GEORGETOWN UNIVERSITY FINANCIAL STATEMENTS. for the years ended June 30, 2003 and 2002 AND REPORT THEREON

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1 FINANCIAL STATEMENTS for the years ended June 30, 2003 and 2002 AND REPORT THEREON

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3 STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2003 and 2002 (in thousands) ASSETS Cash and cash equivalents $ 9,171 $ 23,722 Accounts receivable, net 30,113 36,032 Prepaid expenses and other assets 74,343 70,407 Contributions receivable, net 138, ,528 Loans receivable, net 35,400 35,905 Unexpended bond proceeds 132, ,314 Investments 615, ,998 Land, buildings and equipment, net 719, ,757 Total assets $ 1,754,485 $ 1,774,663 LIABILITIES AND NET ASSETS Liabilities Accounts payable and accrued liabilities $ 146,435 $ 126,607 Pension liability 50,573 39,490 Refundable deposits on grants 45,172 56,515 Other refundable deposits and advances 21,433 21,091 Other liabilities 29,586 26,673 Notes payable and long term debt 729, ,366 Total liabilities 1,022, ,742 Net assets Unrestricted 193, ,541 Temporarily restricted 142, ,961 Permanently restricted 396, ,419 Total net assets 732, ,921 Total liabilities and net assets $ 1,754,485 $ 1,774,663 The accompanying notes are an integral part of these financial statements. 2

4 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2003 (in thousands) OPERATING REVENUES Temporarily Permanently Unrestricted Restricted Restricted Total Tuition and fees, net $ 276,529 $ - $ - $ 276,529 Grants and contracts 171, ,535 Sales and services of auxiliary enterprises 67, ,511 Contributions 26,055 1,205-27,260 Other investment income 7, ,459 Sales and services of educational departments 11, ,204 Investment return designated for current operations 10,404 23,211-33,615 Other sources 23, ,978 Net assets released from restrictions 19,366 (19,366) - - Total operating revenues 613,445 5, ,091 OPERATING EXPENSES Salaries and fringe benefits 355, ,633 Supplies and services 133, ,950 Depreciation 32, ,648 Interest on indebtedness 24, ,720 Rent 19, ,377 Utilities 15, ,534 Insurance 8, ,330 Travel 20, ,423 Repairs and maintenance 5, ,653 Other 23, ,002 Total operating expenses 639, ,270 Operating subtotal (25,825) 5,646 - (20,179) NON OPERATING REVENUES AND EXPENSES Capital contributions 8,950 12,989 20,026 41,965 Other net realized loss (44,468) - - (44,468) Other net unrealized gain/loss 1, ,840 Unrealized loss on swaps (31,668) - - (31,668) Minimum pension liability adjustment (11,347) - - (11,347) Net assets released from restrictions 5,059 (4,510) (549) - Non operating change in net assets (71,634) 8,479 19,477 (43,678) Change in net assets (97,459) 14,125 19,477 (63,857) Net assets at beginning of year 290, , , ,921 Net assets at end of year $ 193,082 $ 142,086 $ 396,896 $ 732,064 The accompanying notes are an integral part of these financial statements.

5 STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2002 (in thousands) OPERATING REVENUES Temporarily Permanently Unrestricted Restricted Restricted Total Tuition and fees, net $ 261,482 $ - $ - $ 261,482 Grants and contracts 169, ,142 Sales and services of auxiliary enterprises 66, ,175 Contributions 27, ,062 Other investment income 9, ,614 Sales and services of educational departments 2, ,945 Investment return designated for current operations 11,058 21,046-32,104 Other sources 29, ,754 Net assets released from restrictions 22,911 (22,911) - - Total operating revenues 599,760 (482) - 599,278 OPERATING EXPENSES Salaries and fringe benefits 333, ,213 Supplies and services 120, ,887 Depreciation 28, ,471 Interest on indebtedness 27, ,511 Rent 20, ,310 Utilities 14, ,691 Insurance 6, ,445 Travel 19, ,397 Repairs and maintenance 5, ,373 Other 7, ,834 Total operating expenses 584, ,132 Operating subtotal 15,628 (482) - 15,146 NON OPERATING REVENUES AND EXPENSES Capital contributions 71-19,890 19,961 Other net realized losses (43,283) - - (43,283) Other net unrealized losses (59,148) - - (59,148) Unrealized loss on swaps (12,125) - - (12,125) Minimum pension liability adjustment (38,233) - - (38,233) Net assets released from restrictions 5,940 (5,940) - - Non operating change in net assets (146,778) (5,940) 19,890 (132,828) Change in net assets (131,150) (6,422) 19,890 (117,682) Net assets at beginning of year 421, , , ,603 Net assets at end of year $ 290,541 $ 127,961 $ 377,419 $ 795,921 The accompanying notes are an integral part of these financial statements.

6 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2003 and 2002 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (63,857) $ (117,682) Adjustments to reconcile change in net assets to cash and cash equivalents (used in) provided by operating activities: Depreciation and amortization 32,648 28,471 Net realized and unrealized losses on investments 13,886 79,673 Additional minimum pension liability 11,347 38,233 Provision for bad debt 9,142 11,128 Gain/loss on disposal of fixed assets (214) 1,945 Decrease (increase) in accounts receivable 2,505 (5,310) (Increase) decrease in prepaid expenses and other assets (3,936) 9,988 (Increase) decrease in contributions receivable (7,136) 7,701 Decrease (increase) in accounts payable and accrued liabilities 19,564 (2,480) (Decrease) increase in refundable deposits on federal grants (11,343) 571 Increase in deferred revenues 342 5,398 Increase (decrease) in other liabilities 2,913 (13,467) Less interest income on revolving student loan funds (1,527) (2,234) Less contributions restricted for: Investment in endowment (27,677) (15,946) Investment in plant (15,645) (8,754) Investment from revolving student loan funds (18) (11) Net cash and cash equivalents (used in) provided by operating activities (39,006) 17,224 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of land, buildings and equipment (107,765) (80,292) Proceeds from sales of investments 158, ,364 Purchases of investments (141,724) (193,980) Net cash and cash equivalents used in investing activities (90,971) (59,908) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from contributions restricted for: Investment in endowment 27,677 15,946 Investment in plant 15,645 8,754 Payments on notes payable and long-term debt (10,752) (11,014) Change in estimated cost to terminate swap 31,668 12,125 Payments on bond issuance costs - (125) Net change in unexpended bond proceeds 49,198 28,066 Payments on capital lease obligations (60) (142) Disbursements for new student loans receivable (7,381) (4,313) Repayments on student loans receivable 8,585 8,951 Write-offs and other administrative costs of loans receivable (699) (1,501) Interest income on revolving student loan funds 1,527 2,234 New contributions for revolving student loan funds Net cash and cash equivalents provided by financing activities 115,426 58,992 Net (decrease) increase cash and cash equivalents (14,551) 16,308 Cash and cash equivalents at beginning of year 23,722 7,414 Cash and cash equivalents at end of year $ 9,171 $ 23,722 The accompanying notes are an integral part of these financial statements.

7 SUPPLEMENTAL DATA GEORGETOWN UNIVERSITY STATEMENTS OF CASH FLOWS (continued) FOR THE YEARS ENDED JUNE 30, 2003 and 2002 (in thousands) Noncash investing and financing activities: Gifts of securities $ 7,557 $ 5,465 Other non cash gifts 1,077 1,032 Retirements of land, buildings and equipment - 4,263 Interest paid 24,720 27,511 The accompanying notes are an integral part of these financial statements.

8 1. Nature of Operations GEORGETOWN UNIVERSITY Georgetown University (the University), located in Washington, D.C., is the nation s oldest Catholic and Jesuit University. Today the University is a major international, research university which includes four undergraduate schools; a school for summer and continuing education; graduate schools in the arts and sciences, nursing and health studies; business, and foreign service; and professional schools in law and medicine. In addition to providing educational services, the University performs research, training, and other services under grants, contracts, and similar agreements with sponsoring organizations, primarily departments and agencies of the United States Government. 2. Significant Accounting Policies Accrual Basis The financial statements of the University have been prepared on the accrual basis of accounting. Classification of Net Assets The University s net assets have been classified and reported as follows: Unrestricted - All net assets which are not subject to donor imposed restrictions. Temporarily Restricted - Assets whose use is subject to donor imposed restrictions that either expire by the passage of time or can be fulfilled and removed by actions of the University pursuant to these donor restrictions. Permanently Restricted Net assets that are subject to donor-imposed restrictions that require the original contribution be maintained in perpetuity by the University, but permits the use of the investment earnings for general or specific purposes. Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying value of land, buildings and equipment, nontraditional investments, certain real estate holdings, contingency reserves, retirement benefits, and accounts and contributions receivable. Actual results could differ materially, in the near term, from the amounts reported. 7

9 Cash and Cash Equivalents The University defines cash and cash equivalents as cash on hand, demand deposits and short term investment with original maturities of three months or less when purchased. The carrying amount of cash equivalents approximates fair value. The University records in unexpended bond proceeds, on the statement of financial position, cash and cash equivalents held for bond financed land, buildings and equipment. Investments Investments are reported at fair value. Fair value is based on quoted prices for securities traded on public exchanges. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities, or other reasonable valuation methodologies such as appraisals. Fair values for certain private equity and real estate investments held through limited partnerships or commingled fund shares are estimated by the respective external investment managers if market values are not readily ascertainable. These valuations necessarily involve assumptions and estimation methods which are uncertain, and therefore the estimates could differ materially from actual results. The cost of investments sold is determined by use of the average cost method on the trade date. Investment income on endowments is reported net of management fees and other investment income is reported gross. Receivables and Revenue Recognition The University reports receivables at their net realizable value. Unconditional pledges are recognized, in the appropriate net asset categories, at their net present value, discounted using a risk-free rate of return, and net of an allowance for uncollectible amounts. Tuition and fee revenues consist of all tuition and fee revenue earned, net of all student financial aid, University sponsored and donor sponsored. The University recognizes unrestricted revenues from student tuition and fees totally within the fiscal year in which the academic term is predominantly conducted. Deferred tuition and fees are included in other refundable deposits and advances in the statement of financial position. Grant and contract revenues are recognized when related costs are incurred. Classification of Contributions Contributions are recorded as increases in the appropriate net asset category based on donor restrictions. Expirations of temporary restrictions recognized on net assets are reported as net assets released from restrictions. Contributions with donor stipulated restrictions, which are met within the same reporting period, are reported as unrestricted. 8

10 Absent explicit donor stipulations about the length of time long lived assets must be maintained, the University reports expiration of donor restrictions as unrestricted when donated or acquired long lived assets are placed in service. There are no significant contributed services that are required to be reported. Cash received prior to conditions being met is recorded as refundable deposits and advances. Inventories Inventories are valued at cost, principally using the first-in, first-out method, which is not in excess of net realizable value. Inventories are included in prepaid expenses and other assets. Collections The University has elected not to capitalize the cost or value of its collection of works of art, historical treasures, and similar assets. There were no deaccessions during the year. Land, Buildings and Equipment Land, buildings and equipment are stated at cost on date of acquisition, or fair value on date of donation, including interest capitalized on related borrowings during the period of construction, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the University's assets are as follows: Buildings and improvements Computer software (purchased and internally developed) Furniture and equipment years 5-10 years 5-20 years Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in the statement of activities. The University reviews its property and equipment assets for impairment in value whenever events or circumstances indicate that the carrying value may not be recoverable. In performing the review, if the fair value, less selling costs from the disposition of the asset, is less than its carrying value, an impairment loss is recognized. Income Taxes Under provisions of the Internal Revenue Code and the applicable income tax regulations of the District of Columbia, the University is exempt from taxes on income other than unrelated business income under code Section 501(c)(3). The University had no material net unrelated business income during the years ended June 30, 2003 and 2002, and therefore no provision for income taxes has been made. 9

11 Financial Assistance The University maintains a policy of offering qualified applicants admission to the University without regard to financial circumstance. Student financial need is generally fulfilled through a combination of scholarships and fellowships, loans, and employment during the academic year. Tuition and fees have been reduced by certain scholarships and discounts. Net tuition and fee revenue is calculated as follows for the years ended June 30 (in thousands): Tuition and fees, gross $ 330,313 $ 310,603 Less Discounts: University sponsored (46,054) (42,115) Donor sponsored (7,730) (7,006) $ 276,529 $ 261,482 Measure of Operations The University uses a spending rate methodology to determine the amount of endowment income and gains that is included in operating income. Realized and unrealized gains (losses), including endowment income in excess of the spending rate and the effect of derivative financial instruments, minimum pension liability and adjustment, and all capital contributions, are reported as non operating. Spending Rate The University has adopted an endowment spending policy governing the expenditure of the total return of funds by the pooled endowment fund. The spending policy is designed to stabilize annual spending levels and to preserve the portfolio and is independent of the actual yield and appreciation of investments for the year. To achieve this objective, additions to an endowment fund will receive, in the year of the addition, a distribution equal to four percent (4%) of the initial market value of the addition prorated over the number of full quarters remaining in the fiscal year. Thereafter, the distribution is based on 5% of a five year moving average of the pooled endowment market value. Reclassification Certain 2002 amounts have been reclassified to conform with the 2003 presentation. 10

12 3. Accounts Receivable GEORGETOWN UNIVERSITY The major components of accounts receivable, net of applicable allowances for doubtful accounts and third-party payments, were as follows at June 30 (in thousands): Research grants $ 19,357 $ 22,255 Students 6,906 8,391 Due from third party 10,239 7,374 Other 3,609 5,035 40,111 43,055 Less: allowances for doubtful accounts (9,998) (7,023) Total accounts receivable, net $ 30,113 $ 36,032 Bad debt expenses for the years ended June 30, 2003 and 2002 were $3,414,000 and $5,008,000, respectively, and are included in other expenses in the accompanying statements of activities. 4. Contributions Receivable and Split-Interest Agreements Contributions Receivable: Contributions receivable are summarized as follows at June 30 (in thousands): Gross contributions receivable expected to be collected in: Less than one year $ 72,280 $ 75,999 One year to five years 42,613 35,825 Over five years 6,310 1, , ,140 Discount to present value (8,482) (5,214) Allowance for doubtful accounts (32,629) (26,901) Total contributions receivable, net $ 80,092 $ 81,025 The above amounts do not include split-interest agreements held by outside trustees of $58,844,000 and $56,503,000 at June 30, 2003 and 2002, respectively. Bad debt expense for the year ended June 30, 2003 and 2002 was $5,728,000 and $6,120,000 respectively. Discount rates used ranged from 3.49% to 6.42% in 2003 and 4.09% to 6.42% in Split Interest Agreements: The University is sole and partial beneficiary to various trusts established by donors. The University receives income from certain lead and perpetual trusts. The assets held by the 11

13 respective trustees for these trusts will not revert to the University at any time and the income received is used according to donor stipulations. The University is also a remainderman to certain charitable remainder trusts. Upon the death of the beneficiaries of these charitable remainder trusts, the assets will revert to the University to be used according to the donors wishes. Assets held in trust by and for the University are recorded at fair value at the date of initial recognition net of the related liability as applicable and included in investments in the accompanying statement of financial position. The change in value of these assets was an unrealized loss of ($445,000) and ($2,824,000) for the years ended June 30, 2003 and 2002, respectively. Because of uncertainties with regard to their realization and valuation, bequest intentions and other conditional promises are not estimated by management and are recognized only if and when the specified conditions are met. 5. Investments At June 30, the cost and fair value of investments were (in thousands): Cost Value Fair Value Cost Value Fair Value Cash and cash equivalents $ 13,675 $ 13,675 $ 37,350 $ 37,350 Investments: U.S. Gov't/Corp. bonds 121, , , ,300 Equity securities 355, , , ,002 Pledged under loan agreements 11,719 11,719 1,750 1,750 Real estate 6,256 38,500 6,508 38,769 Non-Traditional 75,981 66,704 66,713 60,394 Notes / Other assets 7,091 5,117 8,820 7,433 Total $ 591,868 $ 615,318 $ 649,922 $ 645,998 The use of the cash and cash equivalents reported above is limited and it is, therefore, excluded from cash and cash equivalents on the accompanying statements of financial position. Included in investments at June 30, 2003 and 2002 are assets of the Self-Insurance Trusts as described in Note 11. Fees incurred in the management of the investments for the years ended 2003 and 2002 were approximately $2,583,000 and $2,924,000, respectively. The University invests in various types of investment vehicles. The University s external investment managers incorporate the use of financial instruments with off balance sheet risk. These include hedged equity options and futures. There were no hedging transactions at June 30, 2003 and

14 Investment Income Total net investment gain (loss) for the years ended June 30, 2003 and 2002, respectively, consists of the following: Other investment income $ 7,459 $ 9,614 Investment income on endowments 10,143 15,059 Net realized gains (losses), net of shortfall (15,726) (20,525) Unrealized gains (losses), net 1,840 (59,148) Less investment management expenses (2,583) (2,924) Less other expenses (2,687) (2,789) Total loss from investments $ (1,554) $ (60,713) Operating Investment return designated for operations $ 41,074 $ 41,718 Non-operating Amounts designated for operations in excess (deficiency) of investment return (42,628) (102,431) Total net investment loss $ (1,554) $ (60,713) Pooled Endowment Investments At June 30, 2003 and 2002, some of the University s investments were pooled on a market value basis excluding separately invested life income endowments of $11,935,000 and $12,127,000, respectively, and other separately invested funds of $49,825,000 and $51,912,000, respectively. Individual pooled endowment funds acquire and dispose of units based on the per unit market value at the beginning of the calendar month within which the transaction occurs. June 30, 2003 June 30, 2002 Pooled endowment units 1,648,554 1,547,057 Market value per unit $ $ Decrease in market value per unit $ $ Distributions per unit $ $ Total annual rate of return (1.9%) (12.3%) Included in the pooled funds are quasi endowments, which are internally designated and invested as endowed funds. The market value of these funds for the years ended June 30, 2003 and 2002, respectively, was $114,276,000 and $122,219,000. Investment earnings are distributed to the members of the pool based on each member s proportionate share of assets in the pool at a rate of distribution determined by the University. Earnings in excess of the distributions are reinvested into the pool. The University engages in securities lending of its endowment pool investments whereby certain securities in its portfolio are loaned to other institutions generally for short periods 13

15 of time. By the end of the business day on which securities are delivered to the borrower, collateral equal to 102% of the market value of a loaned U.S. security and/or 105% of a non-u.s. security, including any accrued interest, is obtained from the borrower. Throughout the duration of the loan, it is marked-to-market on a daily basis. On any given day, if the collateral currently held is less than 100% of a loaned U.S. security or 105% of a loaned non-u.s. security, the borrower is required to deliver 102% and 105% respectively, including accrued interest. It is understood that certain standard industry practices may from time-to-time preclude the lending agent from obtaining additional collateral for loans of non-u.s. issues by the close of the next business day unless the market value of the collateral previously delivered by the borrower is less than 100% of the market value of such loaned securities, including the interest. The University has recorded the amount held as collateral of $11,700,000 and $1,800,000 respectively, at June 30, 2003 and 2002, in other assets and other liabilities in the accompanying financial statements. Deficiencies of $28,800,000 and $18,000,000 for donor-restricted pooled endowment funds have been recorded in unrestricted net assets for the years ended June 30, 2003 and 2002, respectively; deficiencies of $2,100,000 and $2,200,000 for donor restricted separately invested endowment funds have been recorded in unrestricted net assets for the years ended June 30, 2003 and 2002, respectively. These deficiencies are the result of declines in market values. 6. Land, Buildings and Equipment At June 30, the components of the University's fixed assets were as follows (in thousands): Buildings and improvements $ 720,646 $ 698,370 Furniture and equipment 39,940 41,863 Construction in progress 187, ,434 Land and improvements 60,034 58,983 Computer software 28,722 26,216 Equipment under capital leases 6,805 6,805 Subtotal 1,043, ,671 Less: accumulated depreciation and amortization (324,833) (297,914) Total $ 719,088 $ 643,757 Buildings with a net book value of approximately $64,525,000 and $67,052,000 were pledged as collateral at June 30, 2003 and 2002, respectively. The University acquired $1,840,000 and $1,959,000 in property through grants for the years ended June 30, 2003 and 2002, respectively. Amortization of computer software was $1,398,000 and $1,241,000 for the years ended June 30, 2003 and 2002, respectively. 14

16 7. Notes Payable and Long Term Debt GEORGETOWN UNIVERSITY Notes payable and long term debt at June 30, 2003 and 2002 are shown in the following tables (in thousands): Description Interest Rate Bonds payable to General Motors Commercial Credit Corporation 3% $ 412 $ 609 Bonds payable to Chase Manhattan Bank 3% to 4% 8,966 9,315 Series A Bonds of % to 6.07% 47,195 49,375 Series B-E Bonds of % to 5.35% 51,700 53, Series A Taxable *4.03% 100, ,000 Series A Bonds of 1999 *3.08% 155, ,750 Series A % to 6.08% 79,149 79,149 Series B 2001 *2.75% 73,600 73,600 Series C 2001 *2.85% 73,600 73,600 Series D 2001 *2.89% 73,650 73,650 Bonds payable to the U.S. Government 3% to 5.5% 4,145 4,339 Mortgage loans payable to the U.S. Public Health Service - DCMF 2.5% 9,180 9,416 Capitalized lease obligations, with monthly payments of principal and interest of $8 and $18, respectively various Bank line of credit - I variable - - Bank line of credit - II variable - - Various mortgages and notes payable various Subtotal 677, ,824 Estimated Cost to Terminate - swap 52,210 20,542 Total $ 729,222 $ 708,366 * These were the variable rates at June 30, 2003 The fair value of the University s debt obligations was approximately $717,011,000 and $697,406,000 at June 30, 2003 and 2002, respectively. The fair value represents the quoted present value of debt service cashflows of DC Revenue Bonds and carrying amounts for all other debt which approximates fair value. 15

17 Maturities of debt obligations for the years ending June 30 (in thousands) are as follows: 2004 $ 12, , , , Thereafter 14, ,551 Subtotal 677,012 Estimated Cost to Terminate - swap 52,210 Total $ 729,222 Covenants of the bond agreements restrict the University from incurring additional indebtedness without the approval of the governmental entity if, after incurring the additional debt, the University's maximum annual pro forma payments of principal and interest on the total debt would exceed 20% of the University's unrestricted current fund expenditures and mandatory transfers, as defined in the bond agreement, for the period during which the bonds will be outstanding. The University has available five unsecured lines of credit at financial institutions totaling $215,000,000 with interest payable on the outstanding balance calculated daily based upon 35, 40, 30, 40 and 35 basis points respectively over 30 day LIBOR, of which $215,000,000 remained undrawn. At June 30, 2003 and 2002, $0 was outstanding. The University has entered into various interest rate swap agreements to manage the interest cost and risk associated with its outstanding debt. The interest rate swap agreements were not entered into for trading or speculative purposes. Under the terms of these agreements, the University pays a fixed rate, determined at inception, and receives a variable rate on the respective notional principal amounts. The accumulated unrealized depreciation that was recognized for these swaps as of June 30, 2003 and 2002 was approximately $52,210,000 and $20,542,000, respectively, and is included in notes payable and long term debt in the statement of financial position. An expense of $31,668,000 and $12,125,000 was recognized for the year ended June 30, 2003 and 2002, respectively, and included in non operating and other on the Statement of Activities. 16

18 The following schedule presents the notional principal amounts of the University s interest rate swaps at June 30, The effective date for the initial calculation period is April 1, 2000: Notional Amount Expiration Date Estimated Cost to Terminate - swap At June 30, 2003 Estimated Cost to Terminate - swap At June 30, 2002 $ 28,300,000 April 09, 2018 $ (3,159,000) $ (2,078,000) 47,450,000 April 13, 2020 (6,957,000) (4,462,000) 104,650,000 May 03, 2021 (16,268,000) (10,431,000) 35,350,000 May 05, 2024 (8,451,000) (3,571,000) 73,600,000 March 28, 2031 (5,689,000) - 73,600,000 April 25, 2034 (5,795,000) - 73,650,000 May 1, 2036 (5,891,000) - $ 436,600,000 $ (52,210,000) $ (20,542,000) These financial instruments necessarily involve counter-party credit exposure. The counterparties for these swap transactions are major financial institutions that meet the University s criteria for financial stability and credit-worthiness. The fair value of the interest rate swaps was computed by a third-party evaluator using the net present value of fixed and floating future cash flows, with floating future flows determined by projecting forward rates. 8. Restricted Net Assets Temporarily Restricted Net Assets Temporarily restricted net assets at June 30 are available for the following purposes (in thousands): Buildings and Equipment $ 25,429 $ 22,530 Time and Other Restrictions 78,522 70,396 Financial Aid 25,065 23,315 Term Endowments 3,363 3,325 Instruction and Research 9,707 8,395 Total $ 142,086 $ 127,961 17

19 Permanently Restricted Net Assets Permanently restricted net assets at June 30 are restricted to investment in perpetuity, the income from which is expendable to support (in thousands): General Operations $ 163,841 $ 165,529 Instruction and Research 109,335 96,169 Financial Aid 114, ,960 Other Restrictions 9,269 8,761 Total $ 396,896 $ 377,419 Net Assets Released From Restrictions Donor restrictions met were as follows for the years ended June 30 (in thousands): Financial Aid $ 8,945 $ 9,435 Instruction and Research 5,661 6,290 Time and Other Restrictions 5,268 6,910 Term Endowments Buildings and Equipment 4,456 6,125 Total $ 24,425 $ 28, Operating Expenses by Function Expenses were incurred for the following functions for the years ended June 30 (in thousands): Program: Instruction $ 163,199 $ 149,247 Research 124, ,801 Scholarships and fellowships 9,525 9,017 Auxiliary enterprises - direct 32,946 33,415 Public service 17,967 15,654 Other 3,292 5,631 Support: Institutional support 182, ,170 Academic support 105,547 98,197 Total $ 639,270 $ 584,132 18

20 Operation and maintenance of plant and depreciation are allocated to functional classifications based on square footage. Interest expense is allocated to the functional classifications that directly benefited from the proceeds of the debt. 10. Pension and Other Postretirement Benefit Costs In addition to providing pension benefits, the University provides certain health care and life insurance benefits to retired employees who meet certain eligibility requirements. As of July 1, 1993, the unfunded accumulated postretirement benefit obligation was $4,762,000 (the "transition obligation"). The University elected to defer this transition obligation and recognize it on a straight-line basis over 13 years. The University s policy is to fully fund its accrued postretirement health and life insurance benefits on an annual basis. The assumed rates of increase in the per capita cost of covered health care benefits for plan participants who are under and over age 65 are 6.75% and 6.0%, respectively, for 2003 and Both rates are assumed to decrease gradually from 12% in 2002 to 5.0% over the next seven years and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation $923,000 and $1,329,030 at June 30, 2003 and 2002, respectively. The aggregate of the service and interest cost components of net periodic postretirement benefit expense would increase by $56,000 and $96,049, respectively, for the years ended June 30, 2003 and Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit obligation $804,000 and $1,360,743 at June 30, 2003 and 2002, respectively, and would decrease the aggregate of the service and interest cost components of the net periodic postretirement benefit expense by $49,000 and $102,155 for the years ended June 30, 2003 and 2002, respectively. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.0% and 7.0% at June 30, 2003 and 2002, respectively. The expected long-term rate of return on plan assets used in determining net postretirement benefit expense was 7.0% at June 30, 2003 and Defined Benefit Retirement Plan The Georgetown University Retirement Plan ("the Plan"), originally effective January 1, 1954, and thereafter amended, covers eligible faculty members, staff employees, and certain employees of the University. Benefits under the Plan are based on years of service and the participants' highest compensation for a specified period of employment. The University's policy is to satisfy minimum funding requirements. The Plan is currently subject to the full funding limitations. 19

21 The discount rate used in determining the actuarial present value of the projected benefit obligation was 6.0% and 7.0% at June 30, 2003 and 2002, respectively. The rate of increase in future compensation levels was based on an age-graded salary scale averaging 4.5% at June 30, 2003 and The expected long-term rate of return on plan assets used in determining net pension expense was 7.0% at June 30, 2003 and 2002, respectively. Defined Contribution Retirement Plan Faculty members and certain staff not participating in the Plan are eligible to join the Defined Contribution Retirement Plan. The University s policy is to contribute a percentage of the employee s salary. The University s contribution is 12% for employees hired prior to January 1, 1996 and 10% for employees hired on or after that date. The expense recorded under the Defined Contribution Retirement Plan was $13,468,000 and $15,574,000 for the years ended June 30, 2003 and 2002, respectively. Pension Benefits Other Postretirement Pension Benefits Benefits Other Postretirement Benefits Change in Benefit Obligation: Benefit obligation $ 113,374 $ 37,504 $ 102,632 $ 35,454 Service cost 2, , Interest cost 7,689 2,298 7,791 2,622 Plan participants contributions Amendments - (6,252) - - Actuarial loss 13,873 5,362 9,912 1,200 Benefits paid (7,373) (3,018) (9,387) (3,025) Benefit obligation $ 130,407 $ 37,352 $ 113,374 $ 37,504 Change in Plan Assets: Fair value of plan assets $ 79,668 $ 13,956 $ 94,265 $ 17,680 Actual return on plan assets 2, (5,210) (1,280) Employer contributions 1, Plan participants contributions Benefits paid (7,373) (3,018) (9,387) (3,025) Divestitures/settlements Fair value of plan assets $ 75,804 $ 12,000 $ 79,668 $ 13,956 Reconciliation of Funded Status: Funded status $ (54,603) $ (25,352) $ (33,705) $ (23,548) Unrecognized net actuarial (gain) loss 59,366 16,412 45,020 11,118 Unrecognized prior service (benefit) cost 993 (2,062) 1,256 - Unrecognized net transition obligation (asset) ,029 Accrued benefit cost $ 5,756 $ (11,002) $ 12,571 $ (8,401) 20

22 Pension Benefits Other Postretirement Pension Benefits Benefits Other Postretirement Benefits Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 5,756 $ - $ 12,571 $ - Accrued benefit cost - (11,002) - (8,401) Additional minimum liability (50,573) - (39,490) - Intangible asset 993-1,256 - Accumulated non operating income 49,580-38,234 - Net amount recognized at end of year $ 5,756 $ (11,002) $ 12,571 $ (8,401) Non operating expense for the year $ 11,347 $ - $ 38,233 $ - Components of net periodic benefit cost: Service cost $ 2,844 $ 786 $ 2,426 $ 672 Interest cost 7,689 2,297 7,791 2,622 Expected return on assets (5,311) (904) (6,307) (1,156) Amortization of prior service cost 264 (160) Amortization of transition asset - - (711) 366 Amortization of net actuarial loss 2, , Net periodic cost $ 7,971 $ 2,600 $ 4,862 $ 2,729 An additional minimum pension liability adjustment of $11,347,000 and $38,233,000 was recognized at June 30, 2003 and 2002, respectively. The minimum pension liability adjustment represents the accumulated benefit obligation in excess of the fair value of the plan s assets plus the amount of the prepaid benefit cost. The unrecognized transition obligation is recorded as an intangible asset included in prepaid expenses on the 2003 balance sheet. 11. Commitments and Contingent Liabilities The University carries insurance policies on insurable risks, which it believes to be appropriate. The University generally has self-insured retention limits and has obtained fully insured layers of coverage in excess of self-insured retention limits. Accruals for selfinsurance losses are made based on the University s claims experience and actuarial assumptions. The University has certain liabilities with respect to existing or potential claims, lawsuits, and other proceedings. The University accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. The assets and the present value of expected liabilities of the Hospital Professional and Comprehensive General Liability Trust amounted to $7,905,000 and $11,822,000 at June 30, 2003 and 2002, respectively. The Georgetown University Workers Compensation, Property and Casualty Self-Insurance Trust s assets amounted to $972,000 and $3,002,000 at June 30, 2003 and 2002, respectively. The present value of expected liabilities amounted to $3,149,000 and $3,628,000 at June 30, 2003 and 2002, respectively. These amounts are included in Investments and Other Liabilities in the accompanying financial statements. 21

23 The University receives a substantial amount of its revenues from U.S. Government grants and contracts. The ultimate determination of amounts received under these programs generally is based upon allowable costs, which are subject to audit, and are reported to the U.S. Government. Recovery of indirect costs is based on predetermined rates negotiated with the government. The University is of the opinion that adjustments, if any, arising from such audits will not have a material effect on the financial statements. The University may enter into service agreements with service providers in which it agrees to indemnify the service provider against certain losses and liabilities arising from the service provider's performance under the agreement. Generally, such indemnification obligations do not apply in situations in which the service provider is grossly negligent, engages in willful misconduct, or acts in bad faith. The indemnifications serve to place the University in a liability position no different than if it had performed the services for itself. The University was not aware of any liability under such service agreements for the years ended June 30, 2003 or Contractual commitments authorized by the Board of Directors were approximately $51,454,000 and $80,186,000 at June 30, 2003 and 2002, respectively. The commitments pertain to construction and major maintenance projects. Bonds, loans, federal grants and other University revenues are expected to provide the necessary funding for these commitments. The University has capital commitments with eleven private equity managers totaling $120,000,000. Remaining capital call contributions as of June 30, 2003 and 2002 totaled $55,000,000 and $68,000,000 respectively. The University is a defendant in a number of malpractice lawsuits, all of which are pending in trial or appellate courts of the District of Columbia. According to legal counsel for the Hospital Professional and Comprehensive General Liability Trust, each of the cases is being defended pursuant to the coverage afforded by the respective malpractice insurance policies. Such coverage is subject to the terms and provisions of those policies, including limitations of liability and any applicable exceptions or exclusions. The University considers its liability, if any, to be adequately covered by insurance from its commercial carriers and/or from the Hospital Professional and Comprehensive General Liability Trust. The University carries insurance policies on insurable risks, which it believes to be appropriate. The University generally has self-insured retention limits and has obtained fully insured layers of coverage in excess of self-insured retention limits. Accruals for selfinsurance losses are made based on the University s claims experience and actuarial assumptions. The University has certain liabilities with respect to existing or potential claims, lawsuits, and other proceedings. The University accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. In October 2001, a lawsuit alleging medical malpractice by the University was filed in the Superior Court of the District Columbia In August 2003, a jury awarded $50 million to the plaintiff. The University believes that the award is grossly excessive and supported by 22

24 neither the facts of the case nor the applicable law. In September 2003, the University filed motions with the trial court for judgment notwithstanding the verdict, and for a new trial and, in the alternative, for remittitur, which University management believes to be highly meritorious. The University continues to be unable to reasonably estimate the ultimate outcome of this case. The University does not expect that the ultimate outcome of this litigation will have a material adverse effect on the University s financial condition or changes in net assets. The University is involved in various other claims and legal actions arising in the ordinary course of business. Based upon information currently available, management believes the ultimate disposition of these matters will not have a material adverse effect on the University's financial position, change in net assets or cash flows. 12. Leases The University's leasing operations consist of both operating and capital leases for facilities, office equipment, and vehicles. The lease terms generally range from one month to ten years with options to renew at varying times (in thousands): Rent expense under operating leases Facilities $ 13,652 $ 13,730 Equipment 5,019 5,564 Vehicles 706 1,027 $ 19,377 $ 20,321 Assets recorded under capital leases Equipment $ 6,805 $ 6,805 Less accumulated depreciation (6,784) (6,636) $ 21 $ 169 Minimum annual rentals for the five years subsequent to fiscal year ended June 30 and in the aggregate are (in thousands): Capital Leases Operating Leases 2004 $ 37 $ 6, , , , ,062 Thereafter - 3,257 $ 46 $ 23,226 23

25 The University also leases office space within two buildings known as the Harris and Green Buildings to the National Academy of Sciences. At June 30, 2003 and June 30, 2002, 100% of the office space within the Green Building was leased to tenants and 100% of the two buildings (The Green & Harris Buildings) were leased to tenants. This lease is non-cancelable, and written for a five year term. Expected lease income under these leases is shown below: 13. Tax Credits 2004 $ 2,147, ,147, ,147, Thereafter Total 2,147, ,932 - $ 8,767,668 At June 30, 2003 and 2002, the University had cumulative unrelated business income net operating loss carryovers of approximately $9,796,000 and $10,096,000, respectively. These losses can be carried over for 15 years. The first net operating loss carryover will expire on June 30, At June 30, 2003 and 2002, the University had cumulative empowerment zone employment tax credits which can be carried forward to future years of $33,200,000 and $27,699,000, respectively. These credits can be used to offset U.S. income tax from unrelated business income and can be carried forward for 20 years. The first credits will expire June 30, Discontinued Operations Effective February 17, 2000, the University adopted a plan to transfer the Georgetown University Hospital, the Community Practice Network and the Faculty Practice Group (the transferred business), to Medstar Health Inc. Reversals and adjustments against transaction accruals recorded at that time were $3,744,000 and $20,221,000 for the years ended June 30, 2003 and 2002, respectively. At June 30, 2003 and 2002, the remaining transaction cost estimate liabilities were $14,847,000 and $18,591,000, respectively. The statement of financial position at June 30, 2003 includes accrued liabilities relating to the transferred businesses for third party settlements of $6,036,