
MHHEFA note due July 2026	6,143	6,227
Note due June 2002, 10%	–	1,673
Note due December 2002, 7.91%	11,120	11,325
Note due July 2004, 3% (government subsidized effective rate)	1,803,844	1,634,454
Note due June 2012, 7.29%	243	337
Note due December 2019, 8.88%	75,987	77,697
	$  166,275	181,776

The MHHEFA notes are part of a pooled loan program. The notes are unsecured general obligations of the University, bear interest at a variable rate (1.50% at June 30, 2002) and are due in monthly installments. Under terms of the loan agreements, the University may be required to provide security for the loans in certain circumstances.

The notes due December 2002 and June 2012 are unsecured general obligations of the University and are due in annual installments (with interest payable monthly and semi-annually, respectively). Under terms of the related loan agreements, the University may be required to provide security for the loans in certain circumstances. The notes due July 2004 and December 2019 are secured by certain of the University’s property. The note due July 2004 is payable in quarterly installments. The note due December 2019 is due in annual installments with interest payable monthly.

The commercial paper revenue notes were issued by MHHEFA. Under the commercial paper program, the University may have revenue notes outstanding of up to $100,000,000 to finance and refinance the costs of qualified projects to July 2031. The notes are unsecured, bear interest at rates that are fixed at the date of issue and may have maturities up to 270 days from that date. The notes outstanding at June 30, 2002, bear interest at a weighted-average rate of 1.49%.

In April 2001, the University entered into an interest rate swap agreement with a national bank to reduce its interest rate risk on a portion of the commercial paper revenue notes. The agreement extends through April 2007 and provides for the University to pay a fixed rate of 5.415% and receive a variable rate based on a notional principal amount of $20,100,000.

The aggregate annual maturities of the bonds and notes payable for the five years subsequent to June 30, 2002 are as follows: 2003, $24,207,000; 2004, $16,664,000; 2005, $14,104,000; 2006, $14,987,000; and 2007, $27,248,000.

Total interest costs incurred and paid were $29,797,000 in 2002 and $28,922,000 in 2001, of which $5,432,000 and $514,000 was capitalized in 2002 and 2001, respectively. Interest income of $4,686,000 in 2002 and $2,484,000 in 2001 earned from the investment of the unexpended proceeds of certain borrowings has been applied to reduce the costs of the related assets acquired.

Under terms of a master note agreement with a commercial bank, the University may borrow up to $50,000,000 under a line of credit for APL working capital purposes. Advances under the line of credit are unsecured, due on demand and bear interest at a rate which varies based on certain specified market indices. The laboratory drew $4,902,000 and $0 on the line of credit as of June 30, 2002 and 2001, respectively.

The estimated fair value of the University’s debt is determined based on quoted market prices for publicly traded issues and on the discounted future cash payments to be made for other issues. The discount rates used approximate current market rates for loans or groups of loans with similar maturities and credit quality. The carrying amount and estimated fair value of the University’s debt are summarized as follows at June 30 (in thousands):

	2002		2001
	Carrying amount	Estimated fair value	Carrying amount	Estimated fair value
Variable rate bonds and notes	$  76,704	76,704	88,375	88,375
Fixed rate bonds and note	488,342	518,820	386,342	420,100
Commercial paper revenue notes	97,691	97,691	80,000	80,000
	$662,737	693,215	554,717	588,475

Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of judgment. The University is not required to settle its debt obligations at fair value and settlement is not possible in some cases because of the terms under which the debt was issued.

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