NOTE 1: Endowment and Similar Funds

The major portion of the University's endowment and similar funds is maintained in a single investment pool named the University Pooled Endowment Fund. The University has adopted an investment objective whereby the average annual return of the University Pooled Endowment Fund over rolling five-year periods should equal the rate of inflation (measured by the Consumer Price Index) plus its average level of spending from endowment income. The annual return for the Pooled Endowment Fund was 2.0 percent in 2001 and 43.7 percent in 2000. These percentages have been computed using realized and unrealized gains and losses and investment income. The rate of inflation plus the average level of spending from endowment income was 7.6 percent in 2001 and 8.3 percent in 2000.

The Pooled Endowment Fund is pooled using a market value basis, with each individual fund subscribing to or disposing of units (permanent shares) on the basis of the market value per unit at the beginning of the calendar month within which the transaction takes place. A summary of endowment and similar funds at market value follows:

ENDOWMENT AND SIMILAR FUNDS AS OF JUNE 30, 2001 (in thousands)

The relative risk associated with the University's financial assets is detailed below.

Cash: All cash of the University is maintained in accounts that are collateralized in accordance with the Virginia Security for Public Deposits Act, Section 2.1-359, et seq., of the Code of Virginia.

Investments: The investment policy goals, objectives, and guidelines are established by the Finance Committee of the Board. The University's cash equivalents and investments are categorized by levels of credit risk as described below:

Security Lending: Under authorization of the Board of the University of Virginia Investment Management Company, the University of Virginia, through its agent, Deutsche Bank AG New York, lends U.S. Government and equity securities to various broker-dealers on a temporary basis for collateral. All security loan agreements are collateralized by readily marketable and liquid securities, loans, or other obligations secured by a lien or similar interest on an asset, thereof totaling at least 102 percent of the market value of the loaned securities. The University of Virginia retains the right to pledge or sell these securities held as collateral at its discretion. All security loans can be terminated on demand by either the University or the borrower, and the average term of the security loans as well as collateral held is less than one week. Securities loaned as of June 30, 2001, had a carrying value of $225,105,489 and a market value of $233,106,991. Collateral received totaled $244,319,550. The value of the collateral received is 105 percent of the market value of securities loaned. As such, the University has no assumed credit risk. There were no securities on loan at June 30, 2000, except as noted below.

Additional collateral held for securities lending transactions represents the University's allocated share of cash collateral received and reinvested and securities received for the State Treasury's securities lending program. Information related to the credit risk of these investments and the State Treasury's securities lending program is available on a statewide level in the Commonwealth of Virginia's Comprehensive Annual Financial Report (CAFR).


CATEGORIZATION OF INVESTMENT RISK FOR ASSETS HELD AS OF JUNE 30, 2001 (in thousands)

Derivative Financial Instruments: Derivative instruments are financial contracts whose values depend on the values of one or more underlying assets, reference rates, or financial indexes. A derivative instrument generally has one or more underlying investment, requires little or no initial net investment, and requires or permits a net settlement. In addition, some traditional securities can have derivative-like characteristics. Examples of common derivatives include, but are not limited to, futures, forwards, options, or swap contracts. Although the contract or notional amount of the derivative is not recorded on the financial statements, all derivative instruments are recognized as either an asset or a liability depending on the rights or obligations of the contract measured at fair value.

The University has exposure, both directly and indirectly, to various derivative financial instruments that are used in the normal course of business to enhance returns on investments and manage risk exposure to changes in value due to fluctuations in market conditions. These investments may involve, to varying degrees, elements of credit and market risk in excess of amounts recognized on the financial statements. Credit risk is the possibility that losses may occur from the failure of a counterparty to perform according to the terms of the agreement. The University minimizes the credit (or repayment) risk in its direct derivative instrument by entering into transactions with high-quality counterparties and a legally enforceable master netting agreement. The "net" mark to market exposure represents the netting of the positive and negative exposures with the same counterparty. Market risk arises due to adverse changes in market price, interest rate, and foreign exchange rate fluctuations that may result in a decrease in the market value of a financial investment and/or increases, in its funding cost. The University manages market risk by establishing and monitoring limits as to the type and degree of risk that may be undertaken.

Fair Value Hedge: For the year ended June 30, 2000, the University directly entered into a fair value hedge to manage returns on a portion of its endowment investments having limited liquidity. In order to secure its obligations under the derivative instrument agreement, the University was required to retain a perfected security interest in collateral provided from the University's endowment assets. At June 30, 2001, the University was not participating in any direct fair value hedges.

Summary of the University's outstanding derivatives at June 30, 2001 and 2000 (in thousands):
 

a. Accounts receivable

Current Fund accounts receivable as of June 30 include the following (in thousands):

b. Notes receivable

Notes receivable as of June 30, 2001 and 2000, are reported net of the allowance for uncollectible student loans, which amounted to $2.6 million and $2.2 million, respectively.

c. Advances to foundations

The University advances funds to affiliated foundations to enable the foundations to acquire real property in areas near the University and to enhance foundation operations. Foundations are expected to make principal repayments as funds become available. The Board of Visitors has authorized up to $55 million for advances to the University of Virginia Real Estate Foundation from unrestricted quasi-endowment funds. Advances as of June 30 include the following (in thousands):
 

d. Investment in plant

Investment in plant as of June 30 consists of the following (in thousands):

 

e. Restatement of prior year balances

Certain June 30, 2000 balances have been restated. Current Funds have been adjusted by $1,667,000 to reflect a reclassification of fund balance from Current Restricted to Current Unrestricted. Prior year's current unrestricted fund balance has been adjusted $24,000 to restate prior year's accrued compensated absences and other items.

f. Interfund obligations

Interfund obligations are recorded on each fund as due to/due from other funds. Such borrowings are authorized in advance by the Board of Visitors or administrative action. The borrowings have identifiable repayment schedules in most instances and provide needed working capital or cash advances for special projects. Interest is charged in appropriate instances. Amounts due from and payable to other funds as of June 30 are as follows:

DUE FROM OTHER FUNDS -- 2001 (in thousands)

g. Goodwill

On October 1, 1997, the Medical Center acquired from the University of Virginia Health Services Foundation the Medicine Clinical Laboratories in a transaction accounted for as a purchase. Accordingly, $1,800,000 was recorded as goodwill and is being amortized over five years.

On May 12, 2000, the Medical Center acquired from Augusta Health Care, Inc., the Kidney Dialysis Assets in a transaction accounted for as a purchase. Accordingly, $987,188 was recorded as goodwill for the purchase of the assets and is being amortized over five years. An additional $800,000 was recorded as goodwill for a Non-Competition Agreement and is being amortized over its ten-year life.

On December 15, 2000, the Medical Center acquired from the University of Virginia Health Services Foundation (HSF) its interest in the Hyperbaric Oxygen Unit. In July 1994 the Medical Center and HSF entered into a Memorandum of Agreement for the purpose of joint purchase and operation of a Hyperbaric Oxygen Unit. The Memorandum provided that HSF would own 67 percent interest and the Medical Center would own 33 percent. Accordingly, $1,166,615 was recorded as goodwill for the purchase of the assets and is being amortized over five years.

NOTE 4: Long-Term Debt

In 1985, the Medical Center defeased Hospital Revenue Bonds, Series A and Series B, by placing the proceeds of Hospital Revenue Refunding Bonds, Series C and Variable Rate Demand Revenue Refunding Bonds, Series D, in an irrevocable trust to provide for all future debt service payments on the Series A and Series B Bonds. As of June 30, 2000, $6,555,000 of the defeased bonds remained outstanding. They were redeemed on June 1, 2001.

LONG-TERM DEBT MATURES FOR EACH OF THE NEXT
FIVE YEARS AND IN THE AGGREGATE (in thousands):
 

Note 5: Affiliated Companies

Blue Ridge Health Alliance, Inc. The Medical Center is a participant with the Health Services Foundation (HSF) in Blue Ridge Health Alliance, Inc. (Blue Ridge Health Alliance or the Corporation), a joint venture to develop and operate a managed health care organization in central and western Virginia and certain counties in West Virginia. Blue Ridge Health Alliance, a for-profit corporation, was formed in April 1994, to develop a regional network of physicians, hospitals, and other health care providers through which to deliver health benefits to insured and self-funded employers and other groups. QualChoice of Virginia Health Plan, Inc. (QualChoice), is a wholly owned subsidiary of the Corporation formed to operate a health maintenance organization (HMO) serving employers and other groups in the Commonwealth of Virginia. QualChoice commenced operations on January 4, 1995.

Blue Ridge Health Alliance has authorized capital stock consisting of one million two (1,000,002) shares of common stock, par value $0.01 per share (the "Common Stock"). The authorized shares of common stock consist of 1,000,000 shares of Class A Voting Common Stock and two shares of Class B Voting Common Stock. In 1994, the Medical Center and the HSF each executed a Shareholders Subscription Agreement under which each agreed to contribute $4,550,000 as equity capital. Subsequently, the Medical Center and HSF each were issued one share of Class B Voting Common Stock and shares of Class A Voting Common Stock. Except for the original obligations of the founding shareholders under the Founding Shareholders Subscription Agreements, no shareholder has an obligation to make any loans, advances, or additional equity contributions whatsoever to the capital of the Corporation. The shareholders have acknowledged and agreed that the Corporation is expected to retain its earnings in order to finance growth and that there is no expectation that the Corporation will pay any cash dividends in the foreseeable future.

The Medical Center contributed a total of $15,000,000 to Blue Ridge Health Alliance during the period ended June 30, 1998. Also, on April 6, 1998, the Medical Center loaned $3,800,000 to the Corporation due on July 6, 1998, and bearing interest at 6.25 percent per annum. In July 1998, the Board of Directors of the Corporation issued a capital call to HSF and the Medical Center for $5,000,000. HSF elected not to participate in this capital call in accordance with their rights prescribed in the Shareholders Agreement; accordingly, the Medical Center contributed the entire $5,000,000, by converting the $3,800,000 loan to capital and contributing $1,200,000 in cash. This contribution increased the Medical Center's percentage ownership to 52.05 percent. By agreement between HSF and the Medical Center, HSF relinquished its share of Class B Voting Common Stock to the Medical Center. Corporate actions enumerated in the Amended Articles of Incorporation require approval of the holders of all of the shares of the Class B Voting Common Stock. Except for this special voting requirement, the shares of Class A and Class B Voting Common Stock have equal rights, privileges, and dividend distribution rights. On November 25, 1998, the Medical Center provided a loan to the corporation as evidenced by a promissory note in the amount of $6,678,595 due February 24, 1999, at 4.50 percent per annum. This note was renewed on February 25, 1999, with a due date of March 26, 1999. The note was renewed again on March 27, 1999, and was structured to have an optional renewal each month. On March 5, 1999, the Medical Center loaned $250,000 to the Corporation, which was to be due December 31, 1999, bearing interest at 4.50 percent per annum. Effective September 15, 1999, Blue Ridge Health Alliance revised its Shareholders' Agreement to provide additional capital and to effect a transfer of shares among the shareholders. Under this agreement, the debt owed to the Medical Center was converted to capital. HSF contributed an additional $12,181,232, and Martha Jefferson Hospital contributed an additional $22,881. Once these additional contributions had been made, the Medical Center owned 48.08 percent of the Class A Stock, HSF owned 48.08 percent and Martha Jefferson Hospital owned 3.84 percent. In addition, the University transferred to HSF one share of Class B Common Stock so that both HSF and the University each own one of the two shares, which have been authorized.

On May 30, 2001, the Medical Center loaned $3,000,000 to the Corporation due on May 30, 2004, bearing an interest rate of 6.19 percent per annum.

The net investment in Blue Ridge Health Alliance is summarized below. Complete financial statements for Blue Ridge Health Alliance, Inc., can be obtained from the corporate offices: Towncenter 1, 1000 Research Park Blvd., Charlottesville, Virginia 22911.

Central Virginia Health Network, Inc. In May 1995, the Medical Center joined the Central Virginia Health Network, Inc. (CVHN), a partnership of eight Richmond-area hospitals. Central Virginia Health Network was formed to provide an efficient and coordinated continuum of care, with services ranging from acute hospital treatment to primary physician care and home health services.

The Medical Center originally paid $100 for 10,000 shares of common stock and $109,900 as additional paid-in capital. In addition, the Medical Center is obligated for monthly dues to Central Virginia Health Network of $15,913. The net investment in CVHN is summarized below. Complete financial statements can be obtained from the registered agent: Steven D. Gravely, Esq., Mezzullo and McCandlish, Post Office Box 796, Richmond, Virginia 23206.

University of Virginia/HEALTHSOUTH L.L.C. The Medical Center entered into a joint venture with HEALTHSOUTH Corporation to establish an acute rehabilitation facility. The new facility, located at the Fontaine Research Park in Charlottesville, Virginia, provides patient services to the region. The Medical Center made a capital contribution of $2,230,000 to capitalize the joint venture in May 1996, which represents a 50 percent interest in the joint venture. The net investment in HEALTHSOUTH is summarized below. Complete financial statements can be obtained from the managing member: HEALTHSOUTH Corporation, 7700 East Parham Road, Richmond, Virginia 23294.

Valiance Health, L.L.C. In November 1997, the Medical Center became a participant with Rockingham Memorial Hospital and Augusta Health Care, Inc., in Valiance Health, L.L.C. (Valiance), a joint venture engaging in the business of integrating and coordinating the delivery of health care services in Central and Western Virginia. The Medical Center contributed $100,000 in initial capital, which entitles it to a pro-rata distribution of any profits and losses of Valiance.

University HealthSystem Consortium (UHC) In December 1986 the Medical Center became a member of the University HealthSystem Consortium (UHC). Founded in 1984, UHC is an alliance of the clinical enterprises of academic health centers. While focusing on the clinical mission, UHC is mindful of and supports the research and education missions. The mission of the University HealthSystem Consortium is to advance knowledge, foster collaboration, and promote change to help members compete in their respective health care markets. In keeping with this mission, UHC helps members pool resources, create economies of scale, improve clinical and operating efficiencies, and influence the direction and delivery of health care. Accordingly, UHC is organized and operated on a cooperative basis for the benefit of its member health systems as patrons.

UHC is a not-for-profit organization. It is incorporated as a nonstock corporation and designated as a nonexempt cooperative, which is taxable under Subchapter T (Section 1382-1388) of the Internal Revenue Code. As such, UHC's bylaws provide for distributions of patronage dividends to its patrons. This allocation is based on the value of business done with or for each patron by UHC. For fiscal year 2001 the Medical Center started recording the portion of the patronage dividends that were held by UHC as patronage equity.

HealthCare Partners, Inc. In May 1995, HealthCare Partners, Inc. (HealthCare Partners), a non-stock, non-profit corporation, was established to support networking, external business relationships with neighboring hospitals and physicians groups and expansion of primary care activities. The Medical Center and the Health Services Foundation are the primary contributors to the funding of the corporation. The corporation is governed by a board of directors composed of Health Sciences Center staff, community members, and University Board of Visitors appointees.