Rudyard Kipling wrote that we are “humble because of knowledge and strong because of sacrifice.” At Pepperdine, there is no truer standard by which to measure our strength. The purpose of an annual report is primarily to present the financial health of an institution. In that regard, Pepperdine has never been stronger. But as you have seen in the previous pages, a financial standard alone does not adequately express the source of our strength.

The narrative account of Pepperdine’s success describes many selfless acts made on behalf of our students. Some sacrifices have come as large and generous gifts. Without them, Pepperdine would not have survived beyond its infancy.

Other sacrifices are more personal. My own life would be only a shadow of what it is today had my birth mother not made the painful, but life-altering, decision to provide for me by offering me up for adoption. In accordance with her wishes, I was placed into a Christian home with loving parents who raised me to enjoy right relationships not only with mankind, but with God. Her personal sacrifice saved my life. My adopted parents were both alumni of George Pepperdine College, and placed great value upon a Christian education. They too made great sacrifices so that I could receive the kind of education they had.

Thanks to their values and the strength of my own Pepperdine education, I pursued a rewarding career in public accounting, and later, banking. The opportunities before me were staggering. But the quiet, anonymous sacrifices of the people who cared for me during my life led me back to my alma mater in 2002. Their example of service above self led me to want to live as they had.

My personal story is but one small chapter of the Pepperdine narrative, but it opens my heart to the thousands of other private sacrifices that are made to help our students lead rich and rewarding lives. As chief financial officer and a steward of the University’s resources, I think of these stories as I prepare this financial report.

A Financial Progress Report

The University’s total assets now approach $1.2 billion, again exhibiting solid growth from last year. Thanks to continued positive operational and investment performance total assets increased $66 million during fiscal 2006. This growth was not fueled by taking on significant levels of additional debt, but by generating capital from our own operations and investment returns. The University’s net assets increased $51 million to a fiscal year-end record of $856 million, $636 million of which remains unrestricted.

The University’s investments and cash also increased $51 million during fiscal 2006 and remain a stable source of operational resources. During fiscal 2006, our endowment produced a 14 percent total return, which was well above the 11 percent average earned by endowments over $1 billion during 2006. We may be tempted to attribute our returns solely to our good stewardship, but there can be no doubt that our results also reflect God’s blessing on this institution.

Supportive friends and alumni as well as favorable economic and business conditions have helped bolster our endowment. At the end of fiscal 2006, University investment funds functioning as endowment totaled $521 million and generated $25 million of operational support during fiscal 2006. Increasing our endowment through investment returns as well as new gifts from friends and alumni helped us expand financial aid to our students and provide ongoing support for other University operations.

The University’s long-term obligations increased slightly from one year ago, totaling $210 million at the end of fiscal 2006. This increase was a result of refinancing over $106 million of our debt, and realizing present-value interest savings of nearly $6 million. During the past several years, we have boldly used long-term obligations to further our strategic goals at opportune times. While we may issue additional debt should a warranted need arise, our intent is to increasingly turn to our friends and alumni rather than Wall Street to fund our capital-intensive aspirations—more and improved student housing; more and improved places for our students to gather; and reinvigorating many of the buildings on the Malibu campus that have provided nearly 25 years of service.

We continue to enroll approximately 8,000 students in our five colleges and schools, and enjoy significant student demand for most of our academic offerings. To illustrate, Seaver College accepted just 28 percent of the approximately 8,000 student applications for admission it received for the Fall 2006 term. The number of students enrolled at the University is extremely important since our operating revenue is primarily student-related (items such as tuition, fee, and auxiliary revenue). During fiscal 2006, these items accounted for approximately 75 percent of the University’s total revenue.

While we are clearly dependent on student-related revenues, we have made progress in increasing other revenue sources, such as endowment support and private gifts and grants. During fiscal 2006, private gifts from friends and alumni who support our mission more than doubled to nearly $28 million. We fully appreciate the charge given to us to put their generous gifts to work in the best way possible to benefit our students.

Whether the source of revenue is from our students, endowment support, or gifts from friends and alumni, we know we must continue to increase our investment in our student’s academic and community experience. Accordingly, we make every effort to direct the University’s resources to improving academic, social, and spiritual programs. During fiscal 2006, the University’s instruction, research, academic support, and student service expenses increased by approximately $4 million, to total approximately $146 million. It is especially gratifying to note that 93 percent of each net tuition and fee dollar expended is directed to these mission-critical areas.

Pepperdine University continues to be blessed with financial strength and the ability to choose its path in the world of Christianity and academia. Our present challenge calls us to build from the strength we have garnered thus far and seize the opportunities God places before us all.