(a) General

Johns Hopkins University is a private, nonprofit institution that provides education and related services to students and others, research and related services to sponsoring organizations and professional medical care to patients. The University is based in Baltimore, Maryland, but also maintains facilities and operates education programs elsewhere in Maryland, in Washington, D.C. and, on a more limited scale, in certain foreign locations.

Education and related services (e.g., room, board, etc.) are provided to approximately 17,400 students, including 9,200 full-time students and 8,200 part-time students, and produce about 11% of the University's revenues. The full-time students are divided about equally between graduate level (including postdoctoral) and undergraduate level students and are drawn from a broad geographic area, including most of the states in the United States and numerous foreign countries. Undergraduate students from the United States are predominantly from the eastern states. The great majority of the part-time students are graduate level students from the Baltimore-Washington, D.C. area.

Research and related services (e.g., research training) are provided to over 1,500 government and private sponsors under grants, contracts and similar agreements and produce about 60% of the University's revenues. Over 89% of the revenues from research services are earned under agreements with departments and agencies of the United States Government. Major government sponsors include agencies of the Department of Defense, centers, divisions and institutes of the Department of Health and Human Services and the Agency for International Development, and agreements with these sponsors produced approximately 42%, 31% and 6%, respectively, of revenues from grants, contracts and similar agreements in 1997.

Professional medical services are provided by certain members of the University's faculty to patients at The Johns Hopkins Hospital and certain other hospitals and outpatient care facilities in the Baltimore area and produce about 10% of the University's revenues. The patients are predominantly from the Baltimore area, other parts of Maryland or surrounding states.

(b) Basis of Presentation

The financial statements include the accounts of the various academic and administrative divisions, the Applied Physics Laboratory (APL), The Johns Hopkins University Press and certain affiliated organizations which are controlled by the University, including JHPIEGO Corporation, Peabody Institute of the City of Baltimore (Peabody) and the Fund for Johns Hopkins Medicine. Certain amounts for 1996 have been reclassified to conform to the presentation for 1997.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates.

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 University are classified and reported as follows:

Permanently restricted-- Net assets subject to donor-imposed stipulations that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes.

Temporarily restricted-- Net assets subject to donor-imposed stipulations that may or will be met either by actions of the University and/or the passage of time.

Unrestricted-- Net assets that are not subject to donor-imposed stipulations.

Revenues from sources other than contributions are reported as increases in unrestricted net assets. Contributions are reported as increases in the appropriate category of net assets, except that contributions which impose restrictions that are met in the same fiscal year they are received are included in unrestricted revenues. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulations or by law. Expirations of temporary restrictions recognized on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications from temporarily restricted net assets to unrestricted net assets.

Temporary restrictions on gifts to acquire long-lived assets are considered met in the period in which the assets are acquired or placed in service.

Contributions, including unconditional promises to give, are recognized as revenues in the period received. Contributions received for capital projects or perpetual or term endowment funds and contributions under split interest agreements or perpetual trusts are reported as nonoperating revenues. All other contributions are reported as operating revenues. Conditional promises to give are not recognized until the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value at the date of gift, except that contributions of works of art, historical treasures and similar assets held as part of collections are not recognized or capitalized. In 1996, the art collection of Peabody was transferred to the State of Maryland. The proceeds of the transfer ($15,000,000) were added to the permanent endowment funds of Peabody in accordance with an agreement with the State and, accordingly, were reported as nonoperating revenues.

Contributions to be received after one year are discounted at a rate commensurate with the risk involved. Amortization of the discount is recorded as additional contribution revenue and used in accordance with donor-imposed restrictions, if any, on the contributions. Allowance is made for uncollectible contributions based upon management's judgment and analysis of the creditworthiness of the donors, past collection experience and other relevant factors.

(c) Cash and Cash Equivalents

Short-term investments with maturities at dates of purchase of three months or less are classified as cash equivalents, except that any such investments purchased with funds on deposit with bond trustees, or with funds held in trusts or by external endowment investment managers are classified with the deposits and investments, respectively. Cash equivalents include short-term U.S. Treasury securities and other short-term, highly liquid investments and are carried at cost which approximates fair value.

(d) Investments

Investments are stated at their fair values which are generally determined based on quoted market prices or estimates provided by external investment managers or other independent sources. In the limited cases where such values are not available, historical cost is used as an estimate of fair value.

Assets of pooled endowment and similar funds are invested on the basis of a total return policy to provide income and to realize appreciation in investment values. Realized investment gains of these funds may be used to support operations provided that the funds have a market value in excess of their historical value. The endowment investment pool payout was approximately 5.4% in 1997 and 5.8% in 1996 of average market values.

Investment income included in operating revenues consists of income and realized gains and losses on investments of working capital and nonpooled endowment funds (except where restricted by donors) and the annual appropriation of income and realized gains for pooled endowment and similar funds approved by the Board of Trustees. All unrealized gains, any excess of income and realized gains earned over the appropriated amount for pooled endowment and similar funds and income and realized gains restricted by donors are reported as nonoperating revenues.

(e) Deposits with Bond Trustees

Deposits with bond trustees consist of debt service funds and the unexpended proceeds of certain bonds payable. These funds are invested in short-term, highly liquid securities and will be used for construction of or payment of debt service on certain facilities.

(f) Investment in Plant Assets

Investments in plant assets are stated at cost or at estimated fair value if acquired by gift, less accumulated depreciation and amortization. Depreciation of buildings and equipment and amortization of leasehold improvements are computed using the straight-line method over the estimated useful lives of the assets. Land, library collections and certain historic buildings are not subject to depreciation. Title to certain equipment purchased using funds provided by government granting or contracting agencies is vested in the University. Such equipment is included in investment in plant assets. Certain facilities and equipment used by the APL in connection with its performance under agreements with the United States Government are owned by the government. These facilities and equipment are not included in the balance sheet; however, the University is accountable to the government for them.

(g) Split Interest Agreements and Perpetual Trusts

The University's split interest agreements with donors consist primarily of irrevocable charitable remainder trusts for which the University serves as trustee. Assets held in these trusts are included in investments. Contribution revenues are recognized at the date the trusts are established after recording liabilities for the present value of the estimated future payments to be made to the donors and/or other beneficiaries. The liabilities are adjusted during the terms of the trusts for changes in the values of the assets, accretion of the discounts and other changes in the estimates of future benefits.

The University is also the beneficiary of certain perpetual trusts held and administered by others. The present values of the estimated future cash receipts from the trusts are recognized as assets and contribution revenues at the dates the trusts are established. Distributions from the trusts are recorded as contributions and the carrying value of the assets is adjusted for changes in the estimates of future receipts.

(h) Functional Expenses

Costs related to the operation and maintenance of physical plant, including depreciation of plant assets and interest on related debt, are allocated to program and supporting activities based upon periodic inventories of facilities. Fundraising costs were not significant in 1997.

(i) Insurance

The University, together with certain other institutions, has formed captive insurance companies which arrange and provide professional liability, general liability and property damage insurance for their shareholders. Defined portions of claims paid by these companies are self-insured. The University's annual payments to the companies for insurance coverage are based on actuarial studies and are included in operating expenses.

(j) Agreements with Affiliated Institutions

The University has separate administrative agreements for the exchange of services with The Johns Hopkins Hospital and certain other medical and educational institutions. Costs incurred by the University in providing services to these institutions and the related reimbursements are reported as operating expenses and revenues, respectively, in the appropriate functional and source classifications. Costs incurred by the University for services provided by these institutions are reported as operating expenses in the appropriate functional classifications.

(k) Financial Instruments

Fair values of financial instruments approximate their carrying values in the financial statements, except for indebtedness for which fair value information is provided in note 7.

The University's external investment managers are authorized to use specified derivative financial instruments, including futures and forward currency contracts, in managing the assets under their control, subject to restrictions and limitations adopted by the Board of Trustees.

Futures contracts, which are commitments to buy or sell designated financial instruments at a future date for a specified price, may be used to adjust asset allocation, neutralize options in securities or construct a more efficient portfolio. The managers have made limited use of exchange-traded interest rate futures contracts. Margin requirements are met in cash; however, the managers settle their positions on a net basis and, accordingly, the cash requirements are substantially less than the contract amounts. Forward currency contracts, which are agreements to exchange designated currencies at a future date at a specified rate, may be used to hedge currency exchange risk associated with investments in fixed-income securities denominated in foreign currencies and investments in equity securities traded in foreign markets. The managers settle these contracts on a net basis and, accordingly, the cash requirements are substantially less than the contract amounts. Changes in the market value of the futures and forward currency contracts are included in investment income and were not significant in 1997 and 1996.

(l) Sponsored Projects

Revenues under grants, contracts and similar agreements with sponsoring organizations are recognized as expenditures are incurred for agreement purposes. These revenues include recoveries of facilities and administrative costs which are generally determined as a negotiated or agreed-upon percentage of direct costs, with certain exclusions. Facilities and administrative cost recovery revenues for the academic and support divisions of the University were $132,038,000 in 1997 and $122,981,000 in 1996.

(m) Student Financial Aid

The University provides financial aid to eligible students, generally in a "package" that includes loans, compensation under work-study programs and/or grant and scholarship awards. The loans are provided primarily through programs of the United States Government (including direct and guaranteed loan programs) under which the University is responsible only for certain administrative duties. The grants and scholarships include awards provided through gifts and grants from private donors or from income earned on endowment funds restricted for student aid, as well as general funds unfunded scholarship awards. Grant and scholarship awards were $74,367,000 in 1997 and $72,522,000 in 1996 and are netted against tuition and fees revenues.

(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 expires on September 30, 2002. 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 shall agree.

The APL stabilization, contingency and research fund is included in unrestricted net assets and was approximately $166,885,000 and $157,586,000 at June 30, 1997 and 1996, respectively, including net investments in property and equipment of $69,781,000 and $68,293,000, respectively. At June 30, 1997, APL purchase and subcontract commitments were approximately $30,000,000.

(3) Accounts Receivable

(4) Contributions Receivable

At June 30, 1997, approximately 30% of the gross contributions receivable were due from nine donors, including $27,000,000 due from one donor. At June 30, 1997, the University had also received bequest intentions of approximately $67,000,000 and certain other conditional promises to give. These intentions and 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 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.

At June 30, 1997 and 1996, assets of endowment and similar funds, including cash and cash equivalents and investments, amounted to $1,156,598,000 and $982,618,000, respectively. Certain assets of endowment and similar funds are combined in a common investment pool known as the Endowment Investment Pool (EIP). Each individual fund purchases or disposes of shares on the basis of the market value per share at the end of the quarter during which the transaction takes place. At June 30, 1997 and 1996, assets of the EIP, including cash and cash equivalents and investments, amounted to $1,107,582,000 and $874,455,000, respectively.

At June 30, 1997 and 1996, other investments include $83,684,000 and $67,346,000, respectively, of investments held by the University under deferred compensation agreements. Such amounts approximate the University's related liability to employees which is included in obligations under deferred compensation agreements and other long-term liabilities. At June 30, 1997, investments having a fair value of $7,432,000 were pledged as security for the payment of unemployment claims and investments having a fair value of $8,714,000 were pledged as security for certain bonds and notes payable. At June 30, 1997, commitments for purchases of investments were approximately $5,800,000.

(6) Investment in Plant Assets

(7) Indebtedness

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 (6.41% at June 30, 1997). Average borrowings under the line of credit were $994,000 in 1997 and $4,180,000 in 1996, and total interest costs incurred were $68,000 and $268,000, respectively.

The Revenue Bonds of 1979 are secured under a collateral security agreement which provides for a security interest in certain investment securities and requires that the market value of such securities exceed a specified level. At June 30, 1997, investment securities with a fair value of $7,706,000 were held by the trustee under the agreement. The Revenue Bonds of 1981 and 1982 and the Fifth Off-Street Parking Serial Bonds are secured under loan agreements which provide for mortgages on certain of the University's property and equipment. The Revenue Bonds of 1983, 1985 (APL/STScI Project), 1985A, 1985, 1988 and 1997 are unsecured general obligations of the University. The loan agreements relating to the Revenue Bonds of 1983 and 1985A provide for limitations on the amount of indebtedness the University may incur.

The Refunding Revenue Bonds of 1988 were issued for the purpose of advance refunding portions of the Revenue Bonds of 1983 and 1985A. 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 portions of the Revenue Bonds of 1983 and 1985A. Accordingly, such portions of those Revenue Bonds are considered to have been extinguished and neither the indebtedness ($45,335,000 at June 30, 1997) nor the irrevocable trusts are included in the balance sheet.

The MHHEFA notes are part of a pooled loan program issue of MHHEFA. The notes are unsecured general obligations of the University and bear interest at a variable rate (3.62% at June 30, 1997). Under terms of the loan agreements, the University may be required to provide security for the loans in certain circumstances.

The notes due June 2002, December 2002 and June 2012 are unsecured general obligations of the University. Under terms of the related loan agreements, the University may be required to provide security for the loans in certain circumstances. The note due July 2004 is secured by mortgages on certain of the University's property and a collateral account with a trustee in which investment securities having a fair value of $1,008,000 at June 30, 1997 have been deposited. The note due December 2019 is secured by certain of the University's property.

The aggregate annual maturities of the bonds and notes payable for the five years subsequent to June 30, 1997 are as follows: 1998, $14,451,000; 1999, $13,585,000; 2000, $14,735,000; 2001, $14,171,000; and 2002, $14,218,000. At its option, the University may also redeem approximately $10,000,000 of Revenue Bonds of 1985A on January 1, 1998. The University intends to redeem these bonds on that date from funds on deposit with bond trustees.

Total interest costs incurred and paid on the bonds and notes payable were $30,315,000 in 1997 and $32,485,000 in 1996.

The estimated fair value of the University's indebtedness 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.

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.

(8) Refundable Advances from the U.S. Government

Funds provided by the United States Government under the Federal Perkins, Nursing and Health Professions Student Loan programs are loaned to qualified students and may be reloaned after collections. These funds are ultimately refundable to the government and are included in obligations under deferred compensation agreements and other long-term liabilities. These advances totaled approximately $26,948,000 and $25,558,000 at June 30, 1997 and 1996, respectively.

(9) Net Assets

Under generally accepted accounting principles for external financial reporting by not-for-profit organizations, unrestricted net assets are those which are not subject to donor-imposed restrictions. The practices used by the University for internal financial management and reporting purposes differ in certain respects from the practices prescribed for external financial reporting purposes, particularly with respect to the timing of recognition of the release of donor-imposed restrictions on contributions and related investment income and gains. In addition, certain net assets classified as unrestricted for external financial reporting purposes are designated for specific purposes or uses under various internal operating and administrative arrangements of the University. As a result, substantially all of the net assets classified as unrestricted in the balance sheet as of June 30, 1997 and 1996 have been invested in property and equipment or are designated for specific uses.

(10) Affiliated Organizations

The Johns Hopkins Health System Corporation (JHHS)
JHHS is incorporated and governed separately from the University and is the parent entity of an academically-based health system which includes The Johns Hopkins Hospital, The Johns Hopkins Bayview Medical Center and certain other related organizations. The University and JHHS have established a Board of Johns Hopkins Medicine (JHM) to direct, integrate and coordinate the clinical activities of the two organizations. JHM does not have the authority to incur debt or issue guarantees and its annual budgets require the approval of the boards of trustees of the University and JHHS.

Johns Hopkins Hospital (Hospital)
The Hospital is a member of JHHS and owns and operates a hospital which serves as the primary teaching facility of the University's School of Medicine. Due to the closely-related nature of certain of their operations, the University and Hospital share facilities and provide services to each other in order to fulfill their purposes more effectively. The sharing of facilities and services is negotiated annually and set forth in a Joint Administrative Agreement (JAA). Costs charged to the Hospital under the JAA, related primarily to the provision of professional medical services by the University, aggregated approximately $53,800,000 in 1997 and $47,800,000 in 1996. Costs charged to the University under the JAA, related primarily to rental of space in Hospital facilities under a renewable one-year lease, aggregated approximately $36,300,000 in 1997 and $32,400,000 in 1996.

Dome Corporation (Dome)
Dome is a for-profit, corporate joint venture of the University and JHHS which is 50% owned by each institution. Dome provides property management and development and certain other services to its owners and others. Costs charged to the University by Dome, related primarily to property rentals and management services, aggregated approximately $11,300,000 in 1997 and $10,600,000 in 1996. The University has guaranteed payment of up to $2,500,000 of debt obligations Dome may incur under terms of a credit enhancement agreement relating to the financing of certain properties and, together with JHHS, has agreed to provide Dome with funds required, if any, to meet its obligations under the agreement.

(11) Pension and Postretirement Benefit Plans

The University has several pension plans, primarily defined contribution plans, that are available to substantially all full-time employees. The policy of the University is to fund pension costs accrued. Pension expense was $53,983,000 in 1997 and $47,771,000 in 1996, including $16,843,000 and $16,893,000 respectively, related to pension plans for employees at APL.

The University has a retiree benefits plan that provides postretirement medical benefits to employees who meet specified minimum age and service requirements at the time they retire. The University pays a portion of the cost of participants' medical insurance coverage. The University's portion of the cost for an individual participant depends on various factors, including the age, years of service and time of retirement or retirement eligibility of the participant. The University has established a trust fund for its retiree benefits plan and intends to make contributions to the fund approximately equal to the annual net postretirement benefit cost, including amortization of the transition obligation over a period of 20 years from July 1, 1993.

The decreases in the accumulated postretirement benefit obligation and the unrecognized transition obligation in 1997 include the effects of changes in the health care options available to employees at APL effective June 1, 1997, which are expected to reduce future benefit costs. The discount rates used to calculate the accumulated postretirement benefit obligation were 7.75% at June 30, 1997 and 8% at June 30, 1996. The expected long-term rates of return on plan assets were 8.5% in 1997 and 8% in 1996. The trend rates for growth in health care costs used in the calculation for 1997 were 9.25%-11% for 1998 for participants under age 65, and 8% for 1998 for those over 65; these growth rates are assumed to decrease gradually to 5.5%-7% in 2002 and to remain at those levels thereafter. The health care cost trend rate assumption has a significant effect on the postretirement benefit cost and obligation. An increase of 1% in the assumed annual health care cost trend rates would increase the aggregate service and interest cost components of postretirement benefit cost for 1997 by approximately $1,300,000 and increase the reported accumulated post retirement benefit obligation at June 30, 1997 by approximately $10,300,000. The plan assets consist primarily of investments in mutual funds managed by an independent investment management organization.

(12) Other Commitments and Contingencies

As described in note 10, the University leases certain facilities from the Hospital under a renewable one-year lease which provides for a rent equal to the cost to the Hospital of providing and maintaining the facilities. This lease has been renewed for the year ending June 30, 1998.

The University leases certain other facilities used in its academic and research operations under long-term operating leases expiring at various dates to 2014, subject to renewal options in certain cases. Certain of these facilities are leased from Dome and other affiliated organizations. The aggregate annual minimum rents to be paid to the expiration of the initial terms of these leases are as follows at June 30, 1997 (in thousands):

At June 30, 1997, unexpended research and training awards committed to the University by sponsoring agencies were approximately $556,000,000. These awards are not recognized as assets, but they will be collected as expenditures are made in accordance with the related agreements, which typically have terms of one year.

Amounts received and expended by the University under various federal and state programs are subject to audit by governmental agencies. In 1997, the Office of Inspector General, Department of Health and Human Services (OIG), advised the University that as part of its national program to determine compliance with Medicare guidelines, an audit would be performed of the billings to Medicare for services of faculty teaching physicians. If the audit reveals noncompliance, OIG may seek restitution of Medicare payments as well as damages. Management believes the University has made a good faith effort to comply with Medicare billing guidelines but that the guidelines were unclear, excessively detailed, lacking consistent application and, in some respects, contrary to published regulations. It is possible that the OIG's interpretations of the guidelines with respect to the nature, extent and/or specific content of the records needed to support billings to Medicare may differ from the University's. In these circumstances, it is not possible for the University to determine or estimate what liability, if any, it may incur as a result of the planned audit. In the opinion of management, the ultimate resolution of this matter will not have a significant effect on the financial position of the University.

The University is a party to various litigation and other claims in the ordinary course of business. In the opinion of management, appropriate provision has been made for possible losses on these claims and the ultimate resolution of these matters will not have a significant effect on the financial position of the University.