Pepperdine University 2003 Annual Report A Heritage of Faith
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Financial Overview    Financial Statements

Financial Overview

Fiscal Year 2003

Pepperdine University finished fiscal 2003 on strong financial footings. For the first time in its history, the University's total assets surpassed the $1 billion mark at the end of a fiscal year. The $21 million net increase from one year ago was due to continued strong operations in each of the University's five schools, and improved investment results compared to fiscal 2002. Net assets increased $17 million during fiscal 2003 to $690 million, of which $509 million is unrestricted.

During fiscal 2003, the University neared completion of the Drescher Graduate Campus, which will be home to the residential programs of the University's three graduate schools; the Graziadio School of Business and Management, the Graduate School of Education and Psychology, and the School of Public Policy. The Drescher Graduate Campus academic and executive center buildings opened in August of 2003 to positive reviews from students and faculty alike. The 300-bed student housing complex was completed in October of 2003, and the 56 faculty and staff residences are expected to be complete in early 2004.

During the course of the past three years, the University's investment portfolio has been challenged by a period of volatility and negative returns in the capital markets. However, over this period our long-term diversified strategy, when combined with our five-year averaging of market values for endowment payout purposes, has worked well to protect the investment portfolio and to dampen the effect of volatile markets on operations. In fact, during fiscal 2003, total support from the endowment increased 11 percent to $20 million.

The University's investment portfolio benefited from the general market recovery in fiscal 2003, generating total income and gains of approximately $36 million, or a 6 percent total annual return. These results compare very favorably to the 3 percent total return for the average endowment included in the Cambridge Associates survey for
the fiscal year ending June 30, 2003. University funds functioning as endowment totaled $394 million at July 31, 2003, a 3 percent increase from one year ago.

The University has bridge-funded a significant portion of the Drescher Graduate Campus construction through the issue of taxable and tax-exempt bonds. As a result, the University's long-term obligations totaled $209 million at
the end of fiscal 2003. The University enjoys an "A1" credit rating from Moody's Investors Service. We believe the University's debt load is very manageable given the University's solid reserve levels and strong ability to cover debt service from operating cash flow. The completion of the Drescher Graduate Campus allows us the opportunity to generate additional operating cash flow from increased student housing, expansion of our graduate programs,
and new executive center operations that will help support the University's debt service requirements.

University operations remained strong with net tuition and fee revenues increasing 10 percent to $137 million for fiscal 2003. This compares to 6 percent and 3 percent increases in the preceding two fiscal years. Maintaining a diversified enrollment base and enjoying an increasing reputation have strongly contributed to the University's favorable market position. The University currently enrolls approximately 8,300 students in its five colleges and schools. Total enrollment has increased by 6 percent over the past five years, with demand for each of the University's degree programs continuing to increase, particularly at Seaver College and the Graduate School of Education and Psychology.

The University's total operating expenses for fiscal 2003 increased 4 percent from last year to total $200 million. Although total expenses increased by 4 percent, operating expenses for instruction, research, academic support, and student services for fiscal 2003 increased 6 percent from last year and totaled $131 million. The University remains committed to providing the best possible academic experience for each of its students, and as such has concentrated its financial resources in this vital area. During fiscal 2003, spending on management and general expenses actually decreased by 5 percent or $2 million as compared to last year.

I am pleased to report that Pepperdine University has never been stronger financially, operationally, or strategically. We do not take these blessings for granted, and know that with the help of God, and the Pepperdine community of faculty, staff, students, alumni, and friends, the future of Pepperdine University holds immeasurable promise.

Charles J. Pippin

Charles J. Pippin
Vice President for Finance
and Administration