ML062540117

2005 Financial Report for University of Missouri- Columbia

ML062540117
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Site:	University of Missouri-Columbia
Issue date:	12/31/2005
From:	Univ of Missouri - Columbia
To:	Office of Nuclear Reactor Regulation
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Download: ML062540117 (58)

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GOVERNING BOARD AND ADMINISTRATIVE STAFF...........................................

1 MANAGEMENT'S DISCUSSION AND ANALYSIS.................................................

2 INDEPENDENT AUDITORS' REPORT..........................................................

14 BASIC FINANCIAL STATEMENTS:

Statem ents of N et A ssets.............................................................

16 Statements of Revenues, Expenses and Changes in Net Assets...............................

19 Statem ents of Cash Flows............................................................

20 Statements of Net Assets Held for Pension Benefits........................................

22 Statements of Changes in Net Assets Held for Pension Benefits..............................

22 Notes to Financial Statements.........................................................

23 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF TIlE STATE OF MISSOURI

This page is intentionally left blank.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI

UNIVERSITY OF MISSOURI BOARD OF CURATORS Thomas E. Atkins, President Angela M. Bennett, Vice President Marion H. Cairns John M. Carnahan III Anne C. Ream Doug Russell Cheryl D. S. Walker Don Walsworth David G. Wasinger Maria C. Curtis, Student Representative GENERAL OFFICERS Elson S. Floyd, President Marvin E. Wright, General Counsel John C. Gardner, Vice President for Research and Economic Development Steven Graham, Associate Vice President for Academic Affairs R. Kenneth Hutchinson, Vice President for Human Resources Stephen C. Knorr, Vice President for Government Relations Natalie Krawitz, Vice President for Finance and Administration James H. Ross, Chief Executive Officer of University of Missouri Health Care Brady Deaton, Chancellor, Columbia Campus Stephen W. Lehmkuhle, Interim Chancellor, Kansas City Campus John F. Carney III, Chancellor, Rolla Campus Thomas F. George, Chancellor, St. Louis Campus FINANCE STAFF Natalie Krawitz, Vice President for Finance and Administration Jane E. Closterman, Controller Shirley S. DeJamette, Treasurer Cuba Plain, Director Budget Planning and Development 200S FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI

-FOR THE YEARS ENDED JUNE 30, 200o AND 2004 The following Management's Discussion and Analysis ("MD&A") provides an overview of the financial position and activities of the University of Missouri (the "University") for the fiscal year ended June 30, 2005 and 2004, and should be read in conjunction with the financial statements and notes. This overview is required by Governmental Accounting Standards Board ("GASB") principles, GASB Statement No. 35, Basic Financial Statements - and Management's Discussion and Analysis -for Public Colleges and Universities.

UNIVERSITY ACCOUNTING AND FINANCIAL REPORTING This report includes five financial statements: the Statements of Net Assets, the Statements of Revenues, Expenses and Changes in Net Assets and the Statements of Cash Flows for the University of Missouri System and Aggregate Discretely Presented Component Units; and the Statements of Net Assets Held for Pension Benefits and the Statements of Changes in Net Assets Held for Pension Benefits for the University of Missouri Retirement Trust. The financial statements of the University are prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by GASB. A summary of significant accounting policies followed by the University is included in Note 1 to the financial statements of this report. A more detailed unaudited financial report that includes information on each campus is available at the University of Missouri, 118 University Hall, Columbia, MO 65211.

STATEMENTS OF NET ASSETS The Statements of Net Assets present the financial position of the University at the end of the fiscal year and include all assets and liabilities of the University. Assets and liabilities are generally measured using current values, with certain exceptions, such as capital assets which are stated at cost less accumulated depreciation, and long-term debt which is stated at cost. A summary of the University's assets, liabilities and net assets at June 30, 2005, 2004 and 2003, is as follows (in thousands of dollars):

Fiscal Year 2005 Fiscal Year 2004 Fiscal Year 2003 Assets:

Current Assets Long-Term Investments -

Endowed and Quasi-Endowed Investments Other Investments Capital Assets, Net Other Noncurrent Assets 816,846 596,448 660,794 Total Assets Liabilities:

Current Liabilities Noncurrent Liabilities Total Liabilities 744,372 387,926 1,795,513 86,702 3,831,359 404,328 622,997 1,027,325 1,226,962 555,658 335,469 685,945 2,804,034 3-831.359 709,227 504,110 1,700,324 70,806 3,580,915 370,280 631,587 1,001,867 1,147,472 484,370 305,656 641,550 2,579,048 3,580,915 633,939 336,935 1,542,432 77,870 3,251,970 377,931 517,975 895,906 1,074,585 421,521 317,398 5421,560 2,356,064 3,251,970 Net Assets:

Invested in Capital Assets, Net of Related Debt Restricted -

Nonexpendable Expendable Unrestricted Total Net Assets Total Liabilities and Net Assets 2

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI

CLI 6'FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004 Total Assets have increased by $250.4 million to $3.8 billion, which reflects the University's continued efforts to strengthen its capital position. This increase is primarily attributable to increases in the University's Current Assets discussed below, and the expansion of Capital Assets across all of the campuses. Net capital additions of $197.6 million are offset by $102.4 million in depreciation, resulting in a net change in Capital Assets of $95.2 million. Major additions to Capital Assets during the year are shown in the following table. Refer to additional information in Note 7.

MAJO EPNITUE REAE TO I

APITAL ASSET ADIIN CAPSCS SOURCE OF FUNDING

%LolumolDa:

Basketball Arena

$ 4,563,000 State Appropriations and Gifts Brewer Fieldhouse Renovation 18,357,000 Bond Proceeds Virginia Avenue Housing 2,625,000 Bond Proceeds Kansas City:

University Way

$ 3,076,000 Gifts Health Sciences 3,516,000 State Appropriations and Gifts Rolla:

Havener Center

$ 5,448,000 Bond Proceeds and Gifts Residence Hall 6,296,000 Bond Proceeds In Current Assets, the University held Cash and Cash Equivalents at the end of fiscal year 2005 of $341.0 million, an increase of $124.1 million from the prior year. The University's General Pool was more heavily weighted in short-term commercial paper as of June 30, 2005, than on June 30, 2004. State appropriation withholdings of $61.7 million were released by the State of Missouri at the end of the fiscal year and used to purchase short-term investments. The University's Balanced Pool Cash and Cash Equivalents also increased $33.0 million in preparation for the fiscal year 2006 annual distribution required by the Board of Curators spending policy as discussed in Note 2 of the financial statements.

Long-Term and Short-Term Investment holdings of $1.4 billion as of June 30, 2005, increased $7.3 million over the prior year. Long-Term Investments in the University's endowment funds, comprised primarily of Balanced and Fixed Income Pool, increased $35.1 million in fiscal year 2005 due to receipt of gifts and positive total returns in the pools.

The University's long-term investment in its general pool declined $25.1 million largely due to the University's purchase of short-term investments at the end of fiscal year 2005. Performance of the University's various investment pools for the year ended June 30, 2005, was as follows:

ASSET TOTAL IBENCHMARK DISTRIBUTION I RETURN INDEX RETURN General Pool 547,074,000 3.5%

2.2%

Balanced Pool 684,903,000 9.6%

11.0%

Fixed Income Pool 61,380,000 j 4.8%

7.3%

Other Investments 61,032,000 j N/A N/A Benchmark index returns are calculated by independent investment consultants based on returns of similar security portfolios.

In fiscal year 2005, heightened efforts to increase resources through fund raising continued on all four campuses. These increased efforts directly resulted in an increase in total Pledges Receivable (current and long-term) in fiscal year 2005 to $39.5 million from $24.0 million in the prior fiscal year.

2005 FINANCIAL REPORT: UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 3

FOR THE YEARS ENDED JUNE 30, 2003 AND 2004 Total Liabilities increased $25.5 million over the prior year. Significant changes in Current Liabilities include a

$20.4 million increase in Collateral for Securities on Loan from $61.2 million as of June 30, 2004, to $81.6 million as of June 30, 2005, and a $10.4 million increase in Accrued Liabilities primarily related to accrued self-insurance.

During fiscal year 2005, Bonds and Notes Payable, net of premium/discount and deferred losses on defeasance, decreased $11.1 million. Tbe following is a summary of the long-term debt by type of debt instrument (in thousands of dollars).

Fiscal Year Fiscal Year Fiscal Year 2005 2004 2003 System Facilities Revenue Bonds 400,025 408,295 297,210 Health Facilities Revenue Bonds 165,200 168,550 171,750 Notes Payable 273 Unamortized Premium/Discount and Loss on Defeasance 312 (171)

(3,968) 565,537 576,674 465,265 Capital Lease Obligations 10,171 10,532 10,864 575,708 587,206 476,129 The Net Assets of the University increased in total by $225.0 million, excluding any changes in the University of Missouri Retirement Trust. An explanation of these changes, based on the four net asset categories, is as follows:

" Invested in Capital Assets, Net of Related Debt, represents capital holdings, net of accumulated depreciation and outstanding debt financing related to the acquisition, construction or improvement of those assets. The increase of

$79.5 million to $1.23 billion is due to net additions to capital assets.

" Restricted Nonexpendable Net Assets are subject to externally imposed stipulations that they be maintained permanently by the University. This category of net assets represents the historical value (corpus) of gifts to the University's permanent endowment. The increase of $71.3 million over fiscal year 2004 to $555.7 million at fiscal year end 2005 is primarily a result of private funding for endowment purposes.

" Restricted Expendable Net Assets are subject to externally imposed stipulations governing their use. This category of net assets includes net assets restricted for operations and endowment purposes of $239.6 million, facilities of $20.2 million and student loan programs of $75.7 million. Restricted Expendable Net Assets increased $29.8 million over fiscal year 2004 to $335.5 million at fiscal year end 2005 primarily due to an increase in restricted gift income.

" Unrestricted Net Assets increased $44.4 million to $685.9 million at fiscal year end 2005. This category of net assets is not subject to externally imposed stipulations, although may be designated for specific purposes by action of management or the Board of Curators. Unrestricted Net Assets are used primarily for academics and general operation of the University and consist of $479.4 million for this purpose, as well as $81.3 million for capital projects and $3.4 million for student loan programs. In addition, Unrestricted Net Assets include funds functioning as endowment of $121.8 million.

200S FINANCIAL REPORT: UNIVERSITY OF MISSOURI 4

A COMPONENT UNIT OF THE STATE OF MISSOURI

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 The distribution of the Net Asset balances, including additional details on unrestricted net assets by fund type, as of June 30, 2005, are as follows:

University Loans 0.5%-

Current Plant Funds Restricted 69.9%

Nonexpendable Unrestricted 19.8%

24.5%

Invested in Capital Assets, Net of Related

.Endowment Debt

.17.7%

43.7%

Restricted Expendable 12.0%

1 TotalS$2.8 billion FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003 Total Assets increased $328.9 million to $3.6 billion as of June 30, 2004 compared to June 30, 2003, which reflected the University's continued efforts to strengthen its capital position. This increase was primarily attributable to the increase in the University's Long-Term Investments, and the expansion of Capital Assets across all of the campuses.

Net capital additions of $247.7 million were offset by $89.8 million in depreciation, resulting in a net change in Capital Assets of $157.9 million.

The University held Cash and Cash Equivalents at the end of fiscal year 2004 of $216.9 million, a decrease of $58.0 million from the prior year. The University's General Pool was more heavily weighted in short-term commercial paper on June 30, 2003 than on June 30, 2004. Accounts Receivable, net of $184.5 million, increased $35.9 million as of June 30, 2004, over the prior year. The increase was primarily due to the receipt of bond funds of $34.3 million from the State of Missouri for construction of the new sports arena on the Columbia campus.

Long-Term and Short-Term Investment holdings of $1.3 billion as of June 30, 2004, increased $228.9 million over the prior year. Long-Term Investments in the University's endowed funds, comprised primarily of a Balanced and Fixed Income Pool, increased $75.3 million in fiscal year 2004 due to receipt of gifts, as well as strong bond market performance and improving stock market performance.

Total Liabilities increased $106.0 million over the prior year. During fiscal year 2004, Bonds and Notes Payable, net of premium/discount and deferred losses on defeasance, increased $111.4 million as a result of a $155.2 million bond issuance. The bonds financed $118.1 million for capital expansion across all campuses, $37.1 million to defease a portion of existing bonds and to finance certain costs of issuance.

A significant change in current liabilities included a $26.2 million increase in Funds Held for Others. In January 2004, the University became custodian of approximately $13 million that was previously held in trust by a third party.

Another factor affecting the increase in Funds Held for Others was the increase in payroll withholding liabilities due to timing of collection of employer and employee premiums and the subsequent remittance of these funds to the applicable medical, dental and other employee-related programs. An offsetting decrease in liabilities included a decrease of $55.8 million in Investment Settlements Payable from $74.3 million as of June 30, 2003, to $18.5 million as of June 30, 2004. Purchases and sales of investments are accounted for on the trade date basis. The University records Investment Settlements Payable for purchases of investments occurring on or before June 30, which settle after such date.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 5

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 The Net Assets of the University increased in total by $223.0 million, excluding any changes in the University of Missouri Retirement Trust. An explanation of these changes, based on the four net asset categories, is as follows:

" Invested in Capital Assets, Net of Related Debt, represents capital holdings, net of accumulated depreciation and outstanding debt financing related to the acquisition, construction or improvement of those assets. The increase of

$72.9 million to $1.15 billion is due to net additions to capital assets offset by pay down of bonds outstanding.

" Restricted Nonexpendable Net Assets are subject to externally imposed stipulations that they be maintained permanently by the University. This category of net assets represents the historical value (corpus) of gifts to the University's permanent endowment. The increase of $62.8 million over fiscal year 2003 to $484.4 million at fiscal year end 2004 is primarily a result of private funding for endowment purposes and strong investment returns in the Balanced Pool.

" Restricted Expendable Net Assets are subject to externally imposed stipulations governing their use. This category of net assets includes net assets restricted for operations and endowment purposes of $200.6 million, facilities of $30.1 million and student loan programs of $75.0 million. Restricted Expendable Net Assets decreased $11.7 million from fiscal year 2003 to $305.7 million at fiscal year end 2004 resulting from spend down of prior year gifts restricted for capital expansion and the release of $13.4 million previously restricted for Health System debt covenant requirements.

• Unrestricted Net Assets increased $99.0 million to $641.6 million at fiscal year end 2004. This category of net assets is not subject to externally imposed stipulations, although may be designated for specific purposes by action of management or the Board of Curators. Unrestricted Net Assets are used primarily for academics and general operation of the University and consist of $391.0 million for this purpose, as well as $126.9 million for capital projects and $3.3 million for student loan programs. In addition, Unrestricted Net Assets include funds functioning as endowment of $120.4 million.

6 200S FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS The Statements of Revenues, Expenses and Changes in Net Assets present the University's results of operations. The Statements distinguish revenues and expenses between operating and nonoperating categories, and provide a view of the University's operating margin (in thousands of dollars).

Fiscal Year Fiscal Year Fiscal Year 2005 2004 2003 Operating Revenues:

Net Tuition and Fees Grants and Contracts Patient Medical Services Other Auxiliary Enterprises Other Operating Revenues Total Operating Revenues 355,516 293,885 566,394 236,217 80,797 1,532,809 1,214,209 596,395 133,197 1,943,801 311,778 259,092 492,229 214,621 65,401 1,343,121 1,133,772 516,766 115,529 1,766,067 273,419 259,268 425,700 192,465 65,106 1,215,958 1,059,342 473,874 111,452 1,644,668 Operating Expenses:

Salaries, Wages and Staff Benefits Supplies, Services and Other Operating Expenses Other Operating Expenses Total Operating Expenses Operating Loss (410,992)

(422,946)

(428,710)

Nonoperating Revenues (Expenses):

State Appropriations Investment and Endowment Income Private Gifts Other Nonoperating Revenues (Expenses)

Net Nonoperating Revenues Income before Capital Contributions and Additions to Permanent Endowments State Capital Appropriations and State Bond Funds Capital Gifts and Grants Private Gifts for Endowment Purposes 430,127 89,236 73,504 (8,982) 583,885 421,434 104,486 36,143 (10,627) 551,436 423,330 68,880 40,423 (6,779) 525,854 172,893 128,490 97,144 4,686 13,056 34,351 224,986 2,579,048

-$-2,804034 54,239 21,749 18,506 222,984 2,356,064

$ 2,579,048 13,584 30,239 20,254 161,221 2,194,843

$ 2,356,064 Increase in Net Assets Net Assets, Beginning of Year Net Assets, End of Year 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 7

2 4

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004 Total Operating Revenues increased $189.7 million over fiscal year 2004 to $1.5 billion in fiscal year 2005. This fluctuation is due to increases in tuition, patient medical services and revenues related to certain auxiliary operations.

Nonoperating Revenues include funding sources such as State Appropriations, State Bond Funds, Federal Appropriations and Gift and Investment Income. These sources are categorized under GASB standards as nonoperating because they are not generated as a result of the University's core missions of teaching, research and public service. The following is a graphic illustration of revenues by source, including both operating and nonoperating revenue streams for fiscal year 2005.

Auxiliary Sales and Services Federal and State Investment Enterprises of Educational Appropriations Income 52.3%

Activities and 68.2%

13.5%

Other Operating Revenues 5.3%

Federal, State Private and Net Tuition and Private Capital Gifts and Fees Grants and Contracts and Grants 23.2%

19.2%

18.3%

Total Operating Revenues $1.5 billion Total Nonoperating Revenues $660.7 million Tuition and Fees, net of Scholarship Allowances, which includes University resources used to reduce fees charged to students for related services, increased 14.0% or $43.7 million over fiscal year 2004. This was primarily due to Board-approved increases in undergraduate and graduate tuition and related enrollment fees of 7.5%.

As a research institution, the University receives a substantial amount of funding through Federal, State and Private Grants and Contracts. The University experienced growth in this revenue source of 13.4% from $259.1 million in fiscal year 2004 to $293.9 million in fiscal year 2005. Federal grant funding and State grant funding increased significantly in fiscal year 2005 with increases of 13.4% and 23.2%, respectively. Modest increases of 6.9% occurred in private grants and contracts.

Patient Medical Services, which includes fees for services provided by the University Hospitals and Clinics and related health care units ("UHC") and the University Physicians Practice Plan, increased $74.2 million or 15.1% over fiscal year 2004. Of this increase, $4.0 million relates to the operations of the University Physicians and $70.2 million relates to UHC.

Following two years of consecutive cuts, the University experienced an increase in fiscal year 2005 to its core appropriations from the State of Missouri, resulting in net State Appropriations of $430.1 million. In fiscal year 2004, the University's core appropriations were cut 5.5% with additional extraordinary withholdings of $9.7 million withheld from the State. Subsequently, the State of Missouri released the extraordinary withholdings throughout fiscal year 2004, resulting in net State Appropriations of $421.4 million in fiscal year 2004.

In fiscal year 2005, State Capital Appropriations and State Bond Funds of $4.7 million, consisting primarily of funding for the Health Sciences Center on the Kansas City campus, decreased $49.5 million from $54.2 million in fiscal year 2004. In fiscal year 2004, the State of Missouri released $34.3 million of bond funds for the new sports arena on the Columbia campus. The remaining State Capital Appropriations in fiscal year 2004 consisted primarily of funding for the Life Sciences Center on the Columbia campus, which opened in August 2004, and the Health Sciences Center in Kansas City.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 8

A COMPONENT UNIT OF THE STATE OF MISSOURI C

- L, -7

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 Private and Capital Gifts and Grants of $120.9 million in fiscal year 2005 increased $44.5 million compared to $76.4 million in fiscal year 2004, consisting of an increase in gift income of $43.2 million and an increase in capital grants of $1.3 million.

Gift income is reflected in three categories: Private Gifts, Capital Gifts (restricted for capital expansion) and Private Gifts for Endowments (restricted for the establishment of endowments). Total gifts to the University in fiscal year 2005 of $117.4 million increased $43.2 million compared to $74.2 million in the prior fiscal year. Noncapital private gifts of $107.8 million in fiscal year 2005 increased $53.2 million over the prior fiscal year due to increased focus by the campuses on capital campaigns. Offsetting decreases of $10.0 million in capital gifts in fiscal year 2005 were largely due to nonrecurring pledges in fiscal year 2004 for renovating various sports facilities.

Capital Grants of $3.5 million in fiscal year 2005 and $2.2 million in fiscal year 2004 represent funding received from Federal and State agencies to be used for the expansion of the University's physical plant. The increase of $1.3 million in fiscal year 2005 is primarily due to a new grant from the National Aeronautical Space Administration.

Investment and Endowment Income includes interest and dividend income as well as realized and unrealized gains and losses. Investment and Endowment Income decreased $15.3 million, from $104.5 million in fiscal year 2004 to

$89.2 million in fiscal year 2005. Contributing factors include a decline in the rate of return on the Balanced Pool from 17.4% in fiscal year 2004 to 9.6% in fiscal year 2005 due to lower domestic and international stock market returns in the current fiscal year compared to fiscal year 2004, and a decrease in realized and unrealized net gains of $22.7 million from $61.0 million in fiscal year 2004 to $38.3 million in fiscal year 2005.

Total Operating Expenses reflect a 10.1% or $177.7 million increase over fiscal year 2004. The following is a graphic illustration of total expenses by object of expenditure for fiscal year 2005:

Scholarships Depreciation and Fellowships 5.3%

Supplies',

1.6%

Services and Other 30.7%

30.7%Salaries and Wages Staff Benefits 50.8%

11.6%

Total Operating Expenses $1.9 billion During fiscal year 2005, Salaries and Wages increased approximately 7.4% over fiscal year 2004 primarily due to merit increases for employees effective September 2004. Staff Benefits showed a corresponding increase of 6.0%

year over year related to employer costs associated with the University's medical, dental and life premiums, as well as retirement contributions.

The University's expenses related to Supplies, Services and Other Operating costs increased by 15.4% or $79.6 million to $596.4 million in fiscal year 2005, compared to $516.8 million in fiscal year 2004. Increased patient care operating costs at the UHC directly correlated with UHC's increase in services and patient care revenue, account for $42.0 million of this increase. Increases in costs of goods sold account for $6.7 million of the increase, which relates directly to the increase in auxiliary revenue. In addition, the University has seen an increase in costs related to maintenance, repair and replacement of certain components in its infrastructure and physical plant. These maintenance, repair and replacement costs, which do not meet the University's capitalization limit of $5,000, accounted for approximately $7.4 million in additional costs over fiscal year 2004.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 9

rr7 FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 In addition to their natural classification, it is also informative to review operating expenses by function. The following graphic illustration presents total expenses by function for fiscal year 2005.

Institutional Support Operation and Maintenance of Plant 4.9%

2.9%

Student Services Scholarships and Fellowships 3.4%

1.6%

Academic Support Depreciation 5.7%

5.3%

Public Service Auxiliary Enterprises 7.3%

36.8%

Research Instruction 10.3%

21.8%

STtal Operating Expenses $1.9 billion FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003 Tuition and Fees, net of Scholarship Allowances, which include University resources used to reduce fees charged to students for related services, increased 14.0% or $38.4 million over fiscal year 2003. This was attributable to increases in enrollment of 1.9% and increases in undergraduate and graduate educational fees of 3.2% plus $27 per credit hour.

As a research institution, the University receives a substantial amount of funding through Federal, State and Private Grants and Contracts. Overall, grant funding remained approximately the same year over year at $259.1 million in fiscal year 2004 compared to $259.3 million in fiscal year 2003. Small increases in private grants and contracts were offset by small decreases in Federal and State grant funding.

Patient Medical Services, which include services provided by the UHC and related health care units and the University Physicians Practice Plan, increased $66.5 million or 15.6% over fiscal year 2003. Of this increase, $5.1 million related to the operations of the University Physicians, with $61.4 million related to UHC.

In fiscal year 2003, the University experienced a 10% cut of $50.5 million to its core appropriations for the State of Missouri plus extraordinary withholdings of $28.3 million, resulting in net State Appropriations received of $423.3 million. In fiscal year 2004, the University experienced a further cut of 5.5% to its core appropriations. Additional withholdings of $9.7 million were subsequently released throughout fiscal year 2004, resulting in net State Appropriations of $421.4 million, a slight decrease from fiscal year 2003. State Capital Appropriations and State Bond Funds increased $40.6 million to $54.2 million in fiscal year 2004 due to the release of $34.3 million of state bond funds for the new sport arena on the Columbia campus. The remaining State Capital Appropriations related primarily to funding of the Life Sciences Center on the Columbia campus and the Health Sciences Center on the Kansas City campus.

Gift income is reflected in three categories: Private Gifts, Capital Gifts (restricted for capital expansion) and Private Gifts for Endowments (restricted for the establishment of endowments). Total gifts to the University in fiscal year 2004 of $74.2 million were approximately equal to $74.3 million in the prior fiscal year. Noncapital private gifts decreased $6.0 million or 9.9%. Capital Gifts increased $5.9 million largely related to a large pledge for a sports park on the Columbia campus; offset by a single gift of $6.7 million in land received in fiscal year 2003.

Capital Grants of $2.2 million in fiscal year 2004 and $16.6 million in fiscal year 2003 represented funding received from Federal and State agencies to be used for the expansion of the University's physical plant. The decrease of $14.4 million in fiscal year 2004 was the direct result of the completion of the Life Sciences Building on the Columbia campus, which was partially funded through federal grants.

Investment and Endowment Income includes interest and dividend income as well as realized and unrealized gains and losses. Investment and Endowment Income increased $35.6 million, from $68.9 million in fiscal year 2003 to 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 10 A

COMPONENT UNIT OF THE STATE OF MISSOURI

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fg~,ss~m na'

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(Ww4"Wla.)k4 I

~FOR THlE YEARS ENDED JUNE 30.,2005 AND 2004

$104.5 million in fiscal year 2004. The market continued to improve in fiscal year 2004, which resulted in increases in market values of investments and the recording of realized and unrealized net gains in the amount of $61.0 million, an improvement of $36.0 million over the realized and unrealized gains of $25.0 million recorded in fiscal year 2003.

Total Operating Expenses reflected a 7.4% or $121.4 million increase over fiscal year 2003, as discussed below.

During fiscal year 2004, Salaries and Wages increased approximately 3.0% over fiscal year 2003 primarily due to merit increases for employees effective September 2003. Staff Benefits showed a significant increase of 28.3% year over year due to increases in the employer costs associated with the University's medical, dental and life premiums, as well as retirement contributions.

The University's expenses related to Supplies, Services and Other Operating costs increased by 9.1% or $42.9 million, to $516.8 million in fiscal year 2004, compared to $473.9 million in fiscal year 2003. A considerable portion of this increase related to increased patient care operating costs at the UHC which was directly correlated with UHC's increase in services and patient care revenue. In addition, the University has seen an increase in costs related to maintenance, repair and replacement of certain components in its infrastructure and physical plant. These maintenance, repair and replacement costs, which do not meet the University's capitalization limit of $5,000, accounted for approximately $15.4 million in additional costs over fiscal year 2003. The increase in non-patient care operating costs was approximately 7% year over year.

STATEMENTS OF CASH FLOWS The Statements of Cash Flows provide information about the University's sources and uses of cash and cash equivalents during the fiscal year. The following summarizes sources and uses of cash and cash equivalents into the four categories defined by GASB for the three years ended June 30, 2005 (in thousands of dollars):

Fiscal Year Fiscal Year Fiscal Year 2005 2004 2003 Net Cash Used in Operating Activities (298,894)

(334,212)

(303,796)

Net Cash Provided by Noncapital Financing Activities 538,505 486,553 480,681 Net Cash Used in Capital and Related Financing Activities (215,103)

(92,891)

(179,437)

Net Cash Provided by (Used in) Investing Activities 99,628 (117,442)

(2,8 Net Increase (Decrease) in Cash and Cash Equivalents 124,136 (57,992)

(30,941)

Cash and Cash Equivalents, Beginning of Year 216,863 274,855 305,796 Cash and Cash Equivalents, End of Year 340,999 216,863 274,855 FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004 Net Cash Used in Operating Activities reflects the continued need for funding from the State of Missouri, as funding received from tuition and fees and related sales and services of auxiliary and educational activities are not sufficient to cover operational needs. Cash used in operating activities decreased $35.3 million from $334.2 million in fiscal year 2004 to $298.9 million in fiscal year 2005. This decrease in the use of cash was impacted by increases in operating revenues such as tuition and fees, patient care revenues and federal, state and private grant revenue.

The University's most significant source of cash, Net Cash Provided by Noncapital Financing Activities, includes funds provided by State and Federal appropriations and noncapital private gifts. This funding source of $538.5 million for fiscal year 2005 and $486.6 million for fiscal year 2004 directly offsets uses of funds.

Net Cash Used in Capital and Related Financing Activities increased $122.2 million from $92.9 million in fiscal year 2004 to $215.1 million in fiscal year 2005. The University did not issue new bonds in fiscal year 2005 to offset funds used for capital expansion across all campuses. Proceeds used in net capital additions decreased $45.7 million in fiscal year 2005 to $202.0 million from $247.7 in fiscal year 2004.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THlE STATE OF MISSOURI 1

a

'-I

/

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 Net Cash Provided by (Used In) Investing Activities increased $217.1 million from $(117.5) million in fiscal year 2004 to $99.6 million in fiscal year 2005. The University's investment pool was more heavily weighted in short-term investments as of June 30, 2005, as a result of year-end cash flows. These funds were not used to purchase long-term investments at that time.

FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003 Net Cash Used in Operating Activities reflects the continued need for funding from the State of Missouri, as funding received from tuition and fees and related sales and services of auxiliary and educational activities are not sufficient to cover operational needs. Cash used in operating activities increased $30.4 million from $303.8 million in fiscal year 2003 to $334.2 million in fiscal year 2004. This increase in the use of cash was impacted by increases in employee-related payments, principally benefit costs, and operational payments to suppliers. Offsetting operating sources of cash included increases in tuition and fees and patient care revenues.

The University's most significant source of cash, Net Cash Provided by Noncapital Financing Activities, includes funds provided by State and Federal appropriations and noncapital private gifts. This funding source of $486.6 million for fiscal year 2004 and $480.7 million for fiscal year 2003 directly offset uses of funds.

Net Cash Used in Capital and Related Financing Activities decreased $86.5 million from $179.4 million in fiscal year 2003 to $92.9 million in fiscal year 2004. The University received proceeds of $158.1 million from issuance of System Facilities Revenue Bonds in fiscal year 2004. Proceeds from issuance of the bonds were used to advance refund and defease existing bonds in the amount of $36.4 million. No new bonds were issued in fiscal year 2003. Proceeds used in net capital additions increased $62.6 million in fiscal year 2004 to $247.7 million from $185.1 in fiscal year 2003 primarily due to continued expansion of capital assets across all campuses.

Net Cash Used in Investing Activities was $117.5 million in fiscal year 2004 versus $28.4 million in fiscal year 2003, an increase of $89.1 million. The University's Long-Term Investments increased significantly in fiscal year 2004 as a result of investment of proceeds from the issuance of bonds and positive total returns experienced in fiscal year 2004.

ECONOMIC OUTLOOK The University of Missouri continues to strengthen its financial position through positive operating results and to provide quality service to students, patients and citizens across the state of Missouri. Improvements in the state's economic condition and the related increases in tax receipts resulted in a 3.1% increase in the University's core operating appropriation in fiscal year 2005 after three years of extraordinary withholdings and appropriation reductions. For fiscal year 2006, efforts to bring structural balance to the state's budget and end the state's dependence on one-time funds resulted in no increase in appropriations for higher education. However, because of the growth in state revenues, the University anticipates no mid-year reductions and is mildly optimistic about future increases in state funding.

Fiscal year 2005 was the second year in a row where tuition and fees surpassed state appropriations as the largest source of non-healthcare operating revenues. This is projected to continue in fiscal year 2006 and beyond. The 3.5%

increase in tuition for fiscal year 2006 is the lowest in three years; but, continued enrollment growth on all four campuses has contributed to the University's ability to balance the budget despite flat state support. Both headcount and full-time equivalent enrollment reached historic highs in fall 2004 and again in fall 2005. The University of Missouri, as the state's research and land-grant institution of higher education, enrolls the state's top students. With the goal of addressing the issue of access and affordability, University of Missouri President Elson Floyd has initiated a statewide discussion of guaranteed tuition for undergraduates as a means of providing cost predictability to students and their families.

Increases in mandatory expenses such as health care benefits, retirement contributions, utilities and insurance, in conjunction with flat state support and rising enrollments, have created a budgetary challenge for the University. To meet this challenge, the University has implemented a variety of initiatives to reduce and/or contain costs in such areas as strategic procurement and pharmacy benefits. As a result, over the five-year period from fiscal year 2001 through fiscal year 2005, unrestricted expenditures per full-time equivalent student have increased only 5.6%, or 1.4% annually.

12 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI

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T HE YEARS ENDED JUNE 30. 200S AND 2004 When adjusted for inflation, total expenditures over five years decreased 3.5%. We expect this trend to continue in fiscal year 2006.

The University of Missouri Health System continues to improve its financial position ending fiscal year 2005 with a 6.3% excess margin providing approximately $30 million for capital projects and other initiatives. This improved performance was reflected in the change in the credit outlook from negative to positive by Moody's Investor Services in April 2005. In fiscal year 2006, the Health System must manage the financial impact of reductions in the state Medicaid program. The record hiring of specialty physicians and continuing increases in patient census, surgical volumes and deliveries are projected to bolster performance.

The University continues to strengthen and diversify its funding sources through effective endowment management, increased private giving and record high external research funding. The University of Missouri-Columbia campus recently announced that it was extending its capital campaign goal to $1.0 billion after reaching the original goal of

$600 million six months early. External research funding is at an all time high with a 20% increase in Federal funding on the Columbia campus. With the addition of economic development as a fourth mission of the University, President Elson Floyd recently appointed a vice president for research and economic development to foster partnerships with the state of Missouri and the private sector in support of economic initiatives that build on the University's research strength.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE Of MISSOURI 13

KPMG LLP Suite 900 10 South Broadway St. Louis. MO 63102-1761 Independent Auditors' Report To the Board of Curators University of Missouri:

We have audited the accompanying financial statements of the business-type activities, the aggregate discretely presented component units, and the University of Missouri Retirement Trust of the University of Missouri, a component unit of the State of Missouri, as of and for the year ended June 30, 2005, which collectively comprise the University of Missouri's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the University of Missouri's management.

Our responsibility is to express opinions on these financial statements based on our audit. The accompanying basic financial statements of the University of Missouri as of and for the year ended June 30, 2004 were audited by other auditors whose report dated October 26, 2004, except for notes 13 and 19 to the 2004 basic financial statements as to which the date was December 15, 2005, on those basic financial statements included an explanatory paragraph that referred to the restatement of the 2004 basic financial statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University of Missouri's internal control over financial reporting.

Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

In our opinion, the 2005 financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities, the aggregate discretely presented component units, and the University of Missouri Retirement Trust of the University of Missouri as of June 30, 2005, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As described in note 1, effective July 1, 2004, the University of Missouri implemented Governmental Accounting Standards Board Statement No. 40, Deposit and Investment Risk Disclosures, an amendment of GASB Statement No. 3.

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2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 14 A

COMPONENT UNIT OF THE STATE OF MISSOURI

In accordance with Government Auditing Standards, we have also issued our report dated December 22, 2005 on our consideration of the University of Missouri's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

The Management's Discussion and Analysis on pages 2 through 13, the Schedule of Employer Contributions on page 45, and the Schedule of Funding Progress on page 46 are not required parts of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

K'Pfr(G LcP St. Louis, Missouri December 22, 2005 2003 FINANCIAL REPORT: UNIVERSITY OF MISSOURI A

COMPONENT UNIT OF THE STATE OF MISSOURI 115

• ?Y9 t~demen1s ~'txJdJIkJd4 AS Of JUNE 30, 2005 AND 2004 (in thousands of dollars)

University Discretely Presented Component Units 2005 2004 2005 2004 Assets Current Assets:

Cash and Cash Equivalents Restricted Cash and Cash Equivalents Short-Term Investments Restricted Short-Term Investments Accounts Receivable, Net Pledges Receivable, Net Investment Settlements Receivable Notes Receivable, Net Due From (To) Component Units and Retirement Inventories Prepaid Expenses and Other Current Assets Total Current Assets 131,614 209,385 95,309 126,782 185,206 10,489 6,373 10,301 (2,616) 29,872 78,753 138,110 64,577 69,138 184,488 7,714 5,480 10,702 (2,777) 27,189 S

8,053 8,456 22,470 22,167 2,612 2,232 2,701 2,545 14,131 13,074 1,120 976 816,846 596,448 36,487 36,845 Noncurrent Assets:

Restricted Cash and Cash Equivalents Pledges Receivable, Net Notes Receivable, Net Deferred Charges and Other Assets Restricted Other Assets Long-Term Investments Restricted Long-Term Investments Depreciable Capital Assets, Net Nondepreciable Capital Assets Total Noncurrent Assets Total Assets 9,416 4,874 28,983 46,252 11,467 485,917 646,381 1,600,789 194,724 3,014,513 3.831359 16,271 43,216 11,319 585,976 627,361 1,434,244 266,080 2,984,467 3,580,915 1,310 1,640 34,626 45,353 21,214 113,559 150,046 1,329 39,613 47,785 9,284 102,885 139,730 Liabilities Current Liabilities:

Accounts Payable Accrued Liabilities Deferred Revenue Funds Held for Others Investment Settlements Payable Collateral for Securities on Loan Capital Lease Obligations Bonds and Notes Payable Total Current Liabilities Noncurrent Liabilities:

Capital Lease Obligations Bonds and Notes Payable Deferred Revenue Other Noncurrent Liabilities Total Noncurrent Liabilities Total Liabilities 91,834 103,974 35,179 61,683 16,170 81,611 392 13,485 404,328 9,779 552,052 2,908 58,258 622,997 1,027,325 88,348 93,570 36,489 60,201 18,495 61,196 361 11,620 370,280 10,171 565,054 2,677 53,685 631,587 1,001,867 5,434 18,233 112 870 24,649 95 38,895 38,990 63,639 4,060 16,947 102 480 21,589 189 39,765 39,954 61,543 (continued) 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 16

I AS OF IUNE 30, 200S AND 2004 Discretely Presented University Component Units 2005 2004 2005 2004 Net Assets Invested in Capital Assets, Net of Related Debt Restricted:

Nonexpendable -

Endowment Expendable -

Scholarships, Research, Instruction and Other Loans Capital Projects Unrestricted Total Net Assets 1,226,962 555,658 239,585 75,670 20,214 685,945 2,804,034 1,147,472 484,370 27,199 17,260 200,641 1,640 74,964 30,051 641,550 57,568 2,579,048 86,407 4,875 56,052 78,187 Total Liabilities and Net Assets 3,831359 3.580.915 150,046 139,730 See notes to the financial statements.

200S FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 17

This page is intentionally left blank.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 18

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 (in thousands of dollars)

University Discretely Presented Component Units 2005 2004 Operating Revenues:

Tuition and Fees (Net of Provision for Doubtful Accounts of $4,609 in 2005 and $4,858 in 2004)

Less: Scholarship Allowances Net Tuition and Fees Federal Grants and Contracts State and Local Grants and Contracts Private Grants and Contracts Sales and Services of Educational Activities Auxiliary Enterprises -

Patient Medical Services, Net Housing and Dining Services (Net of Scholarship Allowance of $490 in 2005 and $389 in 2004)

Bookstores Other Auxiliary Enterprises (Net of Scholarship Allowance of $5,472 in 2005 and $4,394 in 2004)

Notes Receivable Interest Income, Net of Fees Other Operating Revenues Total Operating Revenues Operating Expenses:

Salaries and Wages Staff Benefits Supplies, Services and Other Operating Expenses Scholarships and Fellowships Depreciation Total Operating Expenses Operating Income (Loss)

State Appropriations Income after State Appropriations, before Nonoperating Revenues (Expenses)

Nonoperating Revenues (Expenses):

Federal Appropriations Investment and Endowment Income, Net of Fees Private Gifts Interest Expense Other Nonoperating Revenues (Expenses)

Net Nonoperating Revenues (Expenses) 2005 471,240 115,724 355,516 193,473 43,638 56,774 17,920 566,394 57,730 50,422 128,065 855 62,022 1,532,809 987,240 226,969 596,395 30,783 102,414 1,943,801 2004 428,162 116,384 311,778 170,542 35,434 53,116 16,640 492,229 53,462 44,373 116,786 1,580 47,181 1,343,121 919,594 214,178 516,766 25,755 89,774 1,766,067 160,947 153,762 160,947 153,762 46,952 12,018 87,365 44,246 10,692 87,362 7,758 7,296 154,093 149,596 (410,992)

(422,946) 430,127 421,434 6,854 4,166 19,135 (1,512D 6,854 15,776 89,236 73,504 (23,497)

(1,261) 14,602 104,486 36,143 (23,785)

(1,444) 1,024 42 (1,340) 1,640 4,166 300 203 (1,236)

(733) 153,758 130,002 1,366 Income before Capital Contributions and Additions to Permanent Endowments 172,893 128,490 8,220 3,433 State Capital Appropriations and State Bond Funds Capital Gifts and Grants Private Gifts for Endowment Purposes Increase in Net Assets 4,686 13,056 34,351 224,986 54,239 21,749 18,506 222,984 8,220 3,433 Net Assets, Beginning of Year Net Assets, End of Year See notes to the financial statements.

2,579,048 2,356,064 78,187 74,754 2,804,034 2,579,048 86,407 78,187 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 19

lidetnent ledP/

Cash Flows from Operating Activities:

Tuition and Fees Federal, State and Private Grants and Contracts Sales and Services of Educational Activities and Other Auxiliaries Patient Care Revenues Student Housing Fees Bookstore Collections Payments to Suppliers Payments to Employees Payments for Benefits Payments for Scholarships and Fellowships Student Loans Issued Student Loans Collected Student Loan Interest and Fees Other Receipts, Net FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 (in thousands of dollars) 2005 2004

$ 336,011 S 321,506 288,307 271,356 174,492 130,647 558,141 479,750 57,732 53,867 50,058 44,126 (584,618)

(515,431)

(981,507)

(922,159)

(226,969)

(214,178)

(30,783)

(25,755)

(16,718)

(14,487) 13,778 13,813 1,160 1,153 62,022 41[58 Net Cash Used in Operating Activities Cash Flows from Noncapital Financing Activities:

State Appropriations Federal Appropriations Private Gifts Endowment and Similar Funds Gifts Other Payments Deposits of Affiliates Net Cash Provided by Noncapital Financing Activities Cash Flows from Capital and Related Financing Activities:

Capital State Appropriations Capital Gifts and Grants Proceeds from Sales of Capital Assets Purchase of Capital Assets Proceeds from Issuance of Capital Debt, Net Principal Payments on Capital Debt Proceeds from Capital Project Notes Payments on Capital Lease Escrow Deposit on Defeasance Payments on Cost of Debt Issuance Interest Payments on Capital Debt Net Cash Used in Capital and Related Financing Activities Cash Flows from Investing Activities:

Interest and Dividends on Investments Purchase of Investments, Net of Sales and Maturities Other Investing Actitities Net Cash Provided by (Used in) Investing Activities Net Increase (Decrease) in Cash and Cash Equivalents (298,894) 430,141 15,776 58,016 34,351 (1,261)

(334,212) 421,460 14,602 7,243 18,506 (1,444) 486,553 7,377 18,641 13,056 45,067 9,525 3,138 (211,567)

(250,880) 159,267 (11,620)

(10,773) 1,600 3,360 (361)

(332)

(37,346)

(821)

(23,113)

(22,212)

(215,103) 51,598 48,190 (160)

(92,891) 56,424 (176,643)

(117,442)

(57,992) 274,855

$ 216,863 124,136 Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year 216,863

$4 30999ý (continued) 20 200S FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI

6akm,~n/s FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 (in thousands of dollars)

Reconciliation of Operating Loss Used in Operating Activities:

Operating Loss Adjustments to Net Cash Used in Operating Activities -

Depreciation Expense Changes in Assets and Liabilities:

Accounts Receivable, Net Inventory, Prepaid Expenses and Other Assets Notes Receivable Accounts Payable Accrued Liabilities Deferred Revenue 2005 2004

$ (410,992)

$ (422,946) 102,414 (3,422) 699 (2,635) 1,884 14,927 (1,769) 89,774 (363)

(1,230)

(1,101)

(12,374) 7,980 6,048 Net Cash Used in Operating Activities Supplemental Disclosure of Noncash Activities:

Gifts of Noncash Assets and Capital Assets Net Increase in Fair Value of Investments

$ (298,894)

-$ (34,212)

(6,447) 5,600 23.400 See notes to the financial statements.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 21

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£7e$ ok f~

(-Aen Assets Cash and Cash Equivalents Collateral for Securities Lending Due from the University of Missouri System Investment Settlements Receivable Investments:

Government Obligations Corporate Bonds and Notes Corporate Stocks Other Total Assets Liabilities Accounts Payable and Accrued Liabilities Collateral for Securities Lending Investment Settlements Payables Total Liabilities Net Assets Held for Pension Benefits AS OF JUNE 30, 2005 AND 2004 (in thousands of dollars) 2005 2004 50,039 173,580 4

22,594 301,689 109,375 1,783,813 33,282 2,474,376 2,228 173,580 53,255 229,063

$ 2,245,313 41,955 149,917 76 16,647 292,881 108,304 1,333,402 351,264 2,294,446 1,768 149,917 61,236 212,921

$ 2.081.525 lalemeulso 1

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4al, MPewtjso 66eneA FOR THE YEA

.5 ENDED JUNE 30, 2005 AND 2004 (in thousands of dollars) 2005 2004 Net Revenues and Other Additions Investment Income:

Interest and Dividend Income, Net of Fees Net Appreciation in Fair Value of Investments Net Investment Income University Contribution Total Net Revenues and Other Additions Expenses and Other Deductions Administrative Expenses Payments to Retirees and Beneficiaries Total Expenses and Other Deductions Increase in Net Assets Held for Pension Benefits Net Assets Held for Pension Benefits, Beginning of Year Net Assets Held for Pension Benefits, End of Year 41,423 177,105 218,528 49,075 267,603 1,457 102,358 103,815 163,788 2,081,525 2,245,313 26,929 298,720 325,649 48,521 374,170 1,363 100,185 101,548 272,622 1,808,903

$ 2,081,525 See notes to the financial statements.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 22

FOR THE YEARS ENDED IUNE 30, 2005 AND 2004

1.

ORGANIZATION AND

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES UNIVERSITY OF MISSOURI Organization - The University of Missouri (the "University"), a Federal land grant institution, conducts education, research and public service and related activities principally at its four campuses in Columbia, Kansas City, Rolla and St. Louis, which include the University of Missouri Hospitals and Clinics and related health care facilities. The University also administers a statewide cooperative extension service with centers located in each county in the State.

The University is a component unit of the State of Missouri (the "State") and is governed by an appointed nine-member Board of Curators.

Reporting Entity-As defined by generally accepted accounting principles established by the Governmental Accounting Standards Board ("GASB"), the financial reporting entity consists of the primary government and its component units.

Component units are legally separate organizations for which the primary government is financially accountable or the nature and significance of their relationships with the primary government are such that exclusion would cause the primary government's financial statements to be misleading or incomplete.

The following entities are considered component units of the University according to the criteria in GASB Statement No. 14, The Financial Reporting Entity and are discretely presented in the University's financial statements.

The University of Missouri-Columbia Medical Alliance (the "Medical Alliance"), a not-for-profit corporation, provides an integrated health care delivery system for mid-Missouri by establishing affiliations with various medical facilities. Capital Region Medical Center ("CRMC") in Jefferson City, Missouri, operates as an affiliate of the Medical Alliance and provides inpatient, outpatient and emergency care services to the surrounding community.

CRMC is a discretely presented component unit of the Medical Alliance and CRMC is a not-for-profit organization that follows generally accepted accounting principles under the Financial Accounting Standards Board ("FASB").

The purpose of the Medical Alliance is to develop a network of healthcare providers to support the missions of the University of Missouri Healthcare. The University appoints the Board of Directors of the Medical Alliance and can impose its will on the organization.

Missouri Care L.C. is a not-for-profit health maintenance organization which provides services to patients in central Missouri under a certification from the Missouri Department of Social Services. Missouri Care L.C. has contracted with the University of Missouri Healthcare System as a major provider of health care services to the organization's members. Missouri Care L.C. is organized exclusively for charitable purposes, in particular, to benefit its sole member, the Curators of the University of Missouri. The University appoints the Board of Directors of Missouri Care L.C. and can impose its will on the organization.

Complete financial statements for Missouri Care L.C. are available at the University of Missouri, 118 University Hall, Columbia, MO 65211. Financial statements for Medical Alliance are not available.

The University operates the University of Missouri Retirement, Disability and Death Benefit Plan (the "Plan"), which is a single employer, defined benefit plan. The assets of the Plan are held in trust and are restricted for use only to pay for benefits and expenses of the Plan. The Plan is reported as a fiduciary fund of the University.

Financial Statement Presentation -In accordance with GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the University is required to follow all applicable GASB pronouncements. In addition, the University applies all applicable FASB Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30, 1989, except those that conflict with a GASB pronouncement. The University has elected not to apply FASB pronouncements issued after November 30, 1989.

The University has adopted GASB Statement No. 35, Basic Financial Statement-and Management's Discussion and Analysis-for Public Colleges and Universities, as amended by GASB Statements No. 37 and No. 38. GASB Statement No. 35 establishes standards for external financial reporting for public colleges and universities. The financial statement 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 23

FOR THE YEARS ENDED JUNE 3.,

2005 AND 1004 presentation provides a comprehensive entity-wide perspective of the University's net assets, revenues, expenses and changes in net assets and cash flows replacing the fund-group perspective previously required.

Effective July 1, 2004, the University has adopted GASB Statement No. 40, Deposit and Investment Risk Disclosures

- an amendment of GASB Statement No. 3. The statement modifies certain disclosure requirements of GASB Statement No. 3.

Basis of Accounting - The University's financial statements have been prepared using the economic resource focus and the accrual basis. The University reports as a Business Type Activity, as defined by GASB Statement No. 34.

Business Type Activities are those that are financed in whole or in part by funds received from external parties for goods or services.

The University's policy for defining operating activities as reported on the Statements of Revenues, Expenses and Changes in Net Assets are those that generally result from exchange transactions such as payments received for providing services and payments made for services or goods received. Nearly all the University's expenses are from exchange transactions. Certain significant revenue streams relied upon for operations are recorded as nonoperating revenue as defined by GASB Statement No. 34. Nonoperating revenues include revenues from activities that have the characteristics of nonexchange transactions, such as State and Federal appropriations and investment income.

The University of Missouri Retirement Trust is a pension trust fund which accounts for the activity of the University of Missouri Retirement, Disability, and Death Benefit Plan. The financial statements of the trust fund have been prepared using the accrual basis of accounting.

Cash, Cash Equivalents and Investments - Cash and cash equivalents consist of the University's bank deposits and investments with original maturities of three months or less. Investment assets are carried at fair value based primarily on market quotations. Purchases and sales of investments are accounted for on the trade date basis. Investment settlements receivable and investment settlements payable represent investment transactions occurring on or before June 30, which settle after such date. Investment income is recorded on the accrual basis. Net unrealized gains (losses) are included in investment and endowment income in the Statements of Revenues, Expenses and Changes in Net Assets. Derivative instruments such as forward foreign currency contracts are recorded at fair value. The University enters into forward foreign currency contracts to reduce the risk related to fluctuations in currency exchange rates in their international investments. These contracts are marked to market and the changes in their market value are recorded in investment and endowment income on the Statements of Revenues, Expenses and Changes in Net Assets.

Pledges Receivable - The University receives unconditional promises to give (pledges) through private donations from corporations, alumni and various other supporters of the University. Revenue is recognized when a pledge is received and all eligibility requirements, including time requirements, are met. These pledges have been recorded as pledges receivable on the Statements of Net Assets and as private gift revenue on the Statements of Revenues, Expenses and Changes in Net Assets, at the present value of the estimated future cash flows. An allowance of $4,102,000 and

$6,251,000 as of June 30,2005 and 2004 has been made for uncollectible pledges based upon management's expectations regarding the collection of the pledges and the University's historical collection experience.

Inventories - These assets are stated at the lower of cost or market. Cost is determined on an average cost basis, with the exception of the University Hospitals and Clinics inventories, where cost is determined using the first-in, first-out method.

Capital Assets - These assets are carried, if purchased, at cost or, if donated, at fair value at date of gift. Depreciation expense is computed using the straight-line method over the estimated useful lives of the respective assets - generally ten to forty years for buildings and improvements, eight to twenty-five years for infrastructure, seven to fifteen years for equipment and twenty years for library materials. Net interest expense incurred during the construction of debt-financed facilities is included in the capitalization of the related facilities. The University has capitalized works of art and continues to add to these collections. As these collections generally consist of historical artifacts and artworks, they are considered inexhaustible, as well as land, and have not been subject to depreciation. The University does not capitalize collections of historical treasures held for public exhibition, education, research and public service. These collections are not disposed of for financial gain. Accordingly, such collections are not recognized or capitalized for 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 24 A

COMPONENT UNIT OF THE STATE OF MISSOURI

C/

oles em~el5"%nealW#kmn FOR Tile YEARS ENDED JUNE 30.

2005 AND 2004 financial statement purposes. Proceeds from the sale, exchange, or other disposal of any item belonging to a collection of historical treasures must be applied to the acquisition of additional items for the same collection.

Deferred Revenue - Deferred revenues include amounts received for tuition and fees and certain auxiliary activities prior to the end of the fiscal year but related to the subsequent accounting period. Deferred revenues also include amounts received from grant and contract sponsors that have not yet been earned.

Net Assets - The University's net assets are classified for financial reporting in the following net asset categories:

• Invested in capital assets, net of related debt: This component of net assets includes capital assets, net of accumulated depreciation and outstanding principal debt balances related to the acquisition, construction or improvement of those assets.

" Restricted:

Nonexpendable - Net assets subject to externally imposed stipulations that they be maintained permanently by the University. Such assets include the University's permanent endowment funds. The University's policy permits any realized and unrealized appreciation on the endowments to remain with the endowment after the 5% spending distribution discussed in Note 3.

Expendable - Net assets whose use by the University is subject to externally imposed stipulations that can be fulfilled by actions of the University pursuant to those stipulations or that expire by the passage of time.

" Unrestricted: Net assets that are not subject to externally imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of management or the Board of Curators. When an expense is incurred that can be paid using either restricted or unrestricted resources, the University's policy is to first apply the expense towards restricted resources, and then towards unrestricted resources. Unrestricted net assets are used for expenses for academics and general operation of the University.

Scholarship Allowance - Tuition and fees and related housing, dining and other auxiliary enterprises revenues are presented net of scholarships and fellowships applied to student accounts, while scholarships, fellowships and other payments made directly to students are presented as scholarship and fellowship expenses.

Patient Medical Services, Net - Patient medical services revenues are reported net of contractual allowances and bad debt. Patient medical services are primarily provided through University of Missouri Hospitals and Clinics, Ellis Fischel Cancer Research Center, Columbia Regional Hospital, Missouri Rehabilitation Center and University Physicians (collectively, the "University of Missouri Healthcare").

The University of Missouri Healthcare has agreements with third-party payors that provide for payments at amounts different from established rates. Payment arrangements include prospectively determined rates perdischarge, reimbursed costs, discount charges and per diem payments. Patient medical services revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as estimates are refined and final settlements are determined. Patient medical services revenue is also shown net of estimated uncollectible accounts.

Amounts receivable under Medicare and Medicaid reimbursements agreements are subject to examination and certain retroactive adjustments by the related programs. These adjustments increased net patient services revenues by

$5,518,000 and $4,001,000 for the years ended June 30, 2005 and 2004, respectively.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 25

m*ed 40 FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 A percentage breakdown of gross patient accounts receivable by major payer classification of the University of Missouri Healthcare for the years ended June 30, 2005 and 2004, is as follows:

2005 2004 Medicare 29%

22%

Commercial Insurance 10%

9%

Medicaid 24%

21%

Self Pay and Other 11%

13%

Managed Care Agreements 26%

35%

100%

100%

The gross to net patient medical services revenue detail is reflected below for fiscal years 2005 and 2004. The Statements of Revenues, Expenses and Changes in Net Assets reflect net patient medical services revenue as follows (in thousands of dollars):

2005 2004 Patient Medical Services Revenue, Gross 1,063,495 900,419 Less Deductions for Contractuals (464,970)

(385,174)

Less Bad Debt Deductions (32,131)

(23,016)

Patient Medical Services Revenue, Net 566,394 492,229 Interest Rate Swap Agreements - The University enters into interest rate swap agreements to modify interest rates on outstanding debt. Other than the net payments resulting from those agreements, no amounts related to the interest rate swaps are recorded in the financial statements.

New Accounting Pronouncements - The GASH issued GASH Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, effective for fiscal years beginning after December 15, 2004. This statement establishes accounting and financial reporting standards for impairment of capital assets, as well as clarifying and establishing accounting requirements for insurance recoveries. Impairment of a capital asset may be the result of physical damage, technology changes, obsolescence, and construction stoppage. If impairment is determined to exist, the capital asset may be revalued and disclosed in accordance with the provisions of the statement.

The University has not yet determined the effect that adoption of GASB Statement No. 42 may have on the financial statements.

The GASH issued GASH Statement No. 43, Financial Reporting for Postemployment Benefit Plans other than Pension Plans, effective for fiscal years beginning after December 15, 2005 and GASH Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits other than Pensions, effective for fiscal years beginning after December 15, 2006. The University's postemployment benefit plan is self-insured and managed by the University; therefore, both statements are applicable. The statements provide standards for measurement, recognition and display of other postemployment benefit expenditures, assets, and liabilities, including applicable note disclosures and supplementary information. The University has not yet determined the effect that adoption of GASH Statement No.

43 and GASH Statement No. 45 may have on the financial statements.

The GASB has also issued GASH Statement No. 46, Net Assets Restricted by Enabling Legislation, effective for fiscal years beginning after June 15, 2005. This statement provides guidance to governments for determining when net assets have been restricted to a particular use by the passage of enabling legislation and specifies how those net assets should be reported in financial statements when there are changes in the circumstances surrounding such legislation.

Enabling legislation is a specific type of legislation that both authorizes the raising of new resources and imposes legally enforceable limits on how they may be used. This statement also requires governments to disclose in the notes to the financial statements the amount of net assets restricted by enabling legislation. The University has not yet determined the effect that adoption of GASB Statement No. 46 may have on the financial statements.

The GASB has also issued GASH Statement No. 47, Accounting for Termination Benefits, effective for fiscal years beginning after June 15, 2005. The statement provides accounting and reporting guidance for entities that offer benefits 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 26

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 such as early retirement incentives or to employees who are involuntarily terminated. The statement is intended to enhance both the consistency of reporting for termination benefits and the comparability of financial statements, by requiring that similar forms of termination benefits be accounted for in the same manner. The University has not yet determined the effect that adoption of GASB Statement No. 47 may have on the financial statements.

Reclassifications - Certain prior year amounts have been reclassified to conform to current year presentation.

Use of Estimates - The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

DISCRETELY PRESENTED COMPONENT UNIT - MEDICAL ALLIANCE Nature of Operations - The Curators of the University of Missouri, for and on behalf of the University of Missouri Healthcare, and CRMC entered into an Affiliation Agreement dated August 5, 1997. Pursuant to the Affiliation Agreement, the University created the Medical Alliance. The Medical Alliance then became the sole member of CRMC. The Medical Alliance's purpose is to develop a network of healthcare providers to support the missions of the University of Missouri Healthcare.

CRMC operates as a two-hospital system, which consists of the Southwest Campus and Madison Campus complemented by community medical clinics. CRMC primarily earns revenues by providing inpatient, outpatient, and emergency care services to patients in Jefferson City, Missouri. It also operates medical clinics in the surrounding communities.

The operating results of both facilities and clinics are included in the financial statements. CRMC is served by a group of admitting physicians which account for a significant portion of CRMC's net revenues. Additionally, CRMC is also associated with the Capital Region Medical Foundation, which is intended to support the interest of CRMC and does so by raising and holding funds for the benefit of CRMC.

Net Assets - The Medical Alliance's net assets are classified for financial reporting in the following net asset categories:

" Invested in capital assets, net of related debt: This component of net assets includes capital assets, net of accumulated depreciation and outstanding principal debt balances related to the acquisition, construction or improvement of those assets.

" Restricted:

Expendable - Net assets whose use by the Medical Alliance is subject to externally imposed stipulations that can be fulfilled by actions of the Medical Alliance pursuant to those stipulations or that expire by the passage of time.

• Unrestricted: Net assets that are not subject to externally imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of management or the Board of Directors. When an expense is incurred that can be paid using either restricted or unrestricted resources, the Medical Alliance's policy is to first apply the expense towards restricted resources, and then towards unrestricted resources.

Capital Assets - Capital Assets are recorded at cost and are depreciated on a straight-line basis over the estimated useful life of each asset following guidelines of the American Hospital Association. Equipment under capital lease obligations is amortized on the straight-line basis over the shorter period of the lease term or the estimated useful life of the equipment. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets.

Net Patient Medical Service Revenue - Net patient medical service revenue is reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A

COMPONENT UNIT OF THE STATE OF MISSOURI 27

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004

2.

CASH AND CASH EQUIVALENTS Cash & Cash Equivalents-University -The University's cash and cash equivalents include bank deposits, repurchase agreements and investments maturing in three months or less.

Custodial Credit Risk - Deposits - University - The custodial credit risk for deposits is the risk that in the event of bank failure, the University's deposits may not be recovered. State law requires collateralization of all deposits with federal depository insurance, bonds and other obligations of the U.S. Treasury, U.S. Agencies and instrumentalities of the state of Missouri; bonds of any city, county, school district or special road district of the state of Missouri; bonds of any state; or a surety bond having an aggregate value at least equal to the amount of the deposits. The following chart presents cash and cash equivalent deposits balances as of June 30, 2005 (in thousands of dollars):

Unsecured and Collateralized with Securities held by Pledging Institution's Trust Department Not Collateralized Uninsured and in the University's and Fully Insured Total Carrying 2005 Uncollateralized Name Bank Balances Value Cash and Cash Equivalent Deposits 532 148,974 149,506 Total 532 148,974 149,506 Custodial Credit Risk - Deposits - University of Missouri Retirement Trust - The University of Missouri Retirement Trust held deposits, consisting of cash and cash equivalents in the amount of $211,062,000 as of June 30, 2005. These balances are fully secured and collateralized and are not exposed to custodial credit risk.

3.

INVESTMENTS UNIVERSITY OF MISSOURI Investments - The investment policies of the University are established by its governing board, the Board of Curators.

The policies are established to ensure that the University funds are managed in accordance with Section 105.688 of the Revised Statutes of Missouri. Investments for the University are managed in two major categories:

Pooled General Investments - The general investment pools, managed by the University, averaged a total return of 3.53% and.87%, including unrealized gains and losses, for the years ended June 30, 2005 and 2004, respectively.

Pooled Endowment Investments - Endowment and similar funds are pooled for investment purposes when appropriate and permissible. The investment objective is to achieve long-term total returns sufficient to preserve principal, after adjusting for inflation, and to meet the endowment spending targets. The endowment pools, managed by outside managers, are the balanced pool and the fixed income pool and earned a total return of 9.6% and 4.8%, respectively, including unrealized gains and losses, for the year ended June 30, 2005, and 17.4% and 0.0%, respectively, for the year ended June 30, 2004.

If the donor has not provided specific instructions or restrictions, state law permits the Board of Curators to appropriate for expenditure an amount of net appreciation, realized and unrealized, of the investments of endowment funds as the Board considers to be prudent. When administering the power to spend net appreciation, the Board is required to consider the University's long-and short-term needs, present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions. Any net appreciation expended is required to be spent for the purposes for which the endowment was established. The net appreciation on investments of donor-restricted endowments authorized for expenditure in fiscal year 2005 is approximately $26,949,000.

The Board of Curators has adopted a total return philosophy in determining the spendable return for the endowments and similar funds. The spending formula distributes annually 5% of a trailing 12-quarter average of the endowment's total market value, with the understanding that this spending rate over the long term will not exceed total real return 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 28 A COMPONENT UNIT OF THE STATE OF MISSOURI

(net of inflations) from investments. However, to achieve uniformity in amounts to spend from one year to the next, the actual amount available to spend in any given year will not be less than 96% or more than 106% of the prior year's expenditure.

At June 30, 2005, the University held investments, by investment type, as follows (in thousands of dollars):

Carrying Value as of June 30, 2005 Government Obligations 571,579 Corporate Bonds and Notes 197,249 Corporate Stocks 563,042 Other 22,519 Total Short-Term and Long-Term Investments 1,354,389 Commercial Paper 179,590 Repurchase Agreements 11,903 Total Cash and Cash Equivalents 191,493 Total Investments 1,545,882 Custodial Credit Risk - The custodial credit risk for investments is the risk that in the event of failure of the counterparty to a transaction, the University will not be able to recover the value of the investments. In accordance with University policy, the University minimizes its custodial credit risk on deposits by establishing limitations on the types of instruments held with qualifying institutions. Repurchase agreements must be collateralized by U.S. Government issues and/or U.S. Government Agency issues. Certificates of deposit must be collateralized and held at a bank with which the University has a depository agreement. The University's investment of $179,590,000 in commercial paper is uninsured and uncollaterialized. The University's investment of $11,903,000 in repurchase agreements is held by the investment's counterparty, not in the name of the University. All of the remaining University investments are insured and registered and are held by the University or an agent in its name.

Interest Rate Risk - Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The University's Pooled General Investments consist primarily of fixed income securities, with a specific limitation that no more than 15% of the pool consists of variable rate securities. As a means of ensuring the safety of principal invested in the Pooled Endowment Investments, the University's investment policy requires diversification of the investment portfolio.

At June 30, 2005, the maturities of the University's investments are as follows (in thousands of dollars):

As of June 30, 2005 Less than More than I Year 1-5 Years 6-10 Years 10 Years Carrying Value U.S. Agency Obligations

$ 141,148

$ 263,293 33,964 15,364 453,769 U.S. Treasury Obligations 6,248 27,162 8,221 9,834 51,465 Foreign Government Obligations 637 30,807 22,997 11,904 66,345 U.S. Corporate Bonds & Notes 55,945 101,741 12,340 6,121 176,147 Foreign Corporate Bonds & Notes 1,952 6,979 7050 5,121 21,102 Total

$ 205.930

$ 429,982 84,572 48.344 768,828 Credit Risk - The credit risk of investments is the risk that the issuer or other counterparty will not meet its obligations.

This credit risk is typically measured by the credit quality ratings of investments in debt securities as described by a national recognized statistical rating organization such as Standard and Poor's (S&P) and Moody's. For portions of the University's investments, specifically the Endowment Fund, the University's policy states that investments in corporate bonds and other fixed income securities must have an S&P rating of A or better.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 29

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 However, the University has elected to use Moody's Investors Service investment ratings in the following Credit Risk report. Several securities within the Pooled Endowment have Moody's ratings of Baa or Ba and Standard and Poor's ratings in the A range (A-, A, & A+), which places those bonds within the parameters specified in the University's policy.

The following represents the University's investment exposure to credit risk, based on Moody's investment ratings (in thousands of dollars):

As of June 30, 2005 Aaa Aa A

Baa Ba Unrated Total U.S. Agency Obligations

$ 377,698 $ 54,979 $

35 $

$ 21,057 $453,769 U.S. Treasury Obligations 51,465 51,465 Foreign Government Obligations 50,083 1,331 11,582 3,349 66,345 U.S. Corporate Bonds & Notes 22,870 67,706 82,691 245 2,635 176,147 Foreign Corporate Bonds & Notes 11,315 2,877 3,189 680 3,041 21,102 Total

$ 461,966 $ 126 893 97497 $

925 $

$ 81 547 $ 768.828 Foreign Currency Risk - Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of a foreign investment. University policy allows 15-25% of the investment portfolio to be invested in international investments (12.1% and 12.2% denominated in foreign currency in fiscal years 2005 and 2004, respectively). To reduce the risk related to fluctuations in currency exchange rates, the University has entered into forward foreign currency contracts throughout the year. As of June 30, 2005 and 2004,4.7% or $63,383,000 and 4.6% or $61,571,000, respectively, of the University's total investment portfolio is invested in forward foreign currency contracts. These contracts are marked to market and the changes in their market value are recorded in investment and endowment income on the Statements of Revenues, Expenses and Changes in Net Assets. The following represents the University's exposure to foreign currency risk (in thousands of dollars):

Foreign Currency Risk International Investment Securities at Fair Value (in thousands of dollars)

Currency 2005 Australian Dollar 2,856 British Pound Sterling 27,112 Canadian Dollar 2,814 Chilean Peso 21 Danish Krone 911 Euro 65,203 Hong Kong Dollar 2,978 Israeli Shekel 166 Japanese Yen 42,062 Mexican New Peso 301 New Taiwan Dollar 42 New Zealand Dollar 67 Norwegian Krone 589 Polish Zloty 135 South African Comm Rand 425 Singapore Dollar 898 South Korean Won 98 Swedish Krona 4,527 Swiss Franc 12,124 Total

$ 163,329 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 30 A COMPONENT UNIT OF THE STATE OF MISSOURI

FOR THE YEARS ENDED JUNE 30, 200S AND 2004 Concentration of Credit Risk - The concentration of credit risk is the risk of loss that may occur due to the amount of investments in a single issuer (not including investments issued or guaranteed by the U.S. government, investments in mutual funds, or external investment pools).

For University funds invested through the Pooled General Investments category the following restrictions apply:

1) Corporate Bonds should not exceed 20% of the portfolio; 2) Variable Rate securities should not exceed 15% of the portfolio; and 3) Investments in obligations of the U.S. Government, U.S. Government Agency issues or U.S.

Government guaranteed securities is unlimited.

For University funds invested through the Pooled Endowment Investments category, target asset mixes are assessed and evaluated to ensure diversification. The investment policy allows for a portfolio consisting of no more than 47.5%

U.S. equity, 25% international equity, 10% emerging markets equity, 10% alternative investments (maximum of 5.0%

in hedge funds), 10% real estate and 27.5% global fixed income.

Portions of the Pooled Endowment Investments are invested in a fixed income fund, called the Fixed Income Pool, which, due to donor restrictions, can only be invested in fixed income securities. Investments in this portfolio consist of U.S. Government, U.S. Government Agency issues, corporate fixed income, commercial paper and repurchase agreements.

As of June 30, 2005, of the University's total investments, 18.7% are issues of the Federal Home Loan Bank (FHLB),

8.5% are issues of the Federal National Mortgage Association (FNMA), and 5.1% are issues of the Federal Home Loan Mortgage Corporation (FHLMC).

Securities Lending Transactions - The University participates in an external investment pool securities lending program to augment income. The program is administered by the University's custodial agent bank, which lends equity, government and corporate securities for a predetermined period of time to an independent broker/dealer (borrower) in exchange for collateral. Collateral may be cash, U.S. Government securities, defined letters of credit or other collateral approved by the University. Loans of domestic securities are initially collateralized at 102% of the fair value of securities lent. Loans of international securities are initially collateralized at 105% of the fair value of securities lent. The University has minimized its exposure to credit risk from borrower default by having the custodial agent bank determine daily that required collateral meets a minimum of 100% of the fair value of securities on loan for domestic securities lent and 105% for international securities lent. The fair value of collateral for securities on loan totaled $81,611,000 and $61,196,000 at June 30, 2005 and 2004, respectively.

The University continues to receive interest and dividends during the loan period, as well as a fee from the borrower.

In addition, the maturities of the investments made with the cash collateral generally match the maturities of the securities lent. At June 30, 2005, the University has no credit risk exposure since the collateral held exceeds the value of the securities lent. The University is fully indemnified by its custodial bank against any losses incurred as a result of borrower default.

In addition, at June 30, 2005 and 2004, letters of credit and security collateral, not meeting the criteria for inclusion in the Statements of Net Assets, totaled $3,170,000 and $941,000, respectively. At June 30, 2005, the aggregate fair value of the securities lent and related collateral received was $81,799,000 and $60,000,000, respectively.

DISCRETELY PRESENTED COMPONENT UNIT-MEDICA4L.ALLIANCE Investments - The investment policies of Medical Alliance are established by its board of directors. The policies are established to ensure that Medical Alliance funds are managed in accordance with the "Prudent Man Rule."

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A

COMPONENT UNIT OF THE STATE OF MISSOURI 31

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 At June 30, 2005 and 2004, Medical Alliance held the following investments (in thousands of dollars):

2005 2004 Internally Designated for Capital Improvements:

Repurchase Agreements Mortgage-backed securities Money Market Accounts Interest Receivable U.S. Treasury Obligations Certificates of Deposit Subtotal Held by Trustee Under Indenture Agreement:

Money Market Accounts Interest Receivable Less Portion Required for Current Obligations 10,668 13,766 57 74 35,836 8,381 8

S 5,000 8,083 6,100 33 74 24,815 19,390 L4-3015 -L1 43457 UNIVERSITY OF MISSOURI RETIREMENT TRUST Investments - Retirement Trust - The Board of Curators of the University of Missouri establishes the investment policies for the Retirement Trust. Retirement investments emphasize diversification across asset classes, dominated by equity securities, in order to maximize total investment returns. While pursuing this objective, the Retirement Trust maintains its fiduciary duties applicable to investments set forth in Section 105.688 of the Revised Statutes of Missouri.

The Retirement Trust investments earned a total return of 11. 1%, including unrealized gains and losses, for the year ended June 30, 2005, and 18.5% for the year ended June 30, 2004.

At June 30, 2005, the Retirement Trust held investments, by investment type, as follows (in thousands of dollars):

Government Obligations Corporate Bonds and Notes Corporate Stocks Other Total Short-Term and Long-Term Investments Commercial Paper Total Cash and Cash Equivalents Total Investments Carrying Value as of June 30, 2005 301,689 109,375 1,783,813 33,282 2,228,159 12,557 12,557 2,240-716 Custodial Credit Risk - The custodial credit risk for investments is the risk that in the event of failure of the counterparty to a transaction, the Retirement Trust will not be able to recover the value of the investments that are in the possession of an outside party. The investment of $12,557,000 in commercial paper is uninsured and uncollateralized.

The remainder of the Retirement Trust's investments are insured or registered and are held by the Retirement Trust or an agent in its name.

Interest Rate Risk - Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. As a means of ensuring the safety of principal invested, the Retirement Trust's investment policy requires diversification of the investment portfolio.

2005 FI NA NCIAL R EPORT:

U NIV ERSITY OF MISSOUR I A COMPONENT UNIT Of THE STATE OF MISSOURI 32

FOR THE YEARS ENDED JUNE 30, 200S AND 2004 At June 30, 2005, the maturities of the Retirement Trust's investments are as follows (in thousands of dollars):

As of June 30, 2005 Less than More than 1 Year 1-5 Years 6-10 Years 10 Years Carrying Value U.S. Agency Obligations 1,527 2,950 5,871 45,985 56,333 U.S. Treasury Obligations 8,414 4,883 5,665 11,787 30,749 Foreign Government Obligations 1,678 102,338 71,641 38,950 214,607 U.S. Corporate Bonds & Notes 3,047 13,436 11,320 14,547 42,350 Foreign Corporate Bonds & Notes 6,674 24,284 21,662 14,405 67,025 Total 21,340

$ 147,891

$ 116.159

$ 125,674 411,064 Credit Risk - The credit risk of investments is the risk that the issuer or other counterparty will not meet its obligations.

This credit risk is measured by the credit quality ratings of investments in debt securities as described by a nationally recognized statistical rating organization such as Standard and Poor's (S&P) and Moody's. The University's policy on investments for the Retirement Trust states that investments in corporate bonds and other fixed income securities must have a rating of A or better.

However, the University has elected to use Moody's Investors Service investment ratings in the following Credit Risk report. Several securities within the Retirement Trust have Moody's ratings of Baa or Ba and Standard and Poor's ratings in the A range (A-, A, & A+), which places those bonds within the parameters specified by University's policy on investments for the Retirement Trust.

The following represents the Retirement Trust's investment exposure to credit risk, based on Moody's investment ratings (in thousands of dollars):

As of June 30, 2005 Aaa Aa A

Baa Ba Unrated Total U.S. Agency Obligations

$ 6,088 974

$ 49,271

$ 56,333 U.S. Treasury Obligations 30,749 30,749 Foreign Government Obligations 160,096 7,005 39,190 8,316 214,607 U.S. Corporate Bonds & Notes 18,494 7,387 11,467 762 4,240 42,350 Foreign Corporate Bonds & Notes 34,352 7,099 9,768 2,126 13,680 67,025 Total

$219 030

$ 22.465

$ 60.425

$ 2-888

$106 256

$411,064 Concentration of Credit Risk - The concentration of credit risk is the risk of loss that may occur due to the amount of investments in a single issuer (not including investments issued or guaranteed by the U.S. government, investments in mutual funds, or external investment pools). The Retirement Trust investment policy allows for a portfolio consisting of no more than 47.5% U.S. equity, 25% international equity, 10% emerging markets equity, 10% alternative investments (maximum of 5.0% in hedge funds), 10% real estate and 27.5% global fixed income. At June 30, 2005, the Retirement Trust portfolio did not contain any investments from a single issuer which exceeded 5% of the total portfolio.

Foreign Currency Risk - Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of a foreign investment. The Retirement Trust invests a significant portion of its portfolio in international investments (23.8% and 23.1% denominated in foreign currency in fiscal years 2005 and 2004, respectively). To reduce the risk related to fluctuations in currency exchange rates, the University has entered into forward foreign currency contracts throughout the year. As of June 30, 2005 and 2004, 9.7% or $216,017,000 and 9.5% or $199,007,000, respectively, of the Retirement Trust's investment portfolio is invested in forward foreign currency contracts. These contracts are marked to market and the changes in their market value are recorded in net appreciation (depreciation) in fair value of investments in the Statements of Changes in Net Assets Held for Pension Benefits.

2005 FINANCIAL REPORT.

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 33

FOR THiE YEARS ENDED JUNE 30, 2003 AND 2004 Foreign Currency Risk International Investment Securities at Fair Value (in thousands of dollars)

Currency 2005 Australian Dollar 8,582 British Pound Sterling 89,712 Canadian Dollar 18,281 Chilean Peso 72 Danish Krone 2,476 Euro 211,619 Hong Kong Dollar 8,206 Israeli Shekel 561 Japanese Yen 140,182 Mexican New Peso 1,014 New Taiwan Dollar 94 New Zealand Dollar 639 Norwegian Krone 1,417 Polish Zloty 453 South African Comm Rand 930 Singapore Dollar 3,582 South Korean Won 289 Swedish Krona 12,084 Swiss Franc 3,1 Total

$ 530,708 Securities Lending Transactions -The Retirement Trust participates in an external investment pool securities lending program to augment income. The program is administered by the Retirement Trust's custodial agent bank, which lends equity, government and corporate securities for a predetermined period of time to an independent broker/dealer (borrower) in exchange for collateral. Collateral may be cash, U.S. Government securities, defined letters of credit or other collateral approved by the Retirement Trust. Loans of domestic securities are initially collateralized at 102% of the fair value of securities lent. Loans of international securities are initially collateralized at 105% of the fair value of securities lent. The Retirement Trust has minimized its exposure to credit risk from borrower default by having the custodial agent bank determine daily that required collateral meets a minimum of 100% of the fair value of securities on loan for domestic securities lent and 105% for international securities lent. The fair value of collateral held for securities on loan totaled $173,580,000 and $149,917,000 at June 30, 2005 and 2004, respectively.

The Retirement Trust continues to receive interest and dividends during the loan period, as well as a fee from the borrower. In addition, the maturities of the investments made with the cash collateral generally match the maturities of the securities lent. At June 30, 2005, the Retirement Trust has no credit risk exposure since the collateral held exceeds the value of the securities lent. The Retirement Trust is fully indemnified by its custodial bank against any losses incurred as a result of borrower default.

In addition, at June 30, 2005 and 2004, letters of credit and security collateral, not meeting the criteria for inclusion in the Statements of Net Assets Held for Pension Benefits, totaled $11,014,000 and $1,776,000, respectively, for the Retirement Trust. At June 30, 2005 and 2004, the aggregate fair value of the securities lent and related collateral received was $177,170,000 and $145,735,000, respectively.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 34 A

COMPONENT UNIT OF THE STATE OF MISSOURI

FOR THE YEARS ENDED JUJNE 30. 2005 AND 2004

4.

FUNDS HELD IN TRUST BY OTHERS At June 30, 2005 and 2004, Funds Held in Trust by Others (principally endowment funds) aggregated $83,896,000 and $67,349,000, respectively, at fair value. Due to time restrictions or a legal event that has not occurred, these funds are not available to the University and are not included in the accompanying Statements of Net Assets. Income earned and distributed to the University for the years ended June 30, 2005 and 2004, aggregated $1,920,000 and $1,716,000, respectively.

5.

ACCOUNTS RECEIVABLE Accounts receivable at June 30, 2005 and 2004, are summarized as follows (in thousands of dollars):

2005 2004 Grants and Contracts 43,500 34,037 State Appropriations and State Bond Funds 835 37,821 Student Fees and Other Academic Charges 72,891 49,257 University Hospitals and Clinics Patient Services, Net of Contractual Allowances 80,364 65,825 University Physicians Patient Services, Net of Contractual Allowances 15,37 1581 Subtotal 212,47 202,759 Less Provisions for Loss on Accounts Receivable:

Grants and Contracts Allowance 3,885 University Hospitals and Clinics Patient Services Allowances 14,757 12,544 University Physicians Patient Services Allowances 4,490 879 Student Fees and Other Academic Charges 4,69

~

4,848 Subtotal 2774 18,71 185 2_06 L

184.488

6.

NOTES RECEIVABLE Notes receivable consist of resources available for financial loans to students. These resources are provided through Federal loan programs and University loan programs generally funded by external sources. Notes receivable at June 30, 2005 and 2004, are summarized as follows (in thousands of dollars):

2005 2004 Federal Health Profession Loans 12,752 12,983 Carl D. Perkins National Loans 29,712 28,228 University Loan Programs 1565 14,27 Subtotal 58,120 55,484 Less Provision for Loss on Notes Receivable 1,57 1,6

56. 553

$_ 539_18 200S FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MIISSOURI 35

/D fO1lkI/~~ 6~,n~,et/~%uwca/~g4denen1s FOR THE YEARS ENDED JUNE 30, 2005 AND 2004

7.

CAPITAL ASSETS UNIVERSITY OF MISSOURI Capital assets activity for the years ended June 30, 2005 and 2004, is summarized as follows (in thousands of dollars):

Capital Assets, Nondepreciable:

Land Artwork and Historical Artifacts Construction in Progress Total Capital Assets, Nondepreciable Capital Assets, Depreciable:

Buildings and Improvements Infrastructure Equipment Library Materials Total Capital Assets, Depreciable Less Accumulated Depreciation:

Buildings and Improvements Infrastructure Equipment Library Materials Total Accumulated Depreciation Total Capital Assets, Depreciable, Net Total Capital Assets, Net Capital Assets, Nondepreciable:

Land Artwork and Historical Artifacts Construction in Progress Total Capital Assets, Nondepreciable Capital Assets, Depreciable:

Buildings and Improvements Infrastructure Equipment Library Materials Total Capital Assets, Depreciable Less Accumulated Depreciation:

Buildings and Improvements Infrastructure Equipment Library Materials Total Accumulated Depreciation Total Capital Assets, Depreciable, Net Total Capital Assets, Net 2005 Beginning Balance 53,023 16,379 196,678 266,080 1,697,801 175,486 412,899 193,022 2,479,208 615,822 60,853 258,551 109,738 1,044,964 1,434,244 1,700,324 2004 Beginning Balance 53,989 16,298 146,845 217,132 1,555,321 169,354 417,046 182,345 2,324,066 578,367 56,994 260,715 102,690 998,766 1,325,300

!,542,432 Additions/

Transfers 1,242 167 (67,353)

(65,944) 183,707 12,746 69,154 8,476 274,083 48,461 7,059 39,603 7,291 102,414 Retirements 2005 Ending Balance 54,265 5,412 11,134 129,325 5,412 194,724 11,450 515 36,599 48,564 10,107 515 32,818 43,440 1,870,058 187,717 445,454 201,498 2,704,727 654,176 67,397 265,336 117,029 1,103,938 1,600,789 1,795,513 2004 Ending Balance 171,669 5,124 1057-25

-10536 Additions/

Transfers 1,118 81 49,833 51,032 145,412 9,441 36,394 10,677 201,924 40,189 6,518 36,019 7,048 89,774 112,150 163,182 Retirements 2,084 53,023 16,379 196,678 2,084 266,080 2,932 3,309 40,541 46,782 2,734 2,659 38,183 43,576 3,206 5,290 1,697,801 175,486 412,899 193,022 2,479,208 615,822 60,853 258,551 109,738 1,044,964 i 1434,244 1,700,324 200S FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 36 A

COMPONENT UNIT OF THE STATE OF MISSOURI

oled t~i za/~akmen4 FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 The estimated cost to complete construction in progress at June 30, 2005, is $460,667,000 of which $168,321,000 is available from unrestricted net assets. The remaining costs are expected to be funded from $27,235,000 of State appropriations, $69,898,000 of gifts, $10,991,000 of grants, and $184,222,000 of bond proceeds.

Capital assets include a building facility under a capital lease of $8,332,000 and related accumulated depreciation of

$2,396,000 and $1,979,000 at June 30, 2005 and 2004, respectively.

DISCRETELY PRESENTED COMPONENT UNIT-MEDICAL ALLIANCE Capital Assets at June 30, 2005 and 2004 are summarized as follows (in thousands of dollars):

Land and Improvements Buildings Movable Equipment Construction in Progress 2005 6,623 77,229 47,101 14,591 145,544 2004 6,519 76,644 43,814 2,765 129,742 Less Accumulated Depreciation 78,977 72,673 Total Capital Assets, Net 66,567 57,069

8.

ACCRUED LIABILITIES Accrued liabilities at June 30 2005 and 2004, are summarized as follows (in thousands of dollars):

2005 2004 Accrued Salaries, Wages and Related Benefits

$ 36,836

$ 34,541 Accrued Vacation 33,806 31,120 Accrued Self Insurance Claims 29,417 24,043 Interest Payable 3,915 3,866

$ 103,974

$ 93,570

9.

OTHER LIABILITIES Other liabilities at June 30, 2005 and 2004, are summarized as follows (in thousands of dollars):

Accrued Vacation Accrued Self-Insurance Claims Accrued Vacation Accrued Self-Insurance Claims 2005 Beginning of Year 39,852 68,996 108,848 2004 Beginning of Year 40,032 580275 98,307 Additions 34,559 155,415 189.974 Additions 31,081 1376746 1688,827 Payments

$ (31,120)

(146,221)

$ (177,341)

Payments

$ (31,261)

(127,025)

$ (158.286) 2005 End of Year 43,291 78,190

$ 121.481 2004 End of Year 39,852 688996

-$M808-848 Current Portion 33,806 29,417 63.223 Current Portion 31,120 246043

-L-55,ý163

10. BONDS AND NOTES PAYABLE UNIVERSITY OF MISSOURI As of June 30, 2005 and 2004, $565,537,000 and $576,674,000, respectively, of bonds and notes were outstanding, net of unamortized premium/discount and loss on defeasance of $312,000 and ($171,000), respectively. These outstanding bonds are comprised of $400,025,000 and $408,295,000 in System Facilities Revenue Bonds and $165,200,000 and 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 37

f~ oI, FOR THE YEARS ENDED IUNE 30, 200S AND 2004

$168,550,000 in Health Facilities Revenue Bonds at June 30, 2005 and 2004, respectively. The bonds are payable, both as to principal and interest, from net income or designated revenues from the related financed activities. These bonds bear interest at fixed and variable rates ranging from 2.29% to 5.75% per annum and mature at various dates through November 2034. Interest on the variable rate System Facilities Revenue Bonds is paid at the Bond Market AssociationTM daily bond rate.

Bonds and Notes Payable activity by series of issuance for the years ended June 30, 2005 and 2004, was as follows (in thousands of dollars):

2005 2005 Beginning Ending Balance Issuance Payments Defeasance Amortization Balance System Facilities Revenue Bonds:

Series 1997 Series 1998 Series 2000 Series 2001 Series 2002 Series 2003 Less Unamortized Premium/Discount Less Loss on Defeasance Health Facilities Revenue Bonds:

Series 1996A Series 1998A Less Unamortized Premium/Discount Less Loss on Defeasance Less Current Portion System Facilities Revenue Bonds:

Series 1993 Series 1997 Series 1998 Series 2000 Series 2001 Series 2002 Series 2003 Less Unamortized Premium/Discount Less Loss on Defeasance Health Facilities Revenue Bonds:

Series 1996A Series 1998A Less Unamortized Premium/Discount Less Loss on Defeasance Note Payable Less Current Portion S

4,210 54,165 71,830 82,925 40,000 155,165 4,171 (2,364)

(975) $

(2,290)

(2,635)

(690)

(1,680) 3,235 51,875 69,195 82,235 40,000 153,485 (110) 4,061 433 (1,931) 109,035 (1,380) 59,515 (1,970)

(1,206) 54 (772).

106 576,674

- $ (11,620)$

483 11,620 5$565-054 2004 Beginning Balance Issuance Payments Defeasance Amortization 107,655 57,545 (1,152)

(666) 565,537 13,485

$ 552,052 2004 Ending Balance S 37,810 $

5,135 56,365 74,325 83,575 40,000 (199)

(1,631)

S (1,030) $ (36,780) $

(925)

(2,200)

(2,495)

(650) 4,210 54,165 71,830 82,925 40,000 155,165 (100) 4,171 410 (2,364) 155,165 4,102 368 (1,143) 110,355 (1,320) 61,395 (1,880)

(1,260) 54 (878) 106 273 (273) 465,265 $ 159267 $ (10,773)$

7,55A5)$

470 104773

$ 454,492 109,035 59,515 (1,206)

(772) 576,674 115620 15k5_ 0-54 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 38

FOR THE YEARS ENDED JUNE 30, 2003 AND 2004 As of June 30, 2005, the total of principal and interest (in thousands of dollars) due on bonds during the next five years and in subsequent five-year periods is as follows:

Net Payments on Swap Fiscal Year Principal Interest Agreement 2006 13,485 24,676 603 2007 14,155 24,062 608 2008 14,785 23,423 608 2009 15,480 22,751 608 2010 16,235 22,024 616 2011-2015 79,255 99,280 3,029 2016-2020 95,670 79,207 3,038 2021-2025 117,905 54,381 3,038 2026-2030 130,170 23,664 3,038 2031-2035 68,085 3,429 1,681 565,225 376,897 16,867 Future interest payment requirements for variable rate debt are determined using the rate in effect at June 30, 2005, of 2.29%. The above interest payments also include estimated payments on the interest rate swap agreement, as discussed below, at a fixed rate of 3.95%, net of the funds received from the counterparty to the transaction at a rate effective at June 30, 2005, of 2.43%.

On November 13, 2003, the University issued $155,165,000 of System Facilities Revenue Bonds, consisting of

$118,080,000 in Series 2003A bonds at the interest cost of 4.72% and $37,085,000 of Series 2003B bonds at the interest cost of 4.19%. Proceeds from the issuance of the Series 2003A bonds were used to finance construction of new housing facilities on the Columbia, Kansas City and Rolla campuses, various other projects and the cost of issuance. Proceeds from the issuance of the Series 2003B bonds were used to advance refund and defease the University of Missouri System Facilities Revenue Bonds, Series 1993 in the amount of $36,780,000 and to finance certain costs of issuance.

A $1,143,000 loss in connection with the defeasance of the Series 1993 Bonds is included as a reduction of debt outstanding and will be amortized over the remaining life of the original Series 1993 Bonds. The defeasance decreased aggregate debt service payments by $5,288,000 resulting in an economic gain (difference between the present values of the old and new debt service payments) to the University of $3,525,000.

On June 14, 2005, the University entered into an interest rate swap agreement on $134,425,000, notional amount, to hedge the interest rate risk associated with future Tax-Exempt Bonds. The University makes payments based on a fixed rate of 3.353% and receives payments from the counterparty based on a floating rate of 70% of LIBOR. Net payments will commence on December 1, 2005 and will continue on a monthly basis until the swap terminates. The interest rate swap agreement will terminate no later than February 15, 2006. The 2006A and 2006B System Facilities Revenue Bonds are anticipated to be issued on or before February 15, 2006.

On the termination date, if interest rates have risen, the University would receive a payment from the counter party, thereby reducing the amount that needs to be borrowed and lowering debt service to the same level had the bonds been issued on the date the swap was agreed to. If interest rates have fallen, the University of Missouri would make a payment to the counter party by issuing a higher amount of debt. However, by issuing at a lower interest rate, debt service would again approximate what would have been available on the date the agreement was signed.

As of June 30, 2005, the swap had a fair value of ($2,145,940), which represents the cost to the University to terminate the swap. The fair value was developed using the zero coupon method and proprietary models, and was prepared by the counterparty, Bank of America, a major U.S. financial institution. The zero coupon method calculates the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 39

Ooin mlietitt~tancti~zt4#Žaerncn/s FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each net settlement of the swap.

In addition, the University maintains a thirty-year interest rate swap agreement on $40,000,000, notional amount, of its variable rate System Facilities Revenue Bonds. The purpose of the interest rate swap agreement is to convert variable rate debt to fixed rate debt. Based on the swap agreement, the University owes interest calculated at a fixed rate of 3.95% to the counterparty to the swap. In return, the counterparty owes the University interest based on a variable rate set weekly. The $40,000,000 in bond principal is not exchanged; it is only the basis on which the interest payments are calculated.

The University continues to pay interest to the bondholders at the variable rate provided by the bonds. However, during the term of the swap agreement, the University effectively pays a fixed rate on the debt. The University will revert to variable rates if the counterparty to the swap defaults or if the swap is terminated. A termination of the swap agreement may also result in the University making or receiving a termination payment.

As of June 30, 2005, the swap had a fair value of ($3,690,830), which represents the cost to the University to terminate the swap. The fair value was developed using the zero coupon method and proprietary models, and was prepared by the counterparty, J.P. Morgan Chase Bank, a major U.S. financial institution. The zero coupon method calculates the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each net settlement of the swap.

As of June 30, 2005, the University was not exposed to credit risk on the termination payment because the swap had a negative fair value and the University would have owed the payment. However, should interest rates change and the fair value of the swap become positive, the University would be exposed to credit risk. The swap counterparty was rated AA-by Standard & Poor's and Aa2 by Moody's Investors Service as of June 30, 2005. In the event a ratings downgrade occurs, the counterparty may be required to provide collateral if the University's overall exposure exceeds predetermined levels. Permitted collateral investments include U.S. Treasuries, U.S. government agencies, cash and commercial paper rated AI/PI by Standard & Poor's and Moody's, respectively. Collateral may be held by the University or by a third party custodian.

The swap exposes the University to basis risk should the weekly BMA rate paid by the counterparty fall below the daily interest rate due on the bonds. This basis risk can be the result of a downgrade of the University's rating, daily rates becoming higher than weekly rates, or the pricing of the University's bonds by the remarketing agent at rates higher than the BMA index.

At June 30, 2005 and 2004, in-substance defeased bonds aggregating $52,205,000 and $53,620,000, respectively, are outstanding.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 40 A COMPONENT UNIT OF THE STATE OF MISSOURI

~Ak

~m#4 ~ flFd'wfleftq/j~4Gkrnefl1S FOR THE YEARS ENDED JUNE 30, 20O3 AND 2004 DISCRETELY PRESENTED COMPONENT UNIT - MEDICAL ALLIANCE Bonds and Notes payable activity by series of issuance for the years ended June 30, 2005 and 2004, was as follows (in thousands of dollars):

Health Facilities Revenue Bonds Series 1998, dated December 1, 1998 and maturing November 1, 2028, payable in graduated installments from November 1, 1999 to November 1, 2028, bearing interest ranging from 3.35% to 5.30%

Health Facilities Revenue Bonds Series 2004, dated June 1, 2004 and maturing November 1, 2029, payable in graduated installments from November 1, 2005 to November 1, 2029, bearing interest ranging from 2.25% to 5.75%

Less current maturities Health Facilities Revenue Bonds Series 1998, dated December 1, 1998 and maturing November 1, 2028, payable in graduated installments from November 1, 1999 to November 1, 2028, bearing interest ranging from 3.35% to 5.30%

Health Facilities Revenue Bonds Series 2004, dated June 1, 2004 and maturing November 1, 2029, payable in graduated installments from November 1, 2005 to November 1, 2029, bearing interest ranging from 2.25% to 5.75%

Less current maturities 2005 Beginning Balance 22,745 40,245 (480) 39,765 2005 Ending Issuance Payments Balance (480) 22,265 (i480) 39,765 (870) 38.895 2004 Ending Balance 2004 Beginning Balance 23,210 S

23,210 S

(465) 22,745 Issuance Payments (465) $

22,745 17,50 40,245 (480) 39.765 In June 2004, Medical Alliance issued $17,500,000 of tax-exempt Health Facilities Revenue Bonds Series 2004 though the Health and Educational Facilities Authority of the State of Missouri. The bonds proceeds will be used primarily to pay or reimburse the costs of acquiring, constructing and equipping certain health facilities of Medical Alliance and to fund the future debt service requirement fund for these Series 2004 bonds.

Similar to the Series 1998 bonds, the Series 2004 bonds were issued pursuant to the Master Trust Indenture dated December 1, 1998, as supplemented on June 1, 2004. Under the terms of the Master Trust Indenture (the "Master Indenture"), Medical Alliance is required to make payments of principal, premium, if any, and interest on the bonds.

The Series 1998 and 2004 bonds are secured by the unrestricted receivables of Medical Alliance. In addition, the Master Indenture contains certain restrictions on the operations and activities of Medical Alliance, including, among other things, covenants restricting the incurrence of additional indebtedness and the creation of liens on property, except as permitted by the Master Indenture.

The Master Indenture has mandatory sinking fund redemption requirements in which funds are required to be set aside beginning in 2014 and 2025 for the Series 1998 bonds and Series 2004 bonds, respectively.

Interest expense incurred on the bonds during the years ended June 30, 2005 and 2004 was $2,077,000 and $1,185,000, respectively, of which $737,000 was capitalized during the year ended June 30, 2005.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A

COMPONENT UNIT OF THE STATE OF MISSOURI 41

FOR T HE YEARS ENDED JUNE 30, 2005 AND 2004 As of June 30, 2005, the total of principal and interest (in thousands of dollars) due on bonds during the next five years and in subsequent five-year periods is as follows:

Year Ending June 30 Principal Interest 2006 870 S

2,024 2007 900 1,992 2008 935 1,957 2009 970 1,917 2010 1,010 1,874 2011-2015 5,795 8,608 2016-2020 7,375 6,971 2021-2025 9,520 4,766 2026-2029 1230

,0 3976ý5 S

3-1 912

11. SHORT-TERM BORROWINGS During the year ended June 30, 2005, the University sold $168,000,000 of capital project notes at an effective interest rate of 1.5%. The maximum amount of notes outstanding during the year was $168,000,000 and all were repaid in full by June 30, 2005. Proceeds from the issuance of the capital project notes were used to fund various construction projects. Capital project note activity for the year ended June 30, 2005 is as follows (in thousands of dollars):

Beginning End of Fiscal Year of Year Issuance Payments Year Capital Project Notes, Series FY 2004-2005 2005 S

$ 168,000

$ (168,000)

There were no capital project notes sold by the University during the year ended June 30, 2004.

12. LEASE OBLIGATIONS AND COMMITMENTS The University leases various facilities and equipment through operating and capital leases. Facilities under capitalized leases are recorded at the present value of future minimum lease payments.

Capital lease obligations activity for the years ended June 30, 2005 and 2004, is as follows (in thousands of dollars):

Fiscal Beginning End of Current Year of Year

-Additions Payments Year Portion 2005

$ 10,532 (361)

$ 10,171 392 2004 10,864

-(332) 10,532 361 The future minimum payments on all significant leases with initial or remaining terms of one year or more at June 30, 2005, are as follows (in thousands of dollars):

Fiscal Year Capital Operating 2006 S

1,374 3,486 2007 1,374 785 2008 1,374 456 2009 1,374 456 2010 1,374 442 2011-2015 6,871 1,759 2016-2020 580143 Total Future Minimum Payments 19,581

_$7.527 Less: Amount Representing Interest

.,1 Present Value of Future Minimum Lease Payments J

10,171 Total rental expenditures for operating leases for the years ended June 30, 2005 and 2004, were $14,121,000 and

$12,087,000, respectively.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 42 A

COMPONENT UNIT OF THE STATE OF MISSOURI

In addition to the above lease obligations, the University has outstanding commitments for the acquisition, usage and ongoing support of certain software for its patient clinical systems. As of June 30, 2005, these commitments totaled

$21,180,000 and will be paid in the following amounts: $4,351,000 in 2006, $3,960,000 in year 2007 and $12,869,000 in years 2008-2011.

Description of Sublease Arrangement with Institute for Outpatient Surgery ("105') - Concurrent with the sale of assets to 105 on July 1, 2002, the University entered into an agreement with 105 whereby 105 subleased certain building space from the University for a period of approximately 17 years at current market rates. The University recorded the transaction as a direct financing lease and recorded a minimum lease payment to be received of $6,375,000, unearned rental income of $3,233,000 and a write-off of $3,142,000 of building and improvements related to the sublease. The future minimum lease payments to be received under this sublease as of June 30, 2005, are as follows (in thousands of dollars):

Total Minimum Lease Payments to be Received:

Current 418 Noncurrent5,3 Total 5,957 Less: Unearned Rental Income (3,087)

Present Value of Future Minimum Lease Payments Receivable2-7 During 2005 and 2004, the University received $303,000 and $287,000, respectively, of rental income from 10S.

DISCRETELY PRESENTED COMPONENT UNIT-MEDICAL ALLIANCE The Medical Alliance leases certain computer and medical equipment through operating and capital leases. Equipment under capitalized leases is recorded at the present value of future minimum lease payments.

Capital lease obligations activity for the years ended June 30, 2005 and 2004, is as follows (in thousands of dollars):

Fiscal Beginning End of Current Year of Year Additions Payments Year Portion 2005 291 24 (108) 207 112 2004 388 (97) 291 102 The future minimum payments on all significant leases with initial or remaining terms of one year or more at June 30, 2005, are as follows (in thousands of dollars):

Fiscal Year Capital Operating 2006 120 212 2007 85 81 2008 9

19 2009 4

Total Future Minimum Payments 218 312 Less: Amount Representing Interest 11I Present Value of Future Minimum Lease Payments 207___

Total rental expenditures for operating leases for the years ended June 30, 2005 and 2004, were $542,000 and $614,000, respectively.

13. RISK MANAGEMENT The University is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; injuries to employees; natural disasters; and various medically related benefit programs for employees. The University funds these losses through a combination of self-insured retentions and commercially purchased insurance. The amount of self-insurance funds and commercial insurance maintained are based upon analysis of historical information and actuarial estimates. Settled claims have not exceeded commercial coverage in any of the past three fiscal years.

200S FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 43

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 The liability for self-insurance claims at June 30, 2005 and 2004 of $78,190,000 and $68,996,000, respectively, represents the present value of amounts estimated to have been incurred by those dates, using discount rates ranging from 2.70% to 4.20% for fiscal year 2005 and 3.25% to 3.70% for fiscal year 2004, based on expected future investment yield assumptions. Additionally, at June 30, 2005, there is a range of self-insurance claims outstanding, from $560,000 to $1,065,000, which the University has determined there is a reasonable possibility that a loss contingency may be incurred but no accrual has been made within the financial statements because the loss is not both probable and estimable. Changes in this liability (in thousands of dollars) during fiscal years 2005 and 2004 were as follows:

New Claims Fiscal Beginning and Changes Claim End of Year of Year in Estimates Payments Year 2005 S 68,996 155,415

$(146,221)

$ 78,190 2004 58,275 137,746 (127,025) 68,996 2003 49,855 122,277 (113,857) 58,275

14. CONTINGENCIES In December 2002, the Circuit Court of St. Louis County, Missouri rendered a decision in a case filed in January, 1998, finding that the University had violated a statute enacted in 1872 which provided that youth over the age of 16 and resident of the State of Missouri could attend the University without payment of tuition for undergraduate education.

The court decided only the liability phase of the case and did not consider what would be an appropriate remedy or if in fact there should be any finding of damages. The University appealed that Court's decision to the Eastern District Court of Appeals in St. Louis, which transferred the appeal to the Supreme Court of Missouri. The Supreme Court dismissed the appeal as being premature and remanded the case to the Circuit Court of St. Louis County for a trial and determination of what remedy, if any, is appropriate. The statute was amended in 2001 to authorize the charging of tuition. The litigation, therefore, concerns students enrolled prior to the fall semester of 2001.

The Circuit Court of St. Louis County appointed a Special Commissioner to conduct discovery and non-binding mediation in this case. As a result, a settlement was agreed to by the parties, which provides for the University to establish a scholarship fund of $10 million for the class members and spouses and children of class members. In addition, the University would pay slightly in excess of $1 million in attorney fees, expenses and costs. As of June 30, 2005, the University accounted for the $10 million scholarship fund as restricted net assets. The status of the settlement approved is discussed in Note 21.

15. RETIREMENT, DISABILITY AND DEATH BENEFIT PLAN Basis of Accounting - The University of Missouri Retirement, Disability, and Death Benefit Plan (the "Plan") financial statements included herein are prepared using the accrual basis of accounting. Employer contributions to the plan are recognized when due and the employer has made a formal commitment to provide the contributions. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan.

Plan Description - The Plan is a single employer, defined benefit plan for all qualified employees. As authorized by State statute, the University's Board of Curators administers the Plan and establishes its terms. Separate financial statements and supplemental schedules are not prepared for the Plan.

Total University payrolls were $987,240,000 and $919,594,000 the years ended June 30, 2005 and 2004, respectively, of which $766,794,000 and $720,973,000 were covered by the Plan for the respective periods. At June 30, 2005 and 2004, membership in the Plan consisted of:

2005 2004 Active members:

Vested 9,382 8,689 Nonvested 7,469 7,656 Pensioners 6,443 6,429 Former Employees with Deferred Pensions2,7228 Total 25.767 2-5055 2003 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 44 A COMPONENT UNIT OF THE STATE OF MISSOURI

FOR THE YEARS ENDED IUNE 30, 2005 AND 2004 Benefit Provisions - All full-time employees are eligible for benefits after five years of credited service. The annual lifetime annuity payable to a vested employee who retires at age 65 or later is calculated as 2.2% times the number of years of service times the compensation base. Compensation base is defined as the individual's average compensation for the five consecutive highest salary years. Academic members who render summer teaching and research service receive an additional credit for such service. Pension adjustments may be approved at certain times, which increase the benefits paid existing pensioners.

Full benefits are available to members who retire at age 65 or after. Vested employees may retire prior to age 65, provided they are at least age 55 with at least ten years of credited service, or age 60 with five years of credited service.

Benefits are reduced for those who retire early, unless they retire at age 62 or later with at least 25 years of credited service. At retirement, up to 30% of the value of the retirement annuity can be taken in a lump sum; also the single life annuity can be exchanged for an actuarially equivalent annuity option (elected from an array of annuities with joint and survivor, period certain, and guaranteed annual increase features).

Vested employees who terminate prior to eligibility for retirement may elect to have 100% of the actuarial equivalent of their benefit transferred to an Individual Retirement Annuity or into another employer's qualified plan that accepts such rollovers. If the actuarial equivalent is less than $20,000, it may be taken in the form of a lump sum payment.

The value of the accrued benefit to a vested employee at termination or at retirement is subject to a minimum value as provided by the Plan's cash balance feature. This feature computes an accrual equal to 5% of the employee's eligible compensation invested at 7.5% per annum.

The Plan includes a provision allowing vested employees, who become disabled, to continue to accrue service credit until they retire, and a provision which prescribes a pre-retirement death benefit for vested employees.

Contributions - The University's contributions to the Plan are equal to the actuarially determined contribution requirement, as a percent of payroll, which averaged 6.4% and 6.7% for the years ended June 30, 2005 and 2004, respectively. The Plan is funded 100% by University contributions and does not require employee contributions. The contribution rate is updated annually, at the beginning of the University's fiscal year on July 1, to reflect the actuarially determined funding requirement from the most recent valuation, as of the preceding October 1, and the adoption of any Plan amendments during the interim.

Rqire Supe ntr Inomto

- Unaudite (in thousands of dollars)

Annual Required Contribution Fiscal As % of Percentage Net Pension Year Payroll In Dollars Contributed Obligation 2000 5.8%

$ 37,036 100%

$0 2001 4.4%

29,272 100%

0 2002 3.6%

25,319 100%

0 2003 2.6%

17,962 100%

0 2004 6.7%

48,521 100%

0 2005 6.4%

49,075 100%

0 The annual required contribution for the year ended June 30, 2005, was determined as part of the October 1, 2003, actuarial valuation, using the entry age normal actuarial cost method.

The annual required contribution for the year ended June 30, 2004, was determined as part of the October 1, 2002, actuarial valuation, using the entry age normal actuarial cost method.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF TIlE STATE OF MISSOURI 45

ijolesk to~u('e~i,,a~rI1~e1 FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 Significant assumptions used in the valuations for the years ended June 30, 2005 and 2004 were:

2005 2004 8.0%

8.0%

Assumed Annual Rate of Return on Investments Projected Annual Average Salary Increases for Academic and Administrative Employees Projected Annual Average Salary Increases for Clerical and Service Employees Future Retiree Ad Hoc Increases or Cost of Living Adjustments 5.2%

4.5%

0.0%

5.2%

4.5%

0.0%

The actuarial value of assets is based on the cost of the Plan's underlying assets. Although a net pension obligation did not exist as of June 30, 2005, any future liabilities incurred would be amortized over 20 years using the level dollar method on an open basis.

The schedule of funding progress is as follows:

Reuie Supplmenar Inomto Unudte (in thousands of dollars)

Funding Funding Excess/

Actuarial Actuarial Excess/

(Unfunded Liability' Value of Accrued (Unfunded Funded Covered as a % of Covered Date Assets Liability Liability)

Ratio Payroll Payroll 10/1/99

$1,740,756

$1,531,205

$ 209,551 113.7%

$623,318 33.5%

10/1/00 1,906,678 1,686,684 219,994 113.0%

646,198 34.0%

10/1/01 2,119,047*

1,813,018 306,029 116.9%

696,163 44.0%

10/1/02 1,949,794 1,937,617 12,177 100.6%

654,575 1.9%

10/1/03 2,067,727 2,030,613 37,114 101.8%

687,681 5.4%

10/1/04 2,075,032 2,144,738 (69,706) 96.8%

753,266 (9.3)%

• The actuarial vahle of asset methodology changes effective October 1. 2001. firm the book value method, adjusted. ifnecessarg, to be within 20% of market, to the expected tIturn asset valuation method, adjusted. if necessarj; to be within 20% of market.

16. OTHER POSTEMPLOYMENT BENEFITS In addition to the pension benefits described in Note 15, the University provides postretirement medical, dental and life insurance benefits to employees who retire from the University after attaining age 55 and before reaching age 60 with ten or more years of service, or, who retire after attaining age 60 with five or more years of service. As of June 30, 2005 and 2004, 5,475 retirees met those eligibility requirements.

For employees retiring prior to September 1, 1990, the University contributes toward premiums at the same rate as for active employees; 2/3 of the premium for medical benefits and 1/2 of the dental plan premium. For employees who retired under the terms of the Retirement and Death Benefit Plan on September 1, 1990 or thereafter, the University contributes toward premiums on the basis of the employee's length of service and age at retirement.

The University makes available two group term life insurance options. Option A coverage is equal to the retiree's salary at the date of retirement and graded adjustments in coverage made at the attainment of specific age levels.

This coverage is paid in full by the University. Option B coverage is equal to two times the retiree's salary at the date of retirement with graded adjustments in coverage made at the attainment of specific age levels. The University pays approximately 91% of the cost of Option B coverage. Coverage for group term life insurance ends on January 1 following the retiree's 70th birthday.

Postemployment medical, dental and life insurance benefits are also provided to those long-term disability claimants who were vested in the University's retirement plan at the date their disability began, provided the onset date of their disability was on or after September 1, 1990. As of June 30, 2005 and 2004, 228 and 214 long-term disability claimants met those eligibility requirements.

2003 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 46

FOR THE YEARS ENDED JUNE 30, 2005 AND 2004 The University makes available two long-term disability options to its employees. Option A coverage is equal to 60%

of the employee's salary on the date the disability began, with full integration with benefits from other sources. Option B coverage is equal to 66 2/3% of the employee's salary, integrated with other benefits so that benefits from all sources will not exceed 85% of the employee's salary. Both options have a 149-day waiting period and provide benefits to age

65. The University pays for the full cost of Option A coverage; employees enrolled in Option B pay for the additional cost of Option B over Option A.

The terms and conditions governing the postemployment benefits to which employees are entitled are in the sole authority and discretion of the University's Board of Curators.

Postemployment benefit costs, other than long-term disability, are funded on a current basis and the amounts recorded as expense of $14,805,000 and $16,647,000 for the years ended June 30, 2005 and 2004, respectively, are on a pay-as-you-go basis. Long-term disability costs are recognized during the period in which the employee becomes eligible to receive disability benefits and amounted to $1,182,000 and $4,380,000 for the years ended June 30, 2005 and 2004, respectively.

17. SEGMENT INFORMATION A segment is an identifiable activity reported within a stand-alone entity for which one or more revenue bonds are outstanding. A segment has a specific identifiable revenue stream pledged in support of revenue bonds and has related expenses, gains and losses, assets and liabilities that are required by an external party to be accounted for separately.

The University has two segments that meet the reporting requirements of GASB Statement No. 37.

The outstanding debt of the University consists of System Facility Revenue Bonds and Health Facilities Revenue Bonds. The System Facility Revenue Bonds are issued in accordance with a Resolution adopted by the Board of Curators in October 1993. The Resolution provides that the bonds are payable from the gross income and revenues derived from the related facilities including student fees, housing, dining, bookstore and parking revenues and various other University revenues.

The Health Facilities Revenue Bonds are limited obligation bonds secured by revenues of the Health System. The Health System consists of the University of Missouri Hospitals and Clinics, which includes the University of Missouri Hospital, Ellis Fischel Cancer Center, Rusk Rehabilitation Center and the Children's Hospital; the University Physicians Medical Practice Plan, which includes faculty of the University of Missouri-Columbia School of Medicine; and the Missouri Rehabilitation Center.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 47

~-'~

/ o6'ski ems#~,ed',§2~,anc,~/§4ka1emenA FOR THE YEARS ENDED JUNE 30, 200S AND 2004 Summary financial information for the System Facility and the Health Facilities Revenue Bonds as of June 30, 2005 and 2004, is as follows (in thousands of dollars):

System Facility Revenue Bonds 2005 2004 Health Facilities Revenue Bonds 2005 2004 Condensed Statements of Net Assets Assets:

Current Assets Capital Assets, Net Noncurrent Assets Total Assets Liabilities:

Current Liabilities Noncurrent Liabilities Total Liabilities Net Assets:

Invested in Capital Assets, Net of Related Debt Restricted -

Nonexpendable Expendable Unrestricted Total Net Assets Total Liabilities and Net Assets Condensed Statements of Revenues, Expenses and Changes in Net Assets Operating Revenues:

Net Patient Revenue Net Tuition and Fees Bookstore Housing and Related Food Service Parking Other Operating Revenue Total Operating Revenues Operating Expenses:

Depreciation All Other Operating Expenses Total Operating Expenses Operating Income (Loss)

Nonoperating Revenues (Expenses)

Income (Loss) Before Transfers Transfer (To) From Other University Units Increase (Decrease) in Net Assets Net Assets, Beginning of Year Net Assets, End of Year Condensed Statements of Cash Flows Net Cash Flows Provided by Operating Activities Net Cash Flows Provided by (Used In) Investing Activities Net Cash Flows Provided by (Used In) Capital and Related Financing Activities Net Cash Flows Provided by (Used In) Noncapital Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year 69,160 470,679 9,380 549,219 32,322 392,186 424,508 118,525 423,599 10,940

$ 553,064 31,006 401,832 432,838 47,332 8,447 64,447 120,226

$55-3064 157,521 232,862 118,637

$ 509-020 52,572 227,554 280,126 60,328 555 2,919 165,092 228,5894

$- 509020 119,305 218,700 140,013

$ 478 018 51,689 231,070 282,759 42,700 543 2,918 149,098 195,259

$ 478 01_8 67,429 1,857 55,425 124,711 k549,219 12,414 50,422 57,668 12,975 1,368 134,847 13,707 105,181 118,888 15,959 (10,392) 5,567 (1,082) 4,485 120,226 124,711 8,928 44,373 53,419 12,189 1,121 120,030 11,045 99,100 110,145 9,885 (10,776)

(891) 14,310 13,419 106,807 120,226 542,150

$ 473,168 14,789 14,892 556,939 488,06 26,121 508,233 534,354 22,585 15,652 38,237 (4,602) 33,635 195,259

$228 8-94 24,552 444,018 468,570 19,490 15,990 35,480 (9,101) 26,379 168,880 195,2-59 28,356 21,280 36,171 19,408 4,432 (83,003)

(50,215) 105,499 (1,752) 15,733 35,261 70,238 18,869 (12,390)

(55,800)

(29,653) 17,375 14,257 16,615 (8,378) 16,255 24,633 55,284 105,499 32,870 16,255 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 48

0 rn'70, e4

& &mn1 FOR THE YEARS ENDED IUNE 30, 2005 AND 2004

18. OPERATING EXPENSES BY FUNCTION The operating expenses of the University are presented based on natural expenditure classifications. The University's operating expenses by functional classification are as follows:

For the Year Ended June 30, 2005 (in thousands of dollars)

Functional Classification Instruction Research Public Service Academic Support Student Services Institutional Support Operation and Maintenance of Plant Auxiliary Enterprises Scholarships and Fellowships Depreciation Total Operating Expenses Salaries and Wages

$307,880 100,890 69,608 66,679 36,744 79,771 28,932 296,736 Staff Benefits

$ 67,272 20,082 17,024 16,197 8,215 19,932 7,487 70,760

Supplies, Services and Other Operating Expenses

$ 49,924 79,066 54,809 27,344 20,738 (4,964) 20,971 348,507 Scholarships and Fellowships Depreciation Total

$ 425,076 200,038 141,441 110,220 65,697 94,739 57,390 716,003 30,783 30,783 102,414 102,14 30,783 102,414

$ 1943,801

$987.240

$226.969

$ 596 395 For the Year Ended June 30, 2004 (in thousands of dollars)

Functional Classification Instruction Research Public Service Academic Support Student Services Institutional Support Operation and Maintenance of Plant Auxiliary Enterprises Scholarships and Fellowships Depreciation Total Operating Expenses Salaries and Wages

$288,166 102,305 66,639 58,458 32,982 72,583 28,617 269,844 Staff Benefits

$ 61,467 20,593 16,604 16,722 7,043 18,116 7,463 66,170

Supplies, Services and Other Operating Expenses

$ 52,247 80,580 53,544 21,029 24,120 (10,024) 6,566 288,704 Scholarships and Fellowships Depreciation Total

$ 401,880 203,478 136,787 96,209 64,145 80,675 42,646 624,718 25,755 25,755 89,774 89,774 5

25,755 89.774 $ 1766.,067

$919.594

$214.178 S 516 766 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 49

pQ ?&A/cr.Af

<> jo/alto UontnnedJmanctrn'V!/ta/enents FOR THE YEARS ENDED JUNE

30.

2005 AND 2004

19. DISCRETELY PRESENTED COMPONENT UNITS The Discretely Presented Component Units columns in the financial statements include the financial data of the Medical Alliance and Missouri Care L.C.

The Medical Alliance, a not-for-profit corporation, provides an integrated health care delivery system for mid-Missouri by establishing affiliations with various medical facilities. Capital Region Medical Center in Jefferson City, Missouri, operates as an affiliate of the Medical Alliance and provides inpatient, outpatient and emergency care services to the surrounding community.

Missouri Care L.C. is a not-for-profit health maintenance organization which provides services to patients in central Missouri under a certification from the Missouri Department of Social Services. Missouri Care [.C. has contracted with the University of Missouri Healthcare System as a major provider of health care services to the organization's members.

The amounts shown in the Discretely Presented Component Units columns of the Statements of Net Assets and Statements of Revenues, Expenses and Changes in Net Assets relate to the Medical Alliance, including Capital Region Medical Center, and Missouri Care L.C. In the Statements of Net Assets, Medical Alliance is presented as of June 30, 2005 and 2004 and Missouri Care L.C. as of December 31, 2004, to coincide with its calendar year end, and as of June 30, 2004 as reported in the University's financial statements for fiscal year ended June 30, 2004. In the Statements of Revenues, Expenses and Changes in Net Assets, Medical Alliance is presented for the years ended June 30, 2005 and 2004 and Missouri Care L.C. for the six months ended December 31, 2004 and for the twelve months ended June 30, 2004 as reported in the University's financial statements for fiscal year ended June 30, 2004. The Condensed Statements of Net Assets and Condensed Statements of Revenues, Expenses and Changes in Net Assets for these periods are shown below (in thousands of dollars):

2005 Medical Missouri Alliance Care L.C.

_________2004 Medical Missouri Total Alliance Condensed Statements of Net Assets Assets:

Current Assets Capital Assets, Net Noncurrent Assets Total Assets Liabilities:

Current Liabilities Noncurrent Liabilities Total Liabilities Net Assets:

Invested in Capital Assets, Net of Related Debt Restricted -

Expendable Unrestricted Total Net Assets Total Liabilities and Net Assets Care L.C.

Total 11,440 36,845 57,069

$ 1247ý1 k

13973 22.064 66,567

$34.5,965 14,937 S

14,423 36,487 66,567 1,2 6922 15,450

$150,046

$ 25,405 57,069 44,785 S 12-7.259 13,775 39,954

-3,729

$ 9,712 9,712

$ 24,649

$ 7,814

$ 21,589 39,954 27,199 27,199 17,260 17,260 1,640 5,738 5,738 1,640 57,56 3,844 1,031 4,875 134,596 15.450

ý W5.06 $

12-7.259 12.47J

-$ 139.730 2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A

COMPONENT UNIT OF THE STATE OF MISSOURI 50

t~ 6'ornAe/§nanaa4/1a4?nien/ 4 FOR THE YEARS ENDED JUNE 30. 2005 AND 2004 2005 Medical Missouri Alliance Care L.C.

2004 Medical Missouri Total Alliance Care L.C.

Total Condensed Statements of Revenues, Expenses and Changes in Net Assets Operating Revenues:

Net Patient Revenue Other Operating Revenue Total Operating Revenues Operating Expenses:

Salaries and Wages Staff Benefits Supplies, Services and Other Operating Expenses Depreciation Total Operating Expenses Operating Income (Loss)

Nonoperating Revenues (Expenses):

Investment Income Private Gifts Interest Expense Other Nonoperating Revenues (Expenses)

Net Nonoperating Revenues (Expenses)

Increase (Decrease) in Net Assets Net Assets, Beginning of Year Net Assets, End of Year

$123,745 123,745 37,202

$123,745 37,202 160,947

$112,448 112,448 41,314

$112,448 41,314 153,762 46,952 12,018 46,952 44,246 12,018 10,692 44,246 10,692 51,244 7,758 117,972 5,773 36,121 87,365 7,758 36,121 154,093 46,007 7,251 108,196 41,355 45 41,400 87,362 7,296

.149,596 (86) 4,166 1,024 42 (1,340) 1,640 1,366 7,139 1,081 1,024 42 (1,340) 300 203 (1,236) 300 203 (1,236) 1,640 1,366 8,220 78,187

$ 86,407 (733) 3,519 70,011

$ 73,530 (733)

(86) 3,433 73,530

$ 80,669 4,657 5,.738 4,743 4,657 74,754

$ 78,187

20. 2004 RESTATEMENT Subsequent to the issuance of the University's 2004 financial statements, the University's management determined that misstatements had occurred in recording certain pledges receivable and the related revenue, summer academic session deferred tuition revenue and related prepaid expenses, timing of recording payables related to construction in progress and the depreciation of library book acquisitions.

In accordance with the provisions of GASB Statement No. 33, "Accounting and Financial Reporting for Nonexchange Transactions", pledges receivable are recorded and revenue is recognized when a pledge is received and all eligibility requirements, including time requirements, are met. In fiscal year 2004, pledges receivable were recorded and revenue was recognized for certain pledges received during fiscal year 2004 for which all eligibility requirements had not been met. The revenue recognition for these pledges will occur in subsequent fiscal years when all eligibility requirements are met.

In accordance with generally accepted accounting principles, revenues should be recorded in the periods earned and applicable expenses should be recorded in the periods incurred. The deferred revenues for summer session student fees and related expenditures have been restated to record the portion of summer session student fees earned and related expenditures incurred prior to June 30 in the current fiscal year and the portion after June 30 in the following fiscal year.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 51

7-l FOR THE YEARS ENDED JUNE 30.

2005 AND 2004 The University has previously capitalized library books as inexhaustible assets that have not been subject to depreciation.

In the restated financial statements, library holdings are treated as exhaustible assets and are depreciated on a straight-line basis over an estimated useful life of 20 years.

The impact of these misstatements and the related restatements are summarized in the following table:

At June 30:

Current Pledges Receivable, Net Prepaid Expenses and Other Current Assets Pledges Receivable, Net Capital Assets, Net Accounts Payable Deferred Revenue For the Year Ending June 30:

Operating Loss before State Appropriations and Nonoperating Revenue Net Other Nonoperating Revenues before Transfers Net Assets, Beginning of Year:

Invested in Capital Assets, Net of Related Debt Restricted - Expendable Unrestricted Increase in Net Assets Net Assets, End of Year:

Invested in Capital Assets, Net of Related Debt Restricted - Expendable Unrestricted 2004 as Previously Reported 22,749 22,387 47,905 1,807,986 86,272 51,451 Adjustments (15,035)

(9,313)

(31,634)

(107,662) 2,076 (14,962) 2004 as Restated 7,714 13,074 16,271 1,700,324 88,348 36,489 (414,402) 265,121 1,177,275 323,442 535,500 272,068 1,257,210 352,325 635,901 (8,459)

(40,625)

(102,690)

(6,044) 7,060 (49,084)

(109,738)

(46,669) 5,649 (422,861) 224,496 1,074,585 317,398 542,560 222,984 1,147,472 305,656 641,550 In addition, accrued liabilities for Capital Region Medical Center, an affiliate of the Medical Alliance included in the 2004 combined financial statements, have been restated to increase claims incurred but not reported for the medical professional liability based on a third-party actuarial analysis. The effects of the restatement are summarized in the following table:

2004 as Previously Reported Adjustments 2004 as Restated At June 30:

Accrued Liabilities 7,678 1,457 For the Year Ending June 30:

Net Assets, Beginning of Year -

Unrestricted 9,135 16,439 17,896 (1,457) 2005 FINANCIAL REPORT:

UNIVERSITY Of MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 52

91fdiZ-a-nea'Da/ka"en-FOR THE YEARS ENDED IJUNE 30, 2005 AND 2004

21. SUBSEQUENT EVENTS On July 1, 2005, the University sold $80,000,000 of capital project notes at an effective interest rate of 2.6%. The notes will be repaid in full by June 30, 2006. Proceeds from the issuance of the capital project notes will be used to fund various construction projects of the University.

In October 2005, the Board of Curators approved the issue of new bonds. In January 2006, the University expects to issue System Facilities Revenue Bonds, Series 2006, in the amount of $350 million. Proceeds from the issuance of the Series 2006 bonds will be used to finance construction of new housing facilities and renovations and improvements to existing housing facilities on the Columbia and St. Louis campuses and various other projects, advance refunding of previously issued series of revenue bonds, payment of capitalized interest on a portion of the Series 2006 Bonds, and payment of costs of issuance of the Series 2006 Bonds.

On October 3, 2005, the Circuit Court of St. Louis County, Missouri approved the settlement of a case filed in January 1998 relating to charging tuition by the University for undergraduate education, as discussed in Note 14. The judgment, order and decree (the "order") which approved this settlement was scheduled to become final 30 days after the date of the order and an additional 10 days thereafter for possible notice of appeal. Any appeal of the order was required to be filed within this 30-day time period or within 10 days after the date on which the order becomes final. On November 7, 2005, within the time period for filing a timely Notice of Appeal, one of the class members who objected to the settlement and sought to intervene filed a Notice of Appeal. On December 22, 2005, the appeal was dismissed with prejudice and the litigation has reached a conclusion. The University will proceed to establish the scholarship fund called for in the settlement agreement.

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI A COMPONENT UNIT OF THE STATE OF MISSOURI 53

2005 FINANCIAL REPORT:

UNIVERSITY OF MISSOURI 54 A COMPONENT UNIT OF THE STATE OF MISSOURI