2005 Financial Report

ABOUT the UNIVERSITY

anderbilt University is a privately endowed, coeducational, not-for-profit, nonsectarian institution located in Nashville, Tennessee. Founded in 1873, the University operated under the auspices of the MethodistV 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 railway magnate Commodore Cornelius Vanderbilt, who gave one million dollars to build and endow a university that would “con- tribute to strengthening the ties which should exist between all sections of our common country.”

Today, Vanderbilt University is internationally recognized as one of the premier research and teaching universities. Vanderbilt’s undergraduate, graduate, and professional programs rank among the finest in the world. The University’s students— approximately 6,300 undergraduates and more than 5,000 graduate and professional students—and its 2,500 full-time faculty and 16,800 staff members work together to support multidisci- plinary study, academic research, and public service. The University also provides health care services through its medical center, which includes Vanderbilt University Hospital, The Vanderbilt Clinic, and the Monroe Carell Jr. Children’s Hospital at Vanderbilt.

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

For more information, please visit the Vanderbilt University Web site at www.vanderbilt.edu.

A link to the 2005 Financial Report can be found on the Web at www.vanderbilt.edu/divadm/finrprt.

Table of CONTENTS

2 Letter from the Chairman of the Board of Trust 3 Letter from the Chancellor 4 The Year at a Glance 12 Vanderbilt University Statistics 14 2005 Financial Report Overview 22 Financial Ratios 24 Endowment Review 27 Benefactions of the Vanderbilt Family

Consolidated Financial Statements

28 Independent Auditors’ Report 29 Consolidated Statements of Financial Position 30 Consolidated Statements of Activities 31 Consolidated Statements of Cash Flows 32 Notes to the Consolidated Financial Statements

Supplemental Information

44 Vanderbilt University Hospital and Clinic Results of Operations 45 Vanderbilt University Board of Trust 46 Vanderbilt University Administration

Letter from THE CHAIRMAN of the Board of Trust

s chairman of Vanderbilt’s Board of Trust, I am intimately familiar with the University’s plans and objectives, with its bottom line and sky-high plans. I under- stand and appreciate our future endeavors and know well the administrators, facul- A ty, staff, and students who will make our current ambitions a reality. This year has been especially fine. Our past efforts provide a solid foundation upon which we build. Our present engagements continue to distinguish us nationally and internationally in the fields of teaching, research, and medical care. Our future plans are our boldest, most innovative MARTHA R. INGRAM yet and when complete will truly herald a new era at Vanderbilt. Chairman of the Board of Trust The success of 2005 is due in no small part to the realization of a number of initiatives, including Shape the Future–a Campaign for Vanderbilt, the launching of our College Halls program, and the continued leadership of Chancellor Gordon Gee and his administrators. Though years from its conclusion, monies raised thus far as part of Shape the Future have already made a difference in the number of scholarships we are able to offer our most deserving students and in the number of named chairs Vanderbilt fills with world-renowned faculty. Academic strategic initiatives move rap- idly from the drawing board to full implementation because friends and supporters willingly demonstrate their belief in this institution with most generous gifts.

No initiative will be more transformative than our College Halls program, on which ground was broken this summer. A residential college system designed to create the most vibrant living and learning environment in higher education, College Halls—and specifically our first project, the Commons—will be a cohesive, nurturing, challenging community for the talented women and men who come to Vanderbilt. It is our highest priority and will certainly be the perfect residential and community setting for the University’s increasingly outstanding students.

Standing at the forefront of Vanderbilt’s stellar year is Chancellor Gordon Gee. An outstanding leader and a higher education visionary, Gordon is popular with and respected by the University’s alumni, faculty, staff, students, and friends. In fact, polling by the Hustler, Vanderbilt’s student newspaper, has reported his student approval rating at nearly 90 percent or higher since his arrival in 2000.

Working in partnership with the University’s vice chancellors, an engaged Board of Trust, and leaders among faculty, staff, and students, Gordon and I are confident in the future success of Vanderbilt University. Momentum steadily builds, plans are made, and the time for confident execution is now. Our sights are firmly set on the horizon, and we are sure of our success.

Letter from THE CHANCELLOR

ince arriving at Vanderbilt, I have sworn off categorizing a particular year as our “best ever” because of the constant forward momentum of this place. As a result of our efforts and energy, each year truly outshines the previous, indicating that our potential for excel- S lence is fairly limitless. In 2005 alone, the quality of our faculty, our staff and, in particular, our students has made yet another categorical leap for the better.

Vanderbilt’s reputation as one of the finest institutions of higher education in the United States is based upon several tenets, including our commitment to undergraduate education, our integra- tion of our graduate and professional schools into the life of the University, and our encourage- GORDON GEE ment of an atmosphere of collaboration and civility. Drawn by these and the appealing aspects of Chancellor life at Vanderbilt and in Nashville, Tennessee, the University is a highly sought-after destination by both faculty and staff. It is our responsibility to take that desire, that interest, and harness it in order to gather together the most talent in the country. At this, we are succeeding.

All of our students—from first year undergraduates to graduate and professional students in their final year of study—are also aware of what an incredibly unique environment Vanderbilt offers in which to learn and study. In addition to growing our number of applications, no small feat in and of itself, the quality of our applicants continues to increase as well. The world’s finest students are committed to the fact that Vanderbilt University is the place they want to be.

The quality of the medical care we provide and the level of our research findings continue to break records and refine expec- tations. Vanderbilt has long been a leader in providing world-class health care to Middle Tennessee and beyond, but we are never satisfied to rest on our laurels. We strive to make ourselves ever better, to determine how we may serve our communities more fully. We expect that our faculty and researchers will continue to make life-changing, life-saving discoveries. This refusal to be satisfied with the status quo, with only what we can accomplish today, contributes largely to our success.

Vanderbilt University is an institution with a proud legacy to uphold. We have an even more promising place in higher education and medical care and research to realize. Our trajectory has been set, and I could not be more proud of our progress. I know that for years to come, each annual milestone will be better than the last, and I look forward to seeing just how far we will go.

THE YEAR at a Glance

July 2004 August 2004

I The Vanderbilt University School of Nursing (VUSN) M Demonstrating the importance that Vanderbilt places on signs an agreement with the newly established nursing pro- creating and strengthening partnerships in the entire region, gram within Scheer Memorial Hospital in Kathmandu, Chancellor Gordon Gee leads more than 40 Vanderbilt fac- Nepal. Vanderbilt’s Linda D. Norman, senior associate dean of academics, states that VUSN will provide the new program with textbooks, faculty development opportunities, and consultation services. The agreement, which aims to favorably impact Nepal’s nursing shortage, will help create what is reported to be Nepal’s first nursing curriculum that meets the requirements of regulatory bodies in both Nepal and the United States.

I Vanderbilt’s Robert Penn Warren Center for the Human- ities hosts the Eastern Region Summer Institute on Teach- ing the Constitution, in which a select group of elementary, middle, and high school teachers from 24 states gather to learn how to better educate students in the basics of the U.S. Constitution. The institute is funded by a grant from ulty, students, and staff on an event-filled bus tour through the Center for Civic Education in western and central Kentucky as a part of the third annual Calabasas, California. Roads Scholars Tour. The group visits Fort Campbell, Bowl- ing Green’s National Corvette Museum, the University of M U.S. News & World Report names Kentucky, and Dollar General Corporation’s original distri- Vanderbilt University Medical Cen- bution center in Scottsville. ter (VUMC) as one of the nation’s 50 best hospitals based upon sev- I Vanderbilt’s first medicine/law joint-degree student David eral factors including reputation Chooljian completes a visit to Universidad de Concepción in among board-certified physicians, Chile, where he investigates student exchange ideas and mortality statistics, nursing care, helps set up a center for clinical investigations as part of a and medical technology. Vander- collaborative research effort by the Chilean university and bilt, which is the only Tennessee Vanderbilt. The partnership with Universidad de Concep- health care provider on the list, ranks among the top 50 in ción, to which Vanderbilt donated a cardiac catheterization nine major specialties, with particularly high rankings in lab with the goal of improving the standard of care for car- kidney disease; ear, nose, and throat; respiratory disorders; diac patients in Chile, is facilitated by Francisco Albornoz, cancer; and hormonal disorders. assistant professor of medicine at Concepción and former cardiovascular fellow at Vanderbilt. I Vanderbilt earns a national award from the Children’s Miracle Network for its student-organized Dance Marathon I Vanderbilt launches VUmix, a comprehensive download 2004, which raised almost $50,000 for the Monroe Carell service that offers students, faculty, and staff a safe, legal, and Jr. Children’s Hospital at Vanderbilt. Vanderbilt students inexpensive way to obtain and share digital music. The cen- accept the award at a national conference hosted by the terpiece of VUmix is a new partnership with Napster, one of Children’s Miracle Network, of which the Vanderbilt Chil- the largest providers of online music with an enormous dren’s Hospital is a member. library of songs from major and independent record labels.

I Almost two years after a major restructuring of its athlet- I Rutherford County’s Christy-Houston Foundation ics program, Vanderbilt wins praise for its 28th-place awards a grant to fund construction of a helipad above the national ranking among 327 NCAA Division I institutions middle patient tower of the Monroe Carell Jr. Children’s in the United States Sports Academy Director’s Cup, the offi- Hospital at Vanderbilt. The new helipad is expected to aid in cial all-sports measurement of success in collegiate athletics. saving lives by eliminating the transport time required to Led by the Commodores’ success in tennis, basketball, golf, move critically ill or injured children from what is currently baseball, and lacrosse, the ranking places Vanderbilt seventh the only helipad location atop VUMC’s adult hospital tower among the 12 Southeastern Conference schools. to the children’s hospital.

I Vanderbilt University advances to 18th place in the U.S. school choice. The new center will evaluate the impact of News & World Report survey of the best national universi- school choice on student achievement and instructional ties. Vanderbilt’s service learning efforts, which incorporate quality, its effects across racial and class lines, and its ability to volunteering as an instructional strategy, are recognized by meet the needs of special education and disabled students. the magazine as an example of outstanding academic programs leading to student success. Vanderbilt also captures a I The Blair School of Music expands its offerings by adding top 20 spot in the magazine’s ranking of national universi- a history of country music course to the spring curriculum. ties offering the best value based on a combination of high The new country music course, along with others focusing academic quality, accessibility to financial aid, and net cost on jazz, the blues, the music busi- of attendance. ness, and musical theatre, will serve to broaden the experiences of music majors and expand the September 2004 offerings for non-music majors.

M Leaders Engaged for an Active Democracy (LEAD), a M In a speech broadcast on C- nonpartisan coalition of Vanderbilt students and commu- SPAN, USA Today editor Ken nity members, sponsors forums and outreach efforts to Paulson kicks off the 2004-05 Chancellor’s Lecture Series at Van- derbilt by challenging media pro- fessionals to embrace their role as watchdogs and to restore the public’s trust. Paulson, former executive director of the Freedom Forum’s First Amendment Center at Vanderbilt, describes how newspapers play an integral role in society and must be held to the highest standards.

October 2004

M Former Vice President Al Gore and former U.S. Congressman Bill McCollum discuss and debate hotbed topics, such as the war in Iraq, terrorism, and nuclear weapons, before an overflow crowd of encourage active civic participation. Working in teams, nearly 1,000 people in approximately 50 Vanderbilt students canvass the Edgehill, Martha Rivers Ingram West End Park, Woodbine, and Sylvan Heights neighbor- Hall at the Blair School hoods to sign up new voters and remind currently regis- of Music. “The People tered voters of the importance of voting during the upcom- Speak: A Discussion of ing presidential election. America’s Role in the World,” serves as one in a I Vanderbilt reports that its research awards rank among the series of town hall-style top 25 U.S. universities for the first time in recent history. meetings hosted nation- The rankings, as compiled by the National Science Founda- wide by the United Nations Foundation and political groups tion, define each university’s respective success in obtaining ranging from Rock the Vote to the League of Women Voters. federal funding for science and engineering and are considered one of the more objective measures of research quality I With a goal of interesting young minority students in sci- because of the manner in which federal funds are distrib- ence careers, astronomers from Vanderbilt join with col- uted. leagues from Fisk University to present a road show for area schools and community centers using a portable, I Vanderbilt’s Peabody College wins a $10 million U.S. inflatable planetarium. The road show is part of a NASA- Department of Education grant to fund the Center on funded program at Fisk designed to ultimately increase the School Choice, Competition, and Achievement, the first fed- number of minority students pursuing doctoral degrees in erally funded national center to take a wide-ranging look at the physical sciences.

M Sandra J. Rosenthal, associate an internationally recognized physician-scientist at Vander- professor of chemistry and bilt since 1991, is selected to succeed the center’s founding physics, and her interdisciplinary director, Harold L. Moses, Benjamin F. Byrd Jr. Professor of science team representing nano- Clinical Oncology. technology and neuroscience at Vanderbilt receive $1.4 million in funding from the National Insti- December 2004 tutes of Health (NIH) to research the use of fine-tuning nanocrys- I The Conexión Project is established as a partnership tals in tracking the location and between the Vanderbilt Kennedy Center for Research on behavior of nerve cells. This is Human Development and the Tennessee Council on Devel- the first NIH award received by opmental Disabilities. With a federal grant from the Adminis- Vanderbilt’s new Nanoscale Sci- tration on Developmental Disabilities, the Conexión Project ence and Nanotechnology in will collaborate with Woodbine Community Organization to Biology and Medicine Program. develop and distribute information about disability services to Nashville’s Hispanic residents through bilingual materials and Spanish-speaking referral resources. November 2004 I Vanderbilt Divinity School receives a $10 million grant M The Vanderbilt community celebrates groundbreaking for from the Lilly Endowment Inc. to produce a generation of the new $13 million E. Bronson Ingram Studio Arts Center professors better prepared to teach students called to the to debut on campus in the fall of 2005. University officials ministry. The grant is the largest ever received by Vanderbilt estimate that enrollment in studio art classes will increase by Divinity School and marks the beginning of an effort at Vanderbilt to address the nationwide shortage of practical theology professors. The funding will be used to create the Program in Theology and Practice, which is designed to attract 50 new graduate students in teaching for the ministry with an innovative curriculum involving 25 faculty members and 20 area clergy.

I VUMC and the Nashville Veterans Administration Hos- pital reach a new milestone together as Vanderbilt completes its 500th heart transplant. The surgery occurs through a contractual agreement with the U.S. Department of Veterans Affairs, under which Vanderbilt is one of four major transplant centers in the country approved to provide heart transplants to veterans. VUMC is one of the few medical centers in the country to reach the 500-plus heart transplant mark.

I The Nashville Public Education Foundation donates 15 to 20 percent upon completion of the center, which will $1 million for an endowment to support a permanent col- include studios for sculpture, ceramics, photography, com- laborative relationship between Vanderbilt’s Peabody Col- puter arts, painting, and drawing. lege and Metropolitan Nashville Public Schools. The donation to Vanderbilt is designed to support ongoing, I Vanderbilt hosts a conference for dozens of Russian and research-based professional development for Metro teach- American scientists and officials to explore international ers and principals, with the goal of promoting quality edu- nuclear security solutions. With heightened concern in the cation in Nashville’s public schools. wake of terrorist attacks, the attendees explore a wide range of issues related to nuclear security, from nonproliferation activities to hazardous and radioactive waste transport and storage. January 2005

I Raymond N. DuBois, Jr., Hortense B. Ingram Professor of I The Vanderbilt Institute for Integrative Biosystems Molecular Oncology, is named to become the new director Research and Education (VIIBRE) joins with Pria Diag- of the Vanderbilt-Ingram Cancer Center (VICC). DuBois, nostics LLC, a privately-held California company that

specializes in miniaturized medical diagnostics, to collab- children of Middle Tennessee. Funded by a $250,000 grant orate on research for the production of a portable home from the station, the program based at Vanderbilt will pro- HIV-AIDS test. VIIBRE researchers aim to develop a vide age-appropriate books for pediatricians to give children device with the ability to detect the presence of HIV- at their checkups while reinforcing to parents the benefits of AIDS and other infectious diseases such as measles, as reading to their children. well as biological agents such as ricin and anthrax. February 2005 M Edward L. Rubin of the University of Pennsylvania Law School is named John I A re-dedication celebration is held for the recently reno- Wade–Kent Syverud Professor of Law and vated and expanded Bishop Joseph Johnson Black Cultural dean of the Vanderbilt University Law Center, which includes meeting space, classrooms, and an School. Rubin, an internationally recog- art gallery featuring contemporary works of local and nized legal scholar and educator, makes ini- national artists. The event includes musical performances tial plans to lead a review of the Law and the unveiling of a permanent exhibit of African art School’s curriculum. donated by Vanderbilt alumnus Lewis “Scotty” Greenwald.

I Learning Sciences Institute (LSI) director Andrew C. M Kenneth C. Catania, Porter, Patricia and Rodes Hart Professor of Public Policy assistant professor of and Education, introduces the Minority Scholars Program, a biological sciences, new lecture series bringing minority scholars to Vanderbilt gains national media to share ideas and discuss trends in the learning sciences, as attention for his well as to serve as role models for students. As an interdisci- research on the myste- plinary organization, Vanderbilt’s LSI stimulates and sup- rious star-nosed mole. ports research and development at the interface of four areas Featured in The New undergoing rapid expansion: how people learn, effective York Times, Catania’s teaching, curriculum, and policy. study reveals that the marsh-dwelling mole can detect small prey and gulp them down at a speed too fast for the human I Vanderbilt’s Owen Graduate School of Management ranks eye to detect. Catania explains that the study, which reveals 31st among the best MBA programs in the world and 21st that the mole takes an average of 230 milliseconds to iden- among those in the United States, according to Financial tify a small piece of food as edible and consume it, may con- Times, one of the world’s leading business publications. tribute to other research about limitations in the brain’s Recognized by the magazine’s editors for the strength of its ability to process information and make decisions. finance program, the Owen School is among the fastest advancing schools on the list as its world ranking represents I Vanderbilt hosts a national meeting of the Coalition on a 13-place jump. Intercollegiate Athletics, an alliance of faculty from more than 40 NCAA Division I-A universities joining to promote M VUMC partners with Nashville’s WTVF News Channel 5 comprehensive reform of intercollegiate sports. The faculty television station to launch a new literacy program for the debate ideas for improving the academic integrity of college athletic programs, and the meeting results in a policy docu- ment with recommendations to universities in five areas: admissions, scholarships, curricular integrity, scheduling of competitions, and academic advising.

M The Monroe Carell Jr. Children’s Hospital at Van- derbilt celebrates its one- year anniversary with a birthday party for faculty, staff, patients, and their fam- ilies. In the brief span of one year, Vanderbilt Children’s Hospital took up residence in its new facility and gained national recognition for its

family-centered and child-friendly environment for the Career Center and the offices of the Study Abroad pro- patient care, ranking eighth in Child magazine’s listing of gram under one roof. In addition, the new center offers the top 10 children’s hospitals in the country. more than 18,000 square feet of event space in the center of campus.

March 2005 I Packets are mailed with letters of acceptance to selected students from among a record high of more than 11,600 I Chancellor Gordon Gee and a delegation of Vanderbilt applications for Vanderbilt’s fall 2005 freshman class. Less faculty and staff travel to Mexico to convene with officials than 36% of applying students will receive letters of accept- from that nation’s academic, political, and business are- ance, making admissions for the undergraduate class of nas. The visit serves to strengthen the recently formalized 2009 the most selective in the University’s history. partnership with Universidad de las Américas (UDLA) and provides an opportunity for Vanderbilt representa- tives to explore additional partnerships with other Mexi- April 2005 can institutions. I The National Science Foundation (NSF) taps the Vanderbilt M James W. Bradford is named dean of Van- Institute for Software Integrated Systems (ISIS) to play an derbilt’s Owen Graduate School of Manage- important role in a major new $19 million NSF multi-institu- ment. Bradford, a former president and tional center to protect the nation’s computer infrastructure chief executive officer of two international from cyber attacks. ISIS, directed by Janos Sztipanovits, E. glass companies and a graduate of the Van- Bronson Ingram Distinguished Professor of Engineering, is derbilt University Law School, brings to the one of eight university collaborators forming the Team for Owen School a results-oriented style of Research in Ubiquitous Secure Technology, a new NSF management and a determination to incor- Science and Technology Center. Specifically, Vanderbilt porate practical business experience with researchers will help develop new technologies to protect the academic rigor in the education of today’s nation’s infrastructure from a concerted attack by terrorists. MBA students. M The United States Postal Service honors one of Vanderbilt’s M Vanderbilt’s women’s basketball team advances to the Sweet most famous alumni, three-time Pulitzer Prize winner and Sixteen in the NCAA Tournament with a 63-60 win over U.S. Poet Laureate Robert Penn Warren, by unveiling a new Kansas State University. The stamp celebrating the 100th anniversary of the writer’s birth. win marks the Commodores’ second consecutive trip to the Sweet Sixteen under head coach Melanie Balcomb, in only her third season at Vanderbilt.

I Reverend Al Sharpton, political activist and former Democratic presidential can- didate; Howard Dean, chair of the Democratic National Committee and former gov- ernor of Vermont; and Ann Coulter, political commentator and author of Slander: Liberal Lies About the American Right, speak in separate lectures at Langford Auditorium. All three speakers address “Visions of America” for Vanderbilt’s 41st In its foreground, the stamp features a portrait of Warren annual Impact Symposium, a long-running, student-organ- based on a 1948 photograph, and in its background are ized lecture series that brings nationally prominent political scenes recalling All the King’s Men, Warren’s 1947 Pulitzer speakers to campus. Prize–winning novel about political corruption in Louisiana.

I A celebration for students, faculty, and staff occurs for the I Supreme Court Justice Antonin Scalia speaks at the opening of the new Student Life Center. The $11.4 million Vanderbilt University Law School as part of the Cecil Sims project brings together important student services such as Lecture series, during which Scalia labels himself as an “origi-

nalist” that eschews attempts to adapt the U.S. Constitution to M Members of the Vanderbilt accommodate societal changes. During his daylong visit to the community join together for law school, Scalia speaks to classes in constitutional law and three days of celebration cul- administrative law, and he visits with a small group of faculty. minating in commencement exercises. Little Richard and I Vanderbilt University Hospital opens its newly renovated The Jimmy Church Band and expanded emergency department. The new, state-of- kick off the festivities with a the-art facility contains 46 treatment rooms, four trauma performance at The Party. bays equipped with operating room-quality lighting and On the day before com- medical gas delivery systems that drop from the ceiling, a mencement, Shirin Ebadi, who in 2003 became the first family grief room, 16 acute care rooms, two CT scanners, Muslim woman and first Iranian to win a Nobel Peace Prize, and a greatly expanded waiting room. highlights Senior Class Day activities with a lecture on Alumni Lawn. Throughout the three days, camera crews I President George W. Bush appoints Chancellor Gordon from NBC record students’ activities for a broadcast seg- Gee to a six-year term on the 13-member board of trustees ment about university commencement celebrations that of the Christopher Columbus Fellowship Foundation. As a later airs on NBC Nightly News. member of the board, Gee will help oversee the foundation’s efforts to “encourage and support research, study and labor M Christine H. Chung, assistant professor of medicine, designed to produce new discoveries in all fields of endeav- receives the Damon Runyon Cancer Research Foundation’s or for the benefit of mankind.” Clinical Investigator Award. The award goes to support Chung’s research focusing on the use of DNA microarray May 2005

I Ari Dubin, who won an award from the American Israel Public Affairs Committee for coordinating a collaborative response to a 2004 Palestinian Solidarity Movement conference at Duke University, is named the incoming executive director of the Vanderbilt Hillel, which serves the religious, social, and educational needs of the University’s Jewish student communities. Operating out of Vander- bilt’s Ben Schulman Center for Jewish Life, Dubin makes plans to encourage participation by all students in programming and community outreach efforts through the Vanderbilt Hillel.

M Mark D. Does, assistant professor of biomedical engineering and assistant professor of radiology and radiological sciences, wins the prestigious National Science Foundation CAREER award. The award, given to exceptional junior faculty to support their promising technology to identify patterns of gene expression that could research, will help fund predict which patients with head and neck cancers are likely Does’ efforts at Vander- to experience a recurrence and which recurrent tumors will bilt toward advancing respond to specific chemotherapies. the application of mag- netic resonance imag- I Fourteen Vanderbilt undergraduate students begin sum- ing (MRI) technology mer internships in Washington, D.C., through an effort led to more precisely ana- by Vanderbilt’s Division of Student Life in collaboration lyze bodily tissues at the with alumni and the University’s Office of Federal cellular level, particu- Relations. A selection process was utilized to identify the larly in the brain, the most qualified students for the program, which includes spinal cord, and the internship opportunities with the Tennessee Congressional heart. delegation, CNN, the Smithsonian, the U.S. Department of

State, and St. Alban’s School of Public Service. The program ments located in the college halls, and each college hall will also includes weekly seminars and opportunities for stu- feature student-driven programming designed to promote dents to interact with policy makers, journalists, elected intellectual exchange and leadership development. Along officials, and other public servants. with a close-knit residential setting, areas for dining, study, and informal gathering will enhance the living-learning atmosphere at Vanderbilt. June 2005

I Fifty-three young men and women, mostly rising college juniors and seniors with varying majors from universities around the country, complete the inaugural Accelerator summer business institute at Vanderbilt’s Owen Graduate School of Management. The 28-day Accelerator program is structured in a way that challenges students to apply the academic instruction they receive to numerous real-life projects at a sometimes frenetic pace. Among other activities, the students develop business plans to sell products at the Tennessee State Fairgrounds and run a marketing promo- tion for the Music City Motorplex.

I The Vanderbilt School of Medicine advances to 15th place among 125 medical schools for funding from the National Institutes of Health. With the fastest growing academic medical research program in the nation, Vanderbilt’s depart- ments rank in the top 10 in molecular physiology and biophysics, cell and developmental biology/cancer biology, medicine, pharmacology, pediatrics, anesthesiology, bio- chemistry, and radiology.

I The Jim Ayers Institute for Pre-Cancer Detection and Diagnosis is established at the Vanderbilt-Ingram Cancer Center with a pledge of $10 million from Tennessee banker and philanthropist Jim Ayers. In an effort to develop techniques for detecting cancers at their earliest, most curable stages, the institute’s research will focus on proteomics—the study of the thousands upon thousands of proteins responsible for human health and disease.

M Construction begins on the Commons, the first phase of College Halls at Vanderbilt, a residential college system designed to create the most vibrant living and learning environment in higher education. In the University’s most sig-

nificant transformation of the undergraduate experience in a generation, College Halls at Vanderbilt will bring together students, faculty, and staff in smaller community settings within the larger campus. Select faculty will live in apart-

Vanderbilt University STATISTICS

2004/2005 2003/2004 2002/2003 2001/2002 2000/2001 STUDENTS Undergraduate 6,272 6,283 6,319 6,235 6,037 Graduate and professional______5,022 ______4,809 ______4,566 ______4,261 ______4,157 Total fall enrollment 11,294 11,092 10,885 10,496 10,194

Undergraduate admissions Applied 11,170 10,960 9,838 9,754 8,890 Accepted 4,279 4,405 4,5504,528 4,900 Enrolled 1,601 1,545 1,579 1,556 1,642

Selectivity 38.3% 40.2% 46.2% 46.4% 55.1% Yield 37.4% 35.1% 34.7%34.4% 33.5%

Degrees conferred Baccalaureate 1,519 1,514 1,5521,393 1,302 Master’s 1,011 1,017 893849 926 M.D. 90 107 93104 104 Other doctoral ______416 ______383 ______372 ______380 ______383 Total degrees conferred 3,036 3,021 2,910 2,726 2,715

Undergraduate graduation rates 88.0% 86.0% 82.8% 84.1% 84.2%

Undergraduate tuition rate $ 29,240 $ 27,720 $ 26,400 $ 25,190 $ 24,080 % increase over prior year 5.5% 5.0% 4.8% 4.6% 4.7%

HOSPITALS AND CLINICS Licensed beds 832 800 746 746 658 Surgeries 35,022 30,754 28,643 27,678 26,549 Hospital admissions 42,611 39,738 37,867 36,452 31,852 Hospital patient days 238,266 219,518 208,361 200,434 170,377 Average daily census 653 600 571 549 467 Average length of stay (days) 5.6 5.5 5.5 5.5 5.3 Clinic outpatient visits 940,018 824,103 698,960 688,884 641,790 Emergency room visits 82,051 76,831 71,402 70,098 63,999 LifeFlight (helicopter) missions 2,667 2,384 1,794 1,803 1,709

FACULTY AND STAFF Full-time faculty 2,527 2,379 2,253 2,066 1,944 Full-time staff 15,066 14,052 13,388 12,513 11,594 Part-time faculty 334 383 338 329 329 Part-time staff ______1,776 ______1,653 ______1,721 ______1,771 ______1,560 Total headcount 19,703 18,467 17,700 16,679 15,427

RESEARCH EXPENDITURES ($000) Federal $ 210,533 $ 195,582 $ 162,930 $ 124,384 $ 104,652 Non-federal 65,009 58,000 57,972 48,410 42,192 Facilities and administrative costs recovery ______89,053 ______84,151 ______73,051 ______58,506 ______48,051 Total research expenditures $ 364,595 $ 337,733 $ 293,953 $ 231,300 $ 194,895 MANAGED ENDOWMENT Market value ($000) $2,598,227 $2,264,845 $1,987,810 $1,989,692 $2,159,614 Endowment per student $ 230,054 $ 204,187 $ 182,619 $ 189,567 $ 211,851 Total return on endowment 17.8% 16.9% 3.8% -5.8% -4.7% Endowment utilized per payout policy 3.9% 4.5% 5.0% 4.6% 3.9% __ __ Endowment utilized for strategic initiatives ______0.8% ______0.6% ______1.1% ______Total endowment utilized 4.7% 5.1% 6.1% 4.6% 3.9%

Review of Vanderbilt University STATISTICS

Students Faculty and Staff

Enrollment for the 2004/2005 academic year totaled The University employed 19,703 regular and temporary 11,294 students. Over 95% of this latest enrollment total faculty and staff in 2005, including those employed in consisted of full-time students. In addition to the wholly-owned affiliated entities. This figure does not take University’s undergraduate, graduate, and professional into account more than 1,300 clinical and adjunct faculty student enrollment, Vanderbilt’s academic enterprise that are affiliated with Vanderbilt but are not paid directly encompasses hundreds of postdoctoral fellows, clinical fel- by the University. In fiscal 2005, most of the headcount lows, medical residents, and others dedicated to learning, increases occurred in the medical center to meet increased research, teaching, and service. patient care volumes, both in the adult and children’s health care areas. Applications for undergraduate admissions continue to increase and reached an all-time high of 11,170 for the fall of 2004. The degree of selectivity exercised strengthened Research Expenditures further as only 38.3% of freshman applicants for fall 2004 were selected. A growing interest by students to attend Total expenditures for externally-funded sponsored research Vanderbilt is evidenced by the increase in the yield rate to and separately-budgeted university research increased to 37.4%. Undergraduate graduation rates have increased sig- $364.6 million in fiscal 2005. These expenditures have nificantly to 88.0% (based on successful graduations with- increased a compounded average of 17.0% per year since in six years of initial enrollment) as the result of student 2001 due primarily to the growth in federal government retention efforts across campus. sponsored research. Total sponsored research and project awards, which include multiple-year grants and contracts, Undergraduate tuition increased 5.5% to $29,240 for the increased 15.0% to $443.7 million in fiscal 2005. Included 2004/2005 academic year, and the University established a within those awards are grants and contracts for instruction, tuition rate of $30,920 for the 2005/2006 academic year. public service, and other activities. Meanwhile, positive trends for applications, selectivity, and yield continued into the fall of 2005. $400 es 12,000 $300

10,000 $200 8,000 (in millions) ch Expenditur 6,000 $100

4,000 Resear 0 2,000 2000/2001 2001/2002 2002/20032003/2004 2004/2005 Federal Non-federal Facilities and Undergraduate Admissions 0 Administrative Fall 2000Fall 2001 Fall 2002 Fall 2003 Fall 2004 Costs Recovery Applied Accepted Enrolled

Managed Endowment Hospitals and Clinics The market value of Vanderbilt’s endowment totaled $2.60 Renovated and expanded adult health care facilities, along billion as of June 30, 2005. The endowment had a positive with the fast-paced growth and expansion of the Monroe return of 17.8% for the fiscal year and outperformed a com- Carell Jr. Children’s Hospital at Vanderbilt, have impacted parable blend of market indices by approximately 4%. patient care statistics. In fiscal 2005, Vanderbilt’s hospitals Endowment utilization per the payout policy is calculated and clinics had an increase of 32 licensed beds, admitted using 4.5% of the previous three years’ average market val- 42,611 patients, served 940,018 outpatient visits, and cared ues. Beginning in fiscal 2003, additional endowment distri- for 82,051 patients in the emergency rooms—all reflecting butions began occurring to support transinstitutional initia- significant growth in patient care volumes over the past few tives through the Academic Venture Capital Fund. In fiscal years. Meanwhile, the average inpatient length of stay rose 2005, these factors resulted in the combined utilization of slightly to 5.6 days. 4.7% of the current year’s average market value to fund operations, scholarships, faculty chairs, research, and capital investments in transinstitutional initiatives.

2005 Financial Report OVERVIEW

This Financial Report reflects Vanderbilt’s accomplish- Total Net Assets ments during fiscal 2005 as well as preparations for contin- $3.89 billion as of June 30, 2005 ued achievement in the years to come. This university’s quality is evidenced by the increased caliber of students and fac- Plant Equity $0.67 billion ulty attracted to Vanderbilt, strong levels of research activity, Unrestricted and the generous support of alumni and friends through Temporarily Net Assets contributions to the Shape the Future Campaign. Core to Restricted Net Assets $3.04 billion these achievements, and the driving force of our future $0.18 billion endeavors, are the institutional leaders who work in tandem Permanently with a commitment to the mission of the University. The Restricted Net Assets faculty, staff, and leadership of Vanderbilt are focused on $0.67 billion promoting quality education, scholarly research, and world- class patient care, all the while remaining in service to the Managed Endowment Middle Tennessee community and society at large. This mis- $2.60 billion sion-driven strategy, implicit in all that we do, has allowed Vanderbilt to consistently generate healthy financial results.

The financial statements, key statistics, and qualitative assess- The second largest component of Vanderbilt’s net assets is ments within this Financial Report provide various perspec- plant equity. Vanderbilt’s property, plant, and equipment tives of how Vanderbilt is committed to sound financial man- assets are largely financed by capital-related debt, resulting agement and the efficient use of resources. Each year presents in plant equity of $0.67 billion after including other net new challenges that must be overcome, but we are never assets associated with plant. Vanderbilt’s plant equity is deterred from setting our targets even higher for the future. based on book values; however, the replacement value of Our ambition, along with our continual efforts to review and the University’s land and facilities far exceeds the reported improve our financial policies and practices, demonstrate book values. our commitment to maintaining a sound financial position from which to support the overall mission of the University. Other net assets at Vanderbilt include accumulated working capital, unrealized gains and losses on investments and derivatives, contributions receivable, undesignated gift Vanderbilt’s Financial Position assets, and interest in trusts held by others.

Total Net Assets Summary of Changes in Net Assets As of June 30, 2005, Vanderbilt’s net assets had reached the As summarized in the table below, the University’s net assets highest level ever at $3.89 billion. Under an accounting increased by $328.0 million in fiscal 2005 and $424.8 million framework based upon generally accepted accounting prin- in fiscal 2004. ciples (GAAP), the University’s net assets are designated as unrestricted (for operating purposes or plant facilities), tem- Summary of Changes in Net Assets porarily restricted (generally unpaid pledges and undistrib- in millions uted gift assets), and permanently restricted (including the 2005 2004 corpus of endowed gifts). As of June 2005, Vanderbilt’s Unrestricted operating results $ 31.3 $ 49.3 financial position consisted of $3.04 billion unrestricted net Non-operating endowment and assets, $0.18 billion temporarily restricted net assets, and investment activity, net 322.0 268.7 $0.67 billion permanently restricted net assets. Non-operating gifts and pledges for plant, endowment, and temporarily The largest component of the University’s net assets is the restricted purposes 26.7 97.9 managed endowment totaling $2.60 billion as of year-end. Other non-operating results, net ______(52.0) ______8.9 The original corpus of endowed gifts, which totaled $0.56 billion, is considered permanently restricted. Vanderbilt Total increase in net assets $______328.0______$ 424.8 reports cumulative returns on endowed gifts as unrestricted net assets because those proceeds are used to support the Ending balance of net assets $ 3,887.4 $ 3,559.4 University’s activities through endowment distributions. ______Since endowment growth has exceeded endowment distributions over the course of Vanderbilt’s history, the unrestricted portion of the endowment had grown to total $2.04 Unrestricted operating results totaled $31.3 million and billion as of June 30, 2005. $49.3 million in fiscal 2005 and 2004, respectively.

Endowment distributions and investment returns on non- off-site network clinics. Also, investments in facilities and endowed assets are recognized as operating revenue in unre- state-of-the-art technologies, targeted marketing efforts, and stricted operating results. In addition to those amounts, a focus upon maximizing patient satisfaction have affected non-operating changes in the net appreciation of invest- consumer preferences, with Vanderbilt advancing from ments totaled $322.0 million in fiscal 2005, due almost fourth to first place among all hospitals in the Middle entirely to a 17.8% return on the managed endowment. Tennessee region based upon independent market research studies over the past ten years. Growth in patient care vol- Also contributing to the fiscal 2005 increase in net assets umes, rate increases from Medicare and major commercial were $26.7 million of new gifts and pledges for plant, contracts, an overall 5% price increase, and the implementa- endowment, and temporarily restricted purposes. In fiscal tion of revenue cycle process improvements all contributed 2004, non-operating gifts and pledges totaled $97.9 mil- to increases in fiscal 2005 net patient care revenues. lion, which included $67.5 million of stock donations from the Martha Ingram family. In fiscal 2005, Vanderbilt’s health care payor mix based on patient days consisted of 31.1% TennCare; 22.9% commer- Other non-operating results consisted largely of mark-to- cial contracts; 22.3% Medicare; 18.0% Blue Cross and Blue market adjustments on interest rate swap agreements, which Shield; and 5.7% self-pays, workers compensation, and out- resulted in accrued losses in fiscal 2005 and accrued gains in of-state Medicaid. The percentage of patients covered by fiscal 2004. TennCare, Tennessee’s state-managed health care program designed for Medicaid-eligible residents and those who lack access to health insurance, increased from the prior year Operating Revenues and largely due to expanded patient activity in the children’s hos- Expenses pital and a continuation of Vanderbilt’s role as the essential access provider in Middle Tennessee. Operating Revenues by Source The graph below illustrates the proportional revenues con- Among the University’s other operating revenues, govern- tributing to the University’s overall financial performance. ment grants and contracts revenue, including government- related indirect cost recovery, increased by 7.3% from the As one of the nation’s leading academic medical centers, prior year and constituted 15% of total operating revenues. Vanderbilt’s health care enterprise, including its physician clinical practice, continues to have a tremendous positive Net tuition, fees, room, and board revenues, which accounted impact on the overall financial health of the University. for 9% of total operating revenues, increased by only 1.1% in Health care services revenue increased by about 17% from fiscal 2005 as Vanderbilt continued to implement planned the prior year and comprised 62% of the University’s total increases in student financial aid. While the University imple- operating revenues in fiscal 2005. mented a 5.5% increase in the undergraduate tuition rate to $29,240 for the 2004/2005 academic year, student financial aid Operating Revenues by Source offsets increased by 14.6% from the prior year. The increases $2,229.5 million in fiscal 2005 in student financial aid, discussed later in this Overview, are the result of strategic plans that direct increasing amounts of Government grants and operational funds to need-based financial aid, making a contracts, including F&A Vanderbilt education more accessible to qualified students costs recovery 15% from all socioeconomic backgrounds. Unlike in the research and patient care areas, the University’s academic leadership Net tuition, fees, room, and board 9% does not aim to increase volumes or market share in terms of undergraduate student enrollment figures. Rather, in the academic areas Vanderbilt is focused upon attracting the Gifts, private grants and contracts, and endowment highest-possible quality and diversity of students and maxi- distributions 9% mizing each student’s overall educational experience once Investment income enrolled. and other 5% Health care 62% Operating Expenses by Function Vanderbilt reports its operating expenses in two formats: by function and by natural classification. The Consolidated Increases in patient care activity occurred through the new Statements of Activities reflect operating expenses by func- children’s hospital, renovated and expanded adult hospital tion, or purpose, for which expenses were incurred. facilities, the growth of campus clinics, and the expansion of Vanderbilt’s mission encompasses four primary purposes—

education, research, health care, and public service—which of total operating expenses. Growth in headcount, as well as are reflected in the following graph. in supplies and materials, correlated with activity and volume increases in health care services and research. Benefit costs Operating Expenses by Function increased at a rate commensurate with the growth in head- $2,198.2 million in fiscal 2005 count, salaries, and wages.

Research 14% Interest expense increased from $18.2 million in fiscal 2004 to $26.8 million in fiscal 2005 as Vanderbilt issued new debt and entered into fixed payer swaps to convert existing variable-rate debt to slightly higher long-term fixed rates. Education, room, Vanderbilt incurred an average interest rate of 3.7% on its and board 21% debt portfolio in fiscal 2005, compared to an average of 3.2% in fiscal 2004.

The provision for bad debts, which primarily relates to Institutional support 3% patient care receivables, grew at a rate slower than the Public service and growth in health care services revenues as management other 3% implemented improved billing and collection procedures. Health care 59% Unrestricted Operating Results Education, room, and board expenses comprised 21% of The University’s operating results before interest and depre- total operating expenses. As in prior years, these expenses ciation increased to $163.7 million in fiscal 2005, as com- are proportionally more than net revenues generated from pared to $160.6 million in the prior year. Operating results tuition, fees, room, and board charges. Therefore, net of interest and depreciation totaled $31.3 million in fis- Vanderbilt, like essentially all other major private universi- cal 2005 and $49.3 million in fiscal 2004. ties, relies upon philanthropy, endowment support, and other alternative sources of revenue to supplement net The fiscal 2005 operating activity was in line with long-term tuition revenues in supporting the educational mission. strategic plans, which forecasted operating results of about $25 million for the year. Strategic investments in faculty The other components of total operating expenses in fiscal recruitment and retention efforts, student financial aid, and 2005 were health care (59%), research (14%), institutional start-up research initiatives have advanced the University in support (3%), and public service and other expenses (3%). many ways. A results-driven ethic across the campus allowed Vanderbilt to make these investments while meeting target- Operating Expenses by Natural Classification ed financial results. The graph below depicts the fiscal 2005 operating expenses of $2,198.2 million by natural classification type. As expected based upon comprehensive capital plans, interest expense increased as noted above by $8.6 million and Salaries, wages, and benefits increased 12.0% from the prior depreciation expense increased from $93.1 million in fiscal year to total $1,279.4 million in fiscal 2005, representing 58% 2004 to $105.6 million in fiscal 2005.

Operating Expenses by Natural Classification $2,198.2 million in fiscal 2005 Financial Priorities Services $107.1 million Philanthropy Supplies and materials $500.9 million Vanderbilt’s gifts, pledges, and private grants and contracts have continued at a strong pace the past several years. External support is critical for the University’s research efforts, academic initiatives, construction projects, student scholarships, faculty chairs, and other mission-driven Salaries, wages, Depreciation and efforts. and benefits amortization $105.6 million $1,279.4 million Interest $26.8 million Vanderbilt’s Shape the Future Campaign, which utilizes phil- Provision for bad debts anthropic reporting standards established by the Council for $95.5 million Advancement and Support of Education, continued its Utilities, operating leases, trend toward exceeding a goal of $1.25 billion by June 2008. and other $82.9 million

As a linchpin for propelling Vanderbilt to new heights of discoveries about the biology of learning and human excellence, the Campaign goals include $300 million for stu- behavior. Further, transinstitutional research into pro- dent scholarships and financial aid; $260 million for faculty teomics, chemical biology, and structural biology is con- chairs and other academic support; $376 million for facili- tributing to positive developments in the design of life-sav- ties and technology; and $314 million for programs, ing drugs. research, and other unrestricted giving. Sponsored research activity, which consists of external fund- Since 1998, Martha Ingram and the Ingram family have ing from government and private sources, provides about donated more than $400 million worth of stock to support 15% of the University’s total operating revenue. In addition the mission of Vanderbilt. The timing of these donations has to direct costs for research, sponsored research awards par- resulted in significant increases in gift activity in varying tially fund the indirect (facilities and administrative) costs of years, such as in fiscal 2004 when the Ingram family donat- performing research. In fiscal 2005, Vanderbilt recovered ed $67.5 million worth of stock to support the University’s $89.1 million from external sponsors for the facilities and efforts. Among the many initiatives that these gifts have sup- administrative costs related to research projects. ported, portions of the most recent stock donations were used in fiscal 2005 to create endowments for student schol- After several consecutive years of tremendous growth rates arships and faculty chairs throughout the University, and to in research activity, Vanderbilt, as expected, experienced a fund construction costs of Medical Research Building IV,the more modest increase in fiscal 2005 as the University maxi- E. Bronson Ingram Studio Arts Center, and the College Halls mized much of its existing research space and the federal at Vanderbilt. government reduced its growth rates in research appropria- tions. Still, Vanderbilt’s research growth remains stellar, with Student Financial Aid the University advancing to 24th in the latest National Vanderbilt’s commitment to improving access to students of Science Foundation ranking of total federally sponsored exceptional quality and broad diversity, regardless of their research awards to universities. More specifically, Vanderbilt ability to pay, drives its financial aid programs for under- possesses the fastest growing medical research academic graduate, graduate, and professional students. Based on this program in the country, rising to 15th in the latest published fundamental principle, the University maintains a need- rankings of National Institutes of Health (NIH) awards. blind admissions process and provides a variety of financial Based upon Vanderbilt’s continuing success in attracting aid packages to students needing assistance. The impact of multi-year research awards and the current expansion of Vanderbilt’s financial aid strategy is reflected through research space, management expects research at the increasingly outstanding student quality, great strides in University to continue growing at a strong pace for the next diversity, and strong trends in student applications. several years.

In tandem with Vanderbilt’s need-blind admissions policy, Research Funding by Source student financial aid is a crucial component of the Fiscal 2005 University’s strategy to attract the most outstanding students. Chancellor Gordon Gee has announced a “Vanderbilt Vow,” which is: If a student is exceptional enough to select Vanderbilt and for Vanderbilt to select that student, then the Federal government University will enable that student’s ability to attend. 80.4% University funded 10.5% Financial aid awards to students, including need-based and merit scholarships and athletic grants, totaled 38.8% of gross Foundations and tuition and educational fees in fiscal 2005. Additional aid also associations 4.0% was awarded to students to cover room and board charges. Corporations 3.8% Other 1.3% Research In the words of John H. Exton, professor of molecular physiology and biophysics and professor of pharmacology at Vanderbilt, “research strengthens the university, acting as a magnet to attract great scholars and researchers who enrich the life of the university and its students.”Vanderbilt As illustrated in the graph above, the federal government holds a strategic advantage through its unique ability to provided 80.4% of the University’s total research funding in perform collaborative research at the intersection of disci- fiscal 2005. The Department of Health and Human Services, plines such as physics, engineering, chemistry, and biology. primarily through the NIH, accounted for about 84% of Collaborative research at Vanderbilt is unveiling important that federal support.

While the majority of research is funded externally, expected to shift towards a larger variable-rate percentage in Vanderbilt funded $38.4 million, or 10.5%, of total research the coming years. Vanderbilt’s leadership will continue to from internal funds, including start-up funding from the monitor and evaluate the optimal asset and debt structure University’s Academic Venture Capital Fund for transinsti- with a focus on financial equilibrium. tutional initiatives. These investments are proving very fruit- ful in promoting discovery, encouraging public service, attracting faculty and students, and creating new avenues for Investments in Plant Facilities obtaining sponsored research funding. In addition to the amounts in reported research totals, many full-time faculty Mission-driven capital projects across the campus are participate in departmental research that contributes to designed to promote and facilitate campus-wide involve- their teaching and to the development of new ideas. ment in the pursuit of outstanding education, research, patient care, and service. Further, in addition to the research activity discussed here, Vanderbilt continues to receive increasing amounts of exter- During the past year, the medical center completed con- nally-sponsored support for public service, teaching, and struction on several floors of the Doctor’s Office Tower at other non-research programs. the widely-acclaimed Monroe Carell Jr. Children’s Hospital at Vanderbilt. Meanwhile, the adult hospital emergency department renovation and expansion was completed in the Debt Portfolio Management spring of 2005, providing state-of-the-art space for patient treatment in the region’s only Level I trauma center. Also, Net of principal reductions, Vanderbilt increased its long- Medical Center East-South Tower was completed with term debt by $184.8 million during fiscal 2005. In January build-outs of the Vanderbilt Orthopaedic Institute, the 2005, Series 2005 A and B bonds were issued in a mix of Vanderbilt Bill Wilkerson Center for Otolaryngology and natural and synthetic variable-rate modes, totaling $391.1 Communication Sciences, and the Vanderbilt-Eskind million, to refund previous debt issues under more favor- Diabetes Clinic. able terms and to provide financing for strategic capital projects including Medical Research Building IV, Buttrick Hall, and the hospital emergency department renovations and expansion.

Vanderbilt has a formal comprehensive debt policy that provides guidance for the use of long-term debt, commercial paper, and derivative transactions. In accordance with that policy, management assesses appropriate debt structures from a number of perspectives, including judgments regarding long-term financial health, asset-debt optimiza- tion, and risk management. A key part of this assessment focuses on current and projected financial ratios, including ratios presented in the section immediately following this Overview, and the compliance with ratio limits established in the debt policy.

Within the framework of the University’s debt policy, Vanderbilt entered into three groups of derivatives during fiscal 2005: long-dated variable-to-fixed interest rate swaps with a duration of about 35 years; short-dated fixed-to-vari- Medical Center East-South Tower able interest rate swaps for the near term; and basis swaps In the spring of 2005, the Vanderbilt community celebrated involving taxable and tax-exempt variable interest rates. The the opening of the new Student Life Center, which provides various derivatives were used to manage the University’s students with event space and a location to explore their composite debt portfolio and to diversify with an acceptable futures through integrated career services, advising, and level of long-term risk. assistance with professional and graduate school pursuits.

As of June 30, 2005, the University’s debt portfolio totaled In addition to the above capital projects completed in fiscal $785.9 million and had been managed to result in a near- 2005, other construction projects continue to change the term allocation of 79% fixed and 21% variable, which is landscape of the campus.

E. BRONSON INGRAM STUDIO ARTS CENTER: The $13 MEDICAL RESEARCH BUILDING IV: Constructed above million E. Bronson Ingram Studio Arts Center houses stu- Light Hall and Langford Auditorium, Medical Research dios for sculpture, ceramics, photography, computer arts, Building IV (MRB IV) is scheduled to open in stages begin- painting, and drawing, as well as interior and exterior gallery ning in fiscal 2006. The new facility will support Vanderbilt’s space, faculty offices, and research areas. Completed early in growth in research awards, which has outpaced the recent the fall of 2005, the center allows for the relocation of the growth in research space. As part of the University’s focus studio arts program from outdated and crowded space to upon transinstitutional efforts, MRB IV will bring together the new facility near the Student Life Center and Branscomb many joint research initiatives, such as that forged by the Quadrangle—a revitalized student life area serving as a pub- College of Arts and Science and the School of Medicine lic portal to the University. through the recently established Vanderbilt Institute of Chemical Biology. BUTTRICK HALL: Originally constructed in the 1920s, Buttrick Hall underwent a complete renovation and addition that more than doubled its size to more than 90,000 square feet. The reinvigorated Buttrick Hall, located on a site central to the campus, is a physical representation of the University’s strategic investments in interdisciplinary schol- arship and teaching for both undergraduate and graduate programs. In addition to serving as a major venue for class- room teaching, the new space will be a hub for interdisciplinary lectures, conferences, and other scholarly and creative pursuits of faculty and students. The renovated Buttrick Hall was completed in time for the fall 2005 semester and already serves as a new focal point for transinstitutional centers in the humanities and social sciences.

Medical Research Building IV

COLLEGE HALLS AT VANDERBILT: Construction began in the summer of 2005 on the first phase of the College Halls at Vanderbilt, the University’s new system for integrating academic and residential life. The College Halls will reinvent the classical definition of a residential college system— where learning and living converge—in ways that will maximize the connections between the people, programs, and ideas that highlight the Vanderbilt experience and create a vibrant intellectual community and sense of belonging for all students. Scheduled for completion in 2008, the first phase, called the Commons, will utilize housing, dining, seminar rooms, student programming, and resident faculty to create a one-of-a-kind experience for first-year students.

Buttrick Hall Perspectives on Trends

VANDERBILT UNIVERSITY INSTITUTE OF IMAGING The strategic priorities for Vanderbilt are bold, but our focus SCIENCE: In fiscal 2005, construction began on the remains steadfast on the University’s goals and mission to Vanderbilt University Institute of Imaging Science (VUIIS), promote excellence in education, research, patient care, and a new four-story, 41,000-square-foot facility for advanced public service. It is this determination and desire for excel- imaging studies of humans and non-human subjects. To be lence that propels us to accomplish our current goals and to located between wings of the existing Medical Center North set our sights increasingly higher. building, VUIIS will support advances in physics, engineering, computing, and other sciences for the development of Applications for fall 2005 incoming freshmen increased for better imaging techniques to be used in biological and med- the fifth record-setting year in a row, allowing Vanderbilt to ical research. become even more selective in assembling the most diverse

and talented student body possible. Further, significant Rising utility costs are among the operating expenses that increases in student retention rates indicate that students, demand management’s attention. The University has bud- once here, are engaged fully in the life of the University. In geted for notable increases in electricity rates, and the recent addition, the number of graduate and professional stu- volatility of natural gas and coal purchase prices presents dents enrolled at Vanderbilt has increased for the fifth con- challenges, too. Vanderbilt has initiated creative intervention secutive year. strategies, power agreements, and the use of long-term pur- chasing to minimize the risk of utility cost increases to the The College Halls at Vanderbilt will transform the living and University’s operating results. learning environment for students. This truly ambitious endeavor will change our current housing, dining, security, It is through strong leadership and an alignment of priori- and other student services to function as an even more all- ties with the overall goals and mission of Vanderbilt that we encompassing community. stand in a position of strength. Our success is measured by life-changing research discoveries for society at large, an out- Vanderbilt maintained its place at 18th in U.S. News & standing environment for student living and learning, a World Report’s latest annual ranking of national universi- healthy quality of life for the Vanderbilt community, and ties and advanced to 14th place in the magazine’s ranking one-of-a-kind patient care. Consistently strong financial of “best values,” which is determined by relating a school’s results are a reflection of the thoughtful stewardship that academic quality to the net cost of attendance for a student management exercises in directing the University’s resources receiving average need-based financial aid. The medical toward those ends. center also continues to achieve national recognition for its research and patient care. In its 2005 ranking of the “best The efforts and accomplishments at Vanderbilt this year hospitals,” U.S. News again ranked Vanderbilt among the have created positive momentum. I am confident that the top 50 in the country. financial stability of this institution and the direction of resources toward mission-critical goals will further this With targeted investments in research facilities and faculty, momentum, allowing this university to achieve unprece- Vanderbilt has capitalized on its strengths as an interdiscipli- dented excellence. nary institution and risen in the rankings of universities with the most significant sponsored research. As the competition for federal research dollars intensifies, we believe the University is poised to continue its climb into the elite ranks of the world’s best research universities. Lauren J. Brisky Vice Chancellor for Administration and Vanderbilt faces many challenges to consider for the future. Chief Financial Officer While quality pervades all that we do, the University is simultaneously implementing strategies of growth and productiv- ity in the research and patient care areas, while containing growth—and focusing upon strategies of student selectivity and faculty excellence—in the University’s educational domain. To accomplish growth in research and patient care, Vanderbilt will continue to capitalize on its unique intellectual landscape and state-of-the-art facilities to attract research awards and expand its patient care market share. Simultaneously, to enhance the educational enterprise, Vanderbilt plans to create more endowed faculty chairs and student scholarships through the Shape the Future Campaign.

As a nonprofit institution, Vanderbilt attempts to maximize its investments directly towards the University’s long-term mission. Still, as is common at most highly-rated private universities, the margin for future shocks is relatively small as Vanderbilt’s operating results are less than 2% of operating revenues. To ensure stable operating results, management must continue to act swiftly to manage costs and redi- rect resources to the University’s priorities.

Financial RATIOS

The following ratio analysis supplements the 2005 Financial Report Overview by providing additional measures of Vanderbilt University’s financial health and flexibility.

Debt Service Coverage Ratio 5.0

The debt service coverage ratio measures the ability to cover debt service require- 4.6 4.5 4.6 ments from continuing operations. The change in unrestricted net assets from oper- 4.0 4.1 4.1 3.8 ating activities is increased by depreciation and interest expenses in order to calculate 3.6 3.6 3.6 3.6 the operating surplus available to make principal and interest payments. The annual 3.0 debt service is normalized to compensate for certain debt issues with back-end loaded principal payment due dates. 2.0

1.0 AT VANDERBILT: The University has consistently covered its annual debt service with healthy ratios between 3.6x to 4.6x in each of the past ten years. Consistent with manage- 0 ment’s capital plans, the debt service coverage ratio declined in fiscal 2005 as the 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 University increased its long-term debt by $185 million to fund strategic capital projects. Operating Results before Interest and Depreciation Normalized Annual Debt Service

Operating Surplus Ratio 12.0% 10.9% 10.4% This ratio measures the margin on each dollar of operating revenue for a university. 9.9% The operating results before interest and depreciation, or operating surplus, are cal- 10.0% 9.3% 8.5% culated as a percentage of total operating revenue. 8.1% 7.8% 8.1% 8.0% 7.6% 7.3%

AT VANDERBILT: The University has successfully maintained positive operating results 6.0%

for the past several years while still making significant strategic investments in faculty, 4.0% student financial aid, and facilities. Since 1996, Vanderbilt’s operating results before interest and depreciation have increased 55% while the University’s total operating rev- 2.0% enue base has grown 129%, leading to a modest decline in this ratio. 0.0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Operating Results before Interest and Depreciation Total Operating Revenue

Debt Service Burden 4.0% This measurement is defined by normalized annual debt service as a percentage of a 3.1% university's total operating expenses. 3.0% 2.6% 2.3% 2.3% 2.2% AT VANDERBILT: The University has maintained a low debt service burden around 2% 2.1% 2.1% 2.0% 2.1% during the past several years. The burden increased slightly in fiscal 2005 due to new debt 2.0% 1.9% issuances resulting in a $185 million increase in Vanderbilt’s long-term debt. Also, in fiscal 2005, the University utilized interest rate swap transactions to increase the fixed-rate 1.0% allocation of its debt portfolio as compared to the prior year, resulting in increased interest expense adjusted for net swap payments. 0.0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Normalized Annual Debt Service Total Operating Expenses

2.0 Primary Reserve Ratio 1.9 The primary reserve ratio measures financial strength by indicating how many years a university could operate using its expendable resources without relying on addition- 1.5 1.6 1.6 1.5 al net assets generated by operations.“Expendable Net Assets” are all unrestricted and 1.3 1.3 1.2 1.2 1.2 temporarily restricted net assets other than those designated for plant facilities. The 1.0 1.1 amount designated for plant facilities is defined as the net investment in property, plant, and equipment, as well as funds designated for future acquisitions of plant 0.5 facilities and retirement of debt.

AT VANDERBILT: The University’s expendable net assets have consistently exceeded a 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 full year’s worth of operating expenses. The primary reserve ratio remained level in fiscal Expendable Net Assets 2005 as growth in the endowment matched growth in the University’s total operating Total Operating Expenses base. Extraordinary endowment returns bolstered this ratio in the late 1990s through 2000; then, subsequent declines in investments coupled with the increased operating size of the University caused declines in the primary reserve ratio from 2000 through 2003.

7.0 Viability Ratio The viability ratio measures the availability of expendable net assets to cover debt 6.0 6.1 should a university need to settle its obligations immediately. Aggregate capital-relat- 5.0 4.9 ed debt includes debt guaranty commitments and any capital project-related com- 4.0 4.5 mercial paper. 4.1 4.1 3.6 3.0 3.4 3.3 3.2 3.2 AT VANDERBILT: The University’s viability ratio of 3.2x as of June 30, 2005, is consis- 2.0 tent with established capital plans and compares favorably to similarly-rated private 1.0 universities with an academic medical center and hospital operations. While the viability ratio is strongly affected by investment returns, recent declines in Vanderbilt’s ratio 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 have resulted in large part from a $225 million debt issuance in May 2000, new debt Expendable Net Assets totaling $100 million in June 2002, and a net increase of $185 million in long-term debt Aggregate Capital-Related Debt in fiscal 2005—all used to finance strategic capital projects as part of the University’s comprehensive capital plans.

3.0 Capital Expenditures to Depreciation This ratio indicates the rate of capitalization occurring at an institution. A ratio above 2.5 2.5 2.5 1.0x indicates that a university is in a growth mode. A ratio below 1.0x indicates that 2.0 2.2 a university may not be investing in its equipment and facilities at a rate fast enough 2.0 1.8 to maintain its plant condition. 1.5 1.4 1.4 1.4 1.2 AT VANDERBILT: The University invested extensively in renovations of existing facili- 1.0 1.1 ties and the construction of new facilities over the past few years. The capital investment 0.5 activity peaked in 2002 with construction of the Biological Sciences Building/Medical Research Building III, the Monroe Carell Jr. Children’s Hospital at Vanderbilt, and the 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 School of Engineering’s renovation and expansion. Capital expenditures have since con- 3-Year Rolling Average tinued at a strong pace for projects including Medical Research Building IV, Medical of Annual Capital Expenditures Center East-South Tower, the Student Life Center, the E. Bronson Ingram Studio Arts Annual Depreciation Expense Center, and Buttrick Hall—and will remain high with construction of the College Halls at Vanderbilt, which began in fiscal 2005.

ENDOWMENT REVIEW

Going Global agers including hedge funds that are focused on Asia, where both economic growth and valuation discrepancies Basic financial theory teaches us that the optimal mix of offer unusual opportunities. non-cash asset classes is equal to the world market portfolio. In other words, the starting point for any asset alloca- Over the longer term, we believe that institutional investors tion discussion should be a capitalization weighted portfo- will move away from the current practice of setting distinct lio of all of the world’s asset categories. Since the U.S. and targets for domestic versus international exposure. Instead, non-U.S. equity markets are roughly equal in size, this prin- they will allocate their portfolios among a small number of ciple suggests that investors should have essentially equal very broad categories, such as global equities, for example. weightings in those two categories. Yet, according to the Within those broad categories, they will attempt to hire tal- most recent Endowment Study by the National Association ented managers who will be given the flexibility to seek of College and University Business Officers, the equity com- attractive returns wherever they may be found. In other ponent of the average endowment fund was allocated 82% words, the split between U.S. and non-U.S. holdings will be to domestic equities and 18% to non-U.S. stocks. This dis- determined by individual security selection and not by an parity is known as the “home country bias” and is present arbitrary geographic allocation decision. At Vanderbilt, we in the portfolios of both individual and institutional are moving steadily toward this new paradigm and look investors around the globe. forward to keeping you informed on our progress.

Vanderbilt was among the first U.S. endowments to invest Endowment Market Value internationally and we had a 12% allocation to internation- in millions al stocks as early as 1985. Today, our marketable equity port- $3,000 folio is structured as follows:

$2,500 Domestic Equities 44% Non-U.S. Industrialized Country Equities 35% $2,000 Emerging Market Equities_____ 21% $1,500 Total Marketable Equity Portfolio 100%_____

$1,000 As you will note, we have a truly global equity portfolio with an approximate balance between domestic and non-U.S. $500 issues. In addition to the theoretical rationale for interna- $0 tional diversification, our strategy is motivated by the fol- 1985 1990 1995 2000 2005 lowing factors that are more tactical in nature: Fiscal Year I Several regions of the world currently enjoy faster growth than the U.S. I Many markets around the world sell at lower valua- Fiscal 2005 in Review tions than the U.S. I Some markets are less competitive than the U.S. which While we are not in the forecasting business, we generally have should allow skilled practitioners to gain an advantage. views regarding likely market trends over the next year or two. In order to minimize our level of embarrassment, we keep For all of these reasons, we expect our non-U.S. equity port- those views to ourselves because we typically only get about folio to outperform for the foreseeable future. half of them right. This year was no exception as we made a couple of good calls and were totally surprised by several out- In recent years, we have focused our efforts on globalizing comes. In the plus column, we have been forecasting 6%-to- the remainder of Vanderbilt’s endowment. For example, 8% U.S. equity returns for a number of years, and the actual 25% of our private equity portfolio is now allocated to return on the S&P 500 for fiscal 2005 was 6.3%. We also venture and leveraged buyout firms outside of the U.S., thought that non-U.S. stocks were more attractive than the and this total does not reflect the fact that many of our domestic market and were particularly enthusiastic about domestic private equity firms have made investments in emerging markets. For the year, non-U.S. industrialized mar- other countries. Similarly, we made three commitments to kets earned 13.6% and the emerging markets generated a non-U.S. real estate funds in fiscal 2005 and have one out- 34.9% return on top of a 33.5% return in the prior fiscal year. standing commitment to an international energy fund. Thirty percent of the endowment is allocated to a variety On the other hand, we were totally wrong about bonds. As a of hedge funds and virtually all of them have a global ori- result of record trade and budget deficits, we expected both entation. Additionally, we are evaluating a number of man- short- and long-term interest rates to rise, resulting in little

or no return on a long-term bond portfolio. In fact, short- years, our return falls in the top quartile of the large endow- term rates did rise by 2.25%, but long-term U.S. Treasury ment peer universe. yields fell by more than 1%. As a result, the return for the year on the Lehman Long Treasury Bond Index was an eye- While this year’s overall results were quite satisfactory, we were popping 16.8%. Perhaps we shouldn’t feel too guilty about disappointed in the way that we achieved them. We measure our poor forecast since Federal Reserve Chairman Alan our returns in eight broad categories within the endowment Greenspan has publicly called the behavior of interest rates a (U.S. stocks, international equities, fixed income, etc.). In a “conundrum.” given year, we typically outperform the relevant market index in five or six of those categories. This year, we only managed Endowment Comparative Asset Mix to gain an advantage in four of the eight. As a result of this % of Portfolio shortfall, we made a number of changes in our lineup of Vanderbilt Large investment managers. On the other hand, we outperformed University Endowment by significant margins in several categories including emerg- Category______Actual % ______Average % ing markets and absolute return. Most important, we enjoyed U.S. Equities 20.9 20.7 very strong returns on our private equity, real estate, and ener- International Equities 26.1 17.8 gy portfolios, resulting in an overall gain of 38.8% on the non- Hedge Funds 22.0 26.1 marketable segment of the endowment. This outcome con- Private Equity______10.0 ______10.0 firms our long-held strategy of devoting time and resources to Total Equities______79.0 ______74.6 those asset classes that we deem less efficient because we are more likely to gain a performance edge. Real Estate 6.0 5.3 Timber & Energy ______3.6 ______3.0 The market value per unit of Vanderbilt’s endowment at Total Real Assets ______9.6 ______8.3 June 30, 2005, was $81.43 as compared to $71.75 at the end of fiscal 2004. The annual transfer to the operating budget Treasury Inflation-Protected for fiscal 2006 will be $3.178 per unit as compared to $3.001 Securities (TIPS) 0.0 2.6 for the year just ended. U.S. Bonds 11.0 9.7 International Bonds 0.0 1.2 Unit Distributions by Purpose High-Yield Bonds 0.0 0.9 as of Spring 2005 Cash ______0.4______2.7 Total Fixed Income______11.4______17.1 School Total Endowment 100.0 100.0 ______Operations Faculty 28% Chairs To round out the major asset categories, real estate earned an 21% 18% return for the year and we believe that private equity returns will be around 20% when they are reported in the Scholarships fall of 2005. 28% Other Restricted 12% Against this market backdrop, Vanderbilt's endowment earned a total return of 17.85% bringing the market value to $2.60 billion. For the year, we accomplished our major General Operations 11% performance objectives, which involve adding value versus both market indices and our peer institutions. First, our return exceeded by approximately 4% a blend of market Endowment Market Value Per Unit versus indices weighted in proportion to our target asset mix. In Distribution Per Unit other words, we added value of approximately $90 million in constant 2005 dollars in comparison to a passive strategy. Second, our return fell $100.00 $5.00

in the 10th percentile (where the 1st percentile is the high- Endowment Market Distribution Per Unit $80.00 $4.00 est ranking) of a universe of endowments and foundations Value Per Unit with assets in excess of $1 billion. Since this universe is $60.00 $3.00

extremely competitive, we are satisfied when our return alue Per Unit $40.00 $2.00 falls in the top half but strive for a top quartile outcome. Distribution Per Unit $20.00 $1.00 Over the past seven years in which we have measured our Market V results versus a blended market index, we have outper- $0.00 $0.00 1985 1990 1995 2000 2005 formed by more than 5% per annum. And, over the past ten Fiscal Year

Our Investment Team

I have managed Vanderbilt’s endowment for twenty years and have enjoyed the privilege of watching it grow from $300 million to $2.6 billion. But, I am particularly proud of the investment team that I have assembled and the culture that permeates the Office of Investments. Carol Womack is responsible for our private equity portfolio. Henry Delicata handles “real” assets including real estate, timber, and energy. And, Greg Dyra and John Liu work as a team managing all of our marketable securities including hedge funds. All of us are assisted by Owen student Greg Zolman who provides quantitative support.

While each person is responsible for a specific component of the portfolio, all decisions are made as a team and unanim- ity is required. We think this approach has two advantages. First, every decision is enhanced by the balance between the domain expertise supplied by each specialist and the broad- er perspective provided by the remainder of the team. Second, the team lives and dies on the basis of our collective performance. No one can ever complain that another member of the team made a bad investment because “we” make every investment.

The capital markets supply a never-ending series of challenges but all of Vanderbilt’s constituents should take com- fort in the depth of our team and in the expertise of the members of the Investment Committee of the Board of Trust who supervise it.

William T. Spitz Vice Chancellor for Investments and Treasurer

Benefactions of the VANDERBILT FAMILY anderbilt University was founded in 1873 by Commodore Cornelius Vanderbilt and has been generously supported by successive generations of his family. Especially signifi- cantV were the gifts and bequests of Harold Stirling Vanderbilt and his wife, Gertrude Conaway Vanderbilt. In 1970, the Board of Trust passed a resolution that the extent of this philanthropy should forever be recognized by the University in appropriate communications. The contributions of the Vanderbilt family are summarized below, without adjustments for inflation. All amounts are shown in thousands of dollars.

The founding gifts of Commodore Cornelius Vanderbilt $ 1,004 Harold Stirling Vanderbilt gifts and bequests 57,279 Gertrude Conaway Vanderbilt gifts and bequests 6,456 Gifts and bequests from other members of the family______8,599 TOTAL______$ 73,338

Independent AUDITORS’ REPORT

Board of Trust, The Vanderbilt University: e have audited the accompanying consolidated statements of financial position of The Vanderbilt University (the W University) as of June 30, 2005 and 2004, 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. Our responsibility 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 America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes considera- tion of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Vanderbilt University as of June 30, 2005 and 2004, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

September 14, 2005

Consolidated Statements of FINANCIAL POSITION

As of June 30, 2005 and 2004 (in thousands) 2005 2004 ASSETS Cash and cash equivalents $ 217,697 $ 186,942 Collateral under security lending agreements 324,757 254,844 Accounts receivable 230,262 228,306 Prepaid expenses and other assets 80,118 75,574 Contributions receivable 84,381 103,165 Student loans receivable 35,117 34,422 Investments 3,188,638 2,697,804 Property, plant, and equipment 1,365,177 1,250,139 Interest in trusts held by others______42,782 ______45,511

Total assets $ 5,568,929 $ 4,876,707

LIABILITIES Accounts payable and accrued liabilities $ 260,093 $ 187,636 Accrued payroll and withholdings 137,871 117,216 Payable under security lending agreements 324,757 254,844 Deferred revenue 48,091 36,188 Commercial paper 5,500 15,000 Actuarial liability for self-insurance 70,464 58,591 Actuarial liability for annuities payable 38,542 37,597 Government advances for student loans 15,781 15,459 Long-term debt and capital leases ______780,399 ______594,800

Total liabilities 1,681,498 1,317,331

NET ASSETS Unrestricted 3,044,386 2,715,713 Temporarily restricted 175,043 221,982 Permanently restricted______668,002 ______621,681

Total net assets 3,887,431 3,559,376

Total liabilities and net assets $ 5,568,929 $ 4,876,707

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

Consolidated Statements of ACTIVITIES

Years Ended June 30, 2005 and 2004 (in thousands) 2005 2004 CHANGES IN UNRESTRICTED NET ASSETS REVENUES Tuition and educational fees, net $ 180,136 $ 178,370 Government grants and contracts 257,241 238,597 Facilities and administrative costs recovery 92,892 87,636 Private gifts, grants, and contracts 61,919 59,500 Endowment distributions 103,849 101,910 Investment income 28,564 20,697 Health care services 1,387,235 1,187,973 Room, board, and other auxiliary services, net 73,248 71,335 Other sources 27,507 22,963 Net assets released from restrictions ______16,931 ______9,984

Total revenues______2,229,522 ______1,978,965

EXPENSES

Operating Instruction 302,972 271,767 Research 298,996 272,241 Health care services 1,301,615 1,105,590 Academic support 93,241 89,070 Institutional support 57,403 58,752 Student services 24,936 23,769 Public service 28,056 19,382 Room, board, and other auxiliary services______91,030 ______89,078

Total expenses______2,198,249 ______1,929,649

Change in unrestricted net assets from operating activity______31,273 ______49,316

OTHER UNRESTRICTED ACTIVITY Gifts and contributions for plant 7,090 1,713 Net assets released from restrictions for plant 39,458 19,600 Donor designation changes (521) (3,596) Change in appreciation, net of endowment distributions 292,307 234,262 Other non-operating activity______(40,934)______9,769

Change in unrestricted net assets from other unrestricted activity______297,400______261,748

Increase in unrestricted net assets 328,673 311,064 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS Contributions and other 3,922 62,575 Donor designation changes (19,707) (8,089) Net gain on contributions receivable 5,864 9,146 Endowment distributions 2,545 2,563 Investment gains 16,826 23,652 Non-operating Net assets released from restrictions ______(56,389)______(29,584)

(Decrease) increase in temporarily restricted net assets (46,939) 60,263 CHANGES IN PERMANENTLY RESTRICTED NET ASSETS Contributions and other 15,725 33,595 Donor designation changes 20,228 11,685 Endowment distributions 252 175 Investment gains ______10,116 ______8,011

Increase in permanently restricted net assets 46,321 53,466

Increase in total net assets $ 328,055 $ 424,793 Net assets at beginning of year______3,559,376 ______3,134,583 Net assets at end of year $ 3,887,431 $ 3,559,376 The accompanying notes are an integral part of the consolidated financial statements.

Consolidated Statements of CASH FLOWS

Years Ended June 30, 2005 and 2004 (in thousands) 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES Increase in total net assets $ 328,055 $ 424,793

Adjustments to reconcile increase in total net assets to net cash provided by operating activities: Non-operating changes in net assets Gifts for plant and endowment (53,396) (63,663) Net realized investment gains (208,906) (92,035) Non-cash changes in net assets Net increase in unrealized appreciation (188,380) (242,683) Gifts of securities other than for plant and endowment (14,367) (66,105) Depreciation and amortization 105,600 93,118 Provision for bad debts 95,464 91,335 Present value adjustment on annuities payable 945 3,738 Present value adjustment on self-insurance 11,873 8,277 Net decrease in interest in trusts held by others 2,729 536 Amortization of bond discounts and premiums (890) 184 Change in operating assets and liabilities Decrease (increase) in: Accounts receivable (97,420) (94,346) Prepaid expenses and other assets (4,544) (5,996) Contributions receivable 18,784 (1,131) Increase (decrease) in: Non-construction accounts payable and accrued liabilities 67,794 (19,700) Accrued payroll and withholdings 20,655 13,168 Deferred revenue______11,903 ______4,661

Net cash provided by operating activities 95,899 54,151

CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments (3,733,318) (1,277,642) Proceeds from the sale of investments 3,654,137 1,262,454 Acquisition of property, plant, and equipment (221,880) (141,367) Disposal of property, plant, and equipment 1,242 1,129 Student loans disbursed (6,521) (6,278) Principal collected on student loans______5,826 ______5,878

Net cash used in investing activities (300,514) (155,826)

CASH FLOWS FROM FINANCING ACTIVITIES Gifts for plant and endowment 53,396 63,663 Increase (decrease) in construction-related payables 4,663 (10,914) Increase in government advances for student loans 322 323 Proceeds from the issuance of debt 482,860 15,000 Payments to retire or defease debt______(305,871) ______(11,449)

Net cash provided by financing activities 235,370 56,623

Net increase (decrease) in cash and cash equivalents $ 30,755 $ (45,052) Cash and cash equivalents at beginning of year______186,942 ______231,994 Cash and cash equivalents at end of year $ 217,697 $ 186,942 The accompanying notes are an integral part of the consolidated financial statements.

NOTES to the Consolidated Financial Statements

1. Organization Cash and Cash Equivalents Cash and cash equivalents, maturing in 90 days or less at date The Vanderbilt University (the University) is a privately of purchase, are reported at fair value. endowed, coeducational, not-for-profit, nonsectarian institution located in Nashville, Tennessee. Founded in 1873, the Investments University owns and operates educational and research facili- Investments are reported at fair value, based primarily on mar- ties as well as a health care system. The University provides edu- ket quotes, except for certain real estate and mortgages that are cational services to approximately 6,300 undergraduate and stated at cost. Fair values for certain alternative investments 5,000 graduate and professional students enrolled in its ten (primarily investments in limited partnerships) are based on schools and colleges. The Chancellor and the Board of Trust, estimates reported by fund managers where a ready market for the governing board of the University, have oversight responsi- the investments does not exist. The estimated values are bility for all of the University’s financial affairs. reviewed and evaluated by the University.

These consolidated financial statements include the accounts of The University has significant exposure to a number of risks all entities in which the University has a significant financial including interest rate, market, and credit risks for both mar- interest and over which the University has control, including its ketable and non-marketable securities. Due to the level of risk hospitals and clinics. All significant intercompany accounts and exposure, it is possible that near-term valuation changes for transactions have been eliminated in consolidation. investment securities may occur to an extent that could mate- rially affect the amounts reported in the University’s financial statements. 2. Summary of Significant Accounting Policies Purchases and sales of securities are recorded on the trade dates, and realized gains and losses are determined on the basis Basis of Presentation of the average historical cost of the securities sold. Net receiv- The consolidated financial statements of the University have ables and payables arising from unsettled trades by investment been prepared on the accrual basis in accordance with account- managers are reported as a component of investments. ing principles generally accepted in the United States of America. All true endowment investments and long-term net assets Based on the existence or absence of donor-imposed restric- functioning as endowment are managed in a pool, unless spe- tions, the University classifies resources into three categories: cial considerations or donor stipulations require that they be held separately. Unrestricted net assets are free of donor-imposed restrictions. All revenues, gains, and losses that are not temporar- Gains and losses on investments generally are reported as ily or permanently restricted by donors are included in increases or decreases in non-operating unrestricted net assets this classification. All expenditures are reported in the unless explicit donor stipulations or law restrict their use. unrestricted class of net assets, since the use of restricted contributions in accordance with donors’ stipulations Endowment Distribution Policy results in the release of the restriction. The University employs a total return policy that establishes the amount of endowment income distributed to support Temporarily restricted net assets are limited as to use by current operational needs. This policy is designed to reduce donor-imposed stipulations that expire with the passage of the impact of capital market fluctuations on operational pro- time or that can be satisfied by action of the University. grams and increase the amount of return that is reinvested in These net assets may include unconditional pledges, split- the corpus of funds in order to enhance its long-term value. interest agreements, and interest in trusts held by others. Under this policy, endowment income distributions are Permanently restricted net assets are amounts required based on a percentage of the previous three years’ average by donors to be held in perpetuity. These net assets may calendar year-end market values. Actual endowment return include unconditional pledges, true endowment, split- earned in excess of distributions under this policy is reinvest- interest agreements, and interest in trusts held by others. ed as part of the University’s managed endowment and is reported as a non-operating item in the Consolidated Expirations of temporary restrictions on net assets, i.e., the pas- Statements of Activities. For years where actual endowment sage of time and/or fulfilling donor-imposed stipulations, are return is less than distributions under the policy, the short- reported as net assets released from restrictions between the fall is covered by realized returns from prior years. applicable classes of net assets in the Consolidated Statements of Activities. Additionally, the Board of Trust has authorized the use of

previously reinvested income, realized capital gains, and pledged cash and cash equivalents collateral under the control principal related to unrestricted funds functioning as endow- of the University, a short-term asset and liability are recorded ment for special transinstitutional academic development representing the market value of such collateral. initiatives. Endowment distributions reported in the Consolidated Statements of Activities include both (a) distri- Split-Interest Agreements and Interest in Trusts Held butions to support current operational needs under the pol- by Others icy as previously described and (b) the aforementioned sup- The University’s split-interest agreements with donors consist plemental endowment distributions for special academic ini- primarily of irrevocable charitable remainder trusts, charitable tiatives to the extent operating expenditures have been gift annuities, and life income funds for which the University incurred. serves as trustee. Assets held in these trusts are included in investments. Contribution revenue is recognized at the dates The supplemental use of unrestricted funds functioning as the trusts are established, net of the liabilities for the present endowment to invest in capital needs of special academic ini- value of the estimated future payments to be made to the tiatives is not reported as endowment distributions in the donors and/or other beneficiaries. Annually, the University Consolidated Statements of Activities. records the change in value of split-interest agreements by marking to market the assets that are associated with each Other Financial Instruments trust and recalculating the liability for the present value of the Recorded amounts for receivables, prepaid expenses and other estimated future payments to be made to the donors and/or assets, and accounts payable and accrued expenses approxi- other beneficiaries. mate fair value. The University also is the beneficiary of certain perpetual trusts Using market quotations for similar issues or borrowings, the held and administered by others. These trust assets are record- University evaluates the estimated fair value of its fixed-rate ed at fair value as interest in trusts held by others with carrying long-term indebtedness relative to carrying value. Principal values adjusted annually for changes in fair value. balances for fixed-rate debt are reported at carrying value, which is substantially equivalent to estimated fair value. Property, Plant, and Equipment Purchased property, plant, and equipment are recorded at cost, The University employs derivatives, primarily interest rate swap including, where appropriate, capitalized interest. Donated agreements, to manage market risk associated with outstanding assets are recorded at fair value at the date of donation. variable-rate debt. Derivative financial instruments are report- Additions to the library collection are expensed at the time of ed at fair value with any resulting gain or loss recognized as a purchase. non-operating item in the Consolidated Statements of Activities. Periodic net cash settlement amounts with counter- Depreciation is calculated by the straight-line method at rates parties are accounted for as adjustments to interest expense on estimated to allocate the cost of various classes of assets over related debt. their estimated useful lives. Equipment is removed from the accounting records at the time of disposal. Parties to interest rate swap agreements are subject to market risk for changes in interest rates as well as risk of credit loss in The University reviews long-lived assets for impairment when- the event of nonperformance by the counterparty. The ever events or changes in circumstances indicate that the carry- University deals only with high quality counterparties that ing amount of an asset may not be recoverable. An impairment meet rating criteria for financial stability and creditworthiness. charge is recognized when the fair value of the asset or group of Additionally, the University requires the posting of collateral assets is less than the carrying value. when amounts subject to credit risk under swap arrangements exceed specified levels. Revenue Recognition The University’s revenue recognition policies are as follows: University management also approves strategic use of derivatives by external investment managers to manage market risks. Tuition and educational fees, net—Student tuition and The most common strategies engaged by such managers are educational fees are recorded as revenues during the year futures contracts, short sales, and hedges against currency the related academic services are rendered. Student tuition translation risk for investments denominated in other than U.S. and educational fees received in advance of services to be dollars. These derivative instruments are recorded at their rendered are recorded as deferred revenue. Financial aid respective fair values. provided by the University for tuition and educational fees is reflected as a reduction of tuition and educational fees. Through an agreement with its primary investment custodian, Financial aid does not include payments made to students the University participates in security lending to brokers. For for services rendered to the University. If the University is

unable to award endowment distributions for financial aid assets upon receipt of the gift or expiration of the time restric- in a given year, such amounts are reinvested in order to pro- tion, and after any donor stipulations are met. Gifts for plant vide scholarships in future years. facilities are released from restrictions and recognized as a non- operating item only after resources are expended for the appli- Government grants and contracts—Revenues from govern- cable plant facilities. ment grants and contracts are recognized when allowable expenditures are incurred under such agreements. Contributions receivable of pledged securities are stated at the fair value of the underlying securities. Net changes on shares Facilities and administrative (F&A) costs recovery—F&A pledged in prior years due to fair value changes for the under- costs recovery, historically refered to as indirect cost recov- lying securities are reported separately as a non-operating gain ery, is recognized as revenue and represents reimbursement, or loss on contributions receivable in the Consolidated primarily from the federal government, of F&A costs on Statements of Activities. research grants. The federal F&A costs recovery rate for on- campus research was 51.0% in fiscal 2004 and 2005. This Operating Results rate increases to 52.0% in fiscal 2006, 53.0% in fiscal 2007, Operating results (change in unrestricted net assets from oper- and 53.5% in fiscal 2008. ating activity) in the Consolidated Statements of Activities reflect all transactions that change unrestricted net assets, Health care services—Health care services revenue is except gifts for plant facilities, activity associated with endow- reported at established rates, net of contractual adjustment investments, and certain other non-recurring items. In ments and charity services. Third party contractual rev- accordance with the University’s endowment distribution poli- enue adjustments under governmental reimbursement cy, as previously described, only the portion of total investment programs are accrued on an estimated basis in the period return distributed under this policy to meet operating needs is the related services are rendered. The estimated amounts included in operating revenue. Operating investment income are adjusted to actual during the year that final settlement consists of dividends, interest, and realized gains and losses on is determined by the fiscal intermediary for each program. unrestricted, non-endowed investments. Health care services revenue include those of Vanderbilt’s hospital and clinic operations, Vanderbilt Medical Group, The University’s primary programs are instruction, research, Vanderbilt Health Services, Inc., and other activities direct- health care, and public service. Academic and student support ed toward the purpose of providing health care services to expenses and auxiliary services are considered integral to the the community. delivery of these programs. Fund-raising costs are not material to the University’s contributions or total program costs. Contributions Approximately 50% of gifts and private grants revenue repre- Unconditional promises to give (pledges) are recognized as sent transactions where University services are provided in contribution revenue when the donor’s commitment is exchange for the private grants. received. Conditional promises (primarily bequest intentions) are not recorded until donor stipulations are substan- Costs related to the operation and maintenance of physical tially met. plant, including depreciation of plant assets, are allocated to operating programs and supporting activities based upon peri- Unconditional promises to give, with payments due to odic facility usage surveys. Interest expense on external debt is Vanderbilt in future periods, are recorded as increases in tem- allocated to the activities that have most directly benefited from porarily restricted or permanently restricted net assets at the the debt proceeds. estimated present value of future cash flows, net of an allowance for estimated uncollectible promises. Amortization Tax Status of the discount is recorded as additional contributions in the The University is a tax-exempt organization as described in appropriate net asset class. Section 501(c)(3) of the Internal Revenue Code and is generally exempt from federal income taxes pursuant to Section 501(a) Contributions with donor-imposed restrictions are recorded as of the Code. unrestricted revenue if those restrictions are met in the same reporting period. Otherwise, contributions with donor- Use of Estimates imposed restrictions are recorded as increases in temporarily The preparation of financial statements requires the use of restricted or permanently restricted net assets, depending on estimates and assumptions that affect the reported amounts of the nature of the restriction. assets, liabilities, revenue, and expenses during the reporting period as well as the disclosure of contingent assets and liabil- Contributions recorded as temporarily restricted net assets are ities. Actual results ultimately could differ from management’s released from restrictions and recognized as unrestricted net estimates.

Redesignations 3. Accounts Receivable When donors amend or clarify intent for applicable gifts and contributions reported in a previous fiscal year, revisions are Accounts receivable as of June 30 were as follows separately reflected as donor designation changes within the (in thousands): Consolidated Statements of Activities. 2005 2004 Reclassifications Patient care $ 307,109 $ 278,157 Certain reclassifications have been made to prior year amounts Students, grants, and other 74,502 66,884 to conform to the current year presentation. Accrued investment income______6,959 ______6,041 Accounts receivable 388,570 351,082 Net unrealized gains on unrestricted, non-endowed investments were reclassified from non-operating activity to operat- Less: Allowance for uncollectible ing revenues for fiscal 2004, resulting in a revision to the change accounts______158,308 ______122,776 in unrestricted net assets from operating activity from $41.2 million to $49.3 million. Accounts receivable, net $______230,262 $______228,306

4. Contributions Receivable 5. Investments

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

2005 2004 2005 2004 Unconditional promises expected Short-term securities $ 277,301 $ 129,179 to be collected in: Bonds 410,680 393,313 Less than one year $ 20,738 $ 18,965 Stocks 1,040,966 1,220,446 One year to five years 74,879 97,203 Partnership investments 1,263,995 778,110 More than five years______1,848 ______1,954 Mortgages 8,305 9,680 Contributions receivable 97,465 118,122 Real estate 156,283 148,493 Other 31,281 17,631 Less: Unamortized discount 6,794 8,820 Net (payables) receivables for unsettled Allowance for uncollectible trades by investment managers______(173) ______952 promises______6,290 ______6,137 Total fair value $______3,188,638 $ ______2,697,804 Total cost $______2,752,160 $ ______2,449,706 Contributions receivable, net $______84,381 $ ______103,165 Investments by net asset category as of June 30 were as follows The University’s net contributions receivable include amounts (in thousands): due from the Ingram Charitable Fund (ICF) totaling $38.7 million and $45.1 million as of June 30, 2005 and 2004, respective- 2005 2004 ly. The assets of the ICF primarily consist of publicly-traded Unrestricted $ 2,480,791 $ 2,024,839 Ingram Micro Inc. common stock and privately-held Ingram Temporarily restricted 136,208 153,434 Industries Inc. common stock. Permanently restricted______571,639______519,531 Total fair value $______3,188,638 $______2,697,804 In addition to pledges reported as contributions receivable, the University had received bequest intentions of approximately $141.1 million as of June 30, 2005. These intentions to give are Through an agreement with its primary investment custodian, not recognized as assets due to their conditional nature. If these the University participates in lending securities to brokers. bequests are received, generally they will be restricted for spe- Among other provisions that limit the University’s risk, this cific purposes stipulated by the donors, primarily endowments agreement specifies that the custodian is responsible for man- for faculty support, scholarships, or general operating support aging strict borrower collateral requirements. Collateral, which of a particular department or division of the University. is pooled by the custodian, generally is limited to cash, government securities, and irrevocable letters of credit. Depending on the type of securities being lent, minimum collateral ranges from 101% to 105% with required daily marking-to-market.

Both the investment custodian and security borrowers have the right to terminate a specific loan of securities at any time. Other than for an event of default, the investment custodian is prohib- ited from re-pledging or otherwise encumbering the pledged collateral. The University receives lending fees and continues to earn interest and dividends on the loaned securities.

At June 30, 2005, investment securities with a market value of $374.4 million were loaned to various approved brokers under this program with collateral having a total market value of $385.0 million, including cash and cash equivalents of $324.8 million. The cash and cash equivalents collateral held by the University’s primary investment custodian and the obligation to return such collateral to security borrowers are reported as an asset and liability on the Consolidated Statements of Financial Position.

6. Investment Return 7. Net Asset Components of Managed Endowment As previously noted, the University employs a total return policy that establishes endowment appreciation distributions. Vanderbilt’s managed endowment represents only those Additionally, the Board of Trust authorized the use of funds endowment-related net assets that are under the management functioning as endowment to support operating and capital control of Vanderbilt University. Gift annuities, interest in needs of certain transinstitutional initiatives. Endowment dis- trusts held by others, and certain contributions pending trans- tributions in fiscal 2005 and 2004 were based on 4.5% of the fer are not considered components of the managed endow- previous three years’ average calendar year-end fair values plus ment. the use of $11.7 million and $8.7 million of funds functioning as endowment for operating expenses of transinstitutional ini- A summary of the University’s managed endowment as of June tiatives in fiscal 2005 and 2004, respectively. Further, $6.6 mil- 30 follows (in thousands): lion and $4.6 million of unrestricted funds functioning as endowment were utilized for capital needs of transinstitutional initia- 2005 2004 tives in fiscal 2005 and 2004, respectively. Liquidations for capital Unrestricted Net Assets: investments related to these initiatives are excluded from the fol- Funds functioning as endowment, lowing summary of endowment distributions and other invest- at cost $ 1,637,322 $ 1,513,420 ment income for the year ended June 30 (in thousands): Net unrealized appreciation on investments 395,673 226,000 2005 2004 Exclude net unrealized losses Operating: allocable to other investments______4,655______18,098 Endowment distributions $ 103,849 $ 101,910 Investment income______28,564 ______20,697 Funds functioning as endowment______2,037,650 ______1,757,518

Total operating return______132,413 ______122,607 Permanently Restricted Net Assets: True endowment 603,724 555,264 Non-operating: Exclude portion allocable to Unrestricted: contributions receivable and other ______(43,147)______(47,937) Endowment appreciation utilized (106,646) (104,648) Investment income 398,953 338,910 Managed true endowment ______560,577 ______507,327 Temporarily restricted: Endowment distributions 2,545 2,563 Total fair value of managed endowment $______2,598,227 $ ______2,264,845 Investment income 16,826 23,652 ______Permanently restricted: Endowment distributions 252 175 Investment income______10,116 ______8,011

Total non-operating return______322,046 ______268,663

Total investment return $______454,459 $______391,270

The components of total investment return for the years ended June 30 were as follows (in thousands):

2005 2004 Net interest, dividend, and partnership income $ 58,293 $ 56,552 Net realized gains from original cost 209,374 92,035 Net unrealized gains______186,792______242,683

Total investment return $______454,459 $______391,270

8. Property, Plant, and Equipment 9. Long-Term Debt, Commercial Paper, and Capital Leases Property, plant, and equipment as of June 30 were as follows (in thousands): Long-term debt consists of bonds and notes payable with scheduled final maturity dates at least one year after the origi- 2005 2004 nal issuance date. Outstanding long-term debt, commercial Land $ 48,385 $ 47,870 paper, and capital lease obligations as of June 30 were as follows Buildings and improvements 1,692,707 1,541,195 (in thousands): Moveable equipment 532,423 494,250 Construction in progress______114,756 ______109,959 Fiscal 2005 Property, plant, and equipment 2,388,271 2,193,274 Remaining Effective Outstanding Years to Interest Principal Maturity Rate 2005 2004 Less: Accumulated depreciation______1,023,094 ______943,135 Fixed-rate long-term debt 1996 Series A 4 5.6% $ 4,265 $ 5,265 Property, plant, and equipment, net $ 1,365,177 $1,250,139 ______1997 Series A 14 5.4% 24,870 26,040 1998 Series A 11 5.6% 21,145 22,510 Purchases for the library collection are not included in the fore- 1998 Series B 24 5.0% 35,075 35,835 going since they are expensed at the time of purchase. As of 1998 Series C 1 10 4.8% 19,370 20,870 June 30, 2005, the estimated replacement cost for library collec- 2001 Series A 11 4.9% 14,700 15,705 tions, including processing costs to properly identify, catalog, 2001 Series B 1 18 5.0% 56,010 57,915 and shelve materials, exceeds $194.8 million. For fiscal 2005 2005 Series B 1, 2 39 3.2% 277,750 — and 2004, $0.7 million and $0.9 million, respectively, of capital- HUD 4 3.0% 660 929 ized interest was added to construction in progress. Internally Note payable 4 7.3% 8,802 9,168 developed software costs of $1.2 million in fiscal 2005 and $1.4 Other 14 3.0%______299 ______368 million in fiscal 2004 were capitalized. Total fixed-rate long-term debt______462,946______194,605

Variable-rate long-term debt 1985 Series A 1 — 0.9% — 45,250 2000 Series A 26 2.0% 63,200 64,400 2000 Series B 26 2.1% 63,200 64,400 2000 Series C 1 — 1.8% — 90,000 2002 Series A 28 2.0% 21,730 22,075 2002 Series B 1 — 1.6% — 77,600 2003 Series A 1 14 2.1% 38,040 40,155 2005 Series A 39 2.4%______113,300 ______—

Total variable-rate long-term debt______299,470______403,880

Par amount of long-term debt 762,416 598,485 Unamortized premium (discount)______17,175 ______(3,685) Total long-term debt 779,591 594,800

Capital leases 4 3.5% ______808 ______— Long-term debt and capital leases 780,399 594,800 Tax-Exempt Commercial Paper, Series A and B < 1 2.4%______5,500 ______15,000 Total long-term debt, commercial paper, and capital leases ______$ 785,899 ______$ 609,800

1 Issued under Master Trust Indenture structure. 2 The 2005 B bonds are fixed only through put dates in fiscal years 2008 through 2010 when re-marketings could result in differing modes.

The preceding table reflects fixed/variable allocations before coverage from standby bond purchase agreements to provide the effects of interest rate swap arrangements used by the liquidity for the variable debt portfolio (both commercial University to manage its debt portfolio. Such agreements are paper and variable rate demand bonds), supplemented by a covered in more detail in a successive footnote. bank revolving credit agreement dedicated solely to debt portfolio liquidity. Tax-exempt commercial paper, as well as all of the aforementioned bonds (with the exclusion of the HUD bonds), have Trust indentures for certain bond issues contain covenants and been issued by the Health and Educational Facilities Board of restrictions involving the issuance of additional debt, mainte- the Metropolitan Government of Nashville and Davidson nance of a specified debt service coverage ratio, and the main- County, Tennessee (HEFB). As a conduit issuer, the HEFB tenance of liquidity facilities. At and for the year ended June 30, loans the debt proceeds to the University. Pursuant to loan 2005, the University has complied with applicable covenants. agreements, the University’s debt service requirements under these loan agreements coincide with required debt service of In prior fiscal years, the University defeased certain obligations the actual HEFB bonds. by irrevocably placing assets with a trustee to pay principal and interest on the obligations as they become due. The outstand- Included in the foregoing are hospital and clinic (patient ing balance of the defeased obligations was $23.4 million as of care) bonds, with a principal balance outstanding of $391.2 June 30, 2005. million as of June 30, 2005, that were issued under a Master Trust Indenture (MTI) structure. The MTI provides the flex- In January 2005, the University issued Series 2005 A and B ibility for multiple parties to participate in debt issuances as bonds aggregating slightly more than $391 million. The Series part of an obligated group; presently, the University’s hospi- 2005 A revenue variable-rate bonds were issued in the amount tals and clinics have no other members participating in its of $113.3 million to finance the construction, expansion, and obligated group. Bonds issued under the MTI are payable renovation of various University facilities and related equip- solely from hospital revenues (as defined in the MTI). All ment, most notably Medical Research Building IV and Buttrick MTI bonds presently outstanding are also supplemented by a Hall. The Series 2005 B bonds in the face amount of $277.75 University guarantee of debt service. million were initially issued as premium term put bonds with fixed rates of interest for terms of three to five years, syntheti- Selected information for long-term debt, commercial paper, cally converted to variable rate through the use of fixed-receiv- and interest rate swap arrangements follows (in thousands): er swaps. New project proceeds from the 2005 B issue aggregating $67.4 million are intended to finance construction, expan- 2005 2004 sion, and renovation of various patient care facilities and relat- Interest cost paid $ 25,954 $ 19,290 ed equipment. Interest cost expensed $ 26,830 $ 18,170 Assets held by trustees for subsequent Remaining proceeds from the Series 2005 B issue primarily were debt service as of June 30 $ 2,024 $ 10,220 used to refund the Series 1985 A, 2000 C, and 2002 B bonds. An accounting loss of $1.5 million for the refunding was included Principal payments and scheduled sinking fund requirements as a non-operating item for fiscal 2005 in the Consolidated on long-term debt due in subsequent fiscal years ending June Statements of Activities. 30 are as follows (in thousands): In fiscal 2005, the University completed a reauthorization of its 2006 $ 14,831 existing tax-exempt commercial paper (CP) program. With 2007 15,482 this action, the authorized limit on the program was raised 2008 16,522 from $275.0 million to $600.0 million. The highest balance 2009 24,481 outstanding for commercial paper during fiscal 2005 was 2010 16,450 $72.25 million with a portion of this balance providing bridge financing for bond refundings. The University also established Thereafter ______674,650 a taxable CP program with a $75.0 million authorization in fis- Total $ 762,416 ______cal 2005. No draws were made under the taxable CP program during the year. Under certain circumstances, variable-rate bond obligations may be converted to a fixed-rate structure. While these bonds are in a variable rate mode, they are subject to optional and mandatory tender. The University has agreements with remar- keting agents to re-market any bonds so tendered. During fiscal 2005, the University transitioned to portfolio self-liquidity

10. Interest Rate Swap Arrangements As of June 30, 2005, the University’s adjusted debt portfolio, after taking into account the aforementioned derivatives, was To manage the fixed/variable mix for its debt portfolio, approximately 79% fixed and 21% variable. including hedging exposure to increasing interest expense from variable-rate debt, the University utilizes interest rate In July 2005, the University entered into additional basis swap agreements. swaps with a notional amount of $150 million that have bullet maturities in July 2035. The University will receive fixed The fair value of interest rate swap arrangements is the estimat- payments averaging 83.85% of the London Interbank Offered ed amount that the University would pay or receive to terminate Rate (LIBOR) and will pay variable amounts based on the these contracts as of the report date. The estimated cumulative Bond Market Association (BMA) municipal swap index. Also fair value loss of these swap arrangements was $45.3 million and in July 2005, the University entered into additional fixed $6.0 million for fiscal 2005 and 2004, respectively, and is includ- receiver swaps with a notional amount of $100 million that ed in accounts payable and accrued expenses. Changes in the fair mature in September 2008. The University will receive fixed value for these contracts, which for fiscal 2005 and 2004 amount- payments averaging 3.527% and pay variable amounts based ed to an unrealized loss of $39.3 million and an unrealized gain on the BMA index. The counterparty has an option exercis- of $10.3 million, respectively, are recorded as other non-operat- able in September 2008 to extend the transaction for two ing items in the Consolidated Statements of Activities. additional years. If exercised, the fixed payment rate will increase to 3.75%. Periodic net cash settlements for all agreements aggregated $8.4 million and $4.1 million for fiscal 2005 and 2004, respectively, Outstanding interest rate swap agreements as of June 30 were and are reflected as adjustments to operating expense in the as follows (in thousands): Consolidated Statements of Activities.

Outstanding Origination/ Notional Amounts Description Settlement Provisions Maturity 2005 2004

January 2002 University receives variable payments based on 70% Gradual amortization1, corresponding to principal $126,400 $128,800 fixed payer of LIBOR and pays fixed amounts at a weighted retirements for the University’s Series 2000A and B swaps average rate of 3.99% bonds, with final expiration in October 2030

January 2005 University receives variable payments based on 68% Amortization commences in October 2033, correspon- $80,000 ___ fixed payer of LIBOR and pays fixed amounts at a weighted ding to principal retirements for the University’s Series swaps average rate of 3.433% 2005A bonds, with final expiration in October 2044

Other fiscal University receives variable payments based on 68% Bullet maturities in October 2039 $315,000 ___ 2005 fixed of LIBOR and pays fixed amounts at a weighted payer swaps average rate of 3.460%

January 2005 University receives fixed payments averaging 2.997% Amortization commences in April 2008, correspon- $277,750 ___ fixed receiver and pays variable amounts based on the BMA index ding to scheduled re-marketings for the University’s swaps Series 2005B bonds, with final maturity in April 2010

March 2005 University receives fixed payments averaging 3.329% Bullet maturities2 in April 2008 $100,000 ___ fixed receiver and pays variable amounts based on the BMA index swaps

Fiscal 2005 University receives payments averaging 80.5% of Bullet maturities in July 2034 $350,000 ___ basis swaps LIBOR and pays variable amounts based on the BMA index

1 Commencing in October 2012, the counterparty has option to cancel 50% of the outstanding notional amount without a termination payment, which would result in a remaining fixed payment commitment of 4.175%. 2 The counterparty has an option exercisable in April 2008 to extend the transaction for two additional years. If exercised, the fixed payment rate will increase to 3.75%.

11. Net Assets Temporarily restricted net assets as of June 30 were comprised of the following (in thousands): The University has chosen to provide further classification information about net assets. 2005 2004 Gifts and pledges $ 152,038 $ 199,388 Unrestricted net assets are internally designated into six Interest in trusts held by others 6,824 7,582 groups: Life income and gift annuities______16,181 ______15,012

Designated for operations represents the cumulative budget- Total temporarily restricted net assets______$ 175,043 $______221,982 ed operating activity of the University and routine equipment replacement reserves. Such temporarily restricted net assets were designated for the Designated gifts and grants are comprised of departmental following purposes or periods as of June 30 (in thousands): gift and grant funds. 2005 2004 Designated for student loans represents University funds set Student scholarships $ 762 $ 715 aside to serve as revolving loan funds for students. Instruction 3,837 3,692 Capital improvements 11,801 19,184 Funds functioning as endowment are amounts set aside by Subsequent period operations and other______158,643______198,391 the Board of Trust, intended to generate income in perpetuity to support operating needs. Such amounts include sub- Total temporarily restricted net assets______$ 175,043 $______221,982 stantially all cumulative realized appreciation on the applicable investments. Permanently restricted net assets as of June 30 were comprised Net unrealized appreciation on investments represents cumu- of the following (in thousands): lative unrealized net gains and losses from original cost on marketable investments. Most of the net unrealized appre- 2005 2004 ciation is attributable to funds functioning as endowment. True endowment $ 603,724 $ 555,264 Interest in trusts held by others 35,958 37,929 Designated for plant facilities represents the net investment Life income and gift annuities______28,320 ______28,488 in property, plant, and equipment, as well as funds designated for future acquisitions of plant facilities and retirement Total permanently restricted net assets______$ 668,002 $______621,681 ofdebt.

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

2005 2004 Designated for operations $ 178,048 $ 164,318 Designated gifts and grants 133,434 131,148 Designated for student loans 30,144 28,879 Funds functioning as endowment, at cost 1,637,322 1,513,420 Net unrealized appreciation on investments 395,673 226,000 Designated for plant facilities ______669,765 ______651,948

Total unrestricted net assets______$ 3,044,386 ______$ 2,715,713

12. Natural Classification of Expenses 14. Student Financial Aid

Operating expenses incurred in the fiscal years ended June 30, The University provides financial aid to students based upon 2005 and 2004, were as follows (in thousands): need and merit. This financial assistance is funded by institutional resources, gifts, endowment income, and externally 2005 2004 sponsored aid. Salaries, wages, and benefits $1,279,366 $1,141,939 Services 107,144 89,661 In fiscal 2005 and 2004, financial aid for tuition and education- Supplies and materials 500,950 436,080 al fees of $114.2 million and $99.6 million was applied to gross Depreciation and amortization 105,600 93,118 tuition and educational fees of $294.3 million and $278.0 mil- Interest expense 26,830 18,170 lion, respectively. In fiscal 2005 and 2004, financial aid for room Provision for bad debts 95,464 91,335 and board of $14.5 million and $12.7 million was applied to Utilities, operating leases, and other______82,895 ______59,346 gross room and board of $41.5 million and $39.1 million, respectively. Total operating expenses $2,198,249______$1,929,649 Loans to students from University funds are carried at cost, which, based on secondary market information, approximates the fair value of educational loans with similar interest rates 13. Retirement Plans and payment terms. Loans receivable from students under governmental loan programs, also carried at cost, can only be The University’s full-time faculty and staff members partici- assigned to the United States government or its designees. Loan pate in defined contribution retirement plans administered balances are net of allowances for estimated uncollectible by third-party investment and insurance firms. For eligible accounts of $3.9 million for both fiscal 2005 and 2004. employees with one year of continuous service, these plans require employee and matching employer contributions; such Loans to qualified students are funded principally with govern- contributions immediately fully vest with the employee. ment advances to the University under the Perkins, Nursing, and Health Professions Student Loan Programs. The University’s obligations under these plans are fully funded by periodic transfers to the respective retirement plan administrators with the corresponding expenses recognized in the year 15. Related Parties incurred. Retirement plan contributions for fiscal 2005 and 2004 were $35.5 million and $32.3 million, respectively. The University contracts with certain related parties for the purchase of goods, performance of construction activities, and provision of other services. Significant purchases of goods and services from related parties typically are subject to competitive pricing analyses. During fiscal 2005 and 2004, the University had related party transactions approximating $36.6 million and $21.8 million, respectively.

16. Commitments and Contingencies cannot be determined at this time, although management expects they will not have a significant effect on the (A) Construction. At June 30, 2005, approximately $108.8 mil- University’s financial position. lion was committed for projects under construction and equipment purchases, to be financed primarily from debt proceeds. (F) Health Care Services Revenue. Revenue from hospital services include amounts paid under reimbursement agreements (B) Lease Obligations. The University leases certain equipment with certain third-party payors and are subject to examina- and real property. These leases are classified as operating leases tion and retroactive adjustments. Any differences between and have lease terms ranging up to fifteen years. Total lease estimated year-end settlements and actual final settlements expense for fiscal 2005 and 2004 was $45.2 million and $33.4 are reported in the year final settlements are known. million, respectively. Future minimum rentals on non-cance- Substantially all settlements have been made through the year lable operating leases with lease terms in excess of one year as ended June 30, 2002. of June 30, 2005, were as follows (in thousands): In August 1996, Congress approved the Health Insurance Portability and Accountability Act of 1996 (Act). Under the 2006 $ 18,936 Act, the federal government was given substantial resources 2007 18,643 and authority for the completion of fraud and abuse investi- 2008 15,638 gations, and the Act has established substantial fines and 2009 14,262 penalties for offenders. Management continues to refine poli- 2010 5,226 cies, procedures, and organizational structures to enforce and 2011 and after______1,632 monitor compliance with this Act, as well as other government statutes and regulations. Total future minimum rentals $______74,337 The medical center’s compliance with laws and regulations is In conjunction with its normal business practices related to the subject to future government review and interpretations, as leasing of equipment, in February 2005 and March 2004, the well as regulatory actions unknown or unasserted at this time. University established financing mechanisms via $16.4 million Management believes that liability, if any, from such reviews and $40.0 million, respectively, of tax-exempt bonds issued by will not have a significant effect on the University’s financial the Health and Educational Facilities Board of the Metropolitan position. Government of Nashville and Davidson County, Tennessee. Payments made by the University under these financing mech- (G) Partnership Investment Commitments. There were anisms are reported as operating lease expense and are included $547.4 million of commitments to venture capital, real in the future minimum rentals above. estate, and distressed security investments as of June 30, 2005. These funds may be drawn down over the next sever- (C) Litigation. The University is a defendant in several legal al years upon request by the general partners. As of June 30, actions. Management believes that the outcome of these 2005, $23.2 million of unallocated cash and cash equivalents actions will not have a significant effect on the University’s in the managed endowment are held to meet these obliga- financial position. tions. Management expects to finance these commitments with available cash and expected proceeds from the sale of (D) Medical Malpractice Liability Insurance. The University is securities. self-insured for the first level of medical malpractice claims. The current self-insured limits are $5.0 million per occurrence, (H) McKendree Village, Inc. Debt Guaranty. In July 1998, not to exceed an annual aggregate of $40.0 million. For this Vanderbilt University and McKendree Village, Inc., a not-for- self-insured retention, a trust fund has been established. The profit retirement community, entered into a joint venture funding of the trust is based upon studies performed by an agreement. In September 1998, the University guaranteed actuarial firm. Excess malpractice and professional liability payment of $19.8 million of bond debt issued by McKendree coverage has been obtained from commercial insurance carri- Village. As of June 30, 2005, the balance of the guaranteed ers on a claims-made basis for claims above the retained self- debt was $18.6 million. insurance risk levels. (I) Working Capital Line of Credit. Effective July 31, 2001, the (E) Federal and State Contracts and Other Requirements. University entered into a commitment for a $20.0 million Expenditures and F&A costs related to federal and state unsecured working capital line of credit with a major com- grants and contracts are subject to adjustment based upon mercial bank. The term of the line of credit is one year with review by the granting agencies. The amounts, if any, of automatic renewals. No amounts were outstanding under this expenditures that may be disallowed by the granting agencies line of credit as of June 30, 2005 and 2004.

SUPPLEMENTAL INFORMATION

Vanderbilt University HOSPITAL AND CLINIC Results of Operations

Years Ended June 30, 2005 and 2004 (in thousands) 2005 2004 Operating Revenues Net patient service revenue $ 1,047,042 $ 884,416 Investment income on assets limited as to use under bond indenture agreements 1,317 6 Other revenue______10,306 ______11,006 Total operating revenues ______1,058,665 ______895,428 Operating Expenses Medical services 716,305 616,688 General services 44,642 36,339 Administrative and fiscal services 142,203 108,336 Depreciation and amortization 35,428 26,418 Interest 10,891 5,020 Provision for bad debts ______74,353 ______73,243 Total operating expenses ______1,023,822 ______866,044 Income from operations 34,843 29,384 Other Income Unrestricted endowment income and bequests 716 736 Investment income ______3,010 ______3,442 Total other income ______3,726 ______4,178 Excess of revenues over expenses $ 38,569 $ 33,562 ______

Vanderbilt University BOARD OF TRUST as of June 30, 2005 Officers of the Board J. Hicks Lanier Trustees Emeriti Atlanta, Georgia Martha R. Ingram, Chairman Nelson C. Andrews Nashville, Tennessee Rev. Edward A. Malloy, C.S.C. Nashville, Tennessee Notre Dame, Indiana Dennis C. Bottorff, Vice-Chairman Andrew B. Benedict, Jr. Nashville, Tennessee Jackson W. Moore Nashville, Tennessee Birmingham, Alabama

Darryl D. Berger, Vice-Chairman A Lewis M. Branscomb New Orleans, Louisiana James H. Morgan La Jolla, California Charlotte, North Carolina William W. Bain, Jr., Secretary Miriam M. Cowden Boston, Massachusetts Nancy P.Mulford Nashville, Tennessee Dallas, Texas

Gordon Gee, A Brownlee O. Currey, Jr. Ibrahim Nasmyth Chancellor of the University Franklin, Tennessee Atlanta, Georgia Nashville, Tennessee Frank A. Godchaux III Edward G. Nelson Houston, Texas Nashville, Tennessee Members Delbert Mann Frederick B. Rentschler Los Angeles, California Mary Beth Adderley Scottsdale, Arizona La Jolla, California Alyne Q. Massey Catherine B. Reynolds Nashville, Tennessee Michael L. Ainslie McLean, Virginia Palm Beach, Florida Judson G. Randolph, M.D. Kenneth L. Roberts Nashville, Tennessee Camilla D. Bergeron Nashville, Tennessee New York, New York John W. Rich Joe L. Roby Nashville, Tennessee Monroe J. Carell, Jr. New York, New York Nashville, Tennessee Thomas B. Walker, Jr. Eugene B. Shanks, Jr. Dallas, Texas Sheryll D. Cashin Greenwich, Connecticut Washington, D.C. A James A. Webb, Jr. A Marissa N. Shrum Nashville, Tennessee Carrie A. Colvin Chattanooga, Tennessee Birmingham, Alabama David K. Wilson Richard H. Sinkfield Nashville, Tennessee Thomas F. Cone Atlanta, Georgia Nashville, Tennessee Heather M. Souder A Cecil D. Conlee Atlanta, Georgia Atlanta, Georgia Cal Turner Mark F. Dalton Brentwood, Tennessee Greenwich, Connecticut Eugene H. Vaughan William W. Featheringill Houston, Texas Birmingham, Alabama

A Levi Watkins, Jr., M.D. Ron D. Ford Baltimore, Maryland Atlanta, Georgia Dudley B. White John R. Hall Nashville, Tennessee Lexington, Kentucky W. Ridley Wills II L. Hall Hardaway, Jr. Franklin, Tennessee Nashville, Tennessee J. Lawrence Wilson H. Rodes Hart Rosemont, Pennsylvania Nashville, Tennessee Rebecca W. Wilson Joanne F. Hayes Memphis, Tennessee Nashville, Tennessee William M. Wilson John R. Ingram Nashville, Tennessee Nashville, Tennessee Orrin H. Ingram A Nashville, Tennessee Nominated by Alumni Association

Vanderbilt University ADMINISTRATION

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, General Counsel, 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 and 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

Dennis G. Hall, M.S., Ph.D. Associate Provost for Graduate Education

Edward L. Rubin, 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

James W. Bradford, J.D. Dean of the Owen Graduate School of Management

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

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