USA C...bond issues by the State of Alabama, federal capital grants for the purchase of equipment...

USA CELEBRATES 40TH ANNIVERSARY,ENJOYS RECORD GROWTH

On May 9, 1963, the Alabama State Legislature signed into law a resolution creating the University of South Alabama andestablishing the only major public institution of higher learning on the upper Gulf Coast. In the four ensuing decades, USA hasmade an indelible mark on the education, health, economy and quality of life for the Gulf Coast region and beyond.

The University of South Alabama during its 40th anniversary year continued to indicate excellent vital signs—record enrollmentof high-quality students, increasing research and outreach, solid institutional financial stability, and increased appreciation andsupport from University constituents. As the University enters its fifth decade of service, it is poised to make an even greaterdifference.

“As we all look back over this important anniversary year, we can truly be

proud that the University of South Alabama has continued to

‘Make a Difference’ in the lives of all of our citizens.”

—V. Gordon Moulton, University of South Alabama President,

Spring 2003 General Faculty Meeting

USA’s 40th anniversary year marked the graduation of the University’s 50,000th graduate and the recognition of its first graduate. Above left:President Moulton presents USA’s 50,000th graduate, Huntsville native Jon Fecteau, with a master of business administration degree. Right:The University’s first graduate, Rev. James Allison Sr., was honored with a copy of USA’s charter. The Mobile native was awarded theUniversity’s first diploma during the 1967 spring commencement ceremony, earning a bachelor of science degree in English.

The University this fall set an all-time enrollment record, maintaining itsstatus as one of the fastest growing universities in Alabama.

• Fall semester enrollment at USA was 13,286, up 6.2 percent from one yearago. This represents a growth of 776 students.

• USA enrolled a record number of graduate students for the third straightyear. Graduate school enrollment is 2,670 students, up 13.7 percent fromlast year’s record.

• USA continued to become an increasingly diverse campus with 16.3 percentof its student body being African-American, compared to 12.6 percent fiveyears ago.

• The University continues to attract high achieving students, with the averageACT score of entering freshmen in the 73rd percentile nationally.

Academic and Campus Life Progress

USA made extensive progress in its effort to build academic quality and improve the learning environment on campus. TheUniversity this year:

• Completed a $9.4 million library expansion andrenovation project, adding 53,000 square feet tothe existing building.

• Created formal faculty development programs,including the Program for the Enhancement ofTeaching and Learning (PETAL).

• Completed a new $2.3 million Intramural FieldComplex. The 13-acre complex has a 3,000-square-foot field house, a paved pathway forjogging and walking, and five multi-purposeplaying fields.

• Moved forward with plans to renovate the StudentCenter to accommodate creation of a single,convenient location for student service offices.

• Awarded a record 2,800 academic scholarships—four times the level of five years ago.

• Recruited 77 new full-time faculty.

• Filled key academic leadership and support positions, including deans of Arts and Sciences, Allied Health Professions andEngineering.

• Successfully completed a 10-year review by the Southern Association of Colleges and Schools.

• Announced new academic programs, including Doctor of Audiology, Doctor of Physical Therapy, Master of Science inEnvironmental Toxicology, Master of Science in Nursing for Students Holding Baccalaureate Degrees in Another Field, Bachelorof Science in Radiography: Radiation Therapy, Bachelor of Social Work, and a Concentration in International Political Economy.

Enrollment Sets Record

The $9.4 million library expansion project has enriched learning and researchopportunities for faculty, staff and students.

• Built on its Long-Range Planning Initiatives involving the University and its many external constituencies.

• Implemented the new Student Information System to simplify and streamline student services.

• Appointed a Committee on Diversity to help increase the number of minority faculty and staff members.

• Embarked on a plan to increase minority business participation in supplying goods and services to the University.

• Furthered plans to implement the Campus Transit System.

Medical Milestones

USA this year continued to serve the community’s health care needs, providing care for more than a quarter million patientsand making several key leadership appointments, among other accomplishments.

• Plans for the USA Cancer Research Institute progressed with the recruitment of key senior scientists, creation of a facilityconstruction plan, securing of equipment including the linear accelerator and PET/CT, and creation of a $65 million budgetand funding plan for the Institute’s first five years of operation.

• Dr. Velma Scantlebury, the nation’s first African-American female kidney transplant surgeon, was named director of the USAGulf Coast Regional Transplant Center, and nationally prominent lung surgeon Dr. Joseph LoCicero III was named chair of thedepartment of surgery in the College of Medicine.

• A marketing and business plan has been created and staff assembled to identify new streams of business to help ensure futureeconomic success of USA’s hospitals and physician practice. USA has secured group contract business through this system,including a preferred provider arrangement with Mobile County government employees.

• USA’s Health System has been reorganized to locate its physicians closer to the hospitals housing their respective specialties,improving efficiency and patient satisfaction. USA purchased the former Alabama Orthopaedic building to enable physicianrelocation to the Knollwood Hospital campus.

• USA’s Center for Women’s Health was created by the USA Health System, providing women comprehensive health careacross the life span. The Center became the exclusive provider of the region’s first fourth-dimension ultrasound, providing theclearest images available of an unborn child as it moves inside the womb.

A ribbon-cutting ceremony marked the dedication of the new $2.3 million USA Intramural FieldComplex. From left are: Dr. Dale Adams, vice president for student affairs; President Gordon Moulton;Clay Hammac, Student Government Association president; and Dr. Philip Theodore, directorof campus recreation.

Building Private Support

Strategic plans for fundraising and increasing alumni involvement at the University continue to improve private support.

• Private fundraising campaigns began for a new archaeology building and a $2.5 million renovation of Stanky Field.

• The first official USA Annual Fund and Direct Mail Campaign was initiated.

• The Faculty/Staff Annual Fund was revamped and raised a record $124,791 from an unprecedented 1,103 employees.

• Many new major gifts and commitments were secured, some of which include:

Margarette Griffin - $1 million for children’s cancer research.

Gaston and Sarah Evelyn Cooke Estate - $631,900 for a chair in neuroscience.

Larry Striplin - $200,000 to renovate a portion of Jaguar Gym.

Log-a-Load for Kids - $150,000 to purchase a new neonatal intensive care ambulance.

AmSouth Bank - $100,000 toward an endowed chair in banking and finance.

Celebrating 40 Years of Success

In the face of one of the toughest economic times in state history, USA continued to thrive during its 40th anniversary year,reporting record growth and completing key facilities that will improve the quality of life both for those on campus and in thecommunity. In its short history, the University has established itself as a leader in education, economic development, health careand community service.

“The University of South Alabama has made a miraculous contribution to this region since its humble beginnings four decadesago,” Moulton said. “This year, we not only celebrate our past, but our hopes and aspirations for the future.”

Increasing Research

USA’s research mission this year also saw a significant boost, continuing a trend of increasing external funding and nearingcompletion of a new research park.

• The USA Technology and Research Park earned the University the Innovator of the Year award from the Mobile Area Chamberof Commerce and the Gulf Coast Technology Council. The park will provide hands-on applied research opportunities forfaculty and students, and an economic boost for the community.

• Research contracts and grants at USA this year introduced more than $40 million into Mobile’s economy, representing high-end job growth and scientific advances. The University has more than doubled its research funding over the past five years.

• Direct federal appropriations at USA in fiscal year 2003 reached $13.5 million, supporting such areas as medicine, theenvironment, protection of the coastline, diabetic foot care, birth defects prevention, archaeology, energy research, and youthviolence prevention.

The USA Technology and Research Park will strengthen the Mobile areaeconomy through academic-corporate partnerships.

Financial StatementsUniversity of South Alabama

Years ended September 30, 2003 and 2002with Report of Independent Auditors

University of South Alabama

Financial Statements

Years ended September 30, 2003 and 2002

Contents

Management’s Discussion and Analysis ........................................................... 1

Report of Independent Auditors ........................................................................ 7

Audited Financial Statements

Statements of Net Assets ................................................................................... 9Statements of Revenues, Expenses and Changes in Net Assets ...................... 10Statements of Cash Flows ............................................................................... 11Notes to Financial Statements ......................................................................... 13

1


Management’s Discussion and Analysis

Years ended September 30, 2003 and 2002

INTRODUCTION

The following discussion presents an overview of the financialposition and financial activities of the University of SouthAlabama (the “University”), including the University of SouthAlabama Hospitals (the “Hospital”), at September 30, 2003and 2002 and for the years then ended. This discussion wasprepared by University management and should be read inconjunction with the financial statements and notes thereto,which follow.

FINANCIAL HIGHLIGHTS

The financial position of the University remains strong atSeptember 30, 2003, with total assets of $391,929,000, totalliabilities of $173,737,000 and net assets of $218,192,000.University net assets increased $8,871,000 during the yearended September 30, 2003 compared to an increase of$30,081,000 in the year ended September 30, 2002.

While the increase in net assets during the year endedSeptember 30, 2003 was less than the 2002 increase, thedifference results primarily from two distinct changes between2002 and 2003. During the year ended September 30, 2002,there were several significant components of revenue thatwere not present in 2003. These included allocations fromthe sale of Alabama Public School and College Authoritybond issues by the State of Alabama, federal capital grantsfor the purchase of equipment for the USA Cancer Institute,and gifts, primarily real estate located on the USA KnollwoodHospital Campus, from the USA Foundation. Reportedrevenue from these items was approximately $10,500,000more in 2002 than 2003. In addition to these capital items,the increase in Hospital net assets was approximately$8,000,000 less in 2003 than 2002. These fluctuations arefurther explained in the section entitled “Analysis of FinancialPosition and Results of Operations.”

An overview of each statement is presented herein along witha financial analysis of the transactions impacting thestatement. Where appropriate, comparative financialinformation is presented to assist in the understanding of thisanalysis.

CONDENSED FINANCIAL INFORMATION

Condensed financial statements for the University at and forthe years ended September 30, 2003 and 2002 follow (inthousands):

CONDENSED STATEMENTS OF NET ASSETS

2003____ 2002____

ASSETS

Current $ 112,990 $ 137,246Noncurrent, primarily capital 278,939 243,480

391,929 380,726

LIABILITIES

Current 71,158 62,343Noncurrent 102,579 109,062

173,737 171,405

NET ASSETS

Invested in capitalassets, net of related debt 120,583 109,957

Restricted, nonexpendable 10,029 5,969Restricted, expendable 25,722 22,931Unrestricted 61,858 70,464

$ 218,192 $ 209,321

CONDENSED STATEMENTS OF REVENUES,EXPENSES AND CHANGES IN NET ASSETS

OPERATING REVENUES

Tuition and fees $ 32,592 $ 30,287Hospital revenues 272,258 261,929Other 87,885 84,174

392,735 376,390

OPERATING EXPENSES

Salaries and benefits 276,808 256,985Supplies and other services 103,714 95,002Hospital bad debts 63,560 60,265Other 30,465 28,503

474,547 440,755Operating loss (81,812) (64,365)

NONOPERATING REVENUES (EXPENSES)State appropriations 83,846 81,604Other, net (828) (1,769)

Net nonoperating revenues 83,018 79,835Income before other revenues,

expenses, gains or losses 1,206 15,470Other revenues 7,665 14,611Increase in net assets 8,871 30,081Beginning net assets, adjusted 209,321 179,240Ending net assets $ 218,192 $ 209,321

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Management’s Discussion and Analysis (continued)

CONDENSED STATEMENTS OF CASH FLOWS

2003____ 2002____

CASH AND CASH EQUIVALENTS

PROVIDED BY (USED IN):Operating activities $ (56,365) $ (51,101)Noncapital financing activities 88,494 83,642Capital and related financing

activities (35,848) (26,915)Investing activities (16,349) 29,525

Net change in cash andcash equivalents (20,068) 35,151

CASH AND CASH EQUIVALENTS:Beginning of year 71,755 36,604End of year $ 51,687 $ 71,755

USING THE FINANCIAL STATEMENTS

The University’s financial statements were prepared inaccordance with standards issued by the GovernmentalAccounting Standards Board (GASB). In June 1999, theGASB issued Statement No. 34, Basic Financial Statements– and Management’s Discussion and Analysis – for State andLocal Governments. This was followed in November 1999by GASB Statement No. 35, Basic Financial Statements –and Management’s Discussion and Analysis – for PublicColleges and Universities – an amendment of GASB StatementNo. 34; in June 2001 by GASB Statement No. 37, BasicFinancial Statements – and Management’s Discussion andAnalysis – for State and Local Governments: Omnibus – anAmendment of GASB Statements No. 21 and No. 34; and,also in June 2001 by GASB Statement No. 38, CertainFinancial Statement Note Disclosures. These statements wereeffective for the year ended September 30, 2002. The financialstatement presentation required by GASB Statements No. 34and 35 provides a comprehensive, entity-wide perspective ofthe University’s assets, liabilities, net assets, revenues,expenses, changes in net assets and cash flows. A significantchange required by GASB Statements No. 34 and 35 is thatdepreciation is now presented as a part of expense and theacquisition of capital assets is not. Previously, the University’sfinancial statements focused on the accountability ofindividual fund groups rather than on the University as awhole.

The financial statements report information about theUniversity as a whole and include the financial results of allUniversity divisions including the University of SouthAlabama Hospitals. The assets, liabilities, net assets andresults of operations for the University of South Alabama

Foundation, the University of South Alabama Health ServicesFoundation (Health Services), the South Alabama MedicalScience Foundation, and the USA Research and TechnologyCorporation are not included in the financial statements ofthe University.

ANALYSIS OF FINANCIAL POSITION AND

RESULTS OF OPERATIONS

STATEMENTS OF NET ASSETS

The statements of net assets present the assets, liabilities andnet assets of the University as of the fiscal years endedSeptember 30, 2003 and 2002. The net assets are displayedin three parts, invested in capital assets net of related debt,restricted and unrestricted. Restricted net assets may eitherbe expendable or nonexpendable and are those assets that arerestricted by law or by an external donor. Unrestricted netassets, while they are generally designated for specificpurposes, are available for use by the University to meetcurrent expenses for any purposes. The statements of netassets, along with all of the University’s basic financialstatements, are prepared under the accrual basis of accounting,whereby revenues are recognized when the service is providedand expenses are recognized when others provide the serviceto the University, regardless of when cash is exchanged.

Assets included in the statements of net assets are classifiedas current or noncurrent. Current assets consist primarily ofcash and cash equivalents, investments and hospital patientaccounts receivable. Of these amounts, cash and cashequivalents, investments and accounts receivable compriseapproximately 45%, 11% and 37%, respectively, of currentassets at September 30, 2003. Noncurrent assets at September30, 2003, consist primarily of capital assets.

University cash, cash equivalents and investments declinedslightly from $102,550,000 at September 30, 2002 to$101,442,000 at September 30, 2003. Accounts receivable,primarily hospital, increased from $37,244,000 to$41,357,000 for the same period primarily due to the inclusionof certain clinical services previously billed by HealthServices.

Current liabilities consist primarily of accounts payable andaccrued liabilities and increased from $62,343,000 to$71,158,000 between September 30, 2002 and 2003primarily due to an increase in payroll and related

3

liabilities. Also included in this category is the currentportion of the University’s long-term debt. Noncurrentliabilities consist primarily of bonded indebtedness, notespayable and capital lease obligations. Long-term debtdecreased from $103,512,000 to $95,853,000 betweenSeptember 30, 2002 and 2003 as a result of the repayment ofprincipal. During 2003, the University refunded certain notespayable in the amount of approximately $6,900,000. Thistransaction reduced the University’s long-term debt servicerequirements by approximately $375,000.

Net assets represent the residual interest in the University’sassets after liabilities are deducted. Net assets are classifiedinto one of four categories as shown on the followingillustration:

Net assets invested in capital assets, net of related debt,$120,583,000, represent the University’s capital assets lessaccumulated depreciation and outstanding principal balancesof the debt attributable to the acquisition, construction orimprovement of those assets.

Restricted nonexpendable net assets, $10,029,000, consistprimarily of the University’s permanent endowment funds.While earnings from these funds may be expended, the corpusmay not be expended for any reason and must remain intactwith the University in perpetuity.

Restricted expendable net assets, $25,722,000, are subject toexternally imposed restrictions governing their use. The fundsare restricted primarily for debt service, capital projects,student loans and scholarship purposes.

Unrestricted net assets, $61,858,000, represent those netassets not subject to externally imposed stipulations and areavailable for use at the discretion of the Board of Trustees forany purpose. Although unrestricted net assets are not subjectto restrictions, the majority are designated for variousacademic and research programs and initiatives, as well ascapital projects.

STATEMENTS OF REVENUES, EXPENSES AND

CHANGES IN NET ASSETS

Changes in total University net assets as reported in thestatements of net assets are based on the activity presented inthe statements of revenues, expenses and changes in net assets.The purpose of these statements is to present the change innet assets resulting from revenues received by the University,both operating and nonoperating, and the expenses paid bythe University, both operating and nonoperating, and any otherrevenues, expenses, gains and losses received or incurred bythe University.

Generally, operating revenues have the characteristics ofexchange transactions and are received for providing goodsand services to the various customers and constituencies ofthe University. Operating expenses are those expenses paidto acquire or produce the goods and services provided in returnfor the operating revenues, and to carry out the mission of theUniversity.

Nonoperating revenues have the characteristics ofnonexchange transactions and are revenues generally receivedfor which goods and services are not provided, such as giftsand contributions. Additionally, GASB Statement No. 34specifically requires that state appropriations be classified asnonoperating.

In 2003 and 2002, approximately 69% and 70%, respectively,of operating revenues of the University were hospital patientcare revenues. The remainder consists primarily of tuitionand fees, grants and contracts and auxiliary enterpriserevenues. Substantially all of the net nonoperating revenuesresult from state appropriations.

The following illustration presents the major sources ofUniversity revenues (both operating and nonoperating) forthe years ended September 30, 2003 and 2002:



4



University expenses are presented using natural expenseclassifications. Salaries and benefits represent 58% of theUniversity’s total operating expenses for both fiscal years.

The following illustration presents operating expensecategories, including the hospitals, using natural classificationfor the 2003 and 2002 fiscal years:

While the University reports its expenses on a natural expenseclassification basis, functional classifications representexpenses categorized based on the function of the University.Such University functions include instruction, research,public service, academic support, student services,institutional support, scholarships, and operation andmaintenance of plant. Expenses related to auxiliary enterpriseactivities and the hospitals are presented separately.

The following illustration presents the major uses ofUniversity revenues (both operating and nonoperating) on afunctional basis for the years ended September 30, 2003 and2002:

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Excluding the Hospitals, the expenses by function for the yearsended September 30, 2003 and 2002 are as follows:

For the years ended September 30, 2003 and 2002, theUniversity reported an operating loss of approximately$81,812,000 and $64,365,000, respectively. After addingnonoperating revenue and expenses, primarily stateappropriations which are required to be reported as non-operating by GASB Statement Nos. 34 and 35, the totalincrease in net assets is approximately $8,871,000 and$30,081,000 for the years ended September 30, 2003 and2002, respectively.

As documented in the Financial Highlights section of thisanalysis, the decline in the “Increase in Net Assets” categoryof the University’s operations is due to numerous factors.There was approximately $10,500,000 in non-operatingrevenue, described earlier, that occurred in fiscal 2002 andnot in 2003. These declines were, however, offset somewhatby an increase in gifts to the permanent endowment of theUniversity of approximately $3,500,000 in fiscal 2003.Additionally, hospital financial operating results decreasedby approximately $8,000,000 in fiscal 2003. In the academicdivisions of the University, enrollment has continued toincrease, student tuition and fees have increased, and stateappropriations continue to be relatively unchanged.Operational expenses, primarily salaries and wages, increasedduring the year ended September 30, 2003.

STATEMENTS OF CASH FLOWS

The statements of cash flows present information related tocash flows of the University. The statements present cash flowsby category: operating activities, noncapital financingactivities, capital and related financing activities and investingactivities. The net cash provided to, or used by the University,is presented by category.

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Increases in cash and cash equivalents from noncapitalfinancing activities were due primarily to the receipt of stateappropriations and decreases in cash and cash equivalentsfrom investing activities resulted from a net purchase ofinvestments. Those items were offset by decreases in cashand cash equivalents from capital and related financingactivities and cash used in operating activities. Cash and cashequivalents decreased from capital and related debt activitydue primarily to purchases of capital assets and payment ofprincipal and interest on debt. The decrease in cash and cashequivalents from operating activities is consistent with theUniversity’s operating loss.

CAPITAL ASSETS AND

DEBT ADMINISTRATION

Total capital asset additions for the University wereapproximately $25,900,000 during the year ended September30, 2003. Significant capital asset additions included a majoraddition to the University Library. This project was reportedas construction in progress at September 30, 2002 and wasput into service in 2003. Several other construction andrenovation projects at the University are ongoing – the mostsignificant of which are the construction of the initial buildinglocated in the USA Technology and Research Park and a newintramural field facility. There are no significant commitmentsfor capital expenditures at September 30, 2003.

Two notes payable to the Alabama Higher EducationEquipment Loan Authority, with interest rates of 4.37% and3.85%, in the amount of $6,896,000 were refinanced duringthe year with a limited obligation note with Compass Bank,with an interest rate of 2.743%. This transaction will resultin future debt service savings to the University ofapproximately $375,000 over the remaining life of the note.Other long-term debt in the amount of approximately$8,370,000 was retired during the year ended September 30,2003.

During the year ended September 30, 2003, the University’sbond credit rating was upgraded by Moody’s InvestorsServices to A3.

ECONOMIC OUTLOOK

While enrollment and tuition have both increased in recentyears, state appropriations have been relatively flat. Whileappropriations were not prorated in 2003, and no prorationis expected for 2004, the political and economic environmentof the State of Alabama indicates that state appropriationswill not grow and could decline for the year ending September30, 2005.

In September 2003, the State of Alabama Legislature passedlegislation requiring that, beginning in October 2003, stateuniversities fund the health insurance premiums of theirparticipating retirees. The University will be assessed amonthly premium by the Public Education Employees HealthInsurance Plan, the administrator for the program. Theanticipated total cost to the University for the year endingSeptember 30, 2004 is approximately $2,700,000.

State appropriations (actual and adjusted for inflation) forthe last ten years are illustrated below:

University administration is not aware of any other currentlyknown facts, decisions or conditions that are expected to havea significant effect on the University’s financial position orresults of operations during fiscal year 2004 beyond thoseunknown variables having a global effect on virtually all typesof business operations. While the University’s overall financialposition is strong, various factors influence the University’sultimate financial success.

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Report of Independent Auditors

The Board of TrusteesUniversity of South Alabama

We have audited the accompanying statements of net assets of the University of South Alabama (the University)as of September 30, 2003 and 2002 and the related statements of revenues, expenses and changes in net assetsand cash flows for the years then ended. These financial statements are the responsibility of the University’smanagement. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financialposition of the University of South Alabama at September 30, 2003 and 2002, and the results of its operationsand its cash flows for the years then ended in conformity with accounting principles generally accepted in theUnited States.

As disclosed in Note 1 to the financial statements, during the year ended September 30, 2002, the Universityadopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 34, BasicFinancial Statements – and Management’s Discussion and Analysis – for State and Local Governments;GASB Statement No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – forPublic Colleges and Universities – an amendment of GASB Statement No. 34; GASB Statement No. 37, BasicFinancial Statements – and Management’s Discussion and Analysis – for State and Local Governments:Omnibus – an amendment of GASB Statements No. 21 and No. 34; and, GASB Statement No. 38, CertainFinancial Statement Note Disclosures.

A Member Practice of Ernst & Young Global

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The Management’s Discussion and Analysis on pages 1-6 is not a required part of the basic financial statementsbut is supplementary information required by the Governmental Accounting Standards Board. We have appliedcertain limited procedures, which consisted primarily of inquiries of management regarding the methods ofmeasurement and presentation of the supplemental information. However, we did not audit the informationand express no opinion on it.

November 7, 2003

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Statements of Net Assets

September 302003 2002

(in thousands)AssetsCurrent assets:

Cash and cash equivalents $ 50,610 $ 71,015Investments, at fair value 11,931 20,018Accounts receivable (less allowances for contractual

adjustments of $12,114 and $9,958 and doubtfulaccounts of $41,121 and $38,573 at September 30, 2003and 2002, respectively) 41,357 37,244

Notes receivable, net 597 656Prepaid expenses, inventories and other 8,495 8,313

Total current assets 112,990 137,246

Noncurrent assets:Restricted cash and cash equivalents 1,077 740Investments, at fair value 37,824 10,777Notes receivable, net 4,541 4,751Deposits with trustees 10,331 9,938Other noncurrent assets 733 885

Capital assets (net of accumulated depreciation of $225,733and $221,546 at September 30, 2003 and 2002, respectively) 224,433 216,389

Total noncurrent assets 278,939 243,480Total assets 391,929 380,726

LiabilitiesCurrent liabilities:

Accounts payable and accrued liabilities 46,247 39,534Deferred revenue 15,180 13,046Deposits 775 1,299Current portion of long-term debt 8,956 8,464

Total current liabilities 71,158 62,343

Noncurrent liabilities:Long-term debt 95,853 103,512Other long-term liabilities 6,726 5,550

Total noncurrent liabilities 102,579 109,062Total liabilities 173,737 171,405

Net assetsInvested in capital assets, net of related debt 120,583 109,957Restricted, nonexpendable:

Scholarships 3,712 652Other 6,317 5,317

Restricted, expendable 25,722 22,931Unrestricted 61,858 70,464Total net assets $ 218,192 $ 209,321

See accompanying notes.

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Statements of Revenues, Expenses and Changes in Net Assets

Year ended September 302003 2002

(in thousands)RevenuesOperating revenues:

Tuition and fees (net of scholarship allowances of $12,137and $10,510 in 2003 and 2002, respectively) – See note 7 $ 32,592 $ 30,287

Net hospital patient services and other – See note 7 272,258 261,929Federal grants and contracts 35,446 31,530State grants and contracts 2,731 2,656Private grants and contracts 26,024 25,183Auxiliary enterprises (net of scholarship allowances of

$339 and $202 in 2003 and 2002, respectively) – See note 7 13,951 14,189Other operating revenues 9,733 10,616

Total operating revenues 392,735 376,390

ExpensesOperating expenses:

Salaries and benefits 276,808 256,985Supplies and other services 103,714 95,002Scholarships and fellowships 3,895 3,583Utilities 9,138 8,756Depreciation 17,432 16,164Provision for hospital bad debts 63,560 60,265

Total operating expenses 474,547 440,755Operating loss (81,812) (64,365)

Nonoperating revenues (expenses):State appropriations 83,846 81,604Investment income and gains on investments 2,679 1,650Interest on indebtedness (5,100) (5,433)Other nonoperating revenues 1,875 2,120Other nonoperating expenses (282) (106)

Net nonoperating revenues 83,018 79,835Income before other revenues, expenses, gains or losses 1,206 15,470

Capital appropriations 264 3,497Capital gifts and grants 3,529 10,796Additions to permanent endowment 3,872 318Increase in net assets 8,871 30,081

Net assetsBeginning of year 209,321 388,399Cumulative effect of change in accounting principle –

adoption of depreciation for capital assets – See note 1 – (209,159)End of year $ 218,192 $ 209,321


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Statements of Cash Flows


(in thousands)Cash flows from operating activitiesTuition and fees $ 34,975 $ 30,457Hospital patient service revenues 207,895 196,012Grants and contracts 64,449 60,072Auxiliary enterprises 14,288 13,252Payments to suppliers and vendors (108,412) (101,348)Payments to employees (275,331) (256,941)Payments for scholarships and fellowships (3,895) (3,583)New loans issued to students (1,092) (787)Student loan repayments 1,240 1,016Other operating revenues 9,518 10,749Net cash used in operating activities (56,365) (51,101)

Cash flows from noncapital financing activitiesState appropriations 83,781 81,610Endowment gifts 3,872 318Agency funds received 495 699Agency funds disbursed (742) (644)Stafford and PLUS loans received 47,986 41,170Stafford and PLUS loans disbursed (48,187) (41,202)Other nonoperating revenues 1,570 1,797Other nonoperating expenses (281) (106)Net cash provided by noncapital financing activities 88,494 83,642

Cash flows from capital and related financing activitiesCapital appropriations 264 3,497Capital gifts and grants 1,851 6,769Purchases of capital assets (25,705) (26,152)Proceeds from sale or lease of capital assets 305 323Proceeds from issuance of capital debt 6,896 –Principal paid on capital debt (15,360) (7,040)Interest paid on capital debt (3,950) (4,312)Deposits with Trustees (149) –Net cash used in capital and related financing activities (35,848) (26,915)

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Statements of Cash Flows (continued)


(in thousands)Cash flows from investing activitiesInterest on investments $ 1,704 $ 1,625Purchase of investments (39,206) (154,558)Sale of investments 21,153 182,458Net cash (used) provided by investing activities (16,349) 29,525

Net change in cash and cash equivalents (20,068) 35,151Cash and cash equivalents:

Beginning of period 71,755 36,604End of period $ 51,687 $ 71,755

Reconciliation of operating loss tonet cash used in operating activities

Operating loss $ (81,812) $ (64,365)Adjustments to reconcile operating loss to net cash used in

operating activities:Depreciation expense 17,432 16,164Changes in assets and liabilities, net:

Student receivables (308) (384)Hospital receivables (829) (5,591)Grants and contracts receivables 420 501Student loan program receivables 148 229Other receivables (2,284) (279)Prepaid expenses, inventories and other (438) (365)Accounts payable and accrued liabilities 7,592 2,343Accrued salaries and wages 1,572 727Deferred revenue 2,142 (81)

Net cash used in operating activities $ (56,365) $ (51,101)

Noncash investing, noncapital financing, and capital andrelated financing transactions

(Increase) decrease in fair value of investments recognized asa component of interest income $ (907) $ 411

Additional maturity on bonds payable recorded asinterest expense $ 1,203 $ 1,145

Gift of capital assets reducing proceeds from capitalgifts and grants $ (593) $ (4,027)

Pledges of capital gifts $ (1,085) $ –


13


Notes to Financial Statements

September 30, 2003 and 2002

NOTE 1: SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

REPORTING ENTITY AND BASIS OF PRESENTATION

The accompanying financial statements present the financialposition and activity of the University of South Alabama (theUniversity). The financial statements of the University do notinclude the assets, liabilities and results of operations of theUniversity of South Alabama Foundation, the University ofSouth Alabama Health Services Foundation, the SouthAlabama Medical Science Foundation or the USA Researchand Technology Corporation. The University is not financiallyaccountable for these organizations; therefore, they do notconstitute component units under the provisions ofGovernmental Accounting Standards Board (GASB)Statement No. 14, The Financial Reporting Entity. Theprimary purpose of these organizations is to operate for thebenefit of the University.

The University is a component unit of the State of Alabamaand is included in the financial statements of the State ofAlabama.

The financial statements include the Statements of Net Assets,the Statements of Revenues, Expenses and Changes in NetAssets and the Statements of Cash Flows. A more completedescription of the financial statements can be found inManagement’s Discussion and Analysis.

Certain amounts in the 2002 financial statements have beenreclassified to conform to the 2003 presentation.

FINANCIAL STATEMENT PRESENTATION

In June 1999, the GASB issued Statement No. 34, BasicFinancial Statements – and Management’s Discussion andAnalysis – for State and Local Governments. This wasfollowed in November 1999 by GASB Statement No. 35,Basic Financial Statements – and Management’sDiscussion and Analysis – for Public Colleges andUniversities – an amendment of GASB Statement No. 34;in June 2001 by GASB Statement No. 37, Basic FinancialStatements – and Management’s Discussion and Analysis –for State and Local Governments: Omnibus – anAmendment of GASB Statements No. 21 and No. 34; and,also in June 2001 by GASB Statement No. 38, CertainFinancial Statement Note Disclosures. These statementswere effective for the year ended September 30, 2002.

The financial statement presentation required by GASBStatement Nos. 34, 35, 37 and 38 provides a comprehensive,entity-wide perspective of the University’s assets, liabilities,net assets, revenues, expenses, changes in net assets and cashflows and replaces the fund group perspective previouslyrequired.

Significant accounting changes made in order to complywith the new requirements include the adoption ofdepreciation of capital assets, reporting tuition and feerevenue net of certain scholarship allowances and reportingrevenue from auxiliary enterprises net of scholarships andallowances.

MEASUREMENT FOCUS AND

BASIS OF ACCOUNTING

For financial reporting purposes, the University is considereda special purpose governmental agency engaged only inbusiness type activities, as defined by GASB StatementNo. 34. Accordingly, the University’s financial statements havebeen presented using the economic resources measurementfocus and the accrual basis of accounting. Under the accrualbasis, revenues are recognized when earned, and expensesare recorded when an obligation has been incurred. Allsignificant transactions related to internal service activitiessuch as publications, telecommunications and institutionalcomputing have been eliminated where appropriate.

The University has the option to apply all FinancialAccounting Standards Board (FASB) pronouncements issuedafter November 30, 1989, unless FASB pronouncementsconflict with GASB pronouncements. The University haselected to not apply FASB pronouncements issued after theapplicable date.

ESTIMATES

The preparation of financial statements in conformity withaccounting principles generally accepted in the United Statesrequires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenuesand expenditures during the reporting period. Actual resultscould differ from those estimates.

14


Notes to Financial Statements (continued)


ACCOUNTING POLICIES (CONTINUED)

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are defined as petty cash, demandaccounts and any short-term investments that take on thecharacter of cash. These investments generally have maturitiesof less than three months and include repurchase agreementsand money market accounts.

INVESTMENT IN POOLED FUNDS

Investments are maintained and administered in a commonpool and are stated at market value. Investments received bygift are recorded at fair market value at the date of receipt.

ACCOUNTS RECEIVABLE

Accounts receivable are primarily from patient care services.Accounts receivable also include amounts due from students,the federal government, state and local governments, orprivate sources in connection with reimbursement ofallowable expenditures made pursuant to the University’sgrants and contracts. Accounts receivable are recorded netof estimated uncollectible amounts.

INVENTORIES

The University’s inventories primarily consist of bookstoreand hospital inventories. Bookstore inventories are valued atcost, on a moving average basis. Hospital inventories arestated at the lower of average cost or market, on a first-in,first-out basis.

FUNDS ON DEPOSIT WITH TRUSTEES

Funds on deposit with trustees are held and invested by thetrustees pursuant to University bond trust indentures. Theuse of principal and earnings thereon is restricted by the termsof the indentures or agreements.

CAPITAL ASSETS

All capital expenditures of $5,000 or more and having a usefullife of two or more years are capitalized at cost at the date ofacquisition. Depreciation is recorded using the straight-linemethod over the estimated useful lives of the assets, generally40 to 50 years for buildings and infrastructure, 10 to 20 yearsfor fixed equipment, 8 to 20 years for land improvements, 10years for library materials and 4 to 15 years for otherequipment. Renovations to buildings and other assets thatsignificantly increase the value or extend the useful life ofthe asset and are over $100,000 are capitalized. Routinerepairs and maintenance are charged to operating expense inthe year in which the expense is incurred.

DEFERRED REVENUES

Student tuition, fees and dormitory rentals are deferred andrecognized over the applicable portion of each school term.

CLASSIFICATION OF NET ASSETS

The University’s net assets are classified as follows:

Invested in capital assets, net of related debt represents theUniversity’s total investment in capital assets, net ofoutstanding debt obligations related to those capital assets.To the extent debt has been incurred but not yet expended forcapital assets, such amounts are not included as a componentof invested in capital assets, net of related debt.

Restricted, nonexpendable net assets consist of endowmentand similar type funds which donors or other outside sourceshave stipulated, as a condition of the gift instrument, that theprincipal is to be maintained inviolate and in perpetuity, andinvested for the purpose of producing present and futureincome, which may either be expended or added to principal.

Restricted, expendable net assets include resources that theUniversity is legally or contractually obligated to spend inaccordance with restrictions imposed by external third parties.

Unrestricted net assets represent resources derived fromstudent tuition and fees, state appropriations, hospital

15





CLASSIFICATION OF NET ASSETS (CONTINUED)revenues, sales and services of educational activities andauxiliary enterprises. Auxiliary enterprises are substantiallyself-supporting activities that provide services for students,faculty and staff. While unrestricted net assets may bedesignated for specific purposes by action of managementor the Board of Trustees, they are available for use, at thediscretion of the governing board, to meet current expensesfor any purpose. Substantially all unrestricted net assets aredesignated for academic and research programs andinitiatives, and capital programs.

When an expense is incurred that can be paid using eitherrestricted or unrestricted resources, the University addresseseach situation on a case-by-case basis prior to determiningthe resources to be used to satisfy the obligation.

SCHOLARSHIP ALLOWANCES AND

STUDENT FINANCIAL AID

Student tuition and fees, and certain other revenues fromstudents, are reported net of scholarship discounts andallowances in the statements of revenues, expenses andchanges in net assets. Scholarship discounts and allowancesare the difference between the stated charge for goods andservices provided by the University and the amount that ispaid by students and/or third parties making payments onthe students’ behalf. Certain governmental grants, such asPell grants and other federal, state or nongovernmentalprograms are recorded as either operating or nonoperatingrevenues in the University’s financial statements. To theextent that revenues from such programs are used to satisfytuition and fees and certain other student charges, theUniversity has recorded a scholarship discount andallowance.

DONOR RESTRICTED ENDOWMENTS

The University is subject to the “Uniform Management ofInstitutional Funds Act” of the Code of Alabama. This lawallows the University, unless otherwise restricted by thedonor, to spend net appreciation, realized and unrealized,on the endowment. The University’s endowment spendingpolicy provides that five percent of the three-year invested

net asset moving average value (inclusive of net realizedand unrealized gains and losses), as measured at September30, is available annually for spending. The University’spolicy is to retain the endowment net interest and dividendincome and net realized and unrealized appreciation withthe endowment after distributions allowed by the spendingpolicy have been made.

CLASSIFICATION OF REVENUES

The University has classified its revenues as either operatingor nonoperating revenues.

Operating revenues include activities that have thecharacteristics of exchange transactions such as studenttuition and fees, net of scholarship discounts and allowances;sales and services of auxiliary enterprises, net of scholarshipallowances; most federal, state and local grants and contracts;and, hospital patient service revenues, net of allowances forcontractual adjustments and doubtful accounts.

Nonoperating revenues include activities that have thecharacteristics of nonexchange transactions, such as giftsand contributions, and other revenue sources that are definedas nonoperating revenues by GASB Statement No. 9,Reporting Cash Flows of Proprietary and NonexpendableTrust Funds and Governmental Entities That Use ProprietaryFund Accounting, and GASB Statement No. 34, such as stateappropriations, investment income and gifts. Gifts to theendowment fund are classified as other nonoperatingrevenues.

GIFTS AND PLEDGES

Pledges of financial support from organizations andindividuals representing an unconditional promise to giveare recognized in the financial statements once all eligibilityrequirements, including time requirements, have been met.In the absence of such promise, revenue is recognized whenthe gift is received. Endowment pledges generally do notmeet eligibility requirements, as defined by GASB StatementNo. 33, Accounting and Financial Reporting for Non-exchange Transactions, and are not recorded as assets untilthe related gift has been received.

16





GIFTS AND PLEDGES (CONTINUED)Unconditional promises that are expected to be collected infuture years are recorded at the present value of the estimatedfuture cash flows.

GRANTS AND CONTRACTS

The University has been awarded grants and contracts forwhich the funds have not been received or expenditures madefor the purpose specified in the award. These awards havenot been reflected in the financial statements, but representcommitments of sponsors to provide funds for specificresearch or training projects. For grants that have allowablecost provisions, the revenue will be recognized as the relatedexpenditures are made. For grants with work completionrequirements, the revenue is recognized as the work iscompleted. For grants without either of the aboverequirements, the revenue is recognized as it is received.

NET PATIENT SERVICE REVENUE

Net patient service revenue is reported at the estimated netrealizable amounts from third-party payers and others forhealthcare services rendered, including estimated retroactiveadjustments under reimbursement agreements with third-partypayers. Retroactive adjustments are accrued on an estimatedbasis in the period the related services are rendered andadjusted in future periods, as final settlements are determined.

THIRD-PARTY REIMBURSEMENT

The University of South Alabama Hospitals (the Hospitals)participate in various programs, both governmental andcommercial (Medicare, Medicaid and Blue Cross), whichprovide reimbursement at rates lower than established billingrates. The difference between these contracted rates andestablished billing rates are accounted for as a reduction ofpatient service revenue. The amount of reimbursement hasbeen estimated for services rendered to Medicare patientsduring the year by applying cost reimbursement principlesestablished by the United States Department of Health andHuman Services. Medicaid reimbursement is based on a perdiem and fee schedule set by the Alabama Medicaid Agency.Blue Cross of Alabama reimbursement has been estimated

by utilizing the reimbursement principles established by BlueCross. Medicare and Blue Cross reimbursements are subjectto audit and retroactive adjustment.

Although there is a possibility that recorded amounts maychange materially, management believes that adequaterecognition has been made in the financial statements for netamounts received or receivable under these programs.

NOTE 2: INCOME TAXES

The University is classified as both a governmental entityunder the laws of the State of Alabama and as a tax-exemptentity under Section 501(a) of the Internal Revenue Code asan organization described in Section 501(c)(3). Accordingly,no provision for income taxes has been made in theaccompanying financial statements.

NOTE 3: CASH

Pursuant to the Security for Alabama Funds EnhancementAct, funds on deposit may be placed in an institutiondesignated as a qualified public depository (QPD) by theState of Alabama. QPD institutions pledge securities to astatewide collateral pool administered by the StateTreasurer’s office. Such financial institutions contribute tothis collateral pool in amounts proportionate to the totalamount of public fund deposits at their respectiveinstitutions. The securities are held at the Federal ReserveBank and are designated for the State of Alabama. Additionalcollateral was not required for University funds on depositwith QPD institutions. At June 30, 2003, the last datereported by the State, the net public deposits subject tocollateral requirements for all institutions participating inthe pool totaled approximately $5,451,042,000. Historically,this amount has not fluctuated significantly from period toperiod. Given the nature of the State of Alabama requirement,deposits held in QPD institutions are not subject tocategorization by risk.

17



NOTE 4: INVESTMENTS

Investments, at fair value consisted of the following atSeptember 30 (in thousands):

TABLE 4 2003 2002

U. S. agency notes $ 30,884 $ 21,272Pooled equity funds 10,339 3,481Pooled bond funds 4,202 4,783Certificates of deposit 4,056 1,017Other 274 242Total $ 49,755 $ 30,795

At September 30, 2003, $159,000 in net realized andunrealized gains on investments of donor-restricted

endowments was recognized and is included in restrictedexpendable net assets on the accompanying 2003 statementof net assets.

There are three categories or levels of credit risk associatedwith investments, for which the related descriptions are: (1)insured or registered, or securities held by the University orits agent in the University’s name; (2) uninsured andunregistered, with securities held by a party other than theUniversity or its agent, but in the University’s name; and (3)uninsured and unregistered, with securities held by acounterparty, or by its trust department or agent, but not inthe University’s name. Investments in the first categoryinclude U. S. Treasury and agency obligations, and pooledbond and equity funds. All investments owned by theUniversity at September 30, 2003, and shown in thepreceding schedule, are in the first category.

NOTE 5: CAPITAL ASSETS

Changes in capital assets for the year ended September 30, 2003 are as follows (in thousands):

TABLE 5A Beginning EndingBalance Additions Transfers Reductions Balance

Capital assets not being depreciated:Land $ 23,358 $ 585 $ – $ (94) $ 23,849Construction-in-progress 6,189 16,574 (8,979) – 13,784

29,547 17,159 (8,979) (94) 37,633

Other capital assets:Land improvement 11,014 12 12 – 11,038Buildings, fixed equipment and

infrastructure 276,757 1,080 9,080 (4,111) 282,806Other equipment 91,428 5,533 (113) (9,470) 87,378Library materials 29,189 2,122 – – 31,311

408,388 8,747 8,979 (13,581) 412,533

Less accumulated depreciation for:Land improvements (6,834) (590) – – (7,424)Buildings, fixed equipment and

infrastructure (137,273) (7,261) – 4,025 (140,509)Other equipment (56,277) (8,057) – 9,220 (55,114)Library materials (21,162) (1,524) – – (22,686)

(221,546) (17,432) – 13,245 (225,733)Other capital assets, net 186,842 (8,685) 8,979 (336) 186,800

Capital assets, net $ 216,389 $ 8,474 $ – $ (430) $ 224,433

18



NOTE 5: CAPITAL ASSETS (CONTINUED)

Changes in capital assets for the year ended September 30, 2002 are as follows (in thousands):

TABLE 5B Beginning EndingBalance Additions Transfers Reductions Balance

Capital assets not being depreciated:Land $ 21,751 $ 1,600 $ 7 $ – $ 23,358Construction-in-progress 6,203 8,384 (8,398) – 6,189

27,954 9,984 (8,391) – 29,547

Other capital assets:Land improvements 9,390 484 1,147 (7) 11,014Buildings, fixed equipment and

infrastructure 265,746 3,072 8,324 (385) 276,757Other equipment 80,573 15,398 (1,080) (3,463) 91,428Library materials 26,961 2,228 – – 29,189

382,670 21,182 8,391 (3,855) 408,388

Less accumulated depreciation for:Land improvements (6,352) (489) – 7 (6,834)Building, fixed equipment and

infrastructure (130,767) (6,920) (114) 528 (137,273)Other equipment (52,292) (7,341) 114 3,242 (56,277)Library materials (19,748) (1,414) – – (21,162)

(209,159) (16,164) – 3,777 (221,546)Other capital assets, net 173,511 5,018 8,391 (78) 186,842

Capital assets, net $ 201,465 $ 15,002 $ – $ (78) $ 216,389

NOTE 6: NONCURRENT LIABILITIES

Changes in noncurrent liabilities for the year ended September 30, 2003 are as follows (in thousands):

Less AmountsTABLE 6A Beginning Ending Due Within Noncurrent

Balance Additions Reductions Balance One Year LiabilitiesLong-term debt

Notes payable $ 8,992 $ 6,896 $ (8,339) $ 7,549 $ 1,677 $ 5,872Bonds payable 99,259 1,203 (5,031) 95,431 5,450 89,981Capital lease obligations 3,725 – (1,896) 1,829 1,829 –

Total long-term debt 111,976 8,099 (15,266) 104,809 8,956 95,853Other long-term liabilities

Compensated absences 10,483 10,905 (9,082) 12,306 5,580 6,726Total noncurrent liabilities $ 122,459 $ 19,004 $ (24,348) $ 117,115 $ 14,536 $ 102,579

19



NOTE 6: NONCURRENT LIABILITIES (CONTINUED)

Changes in noncurrent liabilities for the year ended September 30, 2002 are as follows (in thousands):

Less AmountsTABLE 6B Beginning Ending Due Within Noncurrent

Balance Additions Reductions Balance One Year LiabilitiesLong-term debt

Notes payable $ 10,373 $ – $ (1,381) $ 8,992 $ 1,443 $ 7,549Bonds payable 101,976 1,145 (3,862) 99,259 5,125 94,134Capital lease obligations 5,522 – (1,797) 3,725 1,896 1,829

Total long-term debt 117,871 1,145 (7,040) 111,976 8,464 103,512Other long-term liabilities

Compensated absences 7,582 11,073 (8,172) 10,483 4,933 5,550Total noncurrent liabilities $ 125,453 $ 12,218 $ (15,212) $ 122,459 $ 13,397 $ 109,062

Notes and bonds payable and capital lease obligations are further disclosed below in Notes 7 and 8, respectively.

The AHEEL (Alabama Higher Education Equipment LoanAuthority) Notes, Series 1998-1 and 1998-2, refunded duringthe year ended September 30, 2003, were secured by asubordinate pledge of tuition revenues. Certain computerequipment is pledged as security for the IBM CreditCorporation note. The Compass Bank limited obligation noteis unsecured.

BONDS PAYABLE

The University defeased certain indebtedness during 1978and 1984 by depositing funds in escrow trust accountssufficient to provide for the subsequent payment of principaland interest on the defeased indebtedness. Neither the assetsof the escrow trust accounts nor the defeased indebtedness isincluded in the accompanying statements of net assets. Theprincipal outstanding on all defeased issues was $9,040,000and $10,765,000 at September 30, 2003 and 2002,respectively.

NOTE 7: NOTES AND BONDS PAYABLE

NOTES PAYABLE

Notes payable consisted of the following at September 30(in thousands):

TABLE 7A 2003 2002

AHEEL Series 1998-1,3.85% payable throughOctober 2008 $ – $ 5,396

AHEEL, Series 1998-2,4.37% payable throughOctober 2008 – 2,599

Compass Bank limitedobligation note, 2.743%payable throughSeptember 2008 6,896 –

IBM Credit Corporation,6.00% payable throughJune 2005 653 997

$ 7,549 $ 8,992

20



Substantially all student tuition and fee revenues secureUniversity Tuition Revenue Refunding Bonds. Series 1996Bonds began maturing November 15, 2000, and areredeemable beginning May 2006, at varying premiums. Series1999 Current Interest Bonds began maturing November 15,2002, and Capital Appreciation Bonds mature beginningNovember 15, 2011; Series 1999 Bonds are not redeemableprior to maturity.

During the years ended September 30, 2003 and 2002, thematurity value of the Capital Appreciation Bonds increasedby $1,203,000 and $1,145,000, respectively, over the originalprincipal amount of $19,810,000, reflecting accretion ofinterest. Hospital and Auxiliary Revenue Refunding BondsSeries 1993 are redeemable beginning May 2004 at varyingpremiums, and are secured by a lien on and a pledge of certainHospital revenues and University auxiliary revenues.

DEBT SERVICE ON LONG-TERM OBLIGATIONS

Total debt service by fiscal year is presented in Table 7C onthe following page.

The principal amount of debt service due on bonds atSeptember 30, 2003 and 2002 includes $20,473,000 and$21,676,000, respectively, representing the additional maturityvalue on Series 1999 Capital Appreciation Bonds. These bondsmature in years 2011 through 2019 and are non-interestbearing. Although this additional maturity is presented asprincipal on the debt service schedule above, it is alsorecognized as interest expense on an annual basis in theUniversity’s financial statements as it accretes.

The fair value of notes payable and bonds payable atSeptember 30, 2003 approximates carrying value.

NOTE 7: NOTES AND BONDS PAYABLE

(CONTINUED)

BONDS PAYABLE (CONTINUED)Bonds payable consisted of the following at September 30(in thousands):

TABLE 7B 2003 2002

Hospital and AuxiliaryRevenue RefundingBonds, Series 1993,2.8% to 4.55% payablethrough May 2010 $ 21,790 $ 24,350

University TuitionRevenue RefundingBonds, Series 1996,payable throughNovember 2015 30,335 31,115

University TuitionRevenue RefundingBonds, Series 1996 B,3.8% to 4.6%, payablethrough November 2002 – 805

University TuitionRevenue Bonds, Series1999 Current Interest,3.7% to 4.35%, payablethrough November 2010 19,340 20,320

University TuitionRevenue Bonds, Series1999 Capital Appreciation,4.7% to 5.25%, payableNovember 2011 throughNovember 2018 24,817 23,614

96,282 100,204Less unamortizeddiscount (851) (945)

$ 95,431 $ 99,259

21



NOTE 8: CAPITAL LEASE OBLIGATIONS

On July 21, 1997, the University signed a seven-year LeasePurchase Agreement as a method of financing the purchaseof certain designated radiology equipment, a clinicalinformation system, and other patient care-related equipmentfor the USA Hospitals. Assets totaling $11,915,500 havebeen obtained through proceeds from the Lease PurchaseAgreement as of September 30, 2003. The University may,at its discretion, terminate the lease through the exercise ofpurchase options on a semi-annual basis.

Future minimum capital lease payments at September 30,2003 are as follows (in thousands):

TABLE 8Year ending September 30, 2004 $ 1,879

Less amount representinginterest (50)

Net minimum lease payments $ 1,829

NOTE 9: EMPLOYEE BENEFITS

RETIREMENT AND PENSION PLANS

Employees of the University are covered by two pension plans:a cost sharing multiple-employer defined benefit pension planadministered by the Teachers’ Retirement System of the Stateof Alabama (TRS), and a defined contribution pension plan.

NOTE 7: NOTES AND BONDS PAYABLE (CONTINUED)

DEBT SERVICE ON LONG-TERM OBLIGATIONS (CONTINUED)

Total debt service by fiscal year is as follows (in thousands):

Debt Service on Bonds Debt Service on NotesAdditional

TABLE 7C Principal Interest Maturity Principal Interest Total

2004 $ 5,450 $ 4,515 $ (1,265) $ 1,677 $ 194 $ 10,5712005 5,965 4,328 (1,329) 1,629 144 10,7372006 6,655 4,112 (1,397) 1,378 99 10,8472007 7,265 3,870 (1,469) 1,416 61 11,1432008 7,805 3,602 (1,544) 1,449 21 11,3332009 – 2013 38,320 13,351 (8,408) – – 43,2632014 – 2018 37,750 5,679 (5,012) – – 38,4172019 7,545 97 (49) – – 7,593Subtotal 116,755 $ 39,554 $ (20,473) $ 7,549 $ 519 $ 143,904

Less:Additional maturity (20,473)Unamortized bond

discount (851)Total $ 95,431

22



NOTE 9: EMPLOYEE BENEFITS (CONTINUED)

RETIREMENT AND PENSION PLANS (CONTINUED)Permanent employees of the University participate in TRS, apublic retirement system created by an act of the StateLegislature, with benefit provisions established by the Codeof Alabama. Responsibility for general administration andoperation of the TRS is vested in the Board of Control(currently 14 members). Benefits fully vest after 10 years offull-time, permanent employment. Vested employees mayretire with full benefits at age 60 or after 25 years of service.Participating retirees may elect the maximum benefit, or maychoose among four other monthly benefit options. Under themaximum benefit, participants are allowed 2.0125% of theiraverage final salary (average of three highest years of annualcompensation during the last ten years of service) for eachyear of service. The TRS issues a publicly available financialreport that includes financial statements and requiredsupplementary information. That report may be obtained bywriting to the Retirement Systems of Alabama, P. O. Box302150, Montgomery, Alabama 36130-2150, or by calling(334) 832-4140.

All employees covered by this retirement plan must contribute5% of their eligible earnings to TRS. An actuary employedby the TRS Board of Control establishes the employer-matching amount annually. The pension benefit obligation isa standardized disclosure measure of the present value ofpension benefits, adjusted for the effects of projected salaryincreases and step-rate benefits, estimated to be payable inthe future as a result of employee service to date. During2003 and 2002, the University made total contributions of$10,467,000 and $11,385,000, respectively, to TRS on behalfof participants, which represents 5.02% and 5.96%,respectively, of each participant’s gross earnings.TheUniversity’s payroll for all employees was approximately$230,898,000 and $212,559,000 in 2003 and 2002,respectively. Total payroll for University employeesparticipating in the Teachers’ Retirement System of Alabamawas approximately $208,511,000 and $191,030,000 in 2003and 2002, respectively.

The defined contribution pension plan covers certainacademic and administrative employees, and participation byeligible employees is optional. Under this plan, administered

by Teachers Insurance and Annuity Association – CollegeRetirement Equities Fund (TIAA-CREF), contributions byeligible employees are matched equally by the University upto a maximum of 3% of current annual pay. The Universityand the employees each contributed $738,000 and $687,000for 413 and 410 employees in 2003 and 2002, respectively.

COMPENSATED ABSENCES

Regular University employees accumulate vacation and sickleave, subject to maximum limitations, at varying ratesdepending upon their employee classification and length ofservice. Upon termination of employment, employees arepaid all unused accrued vacation at their regular rate of payup to a maximum of two times their annual vacationaccumulation rate. The accompanying statements of net assetsinclude accruals for vacation pay of approximately$12,307,000 and $10,483,000 at September 30, 2003 and2002, respectively. No accrual is recognized for sick leavebenefits since no terminal cash benefit is available toemployees for accumulated sick leave.

NOTE 10: RISK MANAGEMENT

The University and an affiliate participate in professional andgeneral liability trust funds that are administered by anindependent trustee. These trust funds are irrevocable and usecontributions by the University and its affiliate, together withearnings thereon, to pay liabilities arising from theperformance of its employees. Contributions to the trusts arerecorded as expenditures upon payment and are determinedby independent actuaries. If the trust funds are everterminated, appropriate provision for payment of relatedclaims will be made and any remaining balance will bedistributed to the University and its affiliate in proportion tocontributions made. It is the opinion of Universityadministration that plan assets are sufficient to meet futureplan obligations.

The University participates in a self-insured health plan,administered by an affiliated entity through December 31,2001 and, subsequent to December 31, 2001, by anunaffiliated entity. Administrative fees paid by the

23



NOTE 10: RISK MANAGEMENT (CONTINUED)

University for such services were approximately $1,047,000and $1,153,000 in fiscal years 2003 and 2002, respectively.Contributions by the University and its employees, togetherwith earnings thereon, are used to pay liabilities arising fromhealth care claims. It is the opinion of Universityadministration that plan assets are sufficient to meet futureplan obligations.

NOTE 11: RELATED PARTIES

UNIVERSITY OF SOUTH ALABAMA FOUNDATION

The University of South Alabama Foundation (the USAFoundation) is a not-for-profit foundation that was organizedfor the purpose of promoting education, scientific researchand charitable purposes, and to assist in developing andadvancing the University in furthering, improving andexpanding its properties, services, facilities and activities. TheBoard of Directors of the USA Foundation is not appointedor controlled by the University. Other auditors have auditedthe financial statements of the USA Foundation. Condensedfinancial information for the Foundation at, and for the yearsended, June 30, 2003 and 2002, its fiscal year-end, is presentedin Table 11A, below.

UNIVERSITY OF SOUTH ALABAMA HEALTH

SERVICES FOUNDATION

The University of South Alabama Health Services Foundation(USAHSF) is a not-for-profit corporation that exists to providea group medical practice for physicians who are facultymembers of the University and to further medical educationand research at the University. Condensed 2003 and 2002financial information for the USAHSF is presented in Table11A, below.

The USAHSF reimburses the University for certainadministrative and other support services. Total amountsreceived and accrued for such services were approximately$18,638,000 and $17,260,000 for the years endedSeptember 30, 2003 and 2002, respectively, and are reflectedas private grants and contracts in the accompanying statementsof revenues, expenses and changes in net assets.

CONDENSED FINANCIAL INFORMATION

The condensed financial information presented in Tables 11A,11B and 11C is based upon the individual entities’ statementsprepared in accordance with accounting principles generallyaccepted in the United States. The information for the USAFoundation is presented at, and for the years ended, June 30,2003 and 2002; and information for the USAHSF is presentedat, and for the years ended, September 30, 2003 and 2002.

CONDENSED STATEMENTS OF FINANCIAL POSITION

TABLE 11A 2003 2002USA USA

Foundation USAHSF Foundation USAHSF(In thousands)

Assets $ 270,281 $ 10,578 $ 286,056 $ 12,208

Liabilities 29,281 10,661 36,562 11,579

Net assets (deficit):Unrestricted 40,483 (83) 39,927 629Temporarily restricted 36,850 – 45,130 –Permanently restricted 163,667 – 164,437 –

241,000 (83) 249,494 629Liabilities and net assets $ 270,281 $ 10,578 $ 286,056 $ 12,208

24



OTHER RELATED PARTIES

The South Alabama Medical Science Foundation (SAMSF)is a not-for-profit corporation that exists for the purpose ofpromoting education and research at the University of SouthAlabama. SAMSF reimburses the University for certainadministrative and other related support services. Total

amounts received for such services were approximately$1,240,000 and $1,285,000 in 2003 and 2002, respectively,and are reflected as private grants and contracts in theaccompanying statements of revenues, expenses and changesin net assets.

NOTE 11: RELATED PARTIES (CONTINUED)

CONDENSED FINANCIAL INFORMATION (CONTINUED)

CONDENSED STATEMENTS OF ACTIVITIES

TABLE 11B 2003 2002USA USA


RevenuesHealth care revenues $ – $ 45,504 $ 20,623 $ 49,207Other 14,925 7,805 5,575 6,584

14,925 53,309 26,198 55,791Expenses:

Health care plan costs – – 23,222 –University contributions 5,654 – 9,913 –Management, general and other 15,143 54,021 21,498 55,717

Discontinued operations 2,622 – – –23,419 54,021 54,633 55,717

Revenues over (under) expenses $ (8,494) $ (712) $ (28,435) $ 74

CONDENSED STATEMENTS OF CASH FLOWS

TABLE 11C 2003 2002USA USA


Net cash providedby (used in):

Operating activities $ (7,475) $ 63 $ 2,224 $ (677)Investing activities 6,227 1,100 (550) (3,703)Financing activities (4,590) (811) (10,500) (733)

Net change in cash $ (5,838) $ 352 $ (8,826) $ (5,113)

25

NOTE 11: RELATED PARTIES (CONTINUED)

OTHER RELATED PARTIES (CONTINUED)The USA Research and Technology Corporation (theCorporation) is a not-for-profit corporation that exists for thepurpose of furthering the educational and scientific missionof the University by developing, attracting and retainingtechnology and research industries in Alabama that willprovide professional and career opportunities to theUniversity’s students and faculty. The Corporation was formedin fiscal year 2002.

NOTE 12: COMMITMENTS AND

CONTINGENCIES

GRANTS AND CONTRACTS

At September 30, 2003 and 2002, the University had beenawarded approximately $31,030,000 and $30,652,000,respectively, in grants and contracts that had not been receivedand for which expenditures had not been made for thepurposes specified. These awards, which representcommitments of sponsors to provide funds for research ortraining projects, have not been reflected in the accompanyingfinancial statements. Advances include amounts received fromgrant and contract sponsors which have not been earned underthe terms of the agreements and, therefore, have not yet beenincluded in revenues in the accompanying financialstatements.

LINES OF CREDIT

The University has established a $10 million line of creditwith Regions Bank, with a variable interest rate of .480percentage points over the London Interbank Offered Rate(LIBOR), not to exceed 6.9 percent. No funds were advancedto the University from this credit line during the year endedSeptember 30, 2003.

In connection with the University’s purchasing card program,the University has also established a $2,000,000 line of creditwith First Union National Bank, with a zero percent interestrate. At September 30, 2003 and 2002, approximately$808,000 and $413,000, respectively, was advanced and isincluded in accounts payable in the accompanying statementsof net assets.



In connection with the Hospital’s participation in the State ofAlabama Medicaid Program, the University has establisheda $1,476,000 irrevocable standby letter of credit with RegionsBank with a variable interest rate of .480 percentage pointsover the London Interbank Offered Rate (LIBOR), not toexceed 6.9 percent. The Alabama Medicaid Agency is thebeneficiary of this letter of credit. No funds were advancedunder this letter during the year ended September 30, 2003.

LITIGATION

Various claims have been filed against the University allegingdiscriminatory employment practices and other matters.University administration and legal counsel are of the opinionthat the resolution of these matters will not have a materialeffect on the financial position or the statements of revenues,expenses and changes in net assets of the University.

In December 1999, the University and the State of Alabamaentered into an “Agreement to Dismiss Litigation.” Thisagreement called for the dismissal of the University’s pendinglawsuit against tobacco manufacturers in return for thepayment of $20,000,000 from the State to the University. Thetiming of the receipt of these funds is subject to availability.The payment is to be made over a period of not more than tenyears. Pursuant to a separate agreement, 14% of all fundsreceived are to be paid to the attorneys who represented theUniversity in the litigation. At September 30, 2003,$2,000,000 related to this settlement has been received andrecognized as state appropriations in prior years. Additionally,$2,500,000 related to the settlement has been allocated to theUniversity by the Alabama Public School and CollegeAuthority, all of which has been expended as of September30, 2003.

HOSPITALS MEDICARE/MEDICAID REVENUES

The Hospitals provide health care services primarily toresidents of the region. Revenues from the Medicare programaccounted for approximately 16% and 18% of net patientservice revenues for the years ended September 30, 2003 and2002, respectively. Medicaid program revenues account forapproximately 38% and 41%, respectively, of net patientservice revenues for the same periods. Laws and regulationsgoverning the Medicare and Medicaid programs are complexand subject to interpretation. Hospital management believesthe Hospitals are in compliance with all applicable laws andregulations and are not aware of any pending or threatenedinvestigations involving allegations of potential wrongdoing.While no such regulatory inquiries have been made,

26



NOTE 12: COMMITMENTS AND

CONTINGENCIES (CONTINUED)

HOSPITALS MEDICARE/MEDICAID REVENUES (CONTINUED)compliance with such laws and regulations can be subject tofuture government review and interpretation as well assignificant regulatory action including fines, penalties andexclusion from the Medicare and Medicaid programs.

OTHER POSTRETIREMENT EMPLOYEE BENEFITS

In September 2003, the State of Alabama Legislature passedlegislation that requires all colleges and universities to fundthe health care premiums of its participating retirees. In prioryears, such costs have been paid by the State. Beginning inOctober 2003, the University will be assessed a monthlypremium by the Public Education Employees’ HealthInsurance Plan (“PEEHIP”) based on the number of retireesin the system and an actuarially determined premium. TheUniversity will expense each payment to PEEHIP as it is paid.The anticipated expense for the year ending September 30,2004 is approximately $2,700,000.

NOTE 13: FUNCTIONAL INFORMATION

Operating expenses by functional classification for the yearsended September 30, 2003 and 2002 are listed below (inthousands). In preparing the financial statements, allsignificant transactions and balances among accounts havebeen eliminated.

TABLE 13 2003 2002

Instruction $ 74,121 $ 69,885Research 16,501 13,782Public Service 24,267 24,358Academic support 12,757 12,029Student Services 14,349 14,509Institutional support 13,433 11,995Operation and

maintenance of plant 13,435 12,804Scholarships 1,711 1,670Hospital 268,095 248,565Auxiliary enterprises 13,353 12,485Depreciation 17,432 16,164Other 5,093 2,509

$ 474,547 $ 440,755

NOTE 14: SIGNIFICANT NEW

ACCOUNTING PRONOUNCEMENTS

In June 2002, the GASB issued Statement No. 39, DeterminingWhether Certain Organizations Are Component Units – anamendment of GASB Statement No. 14. GASB Statement No.39 established new guidelines for identifying and reportingorganizations as component units of the University and willbe effective for the University for the year ending September30, 2004. In March 2003, the GASB issued Statement No.40, Deposit and Investment Risk Disclosures – an amendmentof GASB Statement No. 3. GASB Statement No. 40 changesthe required financial statement disclosures for certaininvestments and will be effective for the University for theyear ending September 30, 2005. The effect of theimplementation of GASB Statements No. 39 and No. 40 onthe University is not known at this time.

UNIVERSITY OF SOUTH ALABAMA

BOARD OF TRUSTEES

SEPTEMBER 30, 2003

The Honorable Bob Riley, (President Ex-Officio) Dr. Ed Richardson (Ex-Officio)Governor, State of Alabama Superintendent of EducationMontgomery Montgomery

Mr. Jack R. Brunson Ms. Bettye R. MayeElba York

Mr. J. L. Chestnut, Jr. Ms. Christie McKendree MireeSelma Monroeville

The Honorable E. Crum Foshee Mr. Mayer MitchellAndalusia Mobile

Mr. J. Cecil Gardner The Honorable Bryant MixonMobile Ozark

The Honorable Samuel L. Jones The Honorable James P. Nix, (Chair, Pro Tempore)Mobile Fairhope

The Honorable Larry P. Langford Dr. Steven H. StokesFairfield Dothan

Mr. Donald L. Langham Mr. Larry D. Striplin, Jr.Mobile Selma

The Honorable W. H. LindseyButler

ADMINISTRATION

President V. Gordon Moulton Mr. M. Wayne DavisPresident Vice President for Financial Affairs

Dr. Dale T. Adams Mr. Stanley K. HammackVice President for Student Affairs Associate Vice President for Hospital Affairs

Senior Hospital Administrator

Dr. Joseph F. Busta, Jr. Dr. Robert A. KreisbergVice President for Development and Vice President for Medical AffairsAlumni Relations and Dean, College of Medicine

Dr. Pat C. CoveySenior Vice President for Academic Affairs

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