2003 - Vanderbilt University Financial Report.pdf · 2003 Vanderbilt University is a center for...

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Financial Report

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03Prepared by Vanderbilt

University Division of

Administration

Published by Vanderbilt

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2 Letter from the Chairman of the Board of Trust

3 Letter from the Chancellor

4 The Year at a Glance

8 Statistical Highlights

10 Strategic Initiatives

14 Discussion of Financial Results

18 Financial Ratios

20 Endowment Review

Contents

Consolidated Financial Statements

24 Independent Auditors’ Report

25 Statements of Financial Position

26 Statements of Activities

27 Statements of Cash Flows

28 Notes to the Financial Statements

36 Management Responsibility forFinancial Statements

Supplementary Combined Hospital, Clinic, and Parking Facilities Financial Statements

38 Balance Sheets

39 Statements of Operations

40 Statements of Changes in Net Assets

41 Statements of Cash Flows

43 Benefactions of the Vanderbilt Family

44 Board of Trust and Administration

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Vanderbilt University is a center for scholarly research,informed and creative teaching, and service to the com-munity and society at large. Vanderbilt will uphold thehighest standards and be a leader in the:

• quest for new knowledge through scholarship;• dissemination of knowledge through teaching and

outreach; and• creative experimentation of ideas and concepts.

In pursuit of these goals, Vanderbilt values most highly:

• intellectual freedom that supports open inquiry; and• equality, compassion, and excellence in all endeavors.

For more information, please visit the Vanderbilt Uni-versity Web site at www.vanderbilt.edu.

A link to the 2003 Financial Report can be found on theWeb at www.vanderbilt.edu/divadm/finrprt.

Mission, Goals, and Values

Vanderbilt University is a privately endowed, coeducational, not-for-profit, nonsectarian insti-tution located in Nashville, Tennessee. Founded in 1873, the University operated under the aus-pices of the Methodist Episcopal Church South until 1914. Since that time, it has been governed

by an independent, self-perpetuating Board of Trust. The University is named for the shipping and rail-way magnate Commodore Cornelius Vanderbilt, who gave one million dollars to build and endow auniversity that would “contribute to strengthening the ties which should exist between all sections ofour common country.”

Today, Vanderbilt University is internationally recognized as one of the premier research and teachinguniversities. Vanderbilt’s undergraduate, graduate, and professional programs rank among the finest inthe world. The University’s 6,300 undergraduate students, 4,600 graduate and professional students,and almost 2,300 full-time faculty members work together to support multidisciplinary study, academicresearch, and public service. The University also provides health care services through its medical cen-ter, which includes Vanderbilt University Hospital and The Vanderbilt Clinic.

The University maintains state-of-the-art facilities on its 330-acre campus. Vanderbilt’s academic enter-prise comprises interdisciplinary programs and centers, as well as ten schools and colleges—the Collegeof Arts and Science, the Graduate School, the Blair School of Music, the Divinity School, the School ofEngineering, the Law School, the School of Medicine, the School of Nursing, the Owen Graduate Schoolof Management, and Peabody College of education and human development.

About the University

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I n my capacity as chairman of Vanderbilt’s Board of Trust, I enjoy a particular vantage pointfrom which to observe the growth and achievements of this University. But my relation-ship with Vanderbilt began well before my current role on the governing body of the insti-

tution. Because of my personal history with Vanderbilt—which extends behind me some fourdecades—I feel confident in declaring that this certainly has been one of our finest years.

Given the successful implementation of the strategic plans of Chancellor Gordon Gee and hissenior administrators, our faculty, and a newly invigorated Board of Trust, Vanderbilt’s futurecan be described as unequivocally bright. In fact, I have no doubt that each year hence this Uni-versity will proudly boast of new accomplishments and grand milestones, some of which wehave yet to imagine.

It is because our focus is so keen that I am so certain of our success. Vanderbilt University hasalways strived to serve as a national as well as international leader in teaching, research, patientcare, and public service. Our intent on fostering new ideas and new methodologies, on discov-ering new cures and new methods all stem from our desire to be a great place of learning, a dis-tinguished place of care. Achieving these things is the sole purpose of our dedicated faculty,students, staff, and other members of the extended Vanderbilt community. Involved as I am inthe world of business, I have seen time and time again that success breeds success. So it is at Van-derbilt. With each of our achievements, we develop a taste for what might come next, for whatpossibilities await us.

The future of Vanderbilt University is limitless. We continue to grow our rep-utation in academics and health care, and this growth is done in an atmosphereof healthy respect and appreciation for those who came before us, for thosewho have enabled the achievements of today. Our singular history is Vander-bilt’s strength, as is our desire to improve upon that which is already great. Iknow our determination will continue to serve us well.

L e t t e r f r o m t h e C h a i r m a n o f t h e B o a r d o f T r u s t L e t t e r f r o m t h e C h a n c e l l o r

V anderbilt University is a place that reverberates with a visible vibrancy, inpart because we are transforming ourselves to become the face of the newAmerican university. Wholly committed to this metamorphosis, the efforts

of each and every member of our University community allow Vanderbilt to realizea culture of simplicity, clarity, agility, and accountability.

With the bar set so high and success our only option, a timid naturesimply will not suffice. Therefore, as other institutions hold back,fretting about the year’s financial woes and wondering what isahead, Vanderbilt remains intently focused on executing anaggressive strategy of growth and development. Because we havealways been careful with the management of our assets, we con-tinue to use our resources to fully support our central mission—the education of students, the discovery of new ideas, and thedevelopment of solutions to challenging problems.

A year that has marked a time of great difficulty for some of ourpeer institutions has been a time for Vanderbilt to continue itsascent. It has been a time for us to demonstrate that we refuse tobe in lockstep with other institutions, that we will not pace our-

selves according to the progress of others. We resolved to survive tight times by real-locating from our administrative costs to those aspects of the University that are itshighest calling: faculty, research, teaching, and student support. Through this reso-lution, we have found the freedom to stretch ourselves in the way we interact withstudents, in the way we hire faculty, in the way we are willing to adjust course offer-ings to respond to the events of our times. This has been the year to launch ourstrategic academic plan, to look towards creating a unique system of residential col-leges, to reward interdisciplinary collaboration with funds from our Academic Ven-ture Capital Fund. This has been a year in which Vanderbilt was fully resolved neverto be satisfied with our latest success, but to always look to the next event that willbenefit our students, will encourage our faculty, will strengthen our greater MiddleTennessee community, will embolden our institution.

This is the perfect time for Vanderbilt to forge ahead, to push ourselves, to makeourselves even better. Complacency is unacceptable. The coming years will see uscontinue to strengthen the very essence of this institution in new and exciting ways.We will again and again increase our involvement in the lives of our students, dis-tinguish ourselves as this country’s preeminent medical center for both teaching andpatient care, and help strengthen and shape in the most positive ways Nashville andTennessee, the community we proudly call home.

I assure you that the extraordinary efforts of the Vanderbilt community will notcease in a year or even a decade’s time. Our commitment to this institution is unfail-ing, and our certainty of its success runs wide and deep.

Gordon GeeChancellor

Martha R. IngramChairman of the Board of Trust

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■ Vanderbilt opens its new Biological Sci-ences Building/Medical Research Building III(MRB III), designed to promote studybetween diverse scientific disciplines. The350,000-square-foot facility includes 64state-of-the-art research laboratories, class-rooms, and an 8,650-square-foot green-house for research and teaching. Thelandmark project—a joint undertaking ofthe College of Arts and Science and VUMC—will allow undergraduate students anunprecedented degree of access to hands-onresearch projects with faculty, as well as withgraduate and professional students.

■ Chair of the department of religious stud-ies and professor of psychiatry and anthro-pology Volney P. Gay organizes an all-dayconference at Vanderbilt titled “AIDS andAfrica, Science and Religion.” An audienceof 300 physicians, clergy, and educators dis-cusses how Vanderbilt and other Nashvillereligious, educational, and political commu-nities can better confront the AIDS crisis.

■ James M. Lawson, a Vanderbilt DivinitySchool alumnus who led sit-ins at Nashville’ssegregated lunch counters in the early 1960sand who had a profound effect on Vander-bilt’s national identity, receives the 2002Walter R. Murray Jr. Distinguished AlumnusAward, presented by the Association of Van-derbilt Black Alumni during the VanderbiltReunion celebration. The award, establishedin honor of a 1970 Vanderbilt graduate, rec-ognizes lifetime achievements in personal,professional, and community arenas.

▼The Susan Gray School for Children, partof Vanderbilt’s John F. Kennedy Center forResearch on Human Development, dedicatesits newly renovated accessible playground.The playground boasts sandboxes, swings, a garden, and a playhouse accessible forwalkers and wheelchairs. The 30-year-oldschool serves nearly 150 young children withand without disabilities through an inclu-sive classroom-based program and an out-reach program to homes and communitychildcare centers.

■ Meharry Medical College and VUMCteam up to research why some minority andlow-income groups suffer disproportion-ately from asthma. The National Heart,Lung, and Blood Institute awards a five-year,$6 million grant to Meharry and Vanderbiltto establish the new Center for ReducingAsthma Disparities.

▼A $1.9 million expansion and renovationof one of Vanderbilt’s two child care centerssignificantly increases the number of chil-dren who can receive early childhood educa-tion and care on campus, helping to meet anemployee-identified priority. Care forinfants, toddlers, and two-year-olds wasidentified as the greatest child care need by atask force established to consider improve-ments that would make Vanderbilt a betterplace to work.

■ The Junior League of Nashville announcesa $500,000 gift to establish the JuniorLeague Eating Disorders Center at Vander-bilt Children’s Hospital. The new center willprovide a family-based, multidisciplinaryteam approach to anorexia nervosa andbulimia nervosa and will be the only eatingdisorders center within a 500-mile radius ofNashville.

Vanderbilt Univer-sity education profes-sor Paul A. Cobb ishonored for his workfocusing on core math-ematical concepts forgrades K–3 and middleschool grades withelection to the presti-gious National Academy of Education.Cobb, professor of mathematics education atPeabody College of education and humandevelopment, focuses his research on stu-dents’ mathematical learning as it occurs inthe social context of the classroom.

▲ Vanderbilt dedicates its 21st Avenuepedestrian bridge with a parade led by theUniversity’s mascot Mr. Commodore, Van-derbilt cheerleaders, and a trio of marchingmusicians. The new pedestrian bridge,located at 21st Avenue South and EdgehillAvenue, links two parts of Vanderbilt’s 330-acre campus—the historic main areaand the Peabody College area—and providesa quick, safe, and scenic connection for “commuters” between the two parts of thecampus.

■ The Vanderbilt School of Engineeringannounces the introduction of a new con-struction project management graduate pro-gram that includes a specialization inhealthcare construction. One of only a fewhealthcare construction management pro-grams in the nation, the program ensures thatcivil and environmental engineering studentsgraduate with the necessary expertise tobuild healthcare environments capable ofmeeting modern challenges.

■ Vanderbilt University Hospital is recog-nized in Solucient’s 100 Top HospitalsNational Benchmarks for Success study forthe third year in a row and is the only Ten-nessee hospital named in the 16-memberMajor Teaching category. The awards rec-ognize the efforts of the hospital’s board,management team, and medical staff for pro-viding high quality care, efficient operation,and superior patient results.

■ Ten international Muskie fellows from thehighly competitive Edmund S. Muskie/Free-dom Support Act Graduate Fellowship Pro-gram complete their fall semester withinPeabody’s Department of Leadership, Policy,and Organizations. The Vanderbilt contin-gent of Muskie fellows is the largest in thenation studying issues in higher educationand education policy. The Muskie fellowshipprogram provides fellowships at participat-ing American universities in a variety of aca-demic disciplines to citizens of Armenia,Azerbaijan, Belarus, Georgia, Kazakhstan,Kyrgyzstan, Moldova, Russia, Tajikistan,Turkmenistan, Ukraine, and Uzbekistan.

■ Vanderbilt’s Blair School of Music receivesan award from the National Endowment forthe Arts. Using this award, faculty memberswill create several new works for theNashville Ballet.

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■ The Vanderbilt Children’s Hospital opensthe International Adoption Clinic to meet thegrowing needs of families with internation-ally adopted children. The Clinic assists fam-ilies with medical, developmental, andnutritional problems commonly seen in chil-dren adopted from other countries.

■ President George W. Bush appoints Van-derbilt professor of civil and environmentalengineering Mark D. Abkowitz to a four-year term on the Nuclear Waste TechnicalReview Board. The board reviews theDepartment of Energy’s activities related tothe disposal of spent nuclear fuel and high-level radioactive waste. Abkowitz brings tothe 11-member board expertise in the trans-portation of nuclear waste.

■ Project GRAD (Graduation ReallyAchieves Dreams) Nashville, an educationpartnership led by the Inner City EducationFoundation, Vanderbilt University, andMetro Public Schools, announces its newname, “Imagine College.” The program,designed to open the door to higher educa-tion for inner city students, guarantees schol-arship assistance to any student whograduates with at least a 2.5 grade point aver-age from a participating high school.

▼ Vanderbilt University Hospital earns aplace on the “honor roll” of the nation’s besthospitals in rankings released by U.S. News& World Report magazine for the first timein the 13-year history of the magazine’sannual survey. Vanderbilt is among only 17hospitals on this year’s honor roll.

■ Vanderbilt is named among the nation’s“most competitive” universities in Barron’sProfiles of American Colleges. According toBarron’s Educational Series, Inc., publisherof the guidebook, the schools listed as mostcompetitive accept “only the best and thebrightest students.”

Grins (pronounced“greens”) restaurant,located at the new BenSchulman Center forJewish Life on theVanderbilt campus,opens to the public forbreakfast, lunch, andafternoon takeout.Grins, which is Yid-dish for vegetables, is Nashville’s first fullykosher restaurant.

■ Chancellor Gordon Gee travels to EastTennessee with 40 Vanderbilt students, fac-ulty, and staff to learn more about the stateand to visit areas where Vanderbilt is engagedin community outreach. The group takes apage from country music stars by travelingon a bus emblazoned with “VanderbiltRoads Scholars Tour” during their travelsfrom Nashville to Lynchburg, Chattanooga,Athens, Knoxville, Huntsville, Oneida,Jamestown, and Cookeville.

▲ At the inaugural Founder’s Walk, over1,500 members of Vanderbilt’s Class of 2006are joined by the “Spirit of Gold” marchingband and greeted with cheers at KirklandHall as faculty and staff members escortthem to Curry Field for a special welcomingceremony. The incoming freshmen learn thehistory of the founding of Vanderbilt fromcampus administrators and are introduced tothe Vanderbilt Community Creed by StudentGovernment Association president SamarAli and others.

■ Victims of domestic violence, as well as thefuture lawyers who will represent this grow-ing constituency, benefit from a U.S. Depart-ment of Justice grant to VanderbiltUniversity Law School, establishing the firstdomestic violence clinical training programfor law students in Middle Tennessee. TheDomestic Violence Clinic provides free legalservices for victims of domestic violence,sexual assault, and stalking.

Edgar Meyer, adjunctassociate professor ofbass at Vanderbilt’s BlairSchool of Music andaward-winning bassistand composer, is nameda MacArthur Fellow.More commonly knownas “genius grants,” thefellowships are awardedannually by the John D. and Catherine T.MacArthur Foundation to “individuals whoshow exceptional merit and promise for con-tinued and enhanced creative work.” Each ofthis year’s 24 recipients receives $500,000support over five years.

■ John W. Brock III, director of pediatricurology and professor of urology, is namedthe first surgeon-in-chief for Vanderbilt Chil-dren’s Hospital. Brock, who had been serv-ing as interim surgeon-in-chief, began hiscareer at Vanderbilt 11 years ago when hestarted the pediatric urology division, whichnow boasts three full-time faculty membersand a full-time laboratory supported by anNIH grant.

■ Vanderbilt molecular biologist Ellen H.Fanning is named one of 20 research scien-tists nationwide to each receive a $1 milliongrant over the next four years from theHoward Hughes Medical Institute in a newprogram intended to encourage researchersto invest more creativity into undergraduateeducation. Fanning, the Stevenson Professorof Biological Sciences, intends to use the grantto build what she calls a “Community ofScholars” to give participating undergradu-ates valuable hands-on research experience.

■ Vanderbilt University Medical Center(VUMC) and Gateway Medical Centerdecide to station an air ambulance helicop-ter at Gateway, expanding Vanderbilt’s Life-Flight catchment area by 11,000 squaremiles. Residents in Clarksville and sur-rounding counties gain faster access to Van-derbilt’s medical center, including theregion’s only Level 1 trauma center, thanksto this $2 million-plus project, which pro-vides for Vanderbilt’s third helicopter. Life-Flight averages more than 1,700 emergencypatient transports each year, and has safelycompleted more than 20,000 flights in its 18-year history.

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The Universitypublicly kicks offits “Shape theFuture” campaignwith a goal of$1.25 billion. Withthe launch of thecampaign, chairedby trustee Monroe J. Carell, Jr., Vanderbiltbecomes one of only 23 universities nation-wide working to raise more than $1 billion ina fund-raising campaign.

■ In the U.S. News and World Report scor-ing of graduate and professional schools,Vanderbilt’s School of Medicine jumps twoslots to rank 14th out of 125 accreditedresearch medical schools in the nation. Also,Peabody College is ranked fourth, its highestranking ever, among the nation’s graduateprograms in education, and the Peabody spe-cial education program is ranked numberone, a position it last held in 1996.

■ Vanderbilt’s Dyer Observatory continuesits transformation into one of Middle Ten-nessee’s most unique venues for private, cor-porate, and public events by hosting “Musicon the Mountain,” an Appalachian musicconcert led by three award-winning musi-cians from the Blair School of Music. Thisevent launches a renovation and expansionthat will allow Vanderbilt and the observa-tory to provide enhanced education and out-reach programs.

■ The Vanderbilt University School of Nurs-ing (VUSN) announces plans to offer a Lib-eral Arts-Nursing Program with RhodesCollege. As part of the academic partnership,graduates of Rhodes’ liberal arts program canenroll in VUSN with the prerequisites neededto earn a Master of Science in Nursing degree.

■ Music industry executive Mike Curb,Harvie Branscomb Distinguished VisitingScholar Bill Ivey, and Chancellor Gordon Geelaunch the first university-based policy pro-gram in the nation to fully engage the Amer-ican cultural policy system. The Curb Centerfor Art, Enterprise, and Public Policy at Van-derbilt, made possible by a $2.5 million dona-tion by Curb, will focus on primary sourcesof cultural policy at the national level.

■ The Vanderbilt men’s tennis team wins itsfirst-ever Southeastern Conference (SEC)Tournament championship. Head coach KenFlach is named 2003 SEC Coach of the Year.Later, the Commodore men’s tennis teamadvances to the final game of the NCAA Divi-sion I Men’s Tennis Championship and fin-ishes the season tied for fourth in the nationin the Intercollegiate Tennis Association’sfinal rankings.

■ The newly established Center for the Amer-icas at Vanderbilt provides innovative per-spectives on American history, culture, andsociety by bringing together a powerful groupof scholars whose research and teaching cutsacross the political and geographical bound-aries of North, Central, and South America.This unique center will raise Vanderbilt’s pro-file abroad while encouraging more interna-tional students and faculty to study at theUniversity.

■ Vanderbilt junior Worth Scott hits a dra-matic two-run home run in the bottom of theninth inning to give Vanderbilt’s baseballteam a three-game sweep of the University ofTennessee. The win earns Vanderbilt a sec-ond-place finish in the Southeastern Confer-ence (SEC) East and advances theCommodores to the SEC postseason tourna-ment for the first time since 1996.

■ The Vanderbilt University Sloan Center forInternet Retailing at the Owen GraduateSchool of Management is established with agrant from the Alfred P. Sloan Foundation.The center studies the enormous challengesfacing this dynamic and rapidly evolvingindustry, focusing on the Internet retailingcustomer chain. With the establishment ofthis center, Vanderbilt joins the select ranks ofprestigious universities with Sloan centers.

■ Joseph A. Smith Jr., William L. Bray Pro-fessor and Chair of Urologic Surgery, per-forms Vanderbilt’s first robotic surgicalprocedure—a radical prostatectomy—usingthe medical center’s new $1 million-plus DaVinci Surgical System. Introducing a newdegree of freedom and control for the surgeon and eliminating the awkwardness ofendoscopic technique, robotic systems helpextend the important benefits of minimallyinvasive surgery.

▼Vanderbilt golfers Courtney Wood, SarahJacobs, and Nicki Cutler shoot under par inthe final round of the NCAA Division IWomen’s East Regional at the Salem GlenCountry Club in North Carolina, helping theCommodore women’s golf team advance toits second consecutive appearance in theNCAA Division I Women’s Golf Champi-onship.

■ Kent D. Syverud, dean of the Law Schooland Garner Anthony Professor of Law,announces a new Fulbright program provid-ing future law teachers from India the oppor-tunity to study various approaches to legaleducation in the United States. One Indian lawgraduate each year will be selected to partici-pate in the Master of Law program at Van-derbilt under the new Fulbright-VanderbiltFellowship in Clinical Legal Education.

VUMC becomes thefirst medical center in theregion to offer vision-restoring surgery for macular degeneration.Vanderbilt doctors surgi-cally implant an experi-mental telescopic device,called the Implantable

Miniature Telescope (IMT), which functionslike a telephoto lens mounted inside the frontsurface of the eyeball and works by magnify-ing the patient’s central vision.

Chancellor Gordon Gee participates in the42nd annual Mexico/U.S. Interparliamen-tary Group Conference. Held at Vanderbilt,14 members of the Mexi-can Congress and 18members of the U.S. Con-gress, including U.S. Sena-tor Lamar Alexander andSenate Majority LeaderBill Frist, participate in theconference, which includes topics of discus-sion such as immigration and migration,trade and agriculture, and national security.

■ The Vanderbilt Center for Better Healthconvenes clinical decision-makers fromacross the nation at sessions in Boston,Atlanta, Chicago, and Los Angeles. Medicalofficers at each session identify newapproaches for medical management toreduce costs and improve patient outcomesusing evidence-based medicine. Founded in2002 and led by William W. Stead, associatevice chancellor for health affairs, the innova-tive center works with health care leadersfrom across the country to maximize the ben-efits of information technology for healthcare delivery.

■ A field study co-conducted by John Burke,assistant professor of biological sciences,helps alleviate environmental concerns thathave been raised about the use of geneticallymodified crops and the possible effects shouldthey spread to wild relatives. His work withgenetically modified sunflowers shows thatcross-pollination between genetically modi-fied populations and wild populations doesnot have a major environmental impact.

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Kevin A. Myattbegins as chief humanresource officer oversee-ing all aspects of humanresource services forVanderbilt’s faculty andstaff. Myatt reportsdirectly to vice chancel-lor for administration and chief financial offi-cer Lauren J. Brisky and has a dotted-linereporting relationship to Chancellor GordonGee, a reporting structure that recognizes theimportance of human resources as an essen-tial component of Vanderbilt’s mission.

■ David Brogan, a senior biomedical engi-neering student, receives a prestigious Mar-shall Scholarship, worth approximately$60,000. Brogan is one of 40 U.S. studentschosen this year from more than 800 appli-cants to participate in the British govern-ment–financed scholarship program, whichprovides opportunities for American studentswho have demonstrated academic excellenceto continue their studies for two to three yearsat a British university of their choice.

■ A dim economy does not prevent about4,300 members of the Vanderbilt communityfrom giving approximately $800,000 to areacharities for the second consecutive year dur-ing Vanderbilt’s Community Giving Cam-paign. Donated money serves the United Wayof Metropolitan Nashville, CommunityHealth Charity of Middle Tennessee, andCommunity Shares.

■ Vanderbilt University, with its continuedcommitment to increasing the supply ofaffordable housing in Nashville, renews itsfive-year investment in the Nashville Hous-ing Fund. Through public and privateresources, the nonprofit corporation assistslow- and moderate-income families and indi-viduals to become homeowners and workswith developers to expand affordable hous-ing options in Nashville.

▼ The Learning Channel series titled “Resi-dent Life” begins filming at the VUMC. Theseries is told through the eyes of the medicalcenter’s residents and fellows, and offersviewers a comprehensive look at what it takesto be a physician-in-training in today’s highlyspecialized environment. Vanderbilt’s med-ical center was selectedover several other topacademic medical cen-ters based on thestrength, size, and diver-sity of its graduate med-ical program.

■ Vanderbilt hosts the Turner ConstructionManagement Training Institute to teach tech-nical and managerial skills to owners offemale- and minority-owned, small busi-nesses in Nashville. The new program is madepossible by a partnership among the Univer-sity’s vendor diversity program, Turner Uni-versal Construction, and other partners. Thegoal of the 16-week program is to promotebusiness diversity as a pathway for improv-ing economic opportunities for all businesses.

▼ Vanderbilt University and Tennessee Per-forming Arts Center (TPAC) announce anexciting new initiative titled “Vanderbilt@TPAC@Vanderbilt@TPAC.” As part of thenew partnership, Vanderbilt and TPAC willwork together on a wider range of educa-tional, cultural, and marketing partnershipsto enhance the performing arts in Nashville.The first program under the alliance is a new lunchtime learning series, “InsideOut ofthe (Lunch) Box,” spotlighting the arts in anew and unusual way by providing a glimpseof the performing arts, artists, and the artis-tic process.

■ Vanderbilt School of Nursing’s FacultyPractice Network opens the doors of a newnurse-managed, community-based clinic atMcKendree Village, a progressive living com-munity for seniors that has been part of theVanderbilt family of related institutions forseveral years. The McKendree Senior HealthCenter will offer family practice, mentalhealth, and women’s health services to almost400 senior residents.

■ The Boeing Company donates to Vander-bilt a patent covering a particle-separationtechnology originally developed for use inouter space that could play an important rolein the nanotechnology revolution. The tech-nology, an advanced version of continuousflow electrophoresis, also has the potential toproduce more effective pharmaceuticals.

▲ Vanderbilt celebrates the 130th anniver-sary of its founding. During a special cere-mony, friends and members of the Vanderbiltcommunity gather as a wreath is placed at the foot of the statue of Commodore Cor-nelius Vanderbilt, who gave the founding giftof $1 million to build and endow Vanderbiltin 1873.

■ University leadership announces a newCenter for the Study of Religion and Culture,a joint venture between the Divinity Schooland the College of Arts and Science. The cen-ter provides additional resources for the studyof religion and critical world issues likepoverty and terrorism and will better equipthe University community to approach theseissues from broad multifaith perspectives.

■ Two Vanderbilt biomedical engineeringstudents head to Boston to demonstrate theinvention they helped refine and develop—aprobe that uses laser light to quickly and accu-rately diagnose ovarian cancer. Vanderbiltseniors Elizabeth Kanter and Matt Keller areone of only 15 teams across the nation cho-sen to display their device at an event spon-sored by the Museum of Science and theNational Collegiate Inventors and Innova-tors Alliance, which gives grants to collegesto create student invention teams, courses,projects, networking opportunities, andresources for faculty and student innovators.

■ Vanderbilt undertakes a $2.5 million renovation and expansion of the BishopJoseph Johnson Black Cultural Center toadvance the University’s goal of achievingmeaningful diversity that will benefit all students. Through its programs and infor-mation exchange, the center encourages thecommunity’s awareness of African Americanculture and its important role in this society.

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In fiscal 2003, most of the headcount increases occurred inthe medical center. Increased patient care volumes in the hospi-tal and clinic, combined with additional faculty and staff to meetthe growth of research, drove a majority of the headcountincreases.

Research Expenditures

Total university and sponsored research expenditures increasedto $294.0 million in fiscal 2003. These expenditures haveincreased an annualized average of 15.5% per year since 1999

due primarily to growth in federal government sponsoredresearch. Total government and private sponsored researchawards, which include multiple-year grants and contracts,increased 18.8% to $339.4 million in fiscal 2003. In additionto these sponsored research awards, the University also receivedgrants and contracts for instruction, public service, and othernon-research activities.

Managed Endowment The market value of Vanderbilt’s endowment totaled approxi-mately $2.0 billion as of June 30, 2003. The endowment had apositive return of 3.8% for the fiscal year and outperformed anappropriate blend of market indices by more than 1%. Endow-ment utilization is based on 4.5% of the previous three years’average market values and, beginning in fiscal 2003, alsoincludes the use of unrestricted funds functioning as endow-ment to support transinstitutional initiatives through the Aca-demic Venture Capital Fund. In fiscal 2003, these factorsresulted in the utilization of 6.1% of the current year’s averagemarket value to fund operations, scholarships, faculty chairs,research, and capital investments in transinstitutional initiatives.

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2002/2003 2001/2002 2000/2001 1999/2000 1998/1999

STUDENTSUndergraduate 6,319 6,235 6,037 5,885 5,818Graduate and professional 4,566 4,261 4,157 4,242 4,292

Total fall enrollment 10,885 10,496 10,194 10,127 10,110

Undergraduate admissionsApplied 9,838 9,754 8,890 8,490 9,199Accepted 4,550 4,528 4,900 5,207 5,434Enrolled 1,579 1,557 1,643 1,633 1,495

Selectivity ratio 46.2% 46.4% 55.1% 61.3% 59.1%Matriculation ratio 34.7% 34.4% 33.5% 31.4% 27.5%

Degrees conferredBaccalaureate 1,552 1,393 1,302 1,370 1,417Master’s 893 849 926 1,016 967M.D. 93 104 104 109 96Other doctoral 372 380 383 371 364

Total degrees conferred 2,910 2,726 2,715 2,866 2,844

Undergraduate graduation rates 82.8% 84.1% 84.3% 84.1% 81.3%

Undergraduate tuition rate $ 26,400 $ 25,190 $ 24,080 $ 22,990 $ 21,930% increase over prior year 4.8% 4.6% 4.7% 4.8% 4.9%

HOSPITAL AND CLINICLicensed beds 746 746 658 658 658Surgeries 28,643 27,678 26,549 25,200 23,892Hospital admissions 37,867 36,452 31,852 32,151 31,349Hospital patient days 208,361 200,434 170,377 167,764 165,426Average daily census 571 549 467 458 453Average length of stay (days) 5.5 5.5 5.3 5.2 5.3Clinic outpatient visits 698,960 688,884 641,790 627,988 573,481Emergency room visits 71,402 70,098 63,999 57,604 57,210LifeFlight (helicopter) missions 1,794 1,803 1,709 1,657 1,558

FACULTY AND STAFFFull-time faculty 2,253 2,066 1,944 1,924 1,815Full-time staff 13,388 12,513 11,594 11,131 11,292Part-time faculty 338 329 329 330 318Part-time staff 1,721 1,771 1,560 1,440 1,617

Total headcount 17,700 16,679 15,427 14,825 15,042

RESEARCH EXPENDITURES ($000)Federal $ 162,930 $ 124,384 $ 104,652 $ 92,342 $ 85,545Non-federal 57,972 48,410 42,192 44,689 39,590Facilities and administrative costs 73,051 58,506 48,051 46,397 40,060

Total research expenditures $ 293,953 $ 231,300 $ 194,895 $ 183,428 $ 165,195

MANAGED ENDOWMENT Market value ($000) $1,987,810 $ 1,989,692 $ 2,159,614 $ 2,314,935 $ 1,796,785Total return on endowment 3.8% -5.8% -4.7% 31.9% 19.8%Endowment utilized 6.1% 4.6% 3.9% 3.5% 3.6%Endowment per student $ 182,619 $ 189,567 $ 211,851 $ 228,590 $ 177,724

8 > > >

Students

Enrollment for the 2002/2003 academic year totaled 10,885students, reflecting a moderate increase of eight percentagepoints since fall 1998. Over 95% of the latest enrollment totalconsists of full-time students. The matriculation rate remainedstrong at 34.7% in fall 2002, and applications were at an all-time high of 9,838 for fall 2002 undergraduate admissions. Asa result of increased applications and matriculation rates overthe past five years, Vanderbilt has become progressively moreselective, accepting 46.2% of freshman applicants for fall 2002.

Undergraduate graduation rates decreased slightly to 82.8%(based on successful graduations within six years of initial enroll-ment). Undergraduate tuition increased only 4.8% to $26,400for the 2002/2003 academic year. The University implementeda tuition rate of $27,720 for the 2003/2004 academic year.

Hospital and Clinic

The Psychiatric Hospital at Vanderbilt was merged into Van-derbilt University Hospital (VUH) as of July 1, 2001. Themerger increased VUH’s reported licensed beds, admissions,average daily census, and patient days beginning in fiscal year2002. VUH performed 28,643 surgeries, admitted 37,867patients, served 698,960 outpatient visits, and cared for 71,402patients in its emergency room in fiscal 2003. Surgeries andinpatient admissions increased 3.5% and 3.9%, respectively,from the prior year. Since 1999, outpatient and emergencyroom visits have increased an annualized average of 5.1% and5.7% per year, respectively. Meanwhile, the average inpatientlength of stay remained stable at 5.5 days.

Faculty and Staff

The University employed 17,700 regular and temporary facultyand staff in 2003, including those employed in wholly-ownedaffiliated entities. This figure excludes more than 1,200 clinicaland adjunct faculty not paid directly by Vanderbilt.

9< < <

R e v i e w o f t h e

0

2,000

4,000

6,000

8,000

10,000

12,000

Fall 2002Fall 2001Fall 2000Fall 1999Fall 1998

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

1998/1999 1999/2000 2000/2001 2001/2002 2002/2003

■ Applied ■ Accepted ■ Enrolled

Un

der

gra

du

ate

Ad

mis

sion

s

Res

earc

h E

xpen

dit

ure

s

■ Facilities and ■ Non-Federal ■ FederalAdministrativeCosts


Strategic initiatives

portions of Vanderbilt’s financial aid packages. For manyfamilies, this is simply an unacceptable—and often an impos-sible—prospect. “Shape the Future: A Campaign for Vander-bilt,” with its fundraising goal of $1.25 billion, is committedto improving the affordability of a Vanderbilt educationbecause we believe our community should reflect the broad-est possible array of experiences and perspectives.

Faculty

From the first endowed chairs named in honor of LandonGarland (physics) and Holland McTyeire (history), Vander-bilt has honored the exceptional contributions of its faculty.Today, the number and scope of these con-tributions have grown exponentially—andare, in a word, astounding. The Year at aGlance section of this report highlights asmall sampling of the many faculty accom-plishments and discoveries during the pastyear. Vanderbilt faculty members are novel-ists and musicians of international renown;they uncover the molecular origins of cancerand probe the neural basis of laughter; theyilluminate the complexities of our Constitution. Vanderbiltdraws faculty of this caliber because it can offer something noother university in America can: a constellation of schools andintellectual centers of outstanding quality on a compact andcollegial campus.

This University believes our greatest opening for continuedexcellence comes through keeping our talented facultyinvolved and engaged. We also believe that such excellencecan only be ensured when we constantly attract and welcome

to our community the best and brightest new faculty fromaround the world. To that end, the “Shape the Future” cam-paign aims to increase the number of endowed chairs and pro-fessorships Vanderbilt offers for outstanding scholarship,teaching, and service. The prestige and honor of a chair, alongwith the flexibility provided by the funds often attached to thechair, are absolutely essential to Vanderbilt’s success inrecruiting and retaining the best teacher-scholars.

Programs and Research

At Vanderbilt, we believe the most valuablelearning and the most important discoveriesemerge from a meeting of minds—when peo-ple of different disciplines and perspectivescome together to share and pursue ideas.Making education and research curiosity-driven rather than discipline-bound is a real-ity at this University. Because of our assertivestrategic planning, Vanderbilt can makedecisions that stoke our strength, not depleteit. We have enabled our academic programsto remain untouched by compromise. But

our academic programs are more than untouched. They arebeing stretched and reinvented in new and exciting ways andprovide a unique place from which our students and facultycan study and discover together without boundaries.

As the plans we developed in the previous three years come tofruition at an astounding rate, today Vanderbilt is able toboast of such unique academic centers as the Center for theAmericas; the Center for the Study of Religion and Culture;the Curb Center for Art, Enterprise, and Public Policy; the

Center for Integrative and Cog-nitive Neuroscience; the Instituteof Nanoscale Science and Engi-neering; and the Vanderbilt Insti-tute for Chemical Biology.Further, the proteomics and func-tional biology program hasundertaken groundbreakingresearch into the biosynthesis,structure, metabolism, and func-tion of proteins. This research iscritical to our understanding ofhealth and disease, and more so,to our ability to mitigate thecourse of, find a cure for, andeven prevent diseases.

11< < <

S T R A T E G I C I N I T I A T I V E S

This University believes

our greatest opening for

continued excellence

comes through keeping our

talented faculty involved

and engaged.

Stra

teg

ic in

itiat

ivesT o say that these are exciting times

for Vanderbilt is an understate-ment. In reality, times are always

exciting here at one of America’s great uni-versities. The atmosphere at Vanderbiltoriginates in part from our unique situationas an extensive doctoral-granting researchinstitution that constantly maintains a keenand careful eye towards the liberal arts edu-cation of our students—undergraduate,graduate, and professional. With its singu-lar mission of excellence, we believe Van-derbilt University is well on its way to a newlevel of recognition and discovery.

Though we enjoy constant success, this yearhas been a particularly noteworthy one, cer-tainly in light of a more challenging fiscalenvironment than usual. Always cognizantof our core focus on the education of stu-dents and the support of research and dis-covery, Vanderbilt asked all administrativeareas of the University to trim their budgetsso that our academic areas would remainunaffected by necessary belt-tighteningmeasures. We consider it a true and tellingtestament to the character of Vanderbilt andthose who work here that the Universitycommunity responded to this request so that not a single class,not a single academic program, not a single service providingdirect support to our students or our faculty or our patientshas been affected by the current economic times. In the midstof this slight administrative restructuring and of keeping aneven more vigilant watch than usual on bottom lines, Vander-bilt continues to surge ahead in pursuit of its goal to becomethe new face of the American university.

Students

Each year, Vanderbilt attracts a growing number of thenation’s most talented young women and men to its under-graduate, graduate, and professional programs. Undergradu-ate applications for fall 2003 admissions reached an all-timehigh of almost 11,000, and graduate applications nearly doubled. We were able to recruit a freshman class whose pro-file score (analogous to SAT scores) rose eight points toapproximately 1337. With this fall’s entering undergraduateclass, we will have increased our average profile score over 50points in just five years. For reference, only eight of the top

25 ranked schools, between 1998 and 2001,achieved score improvements of 30 points orgreater in four years.

We realize that recruiting the best students toapply is only the first step, though. The stu-dents who are accepted here must decide toattend and must decide to stay. Making cer-tain that each and every student at Vander-bilt finds a place at the University is of utmostimportance and requires us to continuallyexamine ways in which our community candevelop in both breadth and depth. A prior-

ity to increase the amount of space where students can inter-act resulted in the recent completion of the Ben SchulmanCenter for Jewish Life, an announcement of a multi-milliondollar renovation to the Bishop Joseph Johnson Black Cul-tural Center, and the unveiling of plans to break ground in fis-cal 2004 for a new student life center. And, further, theseexpanding communities fuel Vanderbilt’s vision to create itsown unique system of residential colleges in the coming years.

Also of critical importanceto Vanderbilt is ensuringthat students who want toattend the University canafford to do so. Vander-bilt’s “need-blind” admis-sion practices reflect acommitment to enroll themost qualified students,regardless of their financialneed. Right now, however,loans comprise significant

10 > > >

STRATEGIC Initiatives > > >

Making certain that each

and every student at

Vanderbilt finds a place at

the University is of utmost

importance and requires us

to continually examine ways

in which our community can

develop in both breadth

and depth.


neering’s Jacobs Hall renovations, Light Hallrenovations for the Genetics Institute, thePierce Avenue Plaza and Bridge, the 21stAvenue pedestrian bridge, and the BiologicalSciences Building/Medical Research Build-ing III.

Major facilities currently in planning orunder construction include the MonroeCarell Jr. Children’s Hospital at Vanderbilt,a student life center, the Bill Wilkerson Cen-ter/Musculoskeletal Institute, renovations tothe Stevenson Center, and the Bishop Joseph

Johnson Black Cultural Center renovations and additions.

All of these facilities are aligned with the University’s strate-gic priorities to recruit the best students, to engage our faculty,and to support programs and research advancing Vanderbiltto new extraordinary heights.

12 > > >

S T R A T E G I C I N I T I A T I V E SSt

rate

gic

initi

ativ

es

We are also near finalizing a program for theintegration of our outstanding professionalschools into undergraduate life. This newprogram will allow entering freshmen togain early admission to Vanderbilt’s profes-sional schools, including medicine, law, busi-ness, divinity, and nursing.

Across the campus, individually and inteams, Vanderbilt faculty engage daily inresearch that probes bold ideas and complexquestions. And, most excitingly, our facultyare joined in their bold endeavors by stu-dents at all levels of study who witness first-hand the key ele-ments of the research process. The amount of external awardsthat Vanderbilt researchers received last year from peer-reviewed proposals reached all-time levels. Most recently,Vanderbilt has become the second-fastest growing academicmedical center in the country in terms of funding from the fed-eral National Institutes of Health.

Facilities

Vanderbilt is located in the heart of Nashville, Tennessee, ona compact campus of 330 acres. Because the campus struc-ture affords such a close proximity, the University carefullyconsiders how to maximize its valuable space to best supportinnovative interdisciplinary projects and unique methods forstudent-faculty collaborations.

Major facilities completed during this past fiscal year includethe Ben Schulman Center for Jewish Life, the School of Engi-

Harry R. Jacobson,Vice Chancellor forHealth Affairs

Nicholas S. Zeppos,Provost and Vice Chancellorfor Academic Affairs

At Vanderbilt, we believe

the most valuable learning

and the most important

discoveries emerge from a

meeting of minds—when

people of different

disciplines and perspectives

come together to share and

pursue ideas.

> > >

> > >


Financial resultsFi

nanc

ial r

esul

tsT he greatness of Vanderbilt stems from its unrivaledcommitment to provide the vital resources to takeevery strategic program, department, and school to

new levels of excellence. Vanderbilt continues to build upon itsdistinctive qualities and these investments are showing out-standing results. The recruitment of new talent and addition ofstate-of-the-art facilities fuel impressive growth in sponsoredresearch. The expansion of existing transinstitutional programsand launch of new collaborative opportunities augment theUniversity’s national profile. Enhanced academic programs andstudent life and improved financial support are resulting in asurge in the number of applications. Furthermore, the infusionof vigorous leadership and fiscal stewardship has furtherenhanced Vanderbilt’s strong financial position.

By nurturing relationships across all disciplines and leveragingin-person connections, Vanderbilt put in motion the resourcesnecessary to create an even greater university. Throughenhanced collaboration, all of Vanderbilt’s stakeholders—stu-dents, faculty, staff, trustees, administration, and the commu-nity—are now engaged in active conversation to betterarticulate goals, identify strengths, set priorities, and developtactical strategies. These collegial and intellectual relationshipsforge a convergence of transparency and cohesiveness essentialduring a time marked by skepticism and corporate misdeeds.

The University is mindful of the recent enactment of the Sar-banes-Oxley Act of 2002 (Sarbanes-Oxley), which is intendedto enhance public confidence in management responsibilities forcorporate governance and financial reporting. Although Sar-banes-Oxley does not apply to non-profit entities, managementbelieves implementations of certain provisions may furtherenhance the University’s institutional accountability and respon-sibility. Since its founding, Vanderbilt’s leaders have been com-mitted to financial integrity and have established sound financialpolicies and practices, as well as an effective control structure.Still, in this heightened environment of corporate responsibility,management, along with the Audit Committee of the Board ofTrust, are fine-tuning Vanderbilt’s business policies to mirrormany “best practices” provisions of Sarbanes-Oxley. These bestpractices provide opportunities to refresh the ongoing dialoguewith internal and external auditors, enhance the role of the AuditCommittee, strengthen financial control processes, and improvecommunications around the financial reporting process.

Operating Revenues and Expenses

In fiscal 2003, Vanderbilt generated revenues of $1,798.5 mil-lion and incurred expenses totaling $1,765.5 million—result-ing in an operating surplus of $33.0 million. These results are

comparable with last year’s results of $31.4 million and con-sistent with our strategic financial plans. Stable operatingresults for the academic enterprise combined with healthy oper-ating results of the health services operations formed the foun-dation for the University’s strong financial performance.Ongoing assessments of priorities, implementation of opera-tional improvements, and efficient utilization of availableresources paid clear dividends.

The above graph illustrates the proportional revenues con-tributing to the University’s overall financial performance.

Vanderbilt University Hospital and The Vanderbilt Clinic con-tinue to excel as leading providers of health care services. Favor-able contractual arrangements and utilization trends, which sawgrowth in patient admissions, emergency room visits, and clinicoutpatient services, contributed to a significant increase inhealth care revenues, which constituted 59% of the University’stotal operating revenues.

Government grants and contracts revenue and government-related indirect cost recovery, which constitute 15% of totaloperating revenues, increased by 26.2% from the prior year. Thisrapid growth is due to increases in federal government researchfunding made possible by the University’s investment in researchfacilities and programs.

Net tuition, fees, room, and board accounted for 11% of totaloperating revenues during fiscal 2003. Undergraduate tuitionwas $26,400 representing a 4.8% increase over fiscal 2002. Stu-dent quality and demand indicators continued to trend posi-tively as reflected by increasing applications and highermatriculation rates. To attract and enroll sought-after students,Vanderbilt continued to implement increases in student finan-cial aid, with the discount growing to 37.4% of gross tuition andeducational fees in fiscal 2003—an increase from 35.2% in theprior year.

14 > > >

DISCUSSION of Financial Results > > >

Operating Expenses by Function

Through focused strategic planning, Vanderbilt collectivelyapproaches the education mission with great dedication, cre-ativity, and focus to continually achieve smarter and more effi-cient operations. Instruction and other student services, whichinclude expenses for housing and student dining services, com-prised 23% of total operating expenses. As in past years, expen-ditures for instruction and other student services wereproportionally more than net tuition. The University recognizesthat operating gifts and endowment distributions are an impor-tant supplement to the fundamental support of its educationmission and are significant factors in the growth of academicendeavors. Well-managed health care operations also con-tributed to positive operating results for the hospital and clinic.

Operating Expenses by Type

The graph below depicts the fiscal 2003 operating expenses of$1,765.5 million by natural classification type. Operatingexpenses increased 13.2% from fiscal 2002 primarily due togrowth in health care services and sponsored programs.Together, salaries, wages, and benefits reached $1,042.0 millionin fiscal 2003. This total compensation figure represents 59%of total operating expenses. Growth in all other expenses alignswith institutional spending priorities for supporting the educa-tional mission.

D I S C U S S I O N O F F I N A N C I A L R E S U L T S

Health care59%

Government, primarilyresearch grants

15%

Net tuition, fees,room, and board

11%

Gifts and endowment

distributions10%

Other5%

OPERATING REVENUES BY SOURCE$1,798.5 million

OPERATING EXPENSES BY FUNCTION$1,765.5 million

Health care56%

Instruction and otherstudent services

23%

OrganizedResearch

13%

Other4%

InstitutionalSupport

4%

OPERATING EXPENSES BY TYPE$1,765.5 million

Salary, wages, and benefits$1,042.0 million

Professional services

$91.9 million

Supplies and materials$394.3 million

Interest$19.5 million

Depreciation andamortization$88.2 million

15< < <

Other$129.6 million

Health Care

Vanderbilt University Hospital and The Vanderbilt Clinic expe-rienced healthy operating results through price, volume, andclinical severity increases. As noted earlier, growth in all majorvolume measures—patient days, admissions, outpatient visits,and emergency room visits—resulted in increased patient revenues. With successful negotiation strategies, managementwas able to achieve rate increases on many commercial managed care contracts. Also, Vanderbilt received $10.4

million from TennCare, Tennessee’s state-managed health care program designed for Medicaid-eligible residents and thosewho lack access to health insurance, for its role as an essentialaccess provider.

The increase in patient revenue was offset by the inability to implement rate increases on certain existing contracts; TennCare reimbursements that continued to be notably less thanthe cost of providing health care services; and the continuingimpact of reductions in Medicare reimbursements due to the Bal-anced Budget Act of 1997 and subsequent related acts.

Health care operating expenses increased as the result of servicelevel growth; supply cost inflation; annual wage increases; anunbudgeted market adjustment for nurses in response to thenational nursing shortage; and the significant use of registrynurses, travelers, and other premium paid staff in radiology andlab services. Additionally, changes in the TennCare eligibilityrules increased the volume of self-pay patients who may not havethe financial resources to pay their health care bills. Thesechanges caused an increase in the provision for bad debts and,in many cases, contributed to increases in charity care for whichno revenue is reported.

Sponsored Programs

Sponsored program activity, which includes government andprivate contracts and grants, provides over 16% of the Uni-versity’s total operating revenue. Sponsored program supportfunds the direct and indirect costs for research, instruction, pub-lic service and other sponsored activities. In fiscal 2003, spon-sored program revenue for these activities increasedapproximately 23% from the prior year.

The leading source of Vanderbilt’s funding for sponsored pro-grams is the federal government, which in fiscal 2003 providedapproximately 85.5% of the total sponsored support. TheDepartment of Health and Human Services, primarily the


Fina

ncia

l res

ultsNational Institutes of Health (NIH), accounted for 79% of this

federal support. As of the last published rankings based on fis-cal 2002, Vanderbilt ranked 24th of all universities andresearch institutes in NIH funding, up from 30th in 1998.

Academic Venture Capital Fund

In fiscal 2002, the Academic Venture Capital Fund (AVCF) wascreated specifically for strategic academic initiatives inresearch and scholarship. As a central funding mechanism, theAVCF supports interdisciplinary efforts with the use of accu-mulated operating funds that had been designated as “fundsfunctioning as endowment” several years ago. The goal of theAVCF is to launch new academic initiatives that hold greatpromise for transformative research discoveries and educa-tional accomplishments.

In 2003, the AVCF utilized funds functioning as endowmenttotaling $22 million. The AVCF initiatives include a researchprogram in proteomics and functional biology; a center for inte-grative and cognitive neuroscience; an institute for nanoscalescience and engineering; an institute for integrative biosystemsresearch and education; a program in law and business; a learn-ing sciences institute; an institute for chemical biology; a center

16 > > >

Financial results

Vanderbilt’s Strengths, Challenges,and Trends

The University’s success today results from teams of individu-als leveraging the power of relationships formed across all aca-demic levels. As a more inclusive community, the Universityhas invigorated strategic planning, engaged conversationacross all disciplines, and heightened fiscal transparency. Withthis culture of collaboration, Vanderbilt continues to reachnew heights.

Applications for fall 2003 incoming freshmen approached11,000 for the third record-setting year in a row, which allowedthe University to be increasingly more selective. Entering stu-dents continue to be extraordinary individuals with SAT scoresreaching all-time highs, and student retention rates continue toimprove. Further, demand remains healthy for the graduate andprofessional programs with a significant increase in applica-tions to the Graduate School.

Vanderbilt University Medical Center and the Vanderbilt-Ingram Cancer Center continue to achieve top rankings. In July2003, the Vanderbilt-Ingram Cancer Center was listed as oneof the top ten cancer centers in the country—a remarkableachievement for a cancer center that is only ten years old. Forthe second year in a row, the medical center joined only 16 otherhospitals around the United States on U.S. News & World

Report’s “honor roll.” No other medical facilities in Tennesseemade the prestigious listing.

Vanderbilt’s willingness to work across boundaries and toexperiment with hybrid ideas and concepts is manifested in itsmultidisciplinary programs. Besides facilitating discovery, theseprograms strengthen graduate training, develop researchopportunities for those scholars whose background and expert-ise are unique, attract the brightest students in the world, andreenergize traditional departments and disciplines.

17< < <


for the study of functional genomics of the zebrafish; a centerfor the study of religion and world issues; and a center for thestudy of relations among people of the Americas.

Summary of Changes in Net AssetsAs noted earlier, the University reported a fiscal 2003 operatingsurplus of $33.0 million, which includes operating gifts andendowment distributions. Endowment distributions and invest-ment income recognized as operating revenues totaled $119.3million, which exceeded by $38.1 million the total positiveinvestment return of $81.2 million. This resulted primarily fromendowment distributions occurring at a rate greater than the3.8% return on endowment earned during fiscal 2003. New per-manently restricted gifts and pledges increased to $32.5 millionfor fiscal 2003 compared to $27.5 million for fiscal 2002.

TOTAL NET ASSETS$3,134.6 million

Unrestricted net assets

$2,404.7 million

Permanently restricted net assets

$568.2 million

Temporarily restricted net assets

$161.7 million

Managed endowment$1,987.8 million

Lauren J. Brisky,Vice Chancellor forAdministration and Chief Financial Officer

SUMMARY OF CHANGES IN NET ASSETS (in millions)

2003 2002

Unrestricted operating results $ 33.0 $ 31.4

Non-operating endowment and investment net activity (38.1) (225.4)

New permanently restricted gifts and pledges 32.5 27.5

Other restricted gift activity & non-operating results (19.8) 114.6

Total increase (decrease)in net assets 7.6 (51.9)

Ending balanceof net assets $3,134.6 $3,127.0

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

20032002200120001999

NET ASSETS (in millions)

■ Unrestricted ■ Temporarily ■ PermanentlyRestricted Restricted

Other restricted gift activity and non-operating results, includ-ing a mark-to-market unrealized loss on interest rate swapagreements and reduced market values of pledges receivable,decreased net assets by $19.8 million in 2003. In 2002, otherrestricted gift activity was much greater as the Ingram familycontributed over $100 million in new gifts for plant facilities,pledges, and other temporarily restricted amounts.

These factors combined for a total increase in net assets of $7.6million, resulting in net assets totaling $3.1 billion as of June30, 2003. The managed endowment comprises $2.0 billion ofthat total—with $0.5 billion considered as permanentlyrestricted “corpus” and $1.5 billion of cumulative growth inendowment funds classified as unrestricted net assets.

Still, Vanderbilt’s success brings certain challenges. We mustcontinue to pursue opportunities for improved operational effi-ciency on a regular basis. To attract the best and the brighteststudents and increase the diversity of the student body, we mustcontinue to increase our financial aid budget. Financial assis-tance will depend to a great extent on operating resources, asspending from scholarship endowments—like all endow-ments—will moderate due to market conditions. In the face ofcongressional plans to reduce the growth of NIH research fund-ing, we must continue to attract outstanding faculty and fosterworld-class research. In light of insufficient federal and statereimbursement, labor shortages in skilled positions, and esca-lating pharmaceutical supply costs and insurance rates, we mustbe innovative to provide high-quality health care services.Although we face a number of challenges, the opportunitiesbefore us are remarkable.

Summary

Key points from this 2003 Discussion of Financial Resultsinclude the following:• positive operating results of $33.0 million;• total net assets of $3.1 billion as of June 30, 2003;• significant growth in sponsored program funding;• healthy operating results and volume trends in the hospital

and clinic; and• positive trends in selectivity and student quality.

Vanderbilt is governed by the concept that the ability of anyinstitution of higher learning to create new knowledge, to chal-lenge boundaries, to formulate a vision, and to achieve commongoals rests significantly on the quality of its person-to-personrelationships. Vanderbilt has always been distinguished by a cul-ture that fosters the open exchange of ideas and information.By knitting together more of these collaborative relationships,we will further converge observant financial management withan environment of unsurpassed intellectual richness. More thanever before, there will be no place like Vanderbilt.


SPONSORED PROGRAM FUNDING BY SOURCE

Federal Government

85.5%

Non-Federal Government

0.4%Corporations

5.4%

Foundations & Associations5.8%Other

2.9%


Fina

ncia

l rat

ios

The following ratio analysis supplements the Discussion of Financial Results by providing additional measures of theUniversity’s financial health and flexibility.

18 > > >

FINANCIAL Ratios > > >

Viability RatioThe viability ratio is a measure of clear financial health: the availability ofexpendable net assets to cover debt should the University need to settle itsobligations as of the fiscal year-end. “Expendable Net Assets” are all unre-stricted and temporarily restricted net assets other than those designated forplant facilities. Designated for plant facilities is defined as the net investmentin property, plant, and equipment, as well as funds designated for futureacquisitions of plant facilities and retirement of debt. A ratio of 1.00 orgreater indicates an institution has sufficient expendable net assets to satisfydebt requirements.

At Vanderbilt:The viability ratio remained almost level in fiscal 2003. Thisratio is considered strong, as expendable net assets exceed long-term debtby $1.4 billion as of June 30, 2003. The decline in 2000 resulted from theissuance of $225 million in debt in May 2000. The declines in 2001 and 2002resulted from the decreased value of investments and the issuance of $100million in debt in June 2002.

Debt Coverage RatioThe debt coverage ratio measures the ability to cover debt service require-ments from continuing operations. The change in unrestricted net assetsfrom operating activities is adjusted for depreciation and interest expense.This adjustment results in the “Unrestricted Operating Surplus” that is avail-able to make required principal and interest payments.

At Vanderbilt: The University continues to experience positive operatingresults and a demonstrated ability to cover about four times the requireddebt service. The debt coverage ratio increased in fiscal 2003 as Vanderbiltgenerated additional operating surpluses before interest and depreciationexpenses. Also, unusually low interest rates have tempered the debt servicerequirements, contributing to recent increases in this ratio.

Primary Reserve RatioThe primary reserve ratio measures financial strength and flexibility byindicating how many years the University could operate using its expend-able resources without relying on additional net assets generated by oper-ations. A ratio of 1.00 denotes that an institution would have the abilityto cover its expenses for one year without a revenue stream.

At Vanderbilt: The primary reserve ratio declined in fiscal 2003 asexpendable net assets remained about level while the University’s operat-ing revenues and expenses increased by over 13%. Extraordinary endow-ment returns bolstered this ratio in the late 1990s through 2000. Sincethen, the decreased value of investments and the increased operating sizeof the University have caused declines in the primary reserve ratio. Still,Vanderbilt has the ability to maintain its existing level of continuing oper-ations for well over one year without generating additional revenues.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

20032002200120001999199819971996

4.87

3.38

4.11

6.09

4.514.13

3.25 3.23

Expendable Net AssetsLong-term Debt

0.00

0.50

1.00

1.50

2.00

20032002200120001999199819971996

1.47

1.191.29

1.62

1.90

1.59

1.30

1.12

Expendable Net AssetsTotal Operating Expenses

0.00

1.00

2.00

3.00

4.00

5.00

20032002200120001999199819971996

4.47

3.62

4.60

3.55

4.09

3.603.83

4.07

Unrestricted Operating SurplusDebt Service

> > >

> > >


End

owm

ent r

evie

wEndowment Strategy for the Next Decade

T he key to successful endowment management in the1990s was simple: maintain significant equity expo-sure with particular emphasis on high-octane cate-

gories such as private equity. For the past three years, the bestperforming endowments had a very different look. They hadrelatively little exposure to long-only equity managers andinstead maintained significant allocations to hedge funds,commodities, bonds, and real estate. Obviously, the key ques-tion is: What’s next? Should we revert to the strategy that servedus well during the 1990s, or should we favor the kind of port-folio structure that fared well during the bear market? Or, willthe first decade of the new millennium be completely differentcalling for yet another strategy? Of course, my crystal ball isfuzzy, but here is our best thinking on the intermediate-termfuture of endowment management.

Let me place our strategy in context by describing the environ-ment that we expect. First, as we have stated in prior FinancialReports, returns on stocks and bonds are likely to be modestfor an extended period of time. Second, we expect markets toremain quite volatile and fully anticipate periodic shocks to thesystem. Third, the economics of the investment managementindustry should result in a continuation of the “talent drain” inwhich skilled investment managers leave traditional investmentmanagement firms for the hedge fund industry. Finally, the tra-ditional investment markets will remain relatively efficientwhich suggests that “alternative” investment categories pro-vide the best opportunity for superior performance.

In this environment, our strategy is based on four cornerstones.First, we are focusing on investment strategies that generate cur-rent income and absolute rates of return that are largely inde-pendent of the direction of the stock and bond markets. Second,we are favoring investment managers that have the ability toadd value through both long and short positions. Third, antic-ipating shocks and volatility, we believe it is critical to maintaina highly diversified portfolio that contains a variety of hedges.And finally, we continue to emphasize so-called “nontradi-tional” investments where we may be able to develop an edgeover the competition.

These principles are reflected in our asset allocations depictedin the accompanying table. You will note that we have sub-stantial exposure to private equity, real estate, and commodity-oriented investments such as timber and energy. We also havetargeted exposure in absolute return strategies designed to gen-erate a consistent rate of return irrespective of the direction ofthe market. Additionally, 37% of our domestic equity portfo-lio is allocated to hedge fund managers that maintain both longand short positions. We are looking for managers with similarcapabilities for our international equity portfolio.

Every investment strategy involves both risk and opportunity,so I should spend a moment on our two major areas of con-cern. First, many of these “alternative” investments presentmanagement challenges including illiquidity, complexity, highcost, and a lack of transparency. Second, many other institu-tions are moving in the same direction. Our asset mix is virtu-ally identical to that of our peers in the large endowmentuniverse, and we are concerned about the proliferation of alter-native asset managers and the huge flow of capital into thesesectors. It is reasonable to expect a decrease in return in someof these categories, and there is a high probability of furtheraccidents in highly leveraged funds managed by relatively inex-perienced managers.

These concerns place a particular burden on us to do a good jobof manager selection and monitoring. We certainly don’t have itall figured out, but it is worth noting that we have been invest-ing in real estate for most of the endowment’s history, in privateequity since the late 1970s, and in hedge funds since the late1980s. To enhance our selection and oversight process, we con-tinue to add to the resources available to our investment team.

Whew! Finally, a Positive Return!

After two fiscal years of negative returns, I am pleased toreport that the endowment earned a return of 3.8% for fiscal2003 bringing the market value to $1.9878 billion. While this

ENDOWMENT Review > > >E

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ment review

return certainly pales in comparison to thetrajectory of the 1990s, it is a welcomechange from red ink and consistent withour expectations.

On a per unit basis, the endowment wasvalued at $64.13 as of June 30, 2003, ascompared to $65.13 at the end of fiscal2002. This moderate decline in the mar-ket value per unit resulted from distribu-tions that exceeded the current year 3.8%return rate.

The distribution per unit for fiscal 2003was $3.251. As illustrated, the distribu-tion per unit did not rise as dramaticallyas the market value per unit in the late1990s and, likewise, the distribution perunit has not declined as conspicuously asthe market value since its peak in 2000.The University has been well served by itsdistribution policy which, based on arolling three-year average, mitigates theeffects of large fluctuations in year-to-yearmarket values.

The fiscal 2004 distribution per unit willbe $3.084, which represents a 5.1%decrease. Fiscal 2005’s distribution perunit is also likely to decline modestlyunless the endowment rises by more than15% in the second half of calendar 2003.

Returns on various asset classes for the fiscal year ranged frommoderately negative to quite attractive. While final results willnot be available for some months, we estimate that privateequity fell 10% on top of significant losses in the prior twoyears. Also in the negative column were international equitieswhich declined by 6.5%. Barely in positive territory were U.S.stocks and Treasury Bills which managed a 1.3% return.Emerging market equities and real estate both generatedreturns of approximately 7% although the volatility of emerg-ing markets caused a lot more wear and tear on our invest-ment team. But, for the second consecutive year, the awardfor best performing asset class belongs to long-term U.S. Trea-sury Bonds which returned 19.4%.

We compare our overall return against both a market-basedbenchmark and a universe of large endowment funds. The

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E N D OW M E N T R E V I E W

MANAGED ENDOWMENT ASSET ALLOCATION

% OF TOTAL PORTFOLIO

Target ActualCategory % %

U.S. Equities 20 27Global Equities 10 11International Equities 6 6Emerging Market Equities 6 7Private Equity 15 8

Total Equity 57 59

Real Estate 8 7Timber and Energy 3 3Treasury Inflation-Protected

Securities (TIPS) 0 1Total Inflation Hedges 11 11

Absolute Return Strategies 15 14

U.S. Treasury Securities 14 13Opportunistic Fixed Income 2 0Faculty Mortgages 1 1Cash 0 2

Total Fixed Income 17 16

Total Endowment 100 100

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market-based benchmark is calculated by weighting an appro-priate market index for each asset class in which we invest byour target exposure to that asset category. The private equityand venture capital indices are not available until later in thefall, so we cannot definitively evaluate our performance untilthat time. However, we estimate that we outperformed thebenchmark by more than 1%. We have beaten the benchmarkin each of the past five years and the average level of annualoutperformance has been around 5%.

Our peer group consists of endowments and foundations withassets in excess of $1 billion. This is an exceedingly competitiveuniverse that has outperformed the average endowment byapproximately 2% per annum over the past ten years. Our returnranks in the third quartile of the universe for the fiscal year andnear the top of the second quartile for the past five years.

$0

$500

$1,000

$1,500

$2,000

$2,500

20032002200120001999199819971996199519941993

MANAGED ENDOWMENT MARKET VALUE (in millions)

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$0.00

$1.00

$2.00

$3.00

$4.00

20031998199319881983

Endowment Market Value Per Unit

Distribution Per Unit

Endowment MV Per Unit

Distribution Per Unit

ENDOWMENT MARKET VALUE PER UNIT VS. DISTRIBUTION PER UNIT

(in constant 2003 dollars)


End

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wIn a typical year, we outperform the benchmark in four or fiveof the seven asset classes that we monitor. Our batting aver-age was the same in fiscal 2003, as domestic equity, globalequity, international equity, and absolute return strategiesoutperformed their respective benchmarks by amounts rang-ing from 0.2% to more than 8%. While the data will not beavailable for several months, we believe that our non-mar-ketable investments were in line with their respective bench-marks. On the other hand, emerging markets lagged by 2.8%causing us to make a manager change. Fixed income laggedby 2.1% as a result of our decision to shorten the maturity ofthe portfolio in March 2003. Interest rates continued to fallthrough late June penalizing our performance, but the rise inrates since that time has provided us with an offsetting advan-tage during the first quarter of fiscal 2004.

A Team Effort

While our investment team is charged with day-to-day man-agement of the endowment fund, we actually have two impor-tant sets of partners who contribute importantly to this effort.First, our Investment Committee consists of Trustees JoeRoby, Gordon Gee, Martha Ingram, Fred Rentschler, GeneShanks, Gene Vaughan, and alumni Amy Conlee, BruceEvans, and Michiel McCarthy. In addition to providing over-all supervision, this group has been exceedingly helpful in gen-erating investment ideas and supplementing our due diligenceefforts. Second, the endowment is managed by more thansixty-five investment management firms who bring consider-able skill and expertise to their craft. Some of these relation-ships span several decades and we are very appreciative of thelong-term returns that they have generated. While the mar-kets continue to provide lots of challenges, I can assure youthat this entire team is working hard to achieve the endow-ment’s goal of providing a growing stream of income in sup-port of the University’s mission.

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School Operations

28%

Faculty Chairs20%

Scholarships27% Other

Restricted12%General

Operations13%

UNIT DISTRIBUTIONS BY PURPOSEas of June 2003

E N D OW M E N T R E V I E WCONSOLIDATEDFinancial Statements

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03

William T. Spitz,Vice Chancellor for Investments and Treasurer


Aud

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’rep

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Board of Trust, The Vanderbilt University:

W e have audited the consolidated statements of financial position of The Vanderbilt University as of June30, 2003 and 2002, and the related consolidated statements of activities and cash flows for the years

then ended. These consolidated financial statements are the responsibility of the University’s management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of Amer-ica. Those standards require that we plan and perform the audits to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing the account-ing principles used and significant estimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, thefinancial position of The Vanderbilt University as of June 30, 2003 and 2002, and their changes in net assets andtheir cash flows for the years then ended, in conformity with accounting principles generally accepted in theUnited States of America.

Nashville, Tennessee

September 18, 2003

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INDEPENDENT Auditors’ Report > > >

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S t a t e m e n t s o f F i n a n c i a l P o s i t i o nC o n s o l i d a t e d

As of June 30, 2003 and 2002 (in thousands)

2003 2002Assetsi

Cash and cash equivalents $ 231,994 $ 233,477Collateral under security lending agreements 250,862 195,630Accounts receivable 225,295 213,481Prepaid expenses and other assets 73,589 67,384Contributions receivable 102,034 127,482Student loans receivable 34,022 33,401Investments 2,334,223 2,386,432Property, plant, and equipment 1,203,019 1,098,315Interest in trusts held by others 46,047 44,173

Total assets $4,501,085 $4,399,775

Liabilitiesi

Accounts payable and accrued expenses $ 425,042 $ 370,504Payable under security lending agreements 250,862 195,630Portion of debt scheduled for payment within one year 11,449 12,087 Deferred revenue 31,669 29,862Actuarial liability of annuities payable 33,859 39,736Government advances for student loans 15,136 15,407Long-term debt, net of portion scheduled for payment within one year 598,485 609,554

Total liabilities 1,366,502 1,272,780

Net Assetsi

Unrestricted 2,404,649 2,394,818Temporarily restricted 161,719 213,519Permanently restricted 568,215 518,658

Total net assets 3,134,583 3,126,995

Total liabilities and net assets $4,501,085 $4,399,775

The accompanying notes are an integral part of the consolidated financial statements.


26 27

C o n s o l i d a t e dS t a t e m e n t s o f A c t i v i t i e s S t a t e m e n t s o f C a s h F l o w s

C o n s o l i d a t e d

Years Ended June 30, 2003 and 2002 (in thousands) ) Years Ended June 30, 2003 and 2002 (in thousands)

2003 2002Cash Flows from Operating Activitiesi

Increase (decrease) in total net assets $ 7,588 $ (51,902)

Adjustments to reconcile increase (decrease) in total net assets to net cash provided by operating activities:Non-operating items

Gifts for plant expansion and endowment (68,189) (64,084)Net realized investment losses 30,839 9,812

Noncash itemsGifts of securities (5,391) (104,654)Depreciation and amortization 88,247 80,680Provisions for doubtful accounts 92,463 70,391Net decrease (increase) in unrealized appreciation (51,436) 164,703Present value adjustment on annuities payable (5,877) (1,776)Net increase (decrease) in interest in trusts held by others (1,874) 5,235

Discontinued operationsChange in estimate for discontinued operations provision (3,164) (3,000)Incurred gains, net of depreciation 849 3,386

Change in operating assets and liabilitiesDecrease (increase) in:

Accounts receivable (103,924) (80,516)Prepaid expenses and other assets (6,205) 1,016Contributions receivable 25,097 (5,491)

Increase (decrease) in:Non-construction accounts payable and accrued expenses 44,024 22,024Deferred revenue 1,807 (3,218)

Net cash provided by operating activities 44,854 42,606

Cash Flows from Investing Activitiesi

Purchases of investments (976,019) (1,416,604)Proceeds from the sale of investments 1,054,216 1,509,738Acquisition of property, plant, and equipment (194,378) (281,212)Disposal of property, plant, and equipment 1,427 3,868Student loans disbursed (6,352) (4,835)Principal collected on student loans 5,729 5,375

Net cash used in investing activities (115,377) (183,670)

Cash Flows from Financing Activitiesi

Gifts for plant expansion and endowment 68,189 64,084Increase (decrease) in construction-related payables 12,829 (3,202)Increase (decrease) in government advances for student loans (271) 616Proceeds from the issuance of bonds 40,155 100,000Payments to retire or defease debt (51,862) (11,689)

Net cash provided by financing activities 69,040 149,809

Net increase (decrease) in cash and cash equivalents $ (1,483) $ 8,745

Cash and cash equivalents at beginning of year 233,477 224,732

Cash and cash equivalents at end of year $ 231,994 $ 233,477


2003 2002Changes in Unrestricted Net Assetsi

REVENUESTuition and educational fees $ 263,634 $ 242,606Room and board 37,694 34,520Less: Financial aid (98,595) (85,346)

Net tuition, fees, room, and board 202,733 191,780Government grants and contracts 196,830 156,296Facilities and administrative costs recovery 76,193 61,591Gifts, private grants, and contributions 54,659 52,999Endowment distributions 102,277 93,406Investment income 17,043 14,016Health care services 1,065,118 929,997Auxiliary services 45,235 45,132Other sources 25,635 28,224Net assets released from restrictions 12,812 16,944

Total revenues 1,798,535 1,590,385

EXPENSESInstruction, departmental research, and other related programs 250,619 221,921Organized research 234,452 191,869Health care services 991,356 864,420Academic support 94,782 90,848Institutional support 59,119 59,303Student support services 23,326 21,408Public service 22,670 25,521Room, board, and other auxiliary services 89,154 83,671

Total expenses 1,765,478 1,558,961Change in unrestricted net assets from operating activities 33,057 31,424

OTHER UNRESTRICTED ACTIVITYGifts and contributions for plant facilities 4,432 5,133Donor designation changes (4,000) —Net assets released from restrictions for plant facilities 14,038 12,426Change in appreciation, net of endowment distributions (27,996) (209,485)Other non-operating items (12,864) (3,420)Change in estimate for discontinued operations provision 3,164 3,000

Change in unrestricted net assets from other unrestricted items (23,226) (192,346)Increase (decrease) in unrestricted net assets 9,831 (160,922)

Changes in Temporarily Restricted Net Assetsi

Contributions and other 7,680 122,325Donor designation changes (13,202) (19,654)Net gain (loss) on contributions receivable (9,452) 4,515Endowment distributions 2,608 2,487Investment losses (12,584) (10,525)Net assets released from restrictions (26,850) (29,370)

Increase (decrease) in temporarily restricted net assets (51,800) 69,778

Changes in Permanently Restricted Net Assetsi

Contributions and other 32,489 27,530Donor designation changes 17,202 19,654Endowment distributions 99 182Investment losses (233) (8,124)

Increase in permanently restricted net assets 49,557 39,242

Increase (decrease) in total net assets $ 7,588 $ (51,902)

Net assets at beginning of year 3,126,995 3,178,897

Net assets at end of year $3,134,583 $3,126,995


OP

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1. ORGANIZATION

The Vanderbilt University is a privately endowed, coeducational,not-for-profit, nonsectarian institution located in Nashville, Ten-nessee. Founded in 1873, the University owns and operates educa-tional and research facilities as well as a healthcare system. TheUniversity provides educational services to approximately 6,300undergraduate and 4,600 graduate and professional studentsenrolled in its ten schools and colleges. The Chancellor and theBoard of Trust, the governing board of the University, have over-sight responsibility for all of the University’s financial affairs.

These consolidated financial statements include the accounts of allentities in which the University has a significant financial interestand over which the University has control, including its hospitaland clinic. All significant intercompany accounts and transactionshave been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of PresentationThe consolidated financial statements of the University have beenprepared on the accrual basis in accordance with accounting prin-ciples generally accepted in the United States of America.

Based on the existence or absence of donor-imposed restrictions,the University classifies resources into three categories: unre-stricted, temporarily restricted, and permanently restricted net assets.

Unrestricted net assets are free of donor-imposed restric-tions. All revenues, gains, and losses that are not temporarilyor permanently restricted by donors are included in this clas-sification. All expenditures are reported in the unrestrictedclass of net assets, since the use of restricted contributions inaccordance with donors’ stipulations results in the release ofthe restriction.

Temporarily restricted net assets are limited as to use bydonor-imposed stipulations that expire with the passage oftime or that can be satisfied by action of the University. Thesenet assets may include unconditional pledges, interest in trustsheld by others, and life income and gift annuities.

Permanently restricted net assets are amounts required bydonors to be held in perpetuity. These net assets may includeunconditional pledges, true endowment, interest in trusts heldby others, and life income and gift annuities.

Expirations of temporary restrictions on net assets, i.e., the passageof time and/or fulfilling donor-imposed stipulations, are reportedas net assets released from restrictions between the applicableclasses of net assets in the Consolidated Statements of Activities.

Cash and Cash EquivalentsCash and cash equivalents, maturing in 90 days or less at date ofpurchase, are reported at fair value.

InvestmentsInvestments are reported at fair value, based primarily on marketquotes, except for certain real estate and mortgages that are statedat cost. Fair values for certain alternative investments (primarilyinvestments in limited partnerships) are based on estimatesreported by fund managers where a ready market for the invest-ments does not exist.

The University has significant exposure to a number of risks includ-ing interest rate, market, and credit risks for both marketable andnon-marketable securities. Due to the level of risk exposure, it ispossible that near-term valuation changes for investment securitiesmay occur to an extent that could materially affect the amountsreported in the University’s financial statements.

Purchases and sales of securities are recorded on the trade dates,and realized gains and losses are determined on the basis of the aver-age historical cost of the securities sold. Net receivables andpayables arising from unsettled trades by investment managers arereported as a component of investments.

All true endowment investments and long-term net assets functioning as endowment are managed in a pool, unless specialconsiderations or donor stipulations require that they be held separately.

Gains and losses on investments generally are reported as increasesor decreases in non-operating unrestricted net assets unless explicitdonor stipulations or law restrict their use.

Endowment Distribution PolicyThe University employs a total return policy that establishes theamount of endowment income distributed to support current oper-ational needs. This policy is designed to reduce the impact of capi-tal market fluctuations on operational programs and increase theamount of return that is reinvested in the corpus of funds in orderto enhance its long-term value.

Under this policy, endowment income distributions are based on apercentage of the previous three years’ average year-end market val-ues. Actual endowment return earned in excess of distributionsunder this spending policy is reinvested as part of the University’smanaged endowment and is reported as a non-operating item in theConsolidated Statements of Activities. For years where actualendowment return is less than distributions under the policy, theshortfall is covered by realized returns from prior years.

Additionally, the Board of Trust has authorized the use of previ-ously reinvested income, realized capital gains, and principalrelated to unrestricted funds functioning as endowment for specialtransinstitutional academic development initiatives. Endowmentdistributions reported in the Consolidated Statements of Activitiesinclude both (a) distributions to support current operational needs

28 > > >

under the policy as previously described and (b) the aforementionedsupplemental endowment distributions for special academic ini-tiatives to the extent operating expenditures have been incurred.

The supplemental use of unrestricted funds functioning as endow-ment to invest in capital needs of special academic initiatives are notreported as endowment distributions in the Consolidated State-ments of Activities.

Other Financial Instruments Recorded amounts for receivables, prepaid expenses and otherassets, and accounts payable and accrued expenses approximatefair value.

Using market quotations for similar issues or borrowings, the Uni-versity evaluates the estimated fair value of its fixed-rate long-termindebtedness relative to carrying value. Principal balances forfixed-rate debt are reported at carrying value as long as suchamounts are substantially equivalent to estimated fair value.

The University employs derivatives in a limited manner, primarilyinterest rate swap agreements, to manage market risk associatedwith outstanding variable-rate debt. Derivative financial instru-ments are reported at fair value with any resulting gain or loss rec-ognized as a non-operating item in the Consolidated Statements ofActivities. Periodic net cash settlement amounts with counterpar-ties are accounted for as adjustments to interest expense on therelated debt.

Parties to interest rate swap agreements are subject to market riskfor changes in interest rates as well as risk of credit loss in the eventof nonperformance by the counterparty. The University deals onlywith high quality counterparties that meet rating criteria for finan-cial stability and credit worthiness. Additionally, the Universityrequires the posting of collateral when amounts subject to creditrisk under swap arrangements exceed specified levels.

University management also approves strategic use of derivativesby external investment managers to manage market risks. The mostcommon strategies engaged by such managers are futures contracts,short sales, and hedges against currency translation risk for invest-ments denominated in other than U.S. dollars. These derivativeinstruments are recorded at their respective fair values.

Through an agreement with its primary investment custodian, theUniversity participates in security lending to brokers. For pledgedcash and cash equivalents collateral under the control of the Uni-versity, a short-term asset and liability are recorded representingthe market value of such collateral.

Life Income, Gift Annuities, and Interest inTrusts Held by OthersThe University’s split-interest agreements with donors consist pri-marily of irrevocable charitable remainder trusts, charitable giftannuities, and life income funds for which the University servesas trustee. Assets held in these trusts are included in investments.Contribution revenue is recognized at the dates the trusts are

established, net of the liabilities for the present value of the esti-mated future payments to be made to the donors and/or otherbeneficiaries. The liabilities are adjusted annually for changes inthe value of the assets, accretion of the discount, and otherchanges related to estimated future donor-related payments.

The University also is the beneficiary of certain perpetual trusts heldand administered by others. These trust assets are recorded at fairvalue as interest in trusts held by others with carrying valuesadjusted annually for changes in fair value.

Property, Plant, and EquipmentPurchased property, plant, and equipment are recorded at cost,including, where appropriate, capitalized interest. Donated assetsare recorded at fair value at the date of donation. Additions to thelibrary collection are expensed at the time of purchase.

Depreciation is calculated by the straight-line method at rates esti-mated to allocate the cost of various classes of assets over their esti-mated useful lives. Equipment is removed from the accountingrecords at the time of disposal.

The University reviews long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. An impairment chargeis recognized when the fair value of the asset or group of assets isless than the carrying value.

Revenue RecognitionThe University’s revenue recognition policies are as follows:

Tuition, Educational Fees, Room, and Board — Studenttuition, fees, and housing are recorded as revenues during theyear the related academic services are rendered. Student tuition,fees, and housing received in advance of services to be renderedare recorded as deferred revenue.

Financial Aid — Financial aid is reflected as a reduction totuition, educational fees, room, and board in the Statements ofActivities. Financial aid does not include payments made to stu-dents for services rendered to the University. If the Universityis unable to award endowed scholarships in a given year,endowment distributions are reinvested in order to providescholarships in future years.

Government Grants and Contracts — Revenues from grantsand contracts are recognized as allowable expenditures areincurred under such agreements.

Facilities and Administrative (F&A) Costs Recovery — F&Acosts recovery, historically referred to as indirect cost recovery,is recognized as revenue and represents reimbursement, pri-marily from the federal government, of F&A costs on research grants. The federal F&A costs recovery rate for on-campusresearch was 51.0% and 51.5% in fiscal 2003 and 2002,respectively. The federal F&A cost recovery rate is 51.0% forfiscal 2004 and subject to negotiation with the federal govern-ment for fiscal 2005 and beyond.

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N o t e s > > >

t o t h e C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s t o t h e C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t sN o t e s > > >


Health Care Services — Health care services revenue isreported at established rates, net of contractual adjustmentsand charity services. Third party contractual revenue adjust-ments under governmental reimbursement programs areaccrued on an estimated basis in the period the related servicesare rendered. The estimated amounts are adjusted to actualduring the year that final settlement is determined by the fiscalintermediary for each program. Health care services revenuesinclude those of Vanderbilt University Hospital and Clinic,Vanderbilt Medical Group, Vanderbilt Health Services, Inc.,and other activities directed toward the purpose of providinghealth care services to the community.

ContributionsUnconditional promises to give (pledges) are recognized as contri-bution revenue when the donor’s commitment is received. Condi-tional promises (primarily bequest intentions) are not recordeduntil donor stipulations are substantially met.

Unconditional promises to give, with payments due in future periods, are recorded as increases in temporarily restricted or per-manently restricted net assets at the estimated present value offuture cash flows, net of an allowance for estimated uncollectiblepromises. Amortization of the discount is recorded as additionalcontributions in the appropriate net asset class.

Contributions with donor-imposed restrictions are recorded as unre-stricted revenue if those restrictions are met in the same reportingperiod. Otherwise, contributions with donor-imposed restrictionsare recorded as increases in temporarily restricted or permanentlyrestricted net assets, depending on the nature of the restriction.

Contributions recorded as temporarily restricted net assets arereleased from restrictions and recognized as unrestricted net assetsupon receipt of the gift or expiration of the time restriction, andafter any donor stipulations are met. Gifts for plant facilities arereleased from restrictions and recognized as a non-operating itemonly after resources are expended for the applicable plant facilities.

Contributions receivable of pledged marketable securities arestated at the fair value of the underlying securities with significantchanges in fair value separately reported as a non-operating item.

Operating ResultsOperating results in the Consolidated Statements of Activities reflectall transactions that change unrestricted net assets, except gifts forplant facilities, activity associated with endowment investments, andcertain other non-recurring items. In accordance with the University’stotal return endowment spending policy, as previously described, onlythe portion of total investment return distributed under this policy tomeet operating needs is included in operating revenue. Operatinginvestment income consists of dividends, interest, and realized gainsand losses on unrestricted, non-endowed assets.

The University’s primary programs are instruction, research, patientcare, and public service. Academic and student support expenses and

auxiliary services are considered integral to the delivery of these pro-grams. Fund-raising costs are not material to the University’s contri-butions or total program costs. Approximately 50% of gifts, privategrants, and contributions revenue represent transactions where Uni-versity services are provided in exchange for the private grants.

Costs related to the operation and maintenance of physical plant,including depreciation of plant assets, are allocated to operatingprograms and supporting activities based upon periodic facilityusage surveys. Interest expense on external debt is allocated to theactivities that have most directly benefited from the proceeds of theexternal debt.

Tax StatusThe University is a tax-exempt organization as described in Section501(c)(3) of the Internal Revenue Code and is generally exemptfrom federal income taxes pursuant to Section 501(a) of the Code.

Use of EstimatesThe preparation of financial statements requires the use of esti-mates and assumptions that affect the reported amounts of assets,liabilities, revenue, and expenses during the reporting period as wellas the disclosure of contingent assets and liabilities. Actual resultsultimately could differ from management’s estimates.

ReclassificationsCertain reclassifications have been made to prior year amounts toconform to the current year presentation.

3. ACCOUNTS RECEIVABLE

Accounts receivable as of June 30 were as follows (in thousands):

2003 2002Patient care $ 270,707 $ 234,133Students and others 73,436 71,398Accrued investment income 7,364 10,762Accounts receivable 351,507 316,293Less: Allowance for

uncollectible accounts 126,212 102,812

Accounts receivable, net $ 225,295 $ 213,481

4. CONTRIBUTIONS RECEIVABLE

Contributions receivable as of June 30 were as follows (in thousands):

2003 2002Unconditional promises

expected to be collected in:Less than one year $ 21,750 $ 36,375One year to five years 91,441 102,917More than five years 1,286 1,598

Total unconditional promises 114,477 140,890

Less: Unamortized discount 8,987 10,303Allowance for uncollectible

promises 3,456 3,105

Contributions receivable, net $ 102,034 $ 127,482

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Since November 1998, the Martha and Bronson Ingram family,including gifts through the Ingram Charitable Fund, Inc. (ICF), haspledged or distributed to the University 16.3 million shares ofIngram Micro, Inc. Class A common stock, of which 3.3 millionshares are held by the ICF and 5.5 million shares were held by theUniversity as of June 30, 2003.

Included in temporarily restricted contributions receivable is thefair value of pledged undistributed shares held by the ICF as of June 30:

2003 2002Undistributed Ingram Micro shares

held by the ICF 3,325,000 3,575,000

Market price per share $ 11.00 $ 13.75Fair value (in thousands) $ 36,575 $ 49,156

During fiscal 2002, new pledges of 3.2 million shares donated tothe ICF were reported as contributions receivable at the year-endmarket value, net of the decline since the pledge was received. Netchanges on shares pledged in prior years due to fair value changesfor the underlying stock are reported separately as a non-operat-ing gain or loss on contributions receivable in the ConsolidatedStatements of Activities.

In addition to pledges reported as contributions receivable, the Uni-versity had received bequest intentions of approximately $113 mil-lion as of June 30, 2003. These intentions to give are not recognizedas assets due to their conditional nature. If these bequests arereceived, generally they will be restricted for specific purposes stip-ulated by the donors, primarily endowments for faculty support,scholarships, or general operating support of a particular depart-ment or division of the University.

5. STUDENT FINANCIAL AID

The University provides financial aid, which is funded by gifts,endowment income, and externally sponsored aid, to studentsbased upon need and merit.

Components of financial aid for the years ended June 30 were asfollows (in thousands):

2003 2002Institutional scholarships $ 82,781 $ 71,325Endowed scholarships 9,977 9,039External financial aid 5,837 4,982Total financial aid $ 98,595 $ 85,346

Loans to students from University funds are carried at cost, which,based on secondary market information, approximates the fairvalue of educational loans with similar interest rates and paymentterms. Loans receivable from students under governmental loanprograms, also carried at cost, can only be assigned to the UnitedStates government or its designees. Loan balances are net ofallowances for estimated uncollectible accounts of $3.1 million forJune 30, 2003 and 2002.

Government advances to qualified students are funded principallywith federal loans to the University under the Perkins, Nursing, andHealth Professions Student Loan Programs.

6. INVESTMENTS

Investments by security type as of June 30 were as follows (in thousands):

2003 2002Short-term securities $ 120,089 $ 142,639Bonds 420,467 445,016Stocks 1,049,278 1,118,091Partnership investments 587,150 538,288Mortgages 12,950 18,145Real estate, net 127,768 108,802Other 17,469 18,104Net payables for unsettledtrades by investment managers (948) (2,653)

Total fair value $ 2,334,223 $2,386,432

Total cost $ 2,327,953 $2,433,847

Investments by net asset category as of June 30 were as follows (in thousands):

2003 2002Unrestricted $ 1,778,430 $1,827,679Temporarily restricted 89,981 97,897Permanently restricted 465,812 460,856

Total fair value $ 2,334,223 $2,386,432

Through an agreement with its primary investment custodian, theUniversity participates in lending securities to brokers. Amongother provisions that limit the University’s risk, this agreement spec-ifies that the custodian is responsible for managing strict borrowercollateral requirements. Collateral, which is pooled by the custo-dian, generally is limited to cash, government securities, and irrev-ocable letters of credit. Depending on the type of securities beinglent, minimum collateral ranges from 101% to 105% with requireddaily marking-to-market.

Both the investment custodian and security borrowers have theright to terminate a specific loan of securities at any time. Otherthan for an event of default, the investment custodian is prohibitedfrom re-pledging or otherwise encumbering the pledged collateralin any fashion. The University receives lending fees and continuesto earn interest and dividends on the loaned securities.

At June 30, 2003, investment securities with a market value of$326.6 million were loaned to various approved brokers underthis program with collateral having a total market value of $335.4million, including cash and cash equivalents of $250.9 million.The cash and cash equivalents collateral and the obligation toreturn such collateral are reported as an asset and liability on theConsolidated Statements of Financial Position.

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7. INVESTMENT RETURN

As previously noted, the University employs a total return policythat establishes endowment appreciation distributions. Addition-ally, the Board of Trust authorized the use of funds functioning asendowment to support operating and capital needs of certaintransinstitutional initiatives. Endowment distributions in fiscal2003 and 2002 were based on 4.5% of the previous three years’average year-end market values plus, in 2003, the use of $5.2 mil-lion of funds functioning as endowment for operating expenses oftransinstitutional initiatives.

Further, $17.2 million of unrestricted funds functioning as endow-ment were utilized for capital needs of transinstitutional initiatives in fiscal 2003. Liquidations for these special capitalinvestments are excluded from the following summary of endow-ment distributions and other investment income as of June 30 (in thousands):

2003 2002Operating:

Endowment distributions $ 102,277 $ 93,406 Investment income 17,043 14,016

Total operating return 119,320 107,422

Non-operating:Unrestricted:

Endowment appreciation utilized (104,984) (96,075)Investment income (losses) 76,988 (113,410)

Temporarily restricted:Endowment distributions 2,608 2,487Investment losses (12,584) (10,525)

Permanently restricted:Endowment distributions 99 182Investment losses (233) (8,124)

Total non-operating return (38,106) (225,465)

Total investment return $ 81,214 $ (118,043)

The components of total investment return for the years ended June30 were as follows (in thousands):

2003 2002Net unrestricted interest and dividends

on endowment assets $ 44,284 $ 29,525Other interest, dividends, and

partnership income 16,333 26,947Net realized losses from original cost (30,839) (9,812)Net unrealized gain (losses) 51,436 (164,703)

Total investment return $ 81,214 $ (118,043)

8. NET ASSET COMPONENTS OF MANAGEDENDOWMENT

Vanderbilt’s managed endowment represents only those endow-ment-related net assets that are under the management control ofVanderbilt University. Gift annuities, interest in trusts held by oth-ers, and certain contributions pending transfer are not consideredcomponents of the managed endowment.

Endowment and long-term investment net assets functioning asendowment and the reconciliation to related asset components asof June 30 were as follows (in thousands):

2003 2002Unrestricted Net Assets:

Funds functioning as endowment, at cost $ 1,490,047 $1,593,426

Net unrealized depreciation on investments (2,521) (49,618)

Exclude net unrealized losses allocable to other investments 35,167 21,835

Subtotal-funds functioning as endowment 1,522,693 1,565,643

Permanently Restricted Net Assets:True endowment 502,979 458,223Exclude portion allocable to

contributions receivable and other (37,862) (34,174)Subtotal-managed true endowment 465,117 424,049

Total fair value of managed endowment investments $ 1,987,810 $1,989,692

9. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment as of June 30 were as follows (in thousands):

2003 2002Land $ 47,657 $ 47,416Buildings and improvements 1,317,911 1,253,418Moveable equipment 462,957 437,637Construction in progress 244,758 157,812Property, plant, and equipment 2,073,283 1,896,283

Less: Accumulated depreciation 870,264 797,968

Property, plant, and equipment, net $ 1,203,019 $1,098,315

Purchases for the library collection are not included in the forego-ing since they are expensed at the time of purchase. As of June 30,2003, the estimated replacement cost for library collections, includ-ing processing costs to properly identify, catalog, and shelve mate-rials, exceeds $228 million. For fiscal 2003 and 2002, $1.9 millionand $4.1 million, respectively, of capitalized interest was added toconstruction in progress. Internally developed software costs of$1.1 million in 2003 and $0.7 million in 2002 were capitalized.

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10. DEBT

Bonds and other obligations as of June 30 were as follows (in thousands):

Remaining Average Outstanding PrincipalYears to InterestMaturity Rate 2003 2002

Variable-rate debt:1985 Series A 12 1.5% $ 45,250 $ 45,2502000 Series A 28 1.5% 65,500 66,5002000 Series B 28 1.5% 65,500 66,5002000 Series C 28 1.5% 90,000 90,0002002 Series A 30 1.5% 22,400 22,4002002 Series B 30 1.5% 77,600 77,6002003 Series A 16 1.6% 40,155 —

Total variable-rate debt 406,405 368,250

Fixed-rate debt:1991 Series B 1 6.0% 1,240 2,4101992 Series A — 5.4% — 1,4451993 Series A — 5.1% — 41,3801996 Series A 6 5.2% 6,165 7,0151997 Series A 16 5.3% 27,160 28,2301998 Series A 13 5.6% 23,805 25,0401998 Series B 26 5.0% 36,560 37,2551998 Series C 12 4.7% 21,050 21,2202001 Series A 13 4.8% 16,670 17,5902001 Series B 20 4.9% 59,735 60,025HUD bonds 6 3.0% 1,199 1,454Note payable 6 7.3% 9,509 9,826Other obligations 6 3.0% 436 501

Total fixed-rate debt 203,529 253,391

Total long-term debt 609,934 621,641Less: portion of debt scheduled for

payment within one year 11,449 12,087

Long-term debt, net of portion scheduled for payment within one year $ 598,485 $ 609,554

Hospital (patient care) bonds are issued under a Master TrustIndenture and are payable from Hospital revenue. In addition, theUniversity has unconditionally guaranteed the timely debt serviceof such bonds.

Selected debt-related information follows (in millions):

2003 2002Interest cost paid on bonded debt, other

other obligations, and interest rateswap arrangements $ 22.8 $ 21.1

Interest cost expensed on bonded debt,other obligations, and interest rate swap arrangements $ 19.5 $ 16.4

Assets held by trustees for subsequent debt service as of June 30 $ 8.0 $ 8.6

Principal payments and scheduled sinking fund requirements due insubsequent fiscal years ending June 30 are as follows (in millions):

2004 $ 11.4 2007 $ 18.92005 $ 17.3 2008 $ 20.12006 $ 18.0 Thereafter $524.2

Under certain circumstances, variable-rate bond obligations maybe converted to a fixed-rate structure. Prior to conversion tofixed-rate, bond owners have the right to tender their bonds forpurchase in whole or in part. The University has agreements withunderwriters to re-market any bonds so tendered.

Deeds of trust on certain University property, pledged revenues, andsecurity interests in certain other assets provide debt security. Trustindentures for certain bond issues contain covenants and restrictionsinvolving the issuance of additional debt, maintenance of a speci-fied debt service coverage ratio, and maintenance of external liq-uidity facilities or lines of credit. Contracts with external parties toprovide liquidity facilities for the University’s variable rate demandbonds typically extend for 364 days with renewals subject to nego-tiation. The University has complied with applicable debt covenants.

In June 2002, the University issued Series 2002 A and B variable-rate bonds aggregating $100 million. The bonds were issued tofinance the construction, expansion, and renovation of variousUniversity facilities and related equipment, most notably a chil-dren’s hospital outpatient tower and the Vanderbilt Bill WilkersonCenter for Otolaryngology and Communication Sciences, and theMusculoskeletal Institute.

In May 2003, the University issued 2003 Series A revenue refund-ing bonds, the proceeds of which were deposited into an irrevoca-ble trust to advance refund the 1993 Series A bonds. Neither theprincipal balance of the defeased bonds nor the refunding trustassets are reflected in the Consolidated Statements of FinancialPosition as of June 30, 2003; an advance refunding accounting lossof $1.9 million was included as a non-operating item in the Con-solidated Statements of Activities for fiscal 2003.

11. INTEREST RATE SWAP ARRANGEMENTS

To manage variable interest rate exposure for its debt portfolio, theUniversity entered into two swap arrangements with a major finan-cial institution in fiscal 2002. Under both agreements, the Univer-sity receives variable payments based on 70% of LIBOR. Theindividual notional amounts were $66.5 million for each of thesetwo swap arrangements. The swap notional amounts for each con-tract will gradually decline, corresponding to the principal amorti-zation of the University’s Series 2000 A and B bonds.

Under one swap arrangement that is scheduled to expire in Octo-ber 2030, the University pays a fixed rate of 4.175%. Under thesecond swap arrangement, the University pays a fixed rate of 3.8%,and commencing October 2012, the counterparty has the optionto terminate the contract without a termination payment.

These agreements, having an aggregate notional amount of $131.0million at June 30, 2003, effectively create a synthetic fixed rate ofinterest on the Series 2000 A and B bond issues, resulting in $3.9million and $1.5 million of additional interest expense for fiscal2003 and 2002, respectively.

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The fair value of these swap arrangements is the estimated amountthat the University would pay or receive to terminate these con-tracts as of the report date. As of June 30, 2003, the estimated cumu-lative fair value loss of these swap arrangements was $16.3 million,and is included in accounts payable and accrued expenses. Changesin the fair value for these contracts, which for fiscal 2003 and 2002amounted to unrealized losses of $12.9 million and $3.4 million,respectively, are recorded as other non-operating items in the Con-solidated Statements of Activities.

12. NET ASSETS

The University has chosen to provide further classification infor-mation about net assets.

Unrestricted net assets are internally designated into six groupsdescribed:

Designated for operations represents the cumulative budgetedoperating activity of the University and routine equipmentreplacement reserves.

Designated gifts and grants are comprised of departmental giftfunds.

Designated for student loans represents University funds setaside to serve as revolving loan funds for students.

Funds functioning as endowment are amounts set aside by theBoard of Trust, intended to generate income in perpetuity to sup-port operating needs. Such amounts include substantially allcumulative realized appreciation on the applicable investments.

Net unrealized appreciation on investments represents cumu-lative unrealized net gains (losses) from original cost on mar-ketable investments. Most of the net unrealized appreciation isattributable to funds functioning as endowment.

Designated for plant facilities represents the net investment inproperty, plant, and equipment, as well as funds designated forfuture acquisitions of plant facilities and retirement of debt.

Based on the foregoing designations, unrestricted net assets as ofJune 30 were as follows (in thousands):

2003 2002Designated for operations $ 154,511 $ 110,366Designated gifts and grants 139,524 125,811Designated for student loans 27,954 28,443Funds functioning as endowment 1,490,047 1,593,426Net unrealized appreciation

on investments (2,521) (49,618)Designated for plant facilities 595,134 586,390

Total $ 2,404,649 $2,394,818

Temporarily restricted net assets as of June 30 were comprised ofthe following (in thousands):

2003 2002Gifts and pledges $ 140,169 $ 193,736Interest in trusts held by others 7,095 6,883Life income and gift annuities 14,455 12,900

Total $ 161,719 $ 213,519

Such temporarily restricted net assets were available for the fol-lowing purposes or periods as of June 30 (in thousands):

2003 2002Student scholarships $ 732 $ 844Instruction 3,268 2,438Capital improvements 28,806 28,556Subsequent period operations and other 128,913 181,681

Total $ 161,719 $ 213,519

Permanently restricted net assets as of June 30 were comprised ofthe following (in thousands):

2003 2002True endowment $ 502,979 $ 458,223Interest in trusts held by others 38,952 37,290Life income and gift annuities 26,284 23,145

Total $ 568,215 $ 518,658

13. NATURAL CLASSIFICATION OFEXPENSES

Operating expenses incurred in the fiscal years ended June 30, 2003and 2002, were as follows (in thousands):

2003 2002Salaries, wages, and benefits $ 1,042,008 $ 934,364Professional services 91,837 80,878Supplies and materials 394,262 343,730Depreciation and amortization 88,247 80,680Interest expense 19,530 16,391Other expenses 129,594 102,918

Total $ 1,765,478 $1,558,961

14. DISCONTINUED OPERATIONS

In June 1999, the Board of Trust Executive Committee agreed tosell or otherwise discontinue as a line of business the VanderbiltHealth Plans, Inc. (VHP), a for-profit corporation controlled by Vanderbilt University. During fiscal 1999, the Universityrecorded $34.5 million for losses estimated on the future sale ordisposal of VHP.

As of June 30, 2003, VHP lines of business have either been soldor essentially closed. The remaining divestiture provision balanceof approximately $4.2 million represents an allowance for uncol-lectible receivables.

The remaining assets of VHP consist primarily of cash and short-term investments. The resulting net assets are not material to thenet assets of the University.

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15. RETIREMENT PLANS

The University’s full-time faculty and staff members participate indefined contribution retirement plans administered by third-partyinvestment and insurance firms. For eligible employees with oneyear of continuous service, these plans require employee and match-ing employer contributions; such contributions immediately fullyvest with the employee.

The University’s obligations under these plans are fully funded byperiodic transfers to the respective retirement plan administratorswith the corresponding expenses recognized in the year incurred.Retirement plan contributions for fiscal 2003 and 2002, were$29.3 million and $25.7 million, respectively.

16. COMMITMENTS AND CONTINGENCIES

(A) Construction. At June 30, 2003, approximately $90.4 millionwas committed for projects under construction and equipment pur-chases, to be financed primarily from bond proceeds.

(B) Lease Obligations. The University leases certain equipment andreal property. These leases are classified as operating leases and havelease terms ranging up to fifteen years. Total lease expense for fis-cal 2003 and 2002 was $18.2 million and $15.3 million, respec-tively. Future minimum rentals on non-cancelable operating leaseswith lease terms in excess of one year as of June 30, 2003, were asfollows (in thousands):

2004 $ 14,8412005 12,7852006 9,9312007 6,2972008 3,8872009 and after 4,994Total future minimum rentals $ 52,735

(C) Litigation.The University is a defendant in several legal actions.Management believes that the outcome of these actions will nothave a significant effect on the University’s financial position.

(D) Medical Malpractice Liability Insurance. The University is self-insured for the first level of medical malpractice claims. The cur-rent self-insured limits are $3,000,000 per occurrence, not toexceed an annual aggregate of $17,000,000. For this self-insuredretention, a trust fund has been established. The funding of thetrust is based upon studies performed by an actuarial firm. Excessmalpractice and professional liability coverage has been obtainedfrom commercial insurance carriers on a claims-made basis forclaims above the retained self-insurance risk levels.

(E) Federal and State Contracts and Other Requirements. Expen-ditures and F&A costs related to federal and state grants and con-tracts are subject to adjustment based upon review by the grantingagencies. The amounts, if any, of expenditures that may be disal-lowed by the granting agencies cannot be determined at this time,although management expects they will not have a significant effecton the University’s financial position.

(F) Health Care Services Revenue. Revenues from hospital servicesinclude amounts paid under reimbursement agreements with cer-tain third-party payors and are subject to examination and retroac-tive adjustments. Any differences between estimated year-endsettlements and actual final settlements are reported in the year finalsettlements are known. Substantially all settlements have been madethrough the year ended June 30, 2000.

In August 1996, Congress approved the Health Insurance Portabil-ity and Accountability Act of 1996 (Act). Under the Act, the federalgovernment was given substantial resources and authority for thecompletion of fraud and abuse investigations, and the Act has estab-lished substantial fines and penalties for offenders. Managementcontinues to refine policies, procedures, and organizational struc-tures to enforce and monitor compliance with this Act, as well asother government statutes and regulations.

The medical center’s compliance with laws and regulations is sub-ject to future government review and interpretations, as well as reg-ulatory actions unknown or unasserted at this time. Managementbelieves that liability, if any, from such reviews will not have a sig-nificant effect on the University’s financial position.

(G) Partnership Investment Commitments.There were $316.2 mil-lion of commitments to venture capital, real estate, and distressedsecurity investments as of June 30, 2003. These funds may be drawndown over the next several years upon request by the general part-ners. As of June 30, 2003, $34.8 million of unallocated cash andcash equivalents in the managed endowment are held to meet these obligations. Management expects to finance these commit-ments with available cash and expected proceeds from the sale of securities.

(H) McKendree Village, Inc. Debt Guaranty. In July 1998, Van-derbilt University and McKendree Village, Inc., a not-for-profitretirement community, entered into a joint venture agreement. InSeptember 1998, the University guaranteed payment of $19.8 mil-lion of bond debt issued by McKendree Village. As of June 30, 2003,the balance of the guaranteed debt was $19.4 million.

(I) Working Capital Line of Credit. Effective July 31, 2001, the Uni-versity entered into a commitment for a $20 million unsecuredworking capital line of credit with a major commercial bank,replacing an earlier credit line of $40 million that had expired. Theterm of the line of credit is one year with automatic renewals. Noamounts were outstanding under this line of credit as of June 30,2003 and 2002.

17. RELATED PARTIES

The University contracts with certain related parties for the pur-chase of goods, performance of construction activities, and pro-vision of other services. Significant purchases of goods and servicesfrom related parties typically are subject to competitive pricinganalyses. During fiscal 2003 and 2002, the University had relatedparty transactions approximating $26.7 million and $24.4 mil-lion, respectively.

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Man

agem

ent r

esp

onsi

bili

tyT he management of Vanderbilt University is respon-sible for preparing the accompanying consolidatedfinancial statements, as presented on pages 25 to 35,

and for their integrity, objectivity, and clarity. These consoli-dated financial statements have been prepared in conformitywith accounting principles generally accepted in the UnitedStates of America applicable to colleges and universities andinclude amounts that are based on management’s best esti-mates and judgments.

The University’s system of internal controls provides reason-able assurance that the University’s assets are protected andthat the financial records are reliable. These controls are sup-ported by the establishment and communication of account-ing policies and procedures, the division of responsibilities,the careful selection and training of qualified personnel, anda program of internal audits. Management continually mon-itors the system of internal control for compliance andbelieves that, as of June 30, 2003 and 2002, Vanderbilt Uni-versity’s system of internal controls is adequate to accomplishthe objectives discussed herein.

In terms of proactively managing significant risk areas rela-tive to ensuring complete, accurate, and understandablefinancial statements, management works closely with inter-nal auditors, external auditors, and the Board of Trust on anongoing basis to appropriately identify such risk areas andtake steps to optimize risk exposure. The Board of Trust, gen-erally through its Audit Committee, is responsible for review-ing and monitoring the University’s financial reporting andaccounting practices. Both the internal auditors and the inde-pendent auditors have access to the Audit Committee, andboth meet with the Audit Committee at least semi-annually.

KPMG LLP has audited the accompanying consolidatedfinancial statements. The auditors’ report expresses aninformed judgment as to whether management’s consolidatedfinancial statements present fairly the financial position of theUniversity, as of June 30, 2003 and 2002, and the changes inits net assets and its cash flows for the years then ended, inconformity with accounting principles generally accepted inthe United States of America. The audits included an evalua-tion of the University’s accounting systems, procedures, andinternal controls; tests of the accounting records; and otherauditing procedures to provide reasonable assurance that theconsolidated financial statements were free of material mis-statement. KPMG LLP has not opined on the University’sinternal controls. Management believes that all representa-tions made to KPMG LLP during its audits were valid andappropriate.

Lauren J. Brisky,Vice Chancellor for Administration and Chief Financial Officer

Betty L. Price,Associate Vice Chancellor for Finance and Controller

J. Richard Wagers, Jr.,Senior Vice President and Chief Financial Officer,Vanderbilt University Medical Center

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MANAGEMENT Responsibility > > >

f o r C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

> > >

SUPPLEMENTARY COMBINEDHOSPITAL,CLINIC, AND PARKINGFACILITIES—Financial Statements

> > >

20

03


2003 2002Assetsi

Current:Treasury cash $ 23,051 $ 28,092 Assets limited as to use 292 294Patient accounts receivable,

net of allowance for uncollectible accounts of approximately$52,513 and $32,512 in 2003 and 2002, respectively 122,441 111,655

Contributions receivable, net 3,087 11,566Other receivables 4,862 4,106Inventories of supplies 14,475 12,962Prepaid expenses 4,839 4,100

Total current assets 173,047 172,775

Investments 67,783 74,943

Assets limited as to use, excluding current portion 20,263 64,867

Contributions receivable, net, excluding current portion 15,255 10,400

Property, plant, and equipment, net 372,168 291,478

Deferred financing costs, net 775 478

Total assets $ 649,291 $ 614,941

Liabilitiesi

Current:Current installments on long-term debt $ 3,240 $ 4,680Accounts payable 24,379 19,959Estimated net payables under third-party programs 10,450 12,277Accrued compensated absences 16,500 13,924Accrued interest 1,295 2,843Other accrued expenses and liabilities 52,770 50,424

Total current liabilities 108,634 104,107

Long-term debt, excluding current installments 329,938 331,637

Deferred revenue 500 750

Total liabilities 439,072 436,494

Net Assetsi

Unrestricted 189,383 136,418Temporarily restricted 19,185 40,378Permanently restricted 1,651 1,651

Total net assets 210,219 178,447

Total liabilities and net assets $ 649,291 $ 614,941

38

Va n d e r b i l t U n i v e r s i t y H o s p i t a l , C l i n i c , a n d P a r k i n g F a c i l i t i e s

B a l a n c e S h e e t s

39

S t a t e m e n t s o f O p e r a t i o n sVa n d e r b i l t U n i v e r s i t y H o s p i t a l , C l i n i c , a n d P a r k i n g F a c i l i t i e s

As of June 30, 2003 and 2002 (in thousands)(Using AICPA Health Care Organizations reporting guidelines)

Years Ended June 30, 2003 and 2002 (in thousands)(Using AICPA Health Care Organizations reporting guidelines)

2003 2002Changes in Unrestricted Net Assetsi

Operating revenues:Net patient service revenue $ 785,033 $ 671,197Investment income on assets whose use is limited

under bond indenture agreements 67 150Other revenue 11,180 11,933

Total operating revenues 796,280 683,280

Operating expenses:Medical services 540,432 474,598General services 32,707 27,525Administrative and fiscal services 91,366 83,083Depreciation and amortization 25,300 25,055Interest 8,198 7,546Provision for bad debts 70,935 47,573

Total operating expenses 768,938 665,380Income from operations 27,342 17,900

Other income:Unrestricted endowment income and bequests 776 765Investment income 3,652 2,525

Total other income 4,428 3,290

Excess of revenues over expenses 31,770 21,190

Transfers to other University divisions:Transfers to other Vanderbilt Medical Center divisions, net (5,309) (23,293)Transfers from (to) Vanderbilt health venture subsidiaries 466 (2,055)

Net assets released from restrictions used for purchase of property and equipment 26,038 5,478

Increase in unrestricted net assets $ 52,965 $ 1,320


40

Va n d e r b i l t U n i v e r s i t y H o s p i t a l , C l i n i c , a n d P a r k i n g F a c i l i t i e s

S t a t e m e n t s o f C h a n g e s i n N e t A s s e t s

41

S t a t e m e n t s o f C a s h F l o w sVa n d e r b i l t U n i v e r s i t y H o s p i t a l , C l i n i c , a n d P a r k i n g F a c i l i t i e s

2003 2002Unrestricted Net Assetsi

Excess of revenues over expenses $ 31,770 $ 21,190Transfers to other Vanderbilt Medical Center divisions, net (5,309) (23,293)Transfers from (to) Vanderbilt health venture subsidiaries 466 (2,055)Net assets released from restrictions used for purchase of

property and equipment 26,038 5,478

Increase in unrestricted net assets 52,965 1,320

Temporarily Restricted Net Assetsi

Contributions for plant expansion 5,048 5,701Net assets released from restrictions (26,038) (5,478)Change in net realized and unrealized gains (losses)

on temporarily restricted investments (203) 641

Increase (decrease) in temporarily restricted net assets (21,193) 864

Net increase in total net assets $ 31,772 $ 2,184

Net assets at beginning of year:Unrestricted 136,418 135,098Temporarily restricted 40,378 39,514Permanently restricted 1,651 1,651

Total net assets at beginning of year 178,447 176,263

Net assets at end of year:Unrestricted 189,383 136,418Temporarily restricted 19,185 40,378Permanently restricted 1,651 1,651

Total net assets at end of year $ 210,219 $ 178,447



2003 2002Cash Flows from Operating Activitiesi

Net increase in total net assets $ 31,772 $ 2,184

Adjustments to reconcile net increase in total net assets to net cash provided by operating activities:Transfers to other Vanderbilt Medical Center divisions and

health venture subsidiaries, net 4,843 25,348Contributions for plant expansion (5,048) (5,701)Decrease (increase) in temporarily restricted investments 203 (641)Loss on debt refinancing 1,897 —Provision for bad debts 70,935 47,573Depreciation and amortization of plant and equipment 25,300 25,055Loss on disposal of equipment 130 70Amortization of bond discounts 157 199Amortization of deferred revenue (250) (250)Net unrealized losses (gains) on investments (898) 1,790Net realized and unrealized losses (gains) on assets limited as to use (232) 3,349Increase (decrease) in cash due to changes in:

Patient accounts receivable (81,721) (59,709)Other receivables (781) 663Inventories of supplies (1,513) (1,500)Prepaid expenses (739) (1,415)Accounts payable 4,420 (5,383)Estimated net payables under third-party programs (1,827) (9,893)Accrued compensated absences 2,575 956Accrued interest (1,549) (500)Other accrued expenses and liabilities 2,347 22,906

Net cash provided by operating activities 50,021 45,101

Cash Flows from Investing Activitiesi

Purchase of property, plant, and equipment (106,012) (107,730)Additions to investments, including assets limited as to use (26,902) (100,135)Sale of investments, including assets limited as to use 79,626 125,494

Net cash used by investing activities (53,288) (82,371)

Cash Flows from Financing Activitiesi

Proceeds from the issuance of long-term debt 40,155 77,600Repayment of long-term debt (44,496) (4,455)Bond proceeds placed in trust to refinance long-term debt (904) —Payments of deferred financing costs (352) (474)Transfers to other Vanderbilt Medical Center divisions and

health venture subsidiaries, net (4,843) (30,325)Contributions for plant expansion 8,666 2,592

Net cash provided (used) by financing activities (1,774) 44,938Net increase (decrease) in treasury cash $ (5,041) $ 7,668

Treasury cash - beginning of year 28,092 20,424Treasury cash - end of year $ 23,051 $ 28,092

Supplemental disclosure of cash flow information:Cash paid for interest (net of amount capitalized) $ 7,849 $ 8,046 $ 7,849 $ 8,046Assets and (liabilities) acquired (assumed) related to the transfer of

the Psychiatric Hospital at Vanderbilt on July 1, 2001:Accounts receivable, net $ — $ 4,422Estimated net receivable under third-party programs — 419Inventories — 66Prepaid expenses — 17Property, plant, and equipment, net — 6,160Accounts payable — (6,009)Other accrued expenses and liabilities — (98)

$ — $ 4,977


Vanderbilt University was founded in 1873 byCommodore Cornelius Vanderbilt and has been gener-

ously supported by successive generations of his family.Especially significant were the gifts and bequests of HaroldStirling Vanderbilt and his wife, Gertrude ConawayVanderbilt. The contributions of the Vanderbilt family aresummarized below, without adjustments for inflation.

All amounts are shown in thousands of dollars.

The founding gifts of CommodoreCornelius Vanderbilt $ 1,004

Harold Stirling VanderbiltGifts and bequests 57,279

Gertrude Conaway VanderbiltGifts and bequests 6,456

Gifts and bequests from othermembers of the family 8,599

TOTAL $ 73,338

B E N E FA C T I O N S O F T H E VA N D E R B I L T FA M I LY> > >

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43


MembersMary Beth AdderleyLa Jolla, California

Michael Lewis AinsliePalm Beach, Florida

Daniel M. Barnhardt A

Los Angeles, California

Camilla Dietz BergeronNew York, New York

Monroe J. Carell, Jr.Nashville, Tennessee

Sheryll D. CashinWashington, D.C.

Thomas F. Cone AC


Cecil D. ConleeAtlanta, Georgia

Brownlee O. Currey, Jr.Franklin, Tennessee

Mark F. DaltonGreenwich, Connecticut

William W. FeatheringillBirmingham, Alabama

John R. HallLexington, Kentucky

L. Hall Hardaway, Jr. AC

Hendersonville, Tennessee

H. Rodes Hart Brentwood, Tennessee

Joanne F. HayesNashville, Tennessee

John R. Ingram Nashville, Tennessee

Orrin H. Ingram Nashville, Tennessee

J. Hicks LanierAtlanta, Georgia

Rev. Edward A. Malloy, C.S.C.Notre Dame, Indiana

Sarah Ann McElvain A

Dallas, Texas

Jackson W. MooreMemphis, Tennessee

James H. Morgan A

Charlotte, North Carolina

Nancy Perot MulfordDallas, Texas

Ibrahim Nasmyth A

Atlanta, Georgia

Edward G. Nelson AC


Frederick B. Rentschler II AC

Cameron, Montana

Stephen S. Riven A


Kenneth L. Roberts AC


Joe L. RobyNew York, New York

Eugene B. Shanks, Jr.Greenwich, Connecticut

Marissa Shrum A

Chattanooga, Tennessee

Richard H. Sinkfield Atlanta, Georgia

Cal TurnerBrentwood, Tennessee

Eugene H. Vaughan Houston, Texas

Levi Watkins, Jr., M.D.Baltimore, Maryland

Dudley Brown WhiteNashville, Tennessee

W. Ridley Wills IIFranklin, Tennessee

J. Lawrence WilsonRosemont, Pennsylvania

Rebecca Webb WilsonMemphis, Tennessee

Trustees EmeritiNelson C. Andrews Nashville, Tennessee

Andrew B. Benedict, Jr. Nashville, Tennessee

Lewis M. Branscomb Concord, Massachusetts

Miriam McGaw CowdenNashville, Tennessee

Irwin B. Eskind, M.D.Nashville, Tennessee

Frank A. Godchaux IIIAbbeville, Louisiana

Delbert Mann Los Angeles, California

Alyne Queener MasseyNashville, Tennessee

Judson Randolph, M.D.Nashville, Tennessee

John W. Rich Nashville, Tennessee

Thomas B. Walker, Jr. Dallas, Texas

James A. Webb, Jr. Nashville, Tennessee

David K. Wilson Nashville, Tennessee

A. Nominated by Alumni AssociationAC. Audit Committee

44 > > >

Va n d e r b i l t U n i v e r s i t y > > >

B o a r d o f T r u s t

Gordon Gee, J.D., Ed.D.,Chancellor

Lauren J. Brisky, M.B.A.,Vice Chancellor for Administration and Chief Financial Officer

Harry R. Jacobson, M.D.,Vice Chancellor for Health Affairs

Michael J. Schoenfeld, M.S.,Vice Chancellor for Public Affairs

William T. Spitz, M.B.A.,Vice Chancellor for Investments and Treasurer

David Williams II, M.A., M.B.A., J.D., LL.M.,Vice Chancellor for Student Life and University Affairs, GeneralCounsel, and Secretary of the University

Nicholas S. Zeppos, J.D.,Provost and Vice Chancellor for Academic Affairs

Richard C. McCarty, M.S., Ph.D.,Dean of the College of Arts & Science

Mark Wait, M.M., D.M.A.,Dean of the Blair School of Music

James Hudnut-Beumler, M.Div., M.A., Ph.D.,Dean of the Divinity School

Kenneth F. Galloway, Ph.D.,Dean of the School of Engineering

Kent D. Syverud, M.A., J.D.,Dean of the Law School

Steven G. Gabbe, M.D., M.A.,Dean of the School of Medicine

Colleen Conway-Welch, M.S.N., Ph.D.,Dean of the School of Nursing

William G. Christie, M.B.A., Ph.D.,Dean of the Owen Graduate School ofManagement

Camilla P. Benbow, M.A., M.S., Ed.D.,Dean of Peabody College

Administration > > >

Officers of the Board

Martha R. Ingram, Chairman, Nashville, Tennessee

Dennis C. Bottorff AC, Vice-Chairman, Nashville, Tennessee

Darryl D. Berger, Vice-Chairman, New Orleans, Louisiana

William W. Bain, Jr., Secretary, Boston, Massachusetts

Gordon Gee, Chancellor of the University, Nashville, Tennessee

As of June 30, 2003

“Vanderbilt” and the Vanderbilt logo are registered trademarks and service marks of Vanderbilt University.


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Financial Report

20

03Prepared by Vanderbilt


Administration

Published by Vanderbilt

University Creative

Services

Photos by Vanderbilt


Public Affairs and the

Medical Art Group

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