The Year in Review

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Financials

Paul Lassiter, Chief Financial Officer

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MESSAGE FROM THE CHIEF FINANCIAL OFFICER

Last year's report noted that Pepperdine University had been through a challenging year.

Financial Charts

We believed at that time that Pepperdine would face even more obstacles in fiscal 2009 as a result of the continuing economic downturn. Unfortunately our prediction was correct. Fiscal 2009 proved to be one of the most fiscally challenging years that the University has faced in its history. While the difficulties were indeed great, the blessings of God on this institution and the resolve of our community were more than sufficient to overcome any economic hindrance.

It's a fairly simple exercise to examine the University's financial statements and quickly ascertain that we suffered a great financial loss in fiscal 2009. Principally as a result of investment declines, the University's net assets decreased nearly 17 percent or $169 million, to total $853 million at fiscal year end. We were not alone in experiencing losses of this significance. In the midst of the recent economic downturn, scores of colleges and universities suffered investment losses of such magnitude that some of this country's most well-respected and best known institutions were forced to make immediate and potentially devastating cuts. Many of these institutions relied on endowment support to fund 30 percent or more of their operating budget. Fortunately this was not the case for Pepperdine University.

Endowment support totaled $31 million for fiscal 2009, or approximately 12 percent of total expenses. Since the University's endowment provides a comparatively low level of support for operations, declines in endowment value will not have as dramatic an impact on the University as other institutions that rely more heavily on endowment support to fund their operating activities. This is a time when comparatively high dependence on student tuition revenues actually provides the University with a competitive advantage. As such, we are indeed very fortunate to enjoy continued strong demand for the vast majority of our academic offerings.

During fiscal 2009, the University's endowment funds declined $143 million, or 21 percent from one year ago, to total $530 million. Despite the decline in endowment value, the University's endowment payout is projected to increase in fiscal 2010 as the University distributes endowment support based on a five-year moving average of endowment value multiplied by a 5 percent payout rate. While this payout methodology smoothes out changes in the level of endowment support, without a significant recovery in endowment values in the near term, the overall level of endowment support is expected to decline in future years.

Despite suffering significant investment losses in fiscal 2009, Pepperdine University remains strong. In fact, the University is positioned to emerge from the current economic crisis a stronger and more resilient institution. We reduced annual expenses by over $12 million, and have set these funds into reserves that can be used to shore up declines in future endowment support, fund additional student aid, make strategic investments in scholarship and instruction, or reduce student enrollments in future years.

We're also examining opportunities to reduce expenses further to provide even more financial flexibility. We've improved our liquidity position through positive operating results and a modest increase in the outstanding balance of long-term debt. We continued to invest in property, plant, and equipment, ensuring that our students' academic experience takes place in the highest quality facilities.

Investments in facilities have been funded through the use of existing reserve funds and gifts from friends and alumni. Significant renovations to many of the buildings and the Mullin Town Square on the lower campus in Malibu have been completed. These actions, among others, have been taken to provide an increased level of operating flexibility in the wake of possible continued economic turmoil.

The University's long-term obligations increased modestly from one year ago and now total $227 million. During fiscal 2009, we issued $50 million in taxable fixed-rate debt that was used to retire all of the University's variable-rate debt, completely eliminating exposure to potential interest-rate increases and the related liquidity constraints that such instruments require. The offering generated unrestricted net additional liquidity of more than $17 million. The University's long-term debt-to-total capitalization ratio totaled approximately 21 percent at the end of fiscal 2009.

Today approximately 7,750 students are enrolled at the University's five colleges and schools. Maintaining an appropriate level of student enrollment continues to be of principal importance since approximately 76 percent of the University's operating revenues come directly from tuition.

The University's results from operations were positive overall for fiscal 2009, even though the stresses caused by financial market turmoil are readily apparent. Net tuition revenues increased $9 million to total $175 million, as a result of both increased tuition rates and levels of student enrollment.

The economic slowdown has had a negative impact on private gift and grant revenues, which declined 17 percent from fiscal 2008 levels and totaled $21 million for fiscal 2009. It is vitally important to the future of the University that we sustain a higher level of private gift and grant revenues to both restore the value of our endowment and support current operations. We need the support of our friends and alumni at this time more than ever, since the need for additional student financial aid is likely to increase.

Management and general costs have declined from the prior year as we sought to reduce controllable costs in response to the economic crisis. Since every dollar expended by the University is funded principally by dollars provided from student-dependent sources, we are keenly aware that we must make every possible effort to reduce these costs wherever possible.

Even in the most difficult of times, God continues to bless this special place and the people who dedicate their lives to the service of our students. He has, and we are confident that he will carry us securely into the future.

Paul B. Lasiter
Chief Financial Officer