California Institute of Technology Annual Report, 2004-2005

California Institute of Technology Pasadena, California 91125 California Institute of Technology Annual Report 2004-2005 California Institute of Technology Annual Report 2004-2005 Robert GrubbS, altech's Atins Professor of Chemistry, was awarded the NOBEL PRIZE IN CHEMISTRY on October 5, 2005. The Royal Swedish Academy of Sciences cited Grubbs and his two cowinners "for the development of the metathesis method in organic synthesis." Metathesis is an organic reaction in which chemists selectively strip out certain atoms in a compound and replace them with atoms from another compound to produce a new molecule with specialized properties. Grubbs's work on olefin methathesis has resulted in powerful new catalysts that have enabled custom synthesis of pharmaceuticals and polymers with novel materials properties. Grubbs's award brings to 32 the number of Nobel Prizes won by Caltech faculty and alumni since 1923. Annual Report 2004-2005 • California Institute of Technolog! Produced by the Office of Public Relations Witor/Flito Rarhara NiPalma Contributors: Michael Farquhar, Elena Rudnev, Allison Benter Desion: Denton Design Associates CI РСУз VIIII C/ Ru РСУз H Ph LETTER FROM THE CHAIRMAN Stay tuned— the coming year promises to be as exciting as the last. I was embarking on an exciting new phase of my association with the Institute— but I don't think I could've predicted just how exciting my first year would be. It began with reaching a milestone in our "There's only one. Caltech" campaign, as we celebrated having raised $1 billion toward our $1.4 billion goal. Another highlight was the Institute's 111th annual commencement ceremony, where I performed for the first time one of my most gratifying duties: "hooding" the new PhDs. I watched with pleasure as the Jet Propulsion Lab continued to have phenomenal success with its Mars Exploration Rover program and other missions, and was impressed with how the Caltech community worked together on a plan to correct the deficit in the general budget. Then, in October, things got even more interesting, with two major announcements made just days apart: that David Baltimore would retire as Caltech's president, and that Atkins Professor Robert Grubbs had won the Nobel Prize in Chemistry. Dr. Grubbs's prize brought to 32 the number of Nobels won by Caltech faculty and alumni. Fortunately, we had not gained one laureate only to lose another, as Dr. Baltimore plans to stay on at the Institute as a professor in the biology division. In his nearly nine years at Caltech's helm, David Baltimore has played a huge role in raising the public's awareness of Caltech as a national treasure. During this past year as Board Chairman, and before that as a trustee, I have been repeatedly impressed by his skill at communicating the Institute's mission to a wide range of constituencies-from the scientific community to potential donors to readers of daily newspapers. Of course, his tenure has been distinguished by many other achievements as well. Early on, he encouraged the faculty to think creatively about the future of their disciplines, a process that became the genesis of our current cam-paign. He built an exceptionally capable administrative team—one that includes California Institute of Technology Caltech's first full-time vice president for student affairs, who also happens to be our first female vice president. He made progress in increasing the number of women and minorities on the faculty; on his watch, women served as division chair and chair of the faculty for the first time. He also hosted dozens of illustrious visitors to campus, among them President Bill Clinton, Walter Cronkite, Warren Buffett, Ray Bradbury, Seamus Heaney, Michael Crichton, and James Watson. Although as a professor he won't have the same bully pulpit he did as president, I am glad to know that the Board and I, and indeed the entire Caltech community, will continue to benefit from his eloquence, keen intellect, and future scientific discourses. Where do we go from here? Last October, I authorized the formation of a faculty presidential search committee headed by planetary scientist David Stevenson. This committee sought input from the entire Caltech and JPL community-faculty, staff, students, postdocs, alumni, administration, the Associates, and trustees—and arrived at a list of eminently qualified candidates. The faculty then recommended several of these individuals to the members of the Trustee Presidential Selection Committee, which I chaired. We selected as Caltech's new president Dr. Jean-Lou Chameau, the provost and vice president for academic affairs at Georgia Tech, whom we are looking forward to welcoming into the campus community in September. I am most grateful for the months of hard work and careful consideration both these committees devoted to their task, and thank them for finding a worthy successor to David Baltimore. As we await Dr. Chameau's arrival, the Institute will continue to do what it does best: conduct world-class research and instruction in science and technology. Stay tuned-the coming year promises to be as exciting as the last. Kent Kresa Chairman, Caltech Board of Trustees 2/3 LETTER FROM THE PRESIDENT his will be my last letter for a Caltech annual report. On October 3, 2005, I announced to the campus community my intention to step down from the Caltech presidency at the end of the 2005-06 academic year. This has not been an easy decision to make, but I am convinced that this is the right time to make it. It has been a very eventful eight and a half years-thanks to e-mail and other technological innovations, I suspect it was as busy as R. A. Millikan's entire 24-year tenure-and I am ready to return to the best job in the world, that of professor. My plans are to remain at Caltech and to continue investigating the problems of immunity that have interested me for many years. I also hope to teach and to remain active in the national debates about the direction of science and technology in this country. Transitions from one phase of life to another often prompt reflection, and in the weeks after I announced my retirement, I found myself pondering how both Caltech and I had changed since October 1997. Many of the ways the Institute was different could be quantified. Five more of our faculty and alumni are now Nobel laureates-most recently Robert Grubbs, who won the chemistry prize last October. One hundred new faculty members have been recruited. Some 15 new academic programs or projects have been initiated, among them the Caltech-MIT Voting Technology Project, the Kavli Nanoscience Institute, the Caltech Undergraduate Research Journal, the Lee Center for Advanced Networking, and the Tectonic Observatory. Several of these endeavors owe their existence to the extraordinary gift we received from Gordon and Betty Moore and their foundation. The Jet Propulsion Laboratory, which Caltech manages for NASA, has had a string of successes with such missions as the Mars Global Surveyor, the Mars Exploration Rovers, Cassini (to Saturn), and Galileo (to Jupiter). We are three-quarters of the way through the most ambitious campaign in the Institute's history, which has raised about $1.1 billion toward its $1.4 billion goal. A dozen campus facilities have been constructed or California Institute of Technology Some 15 new academic programs or projects have been initiated... A dozen campus facilities have been constructed or refurbished... and nine classes of students will have graduated by the time l retire. refurbished, and two more-the Cahill Center for Astronomy and Astrophysics and the Walter and Leonore Annenberg Center for Information Science and Technology— are in the planning stages. Twenty-five new trustees have been elected to our Board, and nine classes of students will have graduated by the time I retire. (I want to stress that l'm simply chronicling events here, not taking credit for them.) Less quantifiable was how I am different for having been at Caltech. One thing that's certainly changed is my understanding of the Institute's unique culture. Before I became president, I didn't fully "get" Caltech-something I now realize is virtually impossible to do unless one spends a fair amount of time here. As a consequence, I did not immediately appreciate what an exceptional faculty we have. I knew, of course, how smart they are, how accomplished in their particular research areas; but I had to be on campus a while to experience how they put their considerable intelligence at the service of the institution whenever necessary. Dealing with some of our recent administrative issues has required large amounts of their time, but over and over I have watched them step up to these tasks with impressive enthusiasm and energy. I think their willingness to serve reflects the strong sense of community and loyalty that Caltech has long inspired. This dedicated faculty is the Institute's core strength; it is they who pursue the world-changing research that has made Caltech preeminent in the scientific community. Still, there are challenges on the horizon that must be managed if the Institute is to retain that position. Chief among these are shifts in the way research is funded-particularly the growing preference of funding agencies to give money to research centers, rather than to individual investigators. This practice, while simpler for the agency, can produce a number of difficulties for researchers and universities. It can imply a hierarchical relationship that does not actually exist between the principal investigator who receives funding and the center's other researchers. It can result in grants being awarded more on the merits of a researcher's presentation abilities than on those of the research itself. And, because centers are typically more complex to run than individual labs, principal investigators can often find themselves spending less time on their research and more on administrative tasks. A more effective model is the internally generated "center," like IST, our Information Science and Technology initiative. Rather than being driven by outside funding trends, IST grew organically from changes in Caltech's intellectual landscape, and so is an appropriate kind of organization for us. 4/5 Being president of Caltech has been one of the great experiences of my life. The faculty has been one important influence on my learning curve; the students have been another. Before coming here, I had run the Whitehead Institute at MIT and the Rockefeller University-neither of which involved interacting with undergradu-ates. Becoming familiar with Caltech undergraduate life has been eye-opening. These incredibly bright students experience pressures unlike those at any other American university. But a Caltech education also provides unequalled rewards: virtually unlimited research opportunities, the chance to interact with some of the world's best faculty, association with a remarkably supportive group of peers, and a preparation that positions the students to be thoughtful and effective contributors to our increasingly complex society. We continue to pursue ways to enrich their intellectual and social lives. We have significantly improved the quality of our humanities faculty and have solidified our relationship with the Huntington Library. One of the campaign's major funding priorities has been renovation of the student residences; this process has already begun on the South Houses and will later include the North Houses as well. Another is the construction of a campus center-a building where students can gather socially. Thanks to a lead gift from trustee and former Board Chairman Ben Rosen (BS '54), this project is now more than half funded. Techers' lives will probably always be more heavily weighted toward their studies than other undergrads' —but we should still do everything possible to help them find a balance between academic and extracurricular interests. Of course, students eventually become alumni, and I have had the pleasure of seeing the rigors of a Caltech education pay off for the many men and women who have gone on to become innovators in their chosen fields. Whether in science or technol-gy, business or academia, government service TECHERS arts or eve mark on all segments of our society. I have also been repeatedly impressed by the alumni's concern for current students and by their active involvement in the life of the Institute. Finally, my understanding of Caltech would not have been complete without the guidance of our Board of Trustees. Never having attempted to be CEO of so complicated an organization as Caltech-JPL, I appreciated the expertise they so generously shared with me. My "instruction" actually began before I even arrived on campus, when I was first drawn into the presidential recruitment process. At Caltech, the Board chooses a president from a short list of candidates selected by the faculty-a highly unusual practice in academia, and a good marker of California Institute of Technology the level of trust and respect that exists between different segments of the Caltech community. The lessons continued as I worked with three successive Board chairmen-Gordon Moore, Ben Rosen, and Kent Kresa-on such projects as concluding the Biological Sciences Initiative, launching the "There's only one. Caltech" cam-paign, and correcting the structural deficit in our general budget. Their dedication to the Institute has never failed to inspire me, and I'm sure it will inspire my successor. Being president of Caltech has been one of the great experiences of my life. I came here without an agenda or preconceived ideas about how to exert leadership. I resolved simply to be myself, to try to solve problems as they arose and take advantage of opportunities as they presented themselves. To my mind, the president is lent to an institution for a term during which everything that happens must be overseen. In certain instances, the president can provide leadership, but as often it is a matter of following the lead of others. And then the president passes on his charge to another, hopefully leaving the institution stronger and more vibrant than when he assumed the role. I believe that I do leave Caltech a stronger institution, and finding in myself the ability to make a difference has been deeply rewarding. In the end, I can think of no better way to express my deep regard for the Institute than to say that I have personally chosen to make it my intellectual home. It is simply the best place there is to do science and to influence the next generation of scientists. David Baltimore President 6/7 FINANCIAL REPORT Fiscal Year 2005 fter serving my first full year at this remarkable institution, it is my pleasure to has a certain organizational genius; everything we do, every decision we make, must protect that genius. And while the cost of conducting research and maintaining world-class facilities remains high, the Caltech community continues to ensure the financial integrity of the Institute. Our capital campaign enjoys continued success as it nears its $1.4 billion goal. A number of capital projects are under way that will provide state-of-the-art facilities to support faculty and students, whose work remains the Institute's central focus. Our investment portfolio's strong performance and generous giving from alumni and friends continue to strengthen the financial base that sustains the Institute. I intend, in this and subsequent reports, to provide more information about Caltech's endowment. The budgetary challenges of recent years continued in fiscal year 2005. The costs of research and education, and the facilities that support them, remain high. Our operating revenue sources are generally slow-growing and constrained by a reliance on federal research, a small student population, and dependency on investment returns and unrestricted gifts. These challenges have led to a structural imbalance in the general funds budget. Using its organizational genius, the community devised a plan to increase revenue and reduce expense in order to balance the budget by fiscal 2008. In a matter of months, the plan was implemented -truly a remarkable accom-plishment, but not surprising for a place like Caltech. By responding intelligently to our fiscal challenges, I believe we are a better, stronger, and more financially secure institution. I am humbled by the capacity of the Caltech president, provost, faculty leaders, and senior administrators to accomplish this task without rancor or recrimi-nation. Few institutions possess such a great reservoir of commitment to the success of the whole community and trust in the analysis and judgment of their peers. California Institute of Technology NET ASSETS The Institute's total net assets increased 8.9 percent during fiscal year 2005. Unrestricted net assets grew by $178 million, which reflects continued support from Caltech's campaign and appreciation in the value of the Institute's endowment and other investments. Temporarily restricted net assets decreased by $14 million, as releases to operations from campaign gifts and pledges outweighed new contribu-tions. The $20 million increase in permanently restricted net assets is the result of additions to the endowment. The strong balance sheet assists the Institute in maintaining the most favorable debt ratings possible, Aaa from Moody's Investors Service and AAA from Standard & Poor's. REVENUES Total unrestricted campus revenues (excluding JPL activity) were $674 million, due primarily to strong performance in the Institute's endowment investments. Sponsored research, gift revenues, and investment return provided approximately 90 percent of the unrestricted revenue in fiscal year 2005, consistent with historical trends. The vast majority of sponsored research support, which provided 41 percent of the Institute's unrestricted revenue, comes from various agencies of the federal government, most notably the National Science Foundation, the National Institutes of Health, the National Aeronautics and Space Administration, and the Department of Defense. Fiscal year 2005 was the best in Caltech's history for gifts. Contributions to the campaign came from a variety of sources, among them Gordon and Betty Moore and the Gordon and Betty Moore Foundation, for facilities and research; Warren and Katharine Schlinger, to support chemistry and chemical engineering; a bequest from the estate of Michael Mathes, to create the Mathes Endowed Scholarship Fund for undergraduates; and the Bill and Melinda Gates Foundation, for the "Engineering 50 40 - 30 20 10 0% 48.1% CAMPUS REVENUES (excluding JPL) 40.9% 2005 2004 31.8% 30.4% 17.0% 9.3% 10.3% 12.2% Research Grants and Contracts Investmen Returr Gifts Other Sources 8/9 CAMPUS EXPENSES (excluding JPL) Immunity Against HIV and Other Dangerous Pathogens" research program. Clearly, campaign revenues continue to be essential to the support of Caltech's key facilities, programs, and people. EXPENSES Campus expenses remained essentially unchanged against the prior year at $497 million, as cost containment strategies offset inflation. Instruction and research expenses, which represent almost 80 percent of total expenses, increased by 1.7 percent, due to additional spending of campaign-related gifts for research. Decreases in other categories are primarily due to cost containment efforts across the campus and reductions in year-end accruals and in the annual cost of future postretirement benefits. 79.8% 78.3% 80 60 2005 2004 20 0% 15.3% 12.9% Research and Instruction Institutional 7.3% Auxiliary 6.4% JET PROPULSION LABORATORY (JPL) JPL is a Federally Funded Research and Development Center, sponsored by NASA and operated as a division of Caltech. As NASA's primary Center for Robotic Deep Space Exploration, JPL manages a broad spectrum of space science missions and instruments. Funding for JPL during fiscal year 2005 was $1.6 billion, which was distributed among six areas of science and engineering (see chart). Under the Prime Contract between NASA and Caltech for the operation of JPL, Caltech earns an award fee based, in part, on the success of its missions. In fiscal year 2005, JPL enjoyed another year of unprecedented challenges and achievements, among them the successful launch of the Deep Impact mission and its encounter with a comet; the successful launch and excellent performance to date of the Mars Reconnaissance Orbiter; the continued operation of the Mars rovers (seven times their expected life); Voyager's discovery of the heliosheath; Spitzer's new discoveries back to near the beginning of the universe; and the continued fulfillment of Cassini's California Institute of Technology JPL 2005 FUNDING BY IMPLEMENTING JPL DIRECTORATE Solar system exploration 23% Astronomy & physics 22% Mars exploration 17% Interplanetary network 14% Earth science & technology 14% Jupiter Icy Moons Orbiter 1% Other offices 9% mission, with the Huygens Probe reaching the surface of Titan. As a result of these successes, JPL received high marks from NASA and another three-month extension on the contract's period of performance. Despite ever-increasing demands and pressures on the NASA budget, JPL's portfolio of missions remains strong, reflecting NASA's confidence in the quality of science and engineering conducted at the Lab. CAPITAL ACTIVITIES In 2005, the Institute continued its ongoing investment in research facilities and deferred maintenance, while capital activity related to campaign priorities began in earnest. In June, renovation of the south undergraduate housing complex began. This project, which is scheduled for completion in 2008, will add badly needed modernizations while preserving the aesthetic appeal of the historic structures. In addi-tion, a new 700-space parking facility under the north athletic field was completed. That facility, financed with proceeds from the issuance of the 2003A CEFA bonds, has eased some of the campus parking crunch and has allowed other campaign-funded construction projects to proceed. CONCLUSION The realities of an academic institution in this day and age are demanding. Caltech's uniqueness brings with it additional challenges that require thoughtful discipline. This year was especially challenging as we worked to address tough budgetary issues. It can be hard for those who have spent most of their careers at one institution to fully appreciate how difficult it is to make cuts in a university. To have done so required enormous honesty and leadership from the president and provost. We also drew deeply on the reservoir of trust, leadership, and goodwill of the division chairs and the vice presidents. Equally important was the manner in which senior management embraced this distasteful task. Without the leadership that they showed for the other administrative units, this accomplishment simply would not have happened. I have been continuously impressed by the people at this institution, from trustees to faculty to staff. Despite this year's challenges, protecting Caltech's mission remains our focal point. With the continued dedication of the entire Institute community, we will continue to see Caltech grow and thrive. Dean W. Currie Vice President for Business and Finance 10/11 ENDOWMENT REPORT Fiscal Year 2005 and working capital under the oversight of the Board of Trustees' Investment Committee. HIGHLIGHTS As of September 30, 2005, the market value of the total endowment was $1.5 billion, with virtually all of the assets in the Consolidated Endowment Pool ("the Pool"). The Pool today is a diversified portfolio of actively managed assets. The Pool produced very strong results in the fiscal year ending September 30, 2005, generating an investment return of 20.6%, net of all fees, with 4.5% attributable to Caltech's investment in Google through its venture capital managers. Similarly, the Pool had strong results when measured over the past three years, with an average annual compound return of 15.2%, reflecting its move to a more diversified investment portfolio and a generally more favorable market environment. Its longer five-year performance of 2.5%, however, continues to reflect the impact of the bear market on the Pool's returns in fiscal years 2001 and 2002. During fiscal 2001 and 2002, the Pool was less diversified, with its assets concentrated in traditional common stocks and private equity that were significantly affected by the bear market. California Institute of Technology Since the Pool is a perpetual pool of capital, its results are appropriately judged over longer periods of time. Over the past 10 years, the Pool achieved an annualized return of 11.3%, growing from $748 million to $1.5 billion. This places Caltech's performance well above the average of all reporting college and university endowments, as reported by Cambridge Associates. ASSET ALLOCATION The Pool's overall objective is to provide a growing stream of income to support Caltech's operations. Its long-term asset allocation policy, or "policy portfolio," is key to achieving this goal and is the benchmark against which actual results are judged. The policy portfolio is designed to produce returns at an appropriate level of risk that will provide consistent annual endowment payout for Caltech's operations, preserve purchasing power, and create a larger asset base for future generations of faculty and students. The Pool's asset allocation for fiscal 2005 is as follows: Asset Class Long-term Strategic Targets Tactical Allocation at September 30, 2005 Traditional Assets 40% 54% Domestic Equity 15% 19% International Equity 15% 20% Fixed Income (with cash) 10% 15% Alternative Assets 60% 46% 100% 100% Total HISTORICAL ASSET ALLOCATION 1997-2005 Caltech has significantly changed its policy asset allocation from 1997 through 2005. Prior to 1997, the Pool was essentially a traditional balanced portfolio, with 70% in stocks and 30% in bonds. The table on the following page shows the evolution of the Pool's policy portfolio from 1997 through 2005, along with the expected real return (in excess of inflation) and expected risk, defined as a standard deviation of returns. 12/13 POLICY PORFOLIO 1997-2005 Asset Class Traditional Assets Domestic Equity International Equity Fixed Income (with cash) Alternative Assets Private Equity Absolute Return Inflation Hedges Real Estate Commodities Oil and Gas Timber Domestic TIPS Opportunistic Total Real Expected Compound Return ** Expected Risk (standard deviation) Targets as of September 30 1997 2002 75% 54% 40% 15% 22% 10% 20% 25% * 22% 46% 13% 21% 12% 5% 0% 0% 0% 0% 100% 7.2% 11.1% 7% 0% 100% 6.9% 9.3% Current Targets 40% 15% 15% 10% 60% 13% 25% 17% 5% 3% 3% 2% 4% 5% 100% 6.3% 9.7% ** Caltech invested opportunistically in alternative assets. The changes in expected return and risk reflect changes in target weights and underlying risk and return assumptions. Today's portfolio is expected to produce a real (adjusted for inflation) long-term rate of return of 6.3% with risk of 9.7%, versus the 1997 portfolio with an expected rate of return of 7.2% with 11.1% risk. By having a more diversified portfolio that has lower correlation between the individual asset classes, we expect to achieve an investment return with less market value volatility, important for consistency in our endowment payout. While we may achieve a lower expected return, we achieve greater stability in the portfolio by reducing risk. Over the past 10 years, the Pool has achieved a real return of 8.7%, which has more than covered Caltech's 6.5% payout rate. The Investment Committee reviews the policy portfolio regularly and approves modifications as environments change. In addition, the Pool's actual asset allocation may differ from the policy portfolio as tactical changes are made California Institute of Technology ACTUAL ASSET ALLOCATION Over the past three years, Caltech has been building its absolute return (various hedge funds) and inflation hedge portfolio. The Pool's actual versus long-term policy targets at fiscal year-end reflect this transitional implementation period. ENDOWMENT POOL ASSET ALLOCATION - ACTUAL VS. TARGET As of September 30, 2005 25% 25 20% actual target 20 19% 17% 18% 17% 15% 15% 15 13% 11% 10 9% 10% 6% 5% 5 0% 0% Domestic Equity Internat'l Equity Domestic Cash Bonds Private Equity 0% Opportunistic Absolute Inflation Return Hedges FISCAL 2005 INVESTMENT RESULTS The Pool had strong results for the year ending September 30, 2005, both in absolute and relative performance. The total net investment return was 20.6% versus a policy portfolio benchmark return of 14.5% and a "plain vanilla" stock and bond index of 14.8%. The endowment benefited from its broad diversification and active management. The Pool outperformed its benchmark over the past three, five, and seven years, as shown below. Total Return (Net) I Year 3 Years 5 Years 7 Years Pool 20.6% 15.2% 2.5% 8.8% Policy Benchmark 14.5% 11.8% 1.1% 7.6% Excess Return 6.1% 3.4% 1.4% 1.2% 14/15 RESULTS BY ASSET CLASS Every asset class produced positive returns. The top absolute contributors included private equity, international equity, U.S. equity, and absolute return. ENDOWMENT POOL PERFORMANCE (NET) - ASSET CLASS VS. BENCHMARK Year ending September 30, 2005 80 72% 60 venture: 93% buyouts: 48% 40 33% 33% asset class benchmark 20% 21% 115% 20 15% 15% 13% 9% 8% 8% 0% Domestic Internat'l Equity Equity 2% 3% 3% | 0% Domestic Cash Bonds Private Equity Absolute Inflation Total Pool Return Hedges Fiscal 2005's investment results have been strong both on an absolute and a relative basis. However, the challenges of the three-year bear market are a constant reminder that global investment markets and environments change and unexpected events occur. INVESTMENT COMMITTEE The Investment Committee is a standing committee of Caltech's Board of Trustees, and meets quarterly. The committee establishes and/or approves the endowment's asset allocation policy and strategy, performance benchmarks, investment guidelines and objectives, investment managers, and spending policy proposed by the investment staff. In 2004 the Investment Committee and Board of Trustees approved a change in governance of the Investment Committee, reducing the number of members and adding three nontrustee advisors with special investment expertise. The change in governance was designed to further strengthen the governance and oversight of the endowment. Today, the Committee has 11 members-eight trustees and three nontrustee advisors. The advisors are recognized experts in their fields, typically investment managers, and serve three-year terms, with a maximum of two consecutive terms. Sandra A. Ribovic-Ell Treasurer and Chief Investment Officer California Institute of Technology Financial Statements BALANCE SHEETS at September 30, 2005 and 2004 (dollars in thousands) ASSETS 2005 2004 Cash and cash equivalents $ 10,260 $ 6,122 Advances on grants and contracts 2,854 2,935 Security deposits 234,767 244,665 Accounts and notes receivable, net of allowance for doubtful accounts of $1,277 and $6,170, respectively: United States government 156,396 145,411 17,605 18,884 Contributions receivable, net (Note C) 195,106 233,780 Investments, including securities pledged or 1,780,900 1,540,028 on loan of $230,164 and $239,868, respectively (Note D) Prepaid expenses and other assets 64,863 69,611 Deferred United States government billings (Note E) 276,072 249,194 Property, plant, and equipment, net (Note F) 681,786 651,985 Total assets $ 3,420,609 $ 3,162,615 LIABILITIES and NET ASSETS Liabilities: Accounts payable and accrued expenses $ 294,643 $ 256,941 Security deposits 234,767 244,665 Deferred revenue and refundable advances 26,730 29,140 Annuities, trust agreements and agency funds 91,324 72,549 Bonds and notes payable (Note G) 242,906 239,688 Accumulated postretirement benefit obligation (Note J) 299,478 271,910 Total liabilities 1,189,848 1,114,893 Commitments and contingencies (Note K) Net Assets (Note H): Unrestricted 1,350,358 1,172,765 Temporarily restricted 301,630 315,814 Permanently restricted 578,773 559,143 Total net assets 2,230,761 2,047.722 Total liabilities and net assets $ 3,420,609 $ 3,162,615 The accompanying notes are an integral part of these financial statements. STATEMENTS OF ACTIVITIES for the years ended September 30, 2005 and 2004 (dollars in thousands) 2005 2004 CHANGES IN UNRESTRICTED NET ASSETS: Revenues: Tuition and fees, net of student financial aid of $33,943 and $32,795, respectively $ 19,3931 214,115 $ 17,549 166,958 Investment return 27,383 21,342 Grants and contracts: Jet Propulsion Laboratory - direct 1,638,455 1,585,669 Other United States government - direct 164,641 157,145 Non-United States government - direct 10,491 Indirect cost recovery and management allowance 100,899 97.497 Auxiliary enterprises 34,546 32,881 Other 15,297 16,305 Net assets released from restrictions 87,545 29,783 Total revenues and net assets released from restrictions 2,312,765 2,134,466 Expenses: Instruction and academic support 211,286 200,735 Organized research: Jet Propulsion Laboratory 1,638,455 1,585,669 Other Institute research 185,170 189,241 Institutional support 64,135 75,920 Auxiliary enterprises 35,342 33,585 Total expenses 2,134,388 2,085, 150 Excess of revenues over expenses 178,377 49,316 Other changes in net assets: Increase in minimum pension liability (1,110) - Redesignations of net assets 326 1,571 Increase in unrestricted net assets $ 177,593 $ 50,887 CHANGES IN TEMPORARILY RESTRICTED NET ASSETS: Gifts $ 75,021 $ 18,839 Investment return 1,341 2,717 Vet assets released from restrictions Redesignations of net assets (87,545) (3,001) (29,783) 3,999 Decrease in temporarily restricted net assets $ (14,184) $ (4,2281 CHANGES IN PERMANENTLY RESTRICTED NET ASSETS: Gifts $ 16,734 $ 39,000 201 168 Investment return Other income Redesignations of net assets 20 2,675 56 (5,570) Increase in permanently restricted net assets $ 19,630 $ 33,654 Increase in total net assets $ 183,039 $ 80,313 Net assets at beginning of year 2,047,722 1,967,409 Total net assets at end of year $ 2,230,761 $2,047,722 The accompanying notes are an integral part of these financial statements. 18/19 STATEMENTS OF CASH FLOWS for the years ended September 30, 2005 and 2004 (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Increase in net assets Adjustments to reconcile increase in net assets to net cash used in operating activities: Depreciation and amortization Contributions restricted for long-term investment and capital projects Investment return restricted for long-term investment and capital projects Realized and unrealized gains on investments Gifts of property, plant, and equipment Gifts and other in-kind distributions of securities Actuarial change in trust liability Gain on sales of property, plant, and equipment Changes in assets and liabilities: Accounts and notes receivable, net Contributions receivable, net Deferred United States government billings Prepaid expenses and other assets Accounts payable and accrued expenses Deferred revenue and refundable advances Agency funds Accumulated postretirement benefit obligation Net cash used in operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments Proceeds from sale of investments Purchases of property, plant, and equipment Proceeds from sale of property, plant, and equipment Net cash (used in) provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Change in book overdraft position Change in advances on grants and contracts Contributions restricted for long-term investment and capital projects Investment return restricted for long-term investment and capital projects Cash received under split-interest agreements Cash payments made under split-interest agreements Net borrowings (repayments) on lines of credit Net cash provided by (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Cash paid during the year for interest, net of amounts capitalized Securities lending Securities received to satisfy pledge payments Accrued purchases of plant, property, and equipment 2005 $ 183,039 40,885 (27,279) (2,157) (189,051) (209) (5,384) 3,012 (487) (9,706) (31,589) (26,878) 4,311 14,129 (2,410) 1,190 27,568 (21,016) (878,688) 929,344 (70,510) 2,435 (17,419) 39,032 2,157 6,066 (7,682) 3,000 42,573 4,138 6.122 $ 10,260 $ 6,438 $ 234,767 $ 49,897 $ 1,697 The accompanying notes are an integral part of these financial statements. California Institute of Technology 2004 $ 80,313 39,195 (74,6781 (1,510) (145,839) (47) (9,679) 1,784 (1,435) 8,115 61,266 (31,612) (7,659) 40,987 (325) (295) 39,477 (1,942) (957,912) 1,017,494 (54,554) 4,140 9,168 $ (19,678) (902) 22,252 1,510 12,171 (12,210) (5,000) (1,857) 5,369 753 6,122 6,506 $ 24.565 $ $ 3,147 NOTES TO FINANCIAL STATEMENTS September 30, 2005 and 2004 (dollars in thousands) NOTE A. Description of the California Institute of Technology The California Institute of Technology (the Institute) is a private, not-for-profit institution of higher education based in Pasadena, California. Founded in 1891, the Institute provides education and training services, primarily for students at the undergraduate, graduate, and postdoctoral levels, and performs research, training, and other services under grants, contracts, and similar agreements with sponsoring organizations, primarily departments and agencies of the government of the United States of America. NOTE B. Summary of Significant Accounting Policies BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Institute and the Jet Propulsion Laboratory (JPL), a Federally Funded Research and Development Center managed by the Institute for the National Aeronautics and Space Administration (NASA). The Institute manages JPL under a cost-reim-bursable contract with NASA. JPL's land, buildings, and equipment are owned by the United States government and are excluded from the Institute's financial statements. Receivables and liabilities arising from JPL's operating activities are reflected in the Institute's balance sheets. The direct costs of organized research and the related reimbursement of the costs arising from JPL's activities are segregated in the statements of activities. The management allowances earned under this contract also are included as an indirect cost recovery and management allowance in the statements of activities. The Institute (including JPL) is exempt from federal income taxes under the provisions of Internal Revenue Code Section 501(c)(3). The Institute is also generally exempt from payment of California state income, gift, estate, and inheritance taxes. The financial statements of the Institute have been prepared on the accrual basis of accounting, in accordance with accounting principles generally accepted in the United States of America and with the provisions of the American Institute of Certified Public Accountants' Audit and Accounting Guide, "Not-for-Profit Organizations," which requires the Institute to classify its net assets into three categories according to donor-imposed restrictions or provisions of law: permanently restricted, temporarily restricted, and unrestricted. Permanently restricted net assets include gifts, charitable remainder trusts, pooled income funds, gift annu-ities, other split-interest agreements, and contributions receivable in which donors have stipulated that the principal be invested in perpetuity. Generally, donors permit the unrestricted use of all or part of the investment return on these assets. Investment gains or losses, both realized and unrealized, related to permanently restricted investments are reported as unrestricted revenue unless their use is restricted by donor-imposed stipulations. Temporarily restricted net assets include gifts for which donor-imposed restrictions have not been met, including funds restricted for future capital projects, charitable remainder trusts, pooled income funds, gift annuities, other split-interest agreements, and contributions receivable upon which the donor has placed certain restrictions. These restrictions are removed either through the passage of time or when certain actions are taken by the Institute to fulfill such restrictions. Expirations of temporary restrictions on net assets due to the fulfillment of donor-imposed restrictions and/or the passage of time are reported as releases from temporarily restricted to unrestricted net assets in the statements of activities. Donor-restricted gifts that are received and either spent, or deemed spent, within the same fiscal year are reported as unrestricted revenues. Unrestricted net assets are those not subject to donor-imposed restrictions. 20/21 USE OF ESTIMATES The preparation of financial statements in conformity 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. Actual results could differ from those estimates. REDESIGNATIONS Certain amounts previously received from donors have been transferred among net asset categories due to changes in donor designations. CASH AND CASH EQUIVALENTS Cash and cash equivalents include resources invested in money market funds and short-term investments with original maturities of three months or less, when purchased. Any such investments held by external investment managers are classified as investments in the balance sheets and are not included in cash and cash equivalents. Under the Institute's cash management system, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes and are included in accounts payable and accrued expenses in the balance sheets if an overdraft situation exists. There were no overdrafts at September 30, 2005 and 2004. ADVANCES ON GRANTS AND CONTRACTS Advances on grants and contracts include certain cash balances, totaling $2,854 and $2,935 at September 30, 2005 and 2004, respectively, restricted for use in connection with United States government research. SECURITY DEPOSITS Security deposits consist of collateral related to securities lending in the Institute's investment portfolio. INVESTMENTS Investments are stated at fair value. The fair value of marketable securities and short-term investments is based on quoted market prices. When a quoted market price is not readily determinable, quoted market prices of similar financial instruments are used. The fair value of alternative investments, including limited partnerships and similar interests, is based on information provided by external investment managers at the most recent valuation date prior to year-end. The fair value of real estate and other investments is estimated by professional appraisers or Institute management. Mortgages, notes receivable, and guaranteed investment contracts are carried at cost, which approximates fair value. Purchases and sales of securities are recorded on trade dates, and realized gains and losses are determined based on the average cost of securities sold. Amounts payable for securities purchased were $19,929 and $15,716 at September 30, 2005 and 2004, respectively. The Institute engages a number of outside parties to manage its investment portfolio. The Institute's investment strategy incorporates certain financial instruments, which involve, to varying degrees, elements of market and credit risk in excess of amounts recorded in the financial statements. All investments of endowment and similar funds are carried in an investment pool unless special considerations or donor stipulations require that they be held sepa-rately. Pooled endowment and similar funds are invested on a total return basis to provide both income and investment appreciation. The Institute utilizes a pooled endowment spending policy that establishes allocations for current spending, consistent with an annual budget plan approved by the Board of Trustees. The spending policy allows the expenditure of a prudent amount of the total investment return that attempts to preserve the future purchasing power of endowment principal. As a result of market declines, the fair market value of certain donor-restricted endowment funds is less than the historical cost of such funds. As the market value of the portfolio increases, this deficiency will reverse. Unrealized losses resulting from market declines totaling $13,554 and $32,645 at September 30, 2005 and 2004, respectively, are recorded in unrestricted net assets in California Institute of Technology accordance with Statement of Financial Accounting Standards 124, Accounting for Certain Investments Held by Not-For-Profit Organizations." The Institute participates in a securities lending pro-gram, in which it lends a portion of its investments to third party borrowers through an agreement with its custodian bank. All securities loaned are collateralized by cash and debt instruments in amounts equal to 102% of the market value of the securities loaned. The bank monitors the value and quality of collateral and credit worthiness of borrowers. Collateral received must maintain a weighted-average maturity of 90 days or less and must meet credit quality standards defined in the lending agreement. The Institute does not have the ability to pledge or sell the securities held as collateral without a borrower default. Collateral held and the Institute's obligation to repay such collateral are recorded in the balance sheets as "security deposits." At September 30, 2005 and 2004, investments include guaranteed investment contracts valued at $14,213 and $39,896, respectively, that were purchased with unex-pended proceeds from the Series 2003A California Educational Facilities Authority revenue bonds. These assets are limited to use in specific construction projects and interest payments related to CEFA bonds. PROPERTY, PLANT, AND EQUIPMENT Campus property, plant, and equipment is recorded at the cost of construction or acquisition, or at the appraised value at the date of the gift. Interest costs related to debt used for construction of assets are included in the cost of construction. Depreciation on all assets is calculated over the estimated useful life of each class of depreciable asset, which ranges from three to fifty years, and is computed using the straight-line method. Depreciation on campus buildings used in sponsored research is calculated based on the useful lives of each major building component. The Institute provides for the renewal and replacement of campus assets from various sources set aside for this purpose. Property, plant, and equipment acquired under both federal and nonfederal grants in which title does not ultimately transfer to the Institute is not recorded in the Institute's financial statements. The Institute reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recover-able. An impairment charge is recognized when the fair value of the asset or group of assets is less than the carrying value. SPLIT-INTEREST AGREEMENTS The Institute's split-interest agreements with donors consist primarily of charitable gift annuities and charitable remainder trusts for which the Institute serves as trustee. For irrevocable agreements, assets contributed are included in Institute investments and stated at fair value. Contribution revenue is recognized at the date each trust is established after recording liabilities for the actuarially determined present value of the estimated future payments to be made to the beneficiaries. The actuarial liability is based on the present value of future payments discounted at the appropriate risk-free rate at the inception of each agreement and the applicable actuarial mortality tables. Discount rates on all split-interest agreements range from 3.6% to 11.2%. The Annuity 2000 Mortality Table and the 1990 Group Annuity Mortality Tables were used in 2005 and 2004, respectively. The liabilities are adjusted during the terms of the trusts for changes in the fair value of the assets, accretion of discounts, and other changes in the estimates of future benefits. Actuarial liabilities totaled $67,383 and $56,379 at September 30, 2005 and 2004, respectively. The Institute is also the trustee for certain revocable agreements. Assets contributed are included in Institute investments at fair value, and amounts equal to the value of assets are included in liabilities for annuities, trust agreements, and agency funds. Total assets and liabilities for revocable agreements were $14,985 and $8,406 at September 30, 2005 and 2004, respectively. 22/23 BENEFICIAL INTERESTS The Institute is the beneficiary of charitable remainder and perpetual trusts held and administered by others. The present values of the estimated future cash flows from the trusts approximate the value of the underlying assets and is included in prepaid expenses and other assets in the balance sheets. Contribution revenues are recognized at the date the trusts are established. Distributions from perpetual trusts are recorded as contribution revenues and the carrying value of the beneficial interests is adjusted for changes in the values of the underlying assets. These assets totaled $20,351 and $20,788 at September 30, 2005 and 2004, respectively. REVENUE RECOGNITION The Institute's revenue recognition policies are as follows: TUITION AND FEES - Student tuition and fees are recorded as revenues during the year the related academic services are rendered. Student tuition and fees received in advance of services to be rendered are recorded as deferred rev-enue. Tuition support from Institute sources is displayed as a tuition discount. INVESTMENT RETURN (LOSS) - Investment transactions are recorded on the trade date. Investment income and realized and unrealized gains and losses are reported as increases or decreases to the appropriate net asset category. GIFTS - Gifts from donors, including contributions receivable (unconditional promises to give), are recorded as revenues in the year received. Contributions receivable are reported at their discounted present values, and an allowance for amounts estimated to be uncollectable is provided. Gift revenue from contributions payable in securities or other investments is adjusted to reflect the year end value of securities/investments to be contributed. Donor-restricted gifts, which are received and either spent, or deemed spent, within the same year, are reported as unrestricted revenue. Gifts of long-lived assets with no donor-imposed time restrictions are reported as unrestricted revenue in the year received. Gifts restricted to the acquisition or construction of long-lived assets are reported as temporarily restricted revenue. The temporarily restricted net assets resulting from these gifts are released to unrestricted net assets when the donor-imposed restrictions are fulfilled. Gifts received for endowment investment are held in perpetuity and recorded as permanently restricted. Conditional promises to give are not recorded until the conditions have been substantially met. GRANTS AND CONTRACTS - Revenues from grants and contracts are reported as increases in unrestricted net assets as allowable expenditures under such agreements are incurred. Certain grants and contracts provide for the reimbursement of indirect facilities and administrative costs based on rates negotiated with the Office of Naval Research, the Institute's federal cognizant agency. Amounts received in excess of expenditures are recorded as deferred revenue. AUXILIARY - Revenues from supporting services, such as dining facilities, faculty and student housing, and bookstores are recorded at time of delivery of a product or service. Amounts received in advance of delivery of products or services are recorded as deferred revenue. EXPENSES Expenses are generally reported as decreases in unrestricted net assets. The statements of activities present expenses by functional classification in accordance with the overall educational and research mission of the Institute. Building and improvements depreciation and plant operation expenses are allocated to functional classifications based on square footage occupancy of Institute facil-ities. Equipment depreciation is allocated to functional classifications based on each functional area's average equipment purchases. Interest expense on external debt, net of amounts capitalized, is allocated to the functional categories that have benefited from the proceeds of such debt. Interest expense, net of capitalized interest, for the years ended September 30, 2005 and 2004, was $6,811 and $6,547, respectively, and capitalized interest was $3,143 and $2,686, respectively. California Institute of Technology FAIR VALUE OF FINANCIAL INSTRUMENTS For those financial instruments for which it is practical, the following methods and assumptions are used to estimate fair value: CASH AND CASH EQUIVALENTS - Cost approximates fair value. ACCOUNTS AND NOTES RECEIVABLE - Amounts receivable under contracts and grants are carried at cost, less an allowance for doubtful accounts, which approximates fair value. Student accounts and notes receivable of $11,249 and $13,691 at September 30, 2005 and 2004, are carried at cost, less an allowance for doubtful accounts. Determination of the fair value of student accounts and notes receivable could not be made without incurring excessive costs. BONDS AND NOTES PAYABLE - The fair value of bonds payable is estimated based on quoted market prices for the bonds or similar financial instruments and was $206,739 and $202,752 at September 30, 2005 and 2004, respectively. Amounts outstanding under the revolving bank credit facilities and the money market loan programs are carried at cost, which approximates fair value. CONTRIBUTIONS RECEIVABLE AND BENEFICIAL INTERESTS - Determination of the fair value of contributions receivable could not be made without incurring excessive costs. The fair value of beneficial interests approximates the market value of the underlying assets. NOTE C. Contributions Receivable, net Contributions receivable consist of unconditional promises to give to the Institute in the future and are recorded after discounting to the present value of the future cash flows at the appropriate risk-free rate at the date of each gift. Discount rates on all outstanding contributions at September 30, 2005 and 2004, range from 2.75% to 5.84%. Contributions receivable consisted of the following at September 30, 2005 and 2004: 2005 2004 Contributions receivable at beginning of year, net $ 233,780 $ 246,831 Discount at beginning of year 13,928 16,487 Allowance for doubtful accounts at beginning of year 2,195 1,205 Contributions receivable at beginning of year, gross 249,903 264,523 New contributions received 4,903 64,175 Contribution payments received (76,122) (23,661) Adjustments to fair value of securities to be contributed 29,730 (53,900) Less: Write-offs and other adjustments (1,693) (1,234) Contributions receivable at end of year, gross 206,721. 249,903 Discount at end of year 19,785 (13,928) Allowance for doubtful accounts at end of year 1,830 (2,195) Contributions receivable at end of year, net $ 195,106 $ 233,780 24/25 Gross contributions receivable carried the following restrictions at September 30, 2005 and 2004: Endowment for programs, activities, and scholarships Building construction Education, general, and time restrictions Total contributions receivable, gross 2005 $ 26,900 49,591 130,230 $ 206,721 2004 $ 36.464 64,256 149,183 $ 249,903 Gross contributions receivable are expected to be realized as follows at September 30, 2005 and 2004: Within one year Between one year and five years More than five years Total contributions receivable, gross 2005 $ 79,372 116,340 11,009 $ 206,721 2004 $ 75,283 173,205 1,415 $ 249,903 During the year ended September 30, 2002, the Gordon and Betty Moore Foundation (Foundation), which shares a common board member with the Institute, informed the Institute of its intention to fund research and educational projects totaling $300,000 over ten years. At September 30, 2005 and 2004, contributions receivable included $1,993 and $2,108, respectively, related to one research project; all other project awards made to date have been recorded as conditional gifts. At September 30, 2005, $89,130 of the intention had been received in cash. In December 2005, the Foundation and the Institute determined that the remaining amount of the original commitment should be deemed unconditional. Therefore, the Institute plans to record additional contributions receivable and temporarily restricted revenue of approximately $196,000 in the year ending September 30, 2006. At September 30, 2005 and 2004, $119,123 and $134,084, respectively, in contributions receivable were due from a member of the Institute's Board of Trustees. California Institute of Technology NOTE D Investments Investments consisted of the following at September 30, 2005 and 2004: 2005 2004 Short-term investments $ 171,597 $ 174,313 Government fixed income securities 166,762 102,733 Corporate fixed income securities 69,151 66,493 Domestic equity securities 363,579 368,553 International equity securities 320,158 194,596 Guaranteed investment contracts 14,213 39,896 Alternative investments: Absolute return strategies 245,540 183,003 Private equity 155,309 179,029 Inflation hedges 264,848 220,055 Real estate mortgages, notes, and other investments 9,743 11,357 Total investments $ 1,780,900 $ 1,540,028 Investments were categorized as follows at September 30, 2005 and 2004: Consolidated endowment pool Separately invested endowments Subtotal endowment investments Trusts, annuities, and other Total investments 2005 $ 1,469,455 51,023 1,520,478 260,422 $1,780,900 Investment return consisted of the following for the years ended September 30, 2005 and 2004: Interest and dividend income Net realized gains Net unrealized appreciation Less: management fees Total investment return 2005 $ 30,420 124,140 64,911 (3,814) $ 215,657 2004 $ 1,257,737 49,676 1,307,413 232,615 $ 1,540,028 2004 $ 27,341 36,368 109,471 (3,337) $ 169,843 26/27 NOTE L Deferred United States Government Billings Deferred United States government billings consisted of the following at September 30, 2005 and 2004: 2005 $ 230,817 Accumulated postretirement benefit obligation — JPL Pension benefit asset — JPL Pension benefit liability - JPL Accrued vacation benefits - JPL Total deferred United States government billings 359 44,896 $ 276,072 2004 $ 210,579 (3,044) 41,659 $ 249,194 The Institute's contract with NASA provides for the reimbursement of certain employee benefit costs should the Institute's contract ever be terminated. Therefore, the Institute has recorded a deferred United States government billing related to JPL's accumulated postretirement benefit obligation, which is offset by JPL's pension benefit asset or liability, as the Institute expects to recover the net of these amounts through future charges to United States government grants and contracts. The Institute has also recorded a deferred United States government billing related to JPL's accrued vacation benefits, which are also covered by similar contract provisions. Although these deferred billing amounts may not be currently funded, and therefore may need to be funded as part of future NASA budgets, the Institute believes it has the contractual right to insist that such funding be made available. NOTE F. Property, Plant, and Equipment, net Property, plant, and equipment consisted of the following at September 30, 2005 and 2004: Land and land improvements Buildings and building improvements Equipment Construction in progress Less: accumulated depreciation Property, plant, and equipment, net 2005 $ 55,634 513,165 416,306 100,384 (403,703) $ 681,786 2004 $ 55,149 483,844 413,021 80,142 (380,1711 $ 651,985 Depreciation expense for the years ended September 30, 2005 and 2004, was $40,667 and $38,977, respectively. California Institute of Technology NOTE U• Bonds and Notes Payable Bonds and notes payable consisted of the following at September 30, 2005 and 2004: California Educational Facilities Authority (CEFA) revenue bonds: Series 2003A due October 2032, with interest at 5.0% (including premium of $441 and $458, respectively) Series 1998 due October 2028, with interest at 4.25% (net of issue discount of $2,629 and $2,743, respectively) Series 1998 due October 2027, with interest at 4.5% (net of issue discount of $2,771 and $2,892, respectively) Series 1994 due January 2024, with a variable interest rate reset weekly (2.70% and 1.67%, respectively) Total revenue bonds Other bonds and notes payable: Bank of America revolving bank credit facility (uncollateralized) expiring September 2006, with variable interest rates (average 2.02% at 9/30/04) Bank of America revolving bank credit facility (uncollateralized) expiring September 2006, with variable interest rates Bank of New York money market loan program (uncollateralized) with no expiration date, with variable interest rates JPMorgan Chase money market loan program (uncollateralized) with no expiration date, with variable interest rates (average 3.94% and 2.00%, respectively) Total other bonds and notes payable Total bonds and notes payable 2005 $ 70,441 47,936 50,529 30,000 198,906 -- 44,000 44,000 $ 242,906 2004 $ 70,458 47,822 50,408 30,000 198,688 32,000 - - 9,000 41,000 $ 239,688 The CEFA Series 2003A and CEFA Series 1998 revenue bonds are subject to an early redemption premium if redeemed prior to October 11, 2011, and October 1, 2010, respectively. The Bank of America lines of credit and Bank of New York money market loan program have individual limits of $50,000; the JPMorgan Chase money market loan program has an individual limit of $62,000. The Institute has an internal aggregate limit on borrowings under the two Bank of America revolving lines of credit and the JPMorgan Chase and Bank of New York money market loan programs of $50,000 for borrowings to finance working capital and a separate $50,000 limit for borrowings to finance acquisitions of real estate and temporary funding for capital projects. Year Ending September 30 Amount 2006 $ 74,000 2007 2008 2009 = 2010 Thereafter 168,906 Scheduled principal repayments on bonds and notes payable were as follows at September 30, 2005: Total $ 242,906 Under certain circumstances, the CEFA Series 1994 variable rate revenue bonds could fail to be remarketed, requiring the Institute to repurchase the outstanding bonds totaling approximately $30 million. Therefore, the bonds have been classified as repayable in the following year in the table above. However, the Institute believes a repurchase is unlikely. 28/29 NOTE 1. Components of Net Assets Temporarily restricted net assets were available for the following purposes at September 30, 2005 and 2004: Educational and research funds Capital projects Life income and annuity funds 2005 2004 $ 146,911 $ 163,992 91,368 79,849 36,045 37,861 Endowment and other funds functioning as endowment 27,306 34,112 Total temporarily restricted net assets $ 301,630 $ 315,814 Permanently restricted net assets were available for the following purposes at September 30, 2005 and 2004: Student loan funds Life income and annuity funds Endowment and other funds functioning as endowment Total permanently restricted net assets 2005 $ 16,176 36,531 526,066 $ 578,773 2004 $ 15,483 36,558 507,102 $ 559,143 NOTE I. Retirement Plans The Institute's retirement plans cover substantially all of its employees. Except for a small number of qualified non-academic staff who participated in a defined benefit pension plan that was terminated in 1993 and who are covered by a successor defined benefit pension plan, the Institute provides a defined contribution retirement program for its qualified academic and administrative employees. Pension costs for the defined contribution plans for the years ended September 30, 2005 and 2004, were $17,676 and $16,307, respectively, for the Campus and $54,920 and $50,396, respectively, for JPL. Retirement benefits under the successor defined benefit plan are determined based on years of service and career average compensation, and accrued partially on a fixed dollar basis and partially on a variable dollar basis. Financial and actuarial information for the plan is based on a June 30 measurement date. California Institute of Technology 2005 2004 Change in the benefit obligation: Benefit obligation at beginning of year $ 32,952 $ 31,158 55 65 1,887 1,788 (2,828) (2,617) 2,756 2,558 Benefit obligation at end of year $ 34,822 $ 32,952 Certain financial information regarding the successor defined benefit plan was as follows for the years ended September 30, 2005 and 2004: Service cost Interest cost Benefits paid Actuarial loss The accumulated benefit obligation for the defined benefit pension plan was $34,786 and $32,927 at the valuation dates. 2005 Change in the fair value of plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Benefits paid Plan expenses Fair value of plan assets at end of year $33,425 3,143 (2,828) (63) $33,677 2004 $ 31,510 4,630 (2,617) (98) $ 33,425 Funded status at valuation date: Funded status Unrecognized net actuarial loss Net amount recognized at end of year 2005 $ 11,145) 4,871 $ 3,726 2004 $ 473 2,880 $ 3,353 2005 Amounts recognized in the financial statements: Prepaid benefit cost Accrued benefit liability Additional minimum liability Net amount recognized at end of year $ 2004 $ 3,353 (1,109) 4,835 $ 3,726 $ 3,353 The benefit obligation exceeds the fair value of plan assets at September 30, 2005. In this situation, current accounting rules require the recognition of a liability equal to the unfunded accumulated benefit obligation, which is defined as the difference between the accumulated benefit obligation and the fair value of plan assets. Accordingly, the net liability recognized at September 30, 2005, disclosed above reflects the additional minimum pension liability adjustment. The cost of the adjustment for Campus was $1,110 and is reflected in other changes in unrestricted net assets in the Statement of Activities. The cost related to JPL was $3,725 and is reflected in both JPL direct expense and revenue, as well as in deferred U.S. Government billings, as any cost associated with this adjustment related to JPL will ultimately be recoverable from NASA. 30/31 Net periodic benefit related to the plan for the years ended September 30, 2005 and 2004, included the following components: Service cost Interest cost Expected return on plan assets Net periodic benefit 2005 $ 55 1,887 (2,315) $ (373) Estimated contributions to the retirement plan in the next fiscal year will be $0. $ $ 2004 65 1,788 (2,186) (333) Estimated future benefit payments are expected to be paid as follows: Year Ending September 30 2006 2007 2008 2009 2010 2011-2015 Benefit Payments $3,047 3,222 3,164 3,089 3,011 13,966 The Institute contributes amounts sufficient to maintain retirement plan assets at levels adequate to cover all accrued benefit obligations. Approximately 90% of the plan's assets at September 30, 2005 and 2004, were designated by the plan's funding agent to back annuity contracts distributed to retirees under the plan's immediate participation guarantee agreement with the contract issuer. Participant annuities may be fixed or variable and reflect the value of designated plan equity and fixed income securities. Assets not designated for annuity contracts are invested in separate accounts by the funding agent and carry a target allocation of 62% equities and 38% fixed income. At September 30, 2005 and 2004, total retirement plan assets were invested as follows: 2005 Equity securities Fixed income securities 57% 43% 2004 56% 44% The following weighted-average assumptions were used to determine the Institute's benefit obligations under the successor defined benefit plan at September 30, 2005 and 2004: Discount rate Long-term rate of compensation increase 2005 5.25% 4.00% 2004 6.00% 4.00% To develop the expected long-term rate of return on assets, the Institute considers the historical returns and future expectations for each asset class, as well as the asset allocation of the retirement plan's investment port-folio. The average investment return of the plan has been 7.81% over the past nine calendar years. Estimated future return was based on expected returns for various asset categories. The evaluation of the historical and future returns resulted in the choice of 7.25% for the expected return on plan assets. The following weighted-average assumptions were used to determine the Institute's net periodic benefit cost under the successor defined benefit plan for the years ended September 30, 2005 and 2004: 2005 Discount rate Expected return on plan assets Long-term rate of compensation increase 6.00% 7.25% 4.00% 2004 6.00% 7.25% 3.50% California Institute of Technology NOTE U. Postretirement and Postemployment Benefits Other Than Pensions The Institute's employees may be eligible for certain health and life insurance benefits upon retirement. The Institute's obligation related to these benefits is actuarially determined and has been recorded in the accompanying balance sheets. Any actuarial deferrals resulting from changes in the accumulated postretirement benefit obligation are amortized over the average future working lifetime of Institute employees. The Institute's postretirement benefits are funded on a pay-as-you-go basis; therefore, there are no plan assets. As a result, a formal investment policy has not been developed. The Institute adopted the provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 during the year ended September 30, 2005. The change in the benefit obligation and costs disclosed below include an actuarial gain of $24,449 associated with the federal subsidy provided by the Act. Since the plan's measurement date of June 30, 2005, the Institute elected to provide two MA-PDP plans within the medical plans as of January 1, 2006, to eligible retirees (and their dependents) over 65 in lieu of applying for the 28% subsidy available for providing prescription drug benefits equivalent in value to Medicare Part D. This change in approach will be reflected in determining expense for the year ending September 30, 2006. Certain financial information regarding the plan was as follows for the years ended September 30, 2005 and 2004, and is based on a June 30 measurement date: Change in the accumulated postretirement benefit obligation: Accumulated postretirement benefit obligation at beginning of year Service cost Interest cost Participant contributions Benefits paid Actuarial gain Benefit obligation at end of year Change in the fair value of plan assets: Fair value of plan assets at beginning of year Employer contributions Participant contributions Benefits paid Fair value of plan assets at end of year Funded status at valuation date: Funded status Unrecognized actuarial loss Net amount recognized at end of year 2005 $ 406,426 11,724 23,386 1,102 (13,734) (46,130) $ 382,774 2004 $ 438,636 14,442 25,861 1,161 (13,261) (60,413) $ 406,426 $ $ 12,632 1,102 (13,734) 12,100 1,161 113,2611 $ $ $(382,774) 83,296 $ (299,478) $ (406,4261 134,516 $ (271,910) Total benefit obligation at the end of 2005, excluding the Medicare Part D subsidy, was $439,662. 32/33 Net periodic benefit cost related to the plan for the years ended September 30, 2005 and 2004, includes the following components: Service cost Interest cost Amortization of loss Net of Medicare Part D Subsidy Excluding Medicare Part D Subsidy 2005 2004 2005 2004 $ 11,724 $ 14,442 $12,449 $ 14,442 23,386 25,861 24,914 25,861 5,090 11,274 6,644 11,274 Net periodic benefit cost $ 40,200 $ 51,577 $ 44,007 $ 51,577 The following weighted-average assumptions were used to determine the Institute's obligation under the plan at September 30, 2005 and 2004: Discount rate Health care cost trend rate 2005 5.25% 10.00% 2004 6.25% 10.00% A one-percentage-point change in assumed health care cost trend rates would have the following effects: 1% Increase 1% Decrease Effect on the total of service and interest cost components Effect on accumulated post-retirement benefit obligation $ 6,836 $ (5,677) $65,395 $ (52,101) The following weighted-average assumptions were used to determine the Institute's net periodic benefit cost under the plan for the years ended September 30, 2005 and 2004: 2005 Discount rate 6.25% Health care cost trend rate 10.00% 2004 6.00% 10.00% The Institute expects to contribute approximately $15,000 (including $1,200 in retiree contributions) to the plan during the next fiscal year. Estimated future benefit payments are as follows: Net of Medicare Excluding Medicare Fiscal Year 2006 2007 2008 2009 2010 2011-2015 Part D Subsidy Part D Subsidy $ 13,900 $ 14,700 14,400 16,200 15,600 16,700 17,600 18,900 17,700 20,000 100,700 114,800 The health care cost trend rates for subsequent years are as follows: Year Ending September 30 2006 2007 2008 2009 2010 2011-2015 Health Care Cost Trend Rate 9.00% 8.00% 7.00% 6.00% 5.50% 5.00% California Institute of Technology NOTE N. Commitments and Contingencies CONTINGENCIES The Institute receives funding or reimbursement from agencies of the United States government for various activities, which are subject to audit, and is a defendant in various legal actions incident to the conduct of its activi-ties. Except as specifically discussed below, management does not expect that liabilities, if any, related to these audits or legal actions will have a material impact on the Institute's financial position. The Institute has been named as a potentially respon- sible party (PRP) by NASA under the Comprehensive Environmental Response, Compensation, and Liability Act, as amended. As a PRP, the Institute may be jointly liable for contribution towards clean-up costs, estimated to be in excess of $100 million, of the NASA/JPL Superfund site. The Institute believes that it will have recourse to the United States government for any material liabilities it may incur in connection with being named a PRP for that site. The Institute has been named as one of the defendants in a False Claims Act action brought by a qui tam relator corporation. The complaint, which was filed in the federal district court in Washington, D.C., and served on the Institute in July 2002, alleges that the Institute engaged in misconduct in connection with certain patents obtained relating to the DNA sequencer. Damages and penalties under the False Claims Act include fines of five thousand five hundred dollars to eleven thousand dollars per claim, treble damages, and attorneys' fees. The Department of Justice investigated the allegations of the complaint and declined to intervene in the case on behalf of the United States. The relator opted to pursue the case on its own. On July 3, 2003, the district court in Washington, D.C., granted the defendants' motion for change of venue to the central district of California. The Institute filed a motion to dismiss the complaint on July 28, 2003. After hearing oral argument, the district court granted the motion, dismissing the case in its entirety. The district court issued its opinion on October 17, 2003. On November 6, 2003, the relator filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit. The matter was argued and submitted to the Ninth Circuit on October 17, 2005. On November 21, 2005, the Ninth Circuit issued its decision upholding dismissal of the suit. Officials of the Institute presently are not able to predict the impact, if any, that final resolution of the matters discussed in the preceding two paragraphs will have on the Institute's financial position or changes in its net assets. COMMITMENTS At September 30, 2005, the Institute was committed under certain construction contracts in the amount of approximately $35,000. At September 30, 2005 and 2004, the Institute had committed to invest $223,700 and $129,300, respectively, with alternative investment managers and/or limited partnerships over the next ten years. 34/35 PRICEWA ERHOUS-COOPERS RE PricewaterhouseCoopers LLP 350 South Grand Avenue Los Angeles CA 90071 Telephone (213) 356 6000 Fax (813) 637 4444 Report of Independent Auditors To the Board of Trustees of the California Institute of Technology In our opinion, the accompanying balance sheets and the related statements of activities and cash flows, which appear on pages 18-35, present fairly, in all material respects, the financial position of the California Institute of Technology (the "Institute") at September 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. These financial statements are the responsibility of the Institute's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by manage-ment, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Pricevaterhouse Coopers 2dp January 13, 2006 California Institute of Technology BOARD OF TRUSTEES (as of January 2006) Officers of the Board Kent Kresa, Chair Walter L. Weisman, Vice Chair David Baltimore, President Trustees George L. Argyros Chairman and Chief Executive Officer, Arnel and Affiliates David Baltimore President, California Institute of Technology ordon M. Binder lanaging Director; Coastriew Capita Paul A. Brest President, The William and Flora Hewlett Foundation John E. Bryson Chairman and Chief Executive Officer, Edison International Milton M. Chang Managing Director, Incubic Venture Capital William H. Davidow Founding Partner, Mohr, Davidow Ventures John D. Diekman Founder and Managing Partner, 5 AM Ventures Lounette M. Dyer Arthur L. Goldstein Chairman and Chief Executive Officer (Retired), Ionics, Incorborated William T. Gross Chairman and Founder, Idealab David D. Ho Director, The Aaron Diamond AIDS Research Center Robert Theodore Jenkins Louise Kirkbride* Board Member, State of California Contractors State License Board Kent Kresa* Chairman Emeritus, Northrop Grumman Corporation Jon B. Kutler Chairman and Chief Executive Officer, Quarterdeck Equity Partners, Inc. David Li Lee Managing General Partner, Clarity Partners, L.P. York Liao Managing Director, Winbridge Company Ltd. Alexander Lidow Chief Executive Officer, International Rectifier Corporation Ronald K. Linde* dependent Investor and Chairman of the Boar 'he Ronald and Maxine Linde Foundatio A. Michael Lipper President and Chief Executive Officer, Lipper Advisory Services John W. Mack President, Los Angeles Police Commission Shirley M. Malcom vector, Education and Human Resources Program merican Association for the Advancement of Scien Clara S. Miller Principal, Regulus International Capital Corporation Peter W. Mullin Chairman, Mullin Consulting, Inc. Philip M. Neches* Chairman, Foundation Ventures LLC Patrick H. Nettles, Jr. Executive Chairman, Ciena Corporation Ronald L. Olson Senior Partner, Munger, Tolles & Olson Stephen R. Onderdonk* esident and Chief Executive Officer (Retire onolite Control Products, In Stewart A. Resnick Chairman, Roll International Corporation Sally Kristen Ride President, Imaginary Lines, Inc.; Ingrid and Joseph Hibben Professor of Physics, University of California, San Diego Stephen A. Ross Franco Modigliani Professor of Finance and Economics, Massachusetts Institute of Technology; Chairman, Compensation Valuation, Inc. Marc I. Stern* Vice Chairman, The TCW Group, Inc. Donald W. Tang Vice Chairman, Bear Stearns & Co., Inc. Charles R. Trimble Lewis W. van Amerongen LUA Enterprises, Inc. Walter L. Weisman* Former Chairman and Chief Executive Officer, American Medical International, Inc. Virginia V. Weldon Senior Vice President for Public Policy (Retired), Monsanto Company Gayle E. Wilson Nonprofit Consultant * Members of the Board of Trustees Audit Committee. Ronald K. Linde is chair; David Baltimore, Dean W. Currie, Charles Elachi, Paul C. tre standing attendees. 36/37 Senior Trustees Victor K. Atkins* President, Atkins Company G. Patricia Beckman Community Leader Eli Broad Founder, The Broad Foundations Harold Brown, President Emeritus Counselor, Center for Strategic and International Studies Walter Burke Treasurer, Sherman Fairchild Foundation, Inc. Harry M. Conger Chairman and Chief Executive Officer, Emeritus, Homestake Mining Company Richard P. Cooley Retired Chairman, Seafirst Bank Thomas E. Everhart President Emeritus, California Institute of Technology Camilla Chandler Frost Trustee of the Chandler Trust; a Director and Secretary-Treasurer, Chandis Securities Company Shirley M. Hufstedler Senior Of Counsel, Morrison & Foerster Bobby R. Inman rofessor, Lyndon B. Johnson Centennial Chair in National Poli nd Interim Dean, LBI School of Public Affairs, The Universi of Texas at Austin Sordon E. Moore, Chairman Emeritus Chairman Emeritus. Intel Corboration Sidney R. Petersen* Chairman and Chief Executive Officer (Retired), Getty Oil Company Stanley R. Rawn, Jr. Private Investor Richard M. Rosenberg Chairman and Chief Executive Officer (Retired), Bank of America Corporation Life Trustees Robert Anderson Chairman Emeritus, Rockwell International Corporation Robert O. Anderson Chairman and Chief Executive Officer (Retired), Atlantic Richfield Company Stephen D. Bechtel, Jr. Chairman Emeritus and Director, Bechtel Group, Inc. Donald L. Bren Chairman of the Board, The Irvine Company ewel Plummer Cobl resident Emerita, California State University, Fullerton William R. Gould Chairman Emeritus, Southern California Edison Company Philip M. Hawley Chairman, P. M. Hawley, Inc. William F. Kieschnick President and Chief Executive Officer (Retired), Atlantic Richfield Company Robert S. McNamara President (Retired), The World Bank Ruben F. Mettler, Chairman Emeritus Retired Chairman and Chief Executive Officer, TRW Inc. Simon Ramo Cofounder and Director Emeritus, TRW Inc. Arthur Rock Principal, Arthur Rock and Company Benjamin M. Rosen, Chairman Emeritus Chairman Emeritus, Compaq Computer Corporation Robert J. Schultz Vice Chairman (Retired), General Motors Corporation Mary L. Scranton Nonprofit Consultant Dennis Stanfill Private Investor Charles H. Townes Jobel Laureate and Professor in the Graduate Schoo Department of Physics, University of California, Berkele Harry Wetzel hairman and Chief Executive Officer (Retire he Garrett Corporatio Albert D. Wheelon California Institute of Technology Institute Administrative Council (as of December 2005) David Baltimore President Dean W. Currie Vice President for Business and Finance Hall P. Daily Assistant Vice President for Government and Community Relations Gary Dicovitsky Vice President for Development and Alumni Relations Charles Elachi Vice President; Director, JPL Sandra Ell Treasurer and Chief Investment Officer Jean E. Ensminger Chair, Division of the Humanities and Social Sciences Richard E. Fagen Chief Information Officer Kenneth A. Farley Chair, Division of Geological and Planetary Sciences David L. Goodstein Vice Provost Paul C. Jennings Provost Henry A. Lester Chair of the Faculty Margo Post Marshak Vice President for Student Affairs Elliot M. Meyerowitz Chair, Division of Biology Robert L. O'Rourke Vice President for Public Relations David B. Rutledge Chair, Division of Engineering and Applied Science Thomas W. Schmitt Associate Vice President for Human Resources David A. Tirrell Chair, Division of Chemistry and Chemical Engineering Thomas A. Tombrello Chair, Division of Physics, Mathematics and Astronomy Mary L. Webster Executive Assistant to the President and Secretary, Board of Trustees Harry M. Yohalem General Counsel 38/39 The mission of the California Institute of Technology is to expand human knowledge and benefit society through research integrated with education. We investigate the most challenging, fundamental problems in science and technology in a singularly collegial, interdisciplinary atmosphere, while educating outstanding students to become creative members of society. California Institute of Technology Robert GrubbS, altech's Atins Professor of Chemistry, was awarded the NOBEL PRIZE IN CHEMISTRY on October 5, 2005. The Royal Swedish Academy of Sciences cited Grubbs and his two cowinners "for the development of the metathesis method in organic synthesis." Metathesis is an organic reaction in which chemists selectively strip out certain atoms in a compound and replace them with atoms from another compound to produce a new molecule with specialized properties. Grubbs's work on olefin methathesis has resulted in powerful new catalysts that have enabled custom synthesis of pharmaceuticals and polymers with novel materials properties. Grubbs's award brings to 32 the number of Nobel Prizes won by Caltech faculty and alumni since 1923. Annual Report 2004-2005 • California Institute of Technolog! Produced by the Office of Public Relations Witor/Flito Rarhara NiPalma Contributors: Michael Farquhar, Elena Rudnev, Allison Benter Desion: Denton Design Associates California Institute of Technology Pasadena, California 91125 California Institute of Technology Annual Report 2004-2005 California Institute of Technology Annual Report 2004-2005