MANAGEMENT DISCUSSION & ANALYSIS AND CONSOLIDATED FINANCIAL STATEMENTS With Independent Auditors' Report. May 31, 2014

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1 MANAGEMENT DISCUSSION & ANALYSIS AND CONSOLIDATED FINANCIAL STATEMENTS With Independent Auditors' Report

2 Table of Contents Page SECTION I MANAGEMENT DISCUSSION & ANALYSIS SECTION II AUDITED CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors Report 1 Consolidated Financial Statements Consolidated Statement of Financial Position 3 Consolidated Statement of Activities 4 Consolidated Statement of Cash Flows 5 6

3 SECTION I Management Discussion & Analysis OKLAHOMA BAPTIST UNIVERSITY

4 MANAGEMENT DISCUSSION & ANALYSIS Oklahoma Baptist University (the University) continues to transform lives by equipping students to pursue academic excellence, integrate faith with all areas of knowledge, engage a diverse world, and live worthy of the high calling of God in Christ. This fiscal year, the University continued to experience substantial growth in its student population and to see exciting things happening on campus especially all the new construction projects. God blessed the University with a record freshman class in Fall Five hundred eighty freshmen arrived on Bison Hill to begin their journey toward earning a college degree. Another record was established with the enrollment of 1,990 full-time equivalent students (FTE). Additionally, the total headcount of 2,097 was the highest since The Office of University Advancement pressed forward in the third year of the Vision for a New Century Capital Campaign (VNC). The team led regional campaigns in southeastern Oklahoma, Oklahoma City, Tulsa, and Dallas/Ft. Worth. Specifically, VNC campaign efforts in the fiscal year yielded more than $6.5 million in pledges and gifts. Overall in , a shortened 10-month fiscal year, nearly $8.5 million in gifts were received by OBU. This represents one of the highest fundraising totals in the University s history. In addition, the University hosted more than 700 guests at its second annual Green and Gold Gala featuring Dr. Ben Carson, adding new resources to the general endowment scholarship fund. During the ten-month fiscal period, many exciting physical changes began to take place on campus. In October 2013, the OBU Board of Trustees approved a request to renovate the President s former Home and rename it the Cargill Advancement and Alumni Center in honor of Bob and Sara Lou Cargill who donated funds for the renovation. Renovations were completed in the spring of 2014 and the University Advancement and Alumni Offices were moved from Jent Alumni Center to the Cargill Center. During that same Board meeting, the trustees approved the construction of two additional student housing projects (Buildings 3 and 4 of the residential village). Buildings 1 and 2 of the new residential village were completed in August Construction of Building 3 began in October 2013 and was completed in August 2014 in time for the fall 2014 semester. This apartment building houses 46 students. Work on the fourth student housing building (Building 4) began in June This suite style housing facility will house 160 student beds and 2 apartments, one for a housing director and the other for a faculty family, and is expected to be completed for the fall semester of Additionally, renovation of the 1 st floor snack bar area in the Geiger Center began during Christmas break and was completed in early spring. The area was renovated to include a Starbucks We Proudly Brew and a Chick-Fil-A which opened in February After the end of the spring semester, the University Cafeteria was closed for renovation. A major renovation of the cafeteria space took place over the summer and was completed in August 2014 in time for the start of the fall semester. A majority of the Geiger Center renovations were funded by Chartwells, the University s food service vendor. Additionally, in April 2014, construction began on the Mathena Center which will house all athletic training facilities on campus. Funded by the generosity of Harold and Patricia Mathena, the Mathena Center was completed in August In May 2014, the University held a ground-breaking ceremony for the Jane E. and Nick K. Stavros Hall, the future home of the College of Nursing, and construction began in July As part of the University s continuing commitment to creation stewardship, the residential facilities mentioned above will be heated and cooled using geothermal well fields constructed under a parking lot and under a soccer/lacrosse field. The University finished the fiscal year with strong financial results. The attached consolidated financial statements reflect the financial position of the University as of as well as the results of operations and cash flows for the ten-month period from August 1, 2013 to. The University changed its fiscal year end from July 31 to May 31, so the results of operations reflect the short ten-month fiscal period of transition.

5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Cash and investments provide essential liquidity to cover operating costs as well as fund construction and maintenance costs. The University maintains an investment portfolio that seeks to preserve capital, provide needed liquidity, and maximize investment return within appropriate risk constraints. Cash and investments totaled approximately $20.7 million as of which is an increase of approximately $2.6 million from the prior July. This change is partially due to a difference in the timing of payments for a May 31 fiscal year end versus a July 31 fiscal year end. As noted above, the University also has several construction projects ongoing and has accumulated funds on hand to pay construction costs as they are incurred. Construction of three major projects - Building 3 of the residential village, the Mathena Center and the renovation of the 2 nd floor cafeteria in the Geiger Center - were all completed in August 2014 in time for the fall semester. Endowment assets provide ongoing financial support for the University especially in the area of student scholarships. The University s endowment assets totaled approximately $117.5 million as of (refer to footnote 18) compared to approximately $108 million as of the end of the previous fiscal year. The vast majority of these endowment assets are under management at the Baptist Foundation of Oklahoma. This $9.5 million increase is due to a combination of donor contributions of approximately $3.7 million during and to remarkably improved investment market performance during At, approximately $67,000 of the University s endowment remained underwater compared to approximately $740,000 as of July 31, The University s long-term debt results from a long-term capital lease with the Oklahoma Baptist University Authority (see footnote 8). As part of this lease agreement, the Authority issues long-term debt to fund construction of campus facilities, and the University leases the facilities and funds the debt service payments. During , the University added approximately $8.1 million in educational plant assets and long-term debt as a result of the construction of Buildings 1 and 2 in the new residential village. These two apartment buildings opened in August 2013 and were at full capacity. In addition, a third apartment building was under construction as of ; therefore, the related asset and long-term debt for this third apartment building are not yet reflected on the attached Consolidated Statement of Financial Position. The third apartment building was completed in August 2014, and as a result, educational plant assets and long-term debt both increased by approximately $3.8 million at that time. Construction of Building 4 of the residential village began in June Upon completion of Building 4, approximately $9.7 million is expected to be added to educational plant assets and long-term debt. Construction of a new academic building to house the College of Nursing also began in July Partial, temporary financing consisting of a $6 million bank note was obtained in June 2014 to assist with the costs of construction until donor pledges for the construction of the building are collected. Overall, total net assets increased from approximately $169 million at July 31, 2013 to approximately $184 million at with the increase fairly evenly distributed between the unrestricted, temporarily restricted and permanently restricted categories. The majority of the temporarily and permanently restricted increases will benefit student scholarships and educational programs. CONSOLIDATED STATEMENT OF ACTIVITIES The University has a long history of balanced operating budgets and has continued this discipline for the ten-month fiscal period. As a private university, student generated revenue is the University s primary revenue source. For the ten month fiscal period ending, the University experienced an approximate 8% increase in student generated revenue over the previous fiscal year ended July 31, Student generated revenue includes net tuition and fees as well as auxiliary revenue and totaled approximately $29.9 million for compared to $27.6 million in The University s cost of attendance increased a modest 4.5% from the previous year; therefore, much of this increase was due to enrollment growth of approximately 9% from the previous year.

6 CONSOLIDATED STATEMENT OF ACTIVITIES, continued In the ten-month fiscal period ending, the University continued to receive generous support from its strong base of alumni and friends as well as Oklahoma Southern Baptists. For the ten-month fiscal period, the University received approximately $2.1 million from the Baptist General Convention of Oklahoma s cooperative program compared to approximately $2.5 million for the fiscal year ended July 31, Additionally, the University received approximately $3.5 million in support for specific programs and activities and another $3.7 million as an addition to the University s endowment. Investment market conditions continued to improve in and significantly contributed to the increase in net assets. During the ten-month period ended, the University recognized approximately $5.6 million in unrealized gains on investments compared to approximately $5.3 million for fiscal year ended July 31, Unrealized gains on investments are solely a function of the change in market values as of the last day of the fiscal period and are not considered to be a source of operating revenue for the University. The improvement in investment market conditions is evidenced in the payout of endowment earnings. Income on endowments increased from approximately $3.6 million in to approximately $4.4 million in due to market improvements over the last few years as well as additions to the University s endowment. Endowment earnings not only provide unrestricted operating revenue but also fund a significant amount of student scholarships. Operating expenses, excluding scholarships, were approximately $36.1 million for the ten-month fiscal period ending compared to approximately $37 million for the fiscal year ended July 31, The ten-month fiscal period ending included three academic terms: Fall 2013, January Term 2014, and Spring Therefore, faculty salaries and benefits for a full academic year are included in the ten-month fiscal period ending. The University continued to make progress in improving salary structures for faculty and staff as well as adding additional faculty and staff to accommodate enrollment growth and additional student services. Operating expenses for the ten-month fiscal period ending do include an addition of $117,000 in the actuarially determined post-retirement benefit obligation which is primarily due to a change in the market discount rate used to determine this liability; however, this increase is not attributable to operations of the University. CONCLUSION The University continues to focus on the effective use of its resources to advance the University s mission. We continue to invest in the lives of current students as well as pave the way for future students. Our students are making a difference in this world for Christ.

7 SECTION II Audited Consolidated Financial Statements OKLAHOMA BAPTIST UNIVERSITY

8 INDEPENDENT AUDITORS REPORT Board of Trustees Oklahoma Baptist University Shawnee, Oklahoma We have audited the accompanying consolidated financial statements of Oklahoma Baptist University (the University), which comprise the consolidated statement of financial position as of, and the related consolidated statements of activities and cash flows for the ten-month period then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

9 Board of Trustees Oklahoma Baptist University Shawnee, Oklahoma Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oklahoma Baptist University as of, and the changes in its net assets and cash flows for the ten-month period then ended in accordance with accounting principles generally accepted in the United States of America. Colorado Springs, Colorado October 10,

10 Consolidated Statement of Financial Position ASSETS: Cash and cash equivalents $ 1,967,028 Accounts receivable, net 2,221,240 Due from Oklahoma Baptist University Authority 913,516 Prepaid expenses and other assets 637,444 Student notes receivable, net 1,441,032 Investments 18,697,336 Funds held by others and remainder interests receivable 111,628,372 Educational plant, net 71,774,363 Total Assets $ 209,280,331 LIABILITIES AND NET ASSETS: Liabilities: Accounts payable $ 2,515,240 Accrued expenses and other liabilities 754,586 Prepaid tuition and other deposits 822,014 Capitalized leases payable 16,168,265 Post-retirement benefits obligation 3,204,000 Asset retirement obligation 836,012 Government advances refundable 779,716 25,079,833 Net assets: Unrestricted 64,784,310 Temporarily restricted 30,848,294 Permanently restricted 88,567, ,200,498 Total Liabilities and Net Assets $ 209,280,331 See notes to consolidated financial statements -3-

11 Consolidated Statement of Activities Ten-Month Period Ended Temporarily Permanently Unrestricted Restricted Restricted Total REVENUE, GAINS, AND OTHER SUPPORT: Tuition $ 37,379,469 $ - $ - $ 37,379,469 Fees 4,100, ,100,725 Gross tuition and fees 41,480, ,480,194 Less scholarships (20,398,481) - - (20,398,481) Net tuition and fees 21,081, ,081,713 Contributions and grants 1,272,037 3,456,337 3,730,796 8,459,170 Allocation from Baptist General Convention of Oklahoma 2,119, ,119,087 Royalties from Tulsa Royalties Company - 1,346,750-1,346,750 Auxiliary enterprises 8,808, ,808,909 Investment and endowment income 3,776,623 7,111, ,019 11,020,724 Other income 1,162,673 8,849-1,171,522 Net assets released from restrictions due to satisfaction of purpose and time restrictions 5,966,943 (5,979,569) 12,626 - Total Revenue, Gains, and Other Support 44,187,985 5,943,449 3,876,441 54,007,875 EXPENSES: Instruction 10,485, ,485,837 Public service 215, ,375 Academic support 2,579, ,579,733 Student services 6,563, ,563,395 Auxiliary enterprises 3,247, ,247,902 Plant operations 3,692, ,692,324 Institutional support 6,339, ,339,878 Scholarships 2,403, ,403,989 Depreciation 2,235, ,235,686 Debt service 786, ,889 Total Expenses 38,551, ,551,008 Change in Net Assets 5,636,977 5,943,449 3,876,441 15,456,867 Net Assets, Beginning of Ten-Month Period 59,147,333 24,904,845 84,691, ,743,631 Net Assets, End of Ten-Month Period $ 64,784,310 $ 30,848,294 $ 88,567,894 $ 184,200,498 See notes to consolidated financial statements -4-

12 Consolidated Statement of Cash Flows Ten-Month Period Ended CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 15,456,867 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 2,235,686 Unrealized gains on investments (5,599,742) Loss on disposal of educational plant assets 276,596 Donated investments (1,033,689) Contributions restricted for capital projects (2,807,689) Contributions and income restricted for endowment (3,863,815) Changes in: Accounts receivable (584,483) Due from Oklahoma Baptist University Authority (416,982) Prepaid expenses and other assets (176,326) Student notes receivable (215,840) Accounts payable/accrued expenses 568,695 Prepaid tuition and other deposits (523,041) Post-retirement benefits 117,000 Asset retirement obligation 38,055 Government advances refundable (11,045) Net Cash Provided by Operating Activities 3,460,247 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of educational plant assets (4,417,237) Proceeds from sale of educational plant assets 45,400 Proceeds from sales of investments 8,544,561 Purchases of investments (13,696,907) Net Cash Used by Investing Activities (9,524,183) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capitalized leases payable (710,981) Contributions restricted for capital projects 2,807,689 Contributions and income restricted for endowment 3,863,815 Net Cash Provided by Financing Activities 5,960,523 Change in Cash and Cash Equivalents (103,413) Cash and Cash Equivalents, Beginning of Ten-Month Period 2,070,441 Cash and Cash Equivalents, End of Ten-Month Period $ 1,967,028 SUPPLEMENTAL DISCLOSURES: Cash paid during the ten-month period for interest $ 747,105 Disposition of fully depreciated educational plant assets $ 103,171 Assets acquired under capital leases $ 8,121,338 See notes to consolidated financial statements -5-

13 1. NATURE OF ORGANIZATION:. The Oklahoma Baptist University (the University) was created by action of the Baptist General Convention of the State of Oklahoma in 1909 to function as an operating unit of the Convention under supervision of a Board of Trustees elected by that Convention. Articles of Incorporation were filed February 9, 1910, and amended November 25, 1974, with the State of Oklahoma and a charter was granted for a corporation of perpetual duration without capital stock. The purposes of the corporation are to encourage, support, provide, and maintain Christian education and to engage in Christian undertakings which are in keeping with the purpose of the Baptist General Convention of the State of Oklahoma. The University is exempt from Federal income taxes under the provisions of Section 501(c)(3) of the Internal Revenue Code (the Code) and has been classified as a publicly supported organization that is not a private foundation under Section 509(a) of the Code. Contributions to the University are tax deductible within the limitations prescribed by the Code. During 1991, the University accepted a gift of the Tulsa Royalties Company (the Company) as partial payment of a pledge used for the construction of the School of Business building. Tulsa Royalties Company (a public charity) remains intact as a separate corporation, with its directors being chosen from the University Board of Trustees. When the University received the Company, most of the assets were mineral interests. Additional mineral interests have been donated to Tulsa Royalties Company since that time. Tulsa Royalties Company is a supporting organization of the University. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The consolidated financial statements of the University have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the consolidated financial statements and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the consolidated financial resources and activities of Oklahoma Baptist University and Tulsa Royalties Company. All material transactions and balances between the University and the Company have been eliminated in the consolidated financial statements. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and on deposit in demand and interest-bearing accounts administered by the University. -6-

14 2. SIGNIFICANT ACCOUNTING POLICIES, continued: INVESTMENTS The University reports investments at fair value in the consolidated statement of financial position, with gains and losses included in the consolidated statement of activities. The methodologies for determining fair values are described in Note 17. The amounts the University will ultimately realize could differ materially and significant fluctuations in fair values could occur from year to year. Donated securities are recorded at market value at the date of donation and thereafter carried or sold in accordance with these policies. Income and gains on investments are reported as follows: Increases in permanently restricted net assets if the terms of the gift that gave rise to the investment or applicable law requires income or gains be added to the principal of a permanent endowment. Increases in temporarily restricted net assets if the terms of the gift or applicable law impose restrictions on the use of the income and the terms of the restriction will not be met during the reporting period. Increases in unrestricted net assets in all other cases. Generally, losses on the investments of restricted endowments reduce temporarily restricted net assets to the extent donor-imposed temporary restrictions on net appreciation of investments have not been met before the loss occurs. Any remaining losses reduce unrestricted net assets, but can be restored through subsequent investment gains. ACCOUNTS RECEIVABLE Student accounts receivable are reported net of anticipated losses due to uncollectible accounts. The University allows students to utilize an installment plan to pay their student account balances. Late or insufficient payments are subject to late fees. In addition, account balances not paid by the final installment due date for a semester are subject to finance charges of 15% per annum. Students who leave the University owing a balance are considered delinquent and are subject to internal collection efforts. If internal collection efforts are unsuccessful, those accounts are turned over to a third party collection agency. Accounts turned over to a third party collection agency no longer accrue finance charges. The University maintains an allowance for uncollectible accounts. The amount of the allowance is based on management s evaluation of the collectability of the receivable portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, payment patterns from the students, and general economic conditions. The allowance is maintained at a level which, in management s judgment, is adequate to absorb potential losses inherent in the receivable portfolio. As of, the allowance for uncollectible accounts was $1,465,

15 2. SIGNIFICANT ACCOUNTING POLICIES, continued: UNCONDITIONAL PROMISES TO GIVE Unconditional promises to give to the University are recognized when made. Allowances are recorded for estimated uncollectible promises. Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. Amortization of the discounts is included in contributions. As of, there are no material outstanding unconditional promises to give. CONDITIONAL PROMISES TO GIVE During 2011, the University launched a capital campaign, Vision for a New Century, to raise contributions to increase University endowment and fund several campus renovation and construction projects. The University has received good faith promises of specified amounts to support these campaign projects. These good faith promises are open-ended and subject to unilateral change by the donor. They are not considered to be unconditional promises to give and, therefore, are not recognized prior to receipt of the contribution. As of, total outstanding good faith promises received by the University approximated $8.2 million. Total accumulated campaign gifts, which include outstanding good faith promises, were approximately $36.5 million as of. STUDENT NOTES RECEIVABLE Of the $1,980,288 of outstanding student notes receivable as of, $1,034,234 is outstanding under U.S. Government loan programs as of. The remainder of the loans have been made under the University s endowed loan program. The loans are stated at net realizable value in the accompanying consolidated financial statements and are presented net of an allowance for uncollectible amounts totaling $539,256 at. FUNDS HELD BY OTHERS AND REMAINDER INTERESTS RECEIVABLE Funds held by others represent amounts held for the beneficial interest of the University under irrevocable perpetual agreements between donors and third-party trustees. The University s interests are recorded at the fair value of the net assets, with net increases or decreases in fair value during the year being reported as changes to the appropriate net asset class. Some funds include other life beneficiaries which may affect the valuation of endowment assets. The amounts the University will ultimately realize could differ materially and significant fluctuations in fair values could occur from year to year. Remainder interests represent amounts held by others that will be transferred to the University upon death of the current beneficiaries. -8-

16 2. SIGNIFICANT ACCOUNTING POLICIES, continued: EDUCATIONAL PLANT Plant facilities are stated at cost less accumulated depreciation or, if received as a gift, at fair value at the date received, less any subsequent accumulated depreciation. Generally, improvements, renovations and equipment purchases in excess of $2,000 are capitalized. Depreciation is recognized on a straight-line basis over the estimated useful lives of the related assets as follows: buildings and improvements (50 years), equipment and software (10 years), and vehicles and computer equipment (5 to 10 years). Depreciation begins in the year following the year of acquisition. Library materials, consisting of books, periodicals, microfilm and electronic media, are recorded at cost less accumulated depreciation. Depreciation is recognized on a straight-line basis over an estimated useful life of 20 years. ASSET RETIREMENT OBLIGATION Asset retirement obligations for asbestos remediation are recorded in accordance with GAAP. Initially, the obligation was recorded at fair value and the related asset retirement costs were capitalized. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the University records changes in the asset retirement obligation which result from the passage of time and/or revisions to either the timing of amount or the original estimate of undiscounted cash flows as they occur. GOVERNMENT ADVANCES REFUNDABLE Funds provided by the U.S. Government under the Federal Perkins Loan Program are loaned to qualified students and may be reloaned upon collection. These funds are ultimately refundable to the government and are reported as government advances refundable on the consolidated statement of financial position. NET ASSETS Information regarding financial position and activities is reported in three classes of net assets based on the existence or absence of donor-imposed restrictions. Net assets are classified as follows: Unrestricted net assets are those not subject to donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the board of trustees or may otherwise be limited by contractual agreements with outside parties. Temporarily restricted net assets are those whose use by the University is subject to donor-imposed restrictions that can be fulfilled by actions of the University or by the passage of time. Permanently restricted net assets are subject to donor-imposed restrictions that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes. Such net assets also include the University s beneficial interest in irrevocable trusts held by others. Investment income on remainder interest in trusts that are permanently restricted by the donor are recorded as increases or decreases in permanently restricted net assets. -9-

17 2. SIGNIFICANT ACCOUNTING POLICIES, continued: REVENUES, SUPPORT, SCHOLARSHIPS, AND DEPOSITS Revenue is recognized when earned and support when contributions are made, which may be when cash is received, unconditional promises are made, or ownership of other assets is transferred to the University. Conditional promises to give are not recorded until conditions are substantially met. The University reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. Assets received with donor-imposed restrictions that the University intends to use and actually uses within the same reporting period as received are treated in the same manner as unrestricted revenues for reporting purposes. Permanently restricted net assets reclassified to unrestricted or temporarily restricted net assets represent changes in restrictions specified by the donor. The University reports gifts of property and equipment as unrestricted support unless explicit donor stipulations specify how the donated asset must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how those long-lived assets must be maintained, the University reports expirations of donor restrictions when the donated or acquired longlived assets are put into service. Scholarships funded by unrestricted operating funds and tuition discounts granted to employees and their dependents are reported as a deduction from tuition and fees. Scholarships funded by designated contributions and earnings on assets specifically restricted for student financial aid are reported as expenses. Prepaid tuition and other deposits represent payments received before the services or products are provided by the University. EXPENSES Expenses are recorded as incurred in accordance with the accrual basis of accounting. The costs of providing the various programs and supporting activities of the University have been summarized on a functional basis in the consolidated statement of activities. Accordingly, certain costs have been allocated based on total personnel costs or other systematic bases. Fundraising expenses were $1,390,584 for the ten-month period ended May 31, 2014, and are included in institutional support. Advertising and promotion costs of $263,870 for the ten-month period ended are charged to expense as incurred. -10-

18 2. SIGNIFICANT ACCOUNTING POLICIES, continued: EXPENSES, continued The expenses of the University are classified in the following functional categories: Plant Operations and Debt Functional Department Service Depreciation Total Program services: Instruction $ 10,485,837 $ 1,096,509 $ 602,431 $ 12,184,777 Student services 6,563, , ,665 7,938,079 Auxiliary services 3,247,902 1,966, ,135 5,564,349 Academic support 2,579, , ,035 3,208,050 Scholarships 2,403, ,403,989 Public service 215, ,375 25,496,231 4,231,122 1,787,266 31,514,619 Supporting activities: Institutional support 6,339, , ,420 7,036,389 $ 31,836,109 $ 4,479,213 $ 2,235,686 $ 38,551,008 CHANGE IN FISCAL YEAR In May 2013, the Board of Trustees approved a change in the University's fiscal year end to May 31 which became effective August 1, Therefore, the University's current consolidated financial statements are a short ten-month fiscal period from August 1, 2013 to. UNCERTAIN TAX POSITIONS The financial statement effects of a tax position taken or expected to be taken are recognized in the consolidated financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Interest and penalties, if any, are included in expenses in the consolidated statement of activities. As of, the University and the Company had no uncertain tax positions that qualify for recognition or disclosure in the consolidated financial statements. The University's federal Return of Organization Exempt from Income Tax Form 990 for the years ended July 31, 2013, 2012, and 2011, and the Company's federal Return of Organization Exempt from Income Tax Form 990 for the years ended December 31, 2013, 2012, and 2011 are subject to examination by the IRS, generally for three years after they were filed. -11-

19 3. STUDENT LOANS: As an agent for the federal government, the University's Perkins loan portfolio is guaranteed by the United States Department of Education. There are, therefore, no impaired loans, no nonperforming loans, and no modifications to loan terms executed by the University because amounts that become old or past due are in due course returned to the Department of Education. Funds advanced by the Federal government of $779,716 at, are ultimately refundable to the government and are classified as liabilities in the consolidated statement of financial position. The aging of the Perkins and Endowed loan portfolio by class of loans as of, consists of: Amount Percent of Total Good Standing Deferred and not in repayment $ 831,972 68% Repayment on schedule 394,091 32% $ 1,226, % Past Due Not defaulted: Less than 240 days $ 172,049 23% Default: Greater than 240 but less than 2 years 125,316 17% Default: Greater than 2 years but less than 5 years 131,615 17% Greater than 5 years 325,245 43% $ 754, % Changes in allowance for estimated losses on Perkins and endowed student loans for the ten-month period ended are: Beginning balance $ 539,256 Provisions charged to expense - Loans charged off - Recoveries on loans previously charged off - $ 539,

20 4. INVESTMENTS: Investments at are as follows: Certificates of deposit $ 175,015 Domestic equities 24,783 Bond mutual funds 741,920 Equity mutual funds 298,197 Taxable municipal bonds 74,906 Church building loan fund 10,486,825 Mineral interests 6,895,690 $ 18,697, FUNDS HELD BY OTHERS AND REMAINDER INTERESTS: Funds held by others at were held by the following entities: Funds administered by The Baptist Foundation of Oklahoma $ 107,984,763 Funds administered by the Oklahoma City Community Foundation 747,468 Trusts administered by Southern Baptist Foundation 179,711 Trust administered by Presbyterian Foundation 15,953 Trust administered by Northern Trust Company 909,113 Trust administered by Arvest Asset Management 1,791,364 $ 111,628,372 $63,145,574 of the funds administered by The Baptist Foundation of Oklahoma (Foundation) list the University as the custodian as of. The University has placed these funds with The Baptist Foundation of Oklahoma for investment. Assets held by The Baptist Foundation of Oklahoma as trustee or in a custodial capacity are predominantly pooled investment interests consisting of approximately 70% equity and 30% fixed income investments with various alternative investments utilized in both of those categories in addition to traditional stock and bond portfolios. As of, the University owns approximately 29% of the assets within the investment pool at the Foundation. Some of the alternative investments within the investment pool have certain liquidity restrictions. These assets are carried at fair value. In addition, the Foundation holds mineral interests, real estate and mortgages. -13-

21 5. FUNDS HELD BY OTHERS AND REMAINDER INTERESTS, continued: Funds held by others at are invested as follows: Cash and equivalents $ 1,939,885 Bond mutual funds 2,203,640 Equity mutual funds 795,693 Domestic equities 11,761,320 International equities 19,600,417 Mineral interests 2,591,895 Fixed income instruments 8,194,132 Limited partnerships 63,028,474 Charitable remainder interests 1,393,064 Life insurance 74,165 Commodities 27,158 Other investments 18,529 $ 111,628, INVESTMENT AND ENDOWMENT INCOME: Investment and endowment income consists primarily of interest, dividends, gains, and appreciation from assets held by others. The following is the composition of investment and endowment income for the ten-month period ended May 31, 2014: Unrealized gain on investments $ 5,599,742 Realized gains 15,989 Endowment income 4,444,237 Interest, dividends and other 354,765 Mineral income 605,991 $ 11,020,

22 7. EDUCATIONAL PLANT: The components of educational plant at are as follows: Leasehold improvements $ 283,789 Land and improvements 4,886,737 Buildings 82,626,753 Equipment 21,775,195 Library books 1,515,341 Software 3,776,174 Construction in progress 979, ,843,393 Accumulated depreciation (44,069,030) $ 71,774, CAPITALIZED LEASES PAYABLE: The University has a lease with the Oklahoma Baptist University Authority (Authority) which commenced December 1, 1979, and covers the main campus facilities. The lease, as amended through June 2, 2006, will terminate July 31, 2045, but in no event prior to the payment of all debt issued by the Authority for the benefit of the University. The last scheduled maturity is April The lease payments are equal to the debt service requirements of the outstanding debt. The purpose of the lease was to obtain funds for projects such as the construction and renovation of buildings and the purchase of equipment. Assets totaling approximately $40.7 million have been constructed or purchased under this lease. Accumulated amortization on these assets is approximately $12.2 million as of May 31, These assets are included with educational plant assets. The Authority financed these projects by issuing debt. As of, there is currently one bond issue outstanding, as follows: the Oklahoma Baptist University Authority, Oklahoma Baptist University Revenue Bonds, Series 2005, as well as a bank note, the Oklahoma Baptist University Authority Student Housing Revenue Note, Series

23 8. CAPITALIZED LEASES PAYABLE, continued: In October 2011, the board of trustees approved a resolution to proceed with plans for various construction projects including additional housing for students. Funding for these construction projects consists of a combination of existing funds, future gifts and pledges, and long-term financing. The long-term financing consists of a 20-year term $8,000,000 bank note which was issued by the Authority in May 2012 to construct the first two apartment buildings. In November 2013, the long-term financing for phase 2 was completed in order to construct two additional student housing buildings (buildings 3 and 4). This financing consisted of a second bank note in the amount of $13,500,000 with a term of 262 months. The proceeds of the second note are held by the Authority, and during construction the University advances funds on behalf of the Authority and is reimbursed. As of, the amount due from the Authority is $913,516. Interest costs incurred during construction are being capitalized by the Authority. Building 3 was completed in August 2014 and approximately $3.8 million was added to educational plant assets and capitalized lease payable. Upon completion of building 4, the capitalized lease payable will be adjusted for the change in debt service requirements for the remainder of the $13,500,000 bank note. The bonds and bank note are secured by rentals and other monies derived from the lease of the main campus facilities and by a guarantee of the Baptist General Convention of the State of Oklahoma. Additionally, the University has entered into capital lease agreements for new data center and other equipment. Assets totaling approximately $734,000 were purchased under this lease. These assets are included with educational plant assets. Accumulated amortization on these assets is approximately $85,000. Amortization expense under these lease agreements is included in depreciation and depletion expense on the consolidated statement of activities. The following is a schedule of future minimum lease payments under the capital lease agreements, together with the present value of the net minimum lease payments as of : Year Ending May 31, 2015 $ 1,727, Thereafter 1,728,097 1,689,835 1,661,292 1,552,294 13,703,000 22,062,021 Less amount representing interest (5,893,756) Present value of net minimum lease payments $ 16,168,

24 9. OPERATING LEASES: The University leases space for its graduate program site in Oklahoma City from the Baptist General Convention of Oklahoma. The lease runs through December The University has also entered into operating leases for management of the University mail room and copy center as well as equipment across campus, laundry equipment, and parking facilities which run through July In addition, the University leases postage equipment under an operating lease that expires in December Total lease expense under the above lease agreements for the ten-month period ended was $236,018. Future minimum lease payments are approximately: Year Ending May 31, $ $ 231, ,920 44,067 9,996 5, , FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK: At, the University had certain concentrations of credit risk with several financial institutions in the form of uninsured cash and time deposits. For purposes of evaluating credit risk, the stability of financial institutions conducting business with the University is periodically reviewed and management of the University believes that credit risk related to these uninsured deposits is minimal. 11. RETIREMENT PLANS: Pension Plan - The University provides a defined contribution plan (the Plan) that covers all of its full-time employees. Under the Plan, the University contributes an amount equal to 6% of the participating employees' salaries. Employee contributions are voluntary. Total pension contributions for the ten-month period ended were approximately $847,000. Other Benefit Plans - The University provides deferred compensation (IRC section 457) plans. These plans were funded in the amount of approximately $117,000 as of. The assets are reported as investments, and the liability is included in accrued expenses. There were no contributions to the plans for the ten-month period ended. These benefit plans are funded as costs are incurred. -17-

25 12. POST-RETIREMENT BENEFITS: Exempt employees who retire after a minimum of fifteen years of service and have reached the age of 65 are eligible to receive postretirement benefits in the form of term life insurance and a Medicare supplement insurance policy. Effective August 1, 2011, the plan was revised to provide benefits to retirees starting at age 65, up to a maximum monthly premium of $175. The University recognizes postretirement benefits on an accrual basis as employees perform services to earn such benefits. The plan is not funded. Effective August 1, 2013, new employees were not eligible to participate in these post-retirements benefits. Accumulated postretirement benefit obligation as of is as follows: Accumulated postretirement benefit obligation: Retired participants $ 2,057,700 Active participants: Fully eligible 277,200 Not yet fully eligible 869,100 3,204,000 Plan assets at fair value - Accumulated postretirement benefit obligation in excess of plan assets $ 3,204,000 Net periodic postretirement benefit cost for the ten-month period ended include the following: Service cost $ 39,745 Interest cost 100,083 Amortization of unrecognized prior service cost (100,418) $ 39,410 For measurement purposes, the following assumptions have been used to determine benefit obligations as of : Discount rate 3.8% Expected long-term health care cost increase: Initial rate 8% Ultimate rate 5% Time to ultimate rate 6 years Weighted average remaining service-active participants 12 years -18-

26 12. POST-RETIREMENT BENEFITS, continued: The following is a schedule of estimated benefit payments expected to be paid over the next 10 years: Year Ending May 31, $ 209, , , , ,700 1,072, TULSA ROYALTIES COMPANY: The value of the mineral interests held by Tulsa Royalties Company (the Company) are $5,027,717 as of May 31, 2014, and are included in investments along with the other mineral interests held by the University. Royalties earned by the Company and included in the University's consolidated financial statements were $1,346,750 for the ten-month period ended. These amounts are reported as temporarily restricted income in accordance with the original donor's intent that the funds be used for specified purposes. 14. UNRESTRICTED NET ASSETS: Unrestricted net assets as of consist of the following: Undesignated $ 4,542,521 Less: Post retirement benefit obligation (Note 12) (3,204,000) Less: Asset retirement obligation (Note 2) (836,012) 502,509 Board designated endowments (Quasi-endowments) 8,742,732 Underwater endowments (67,029) Net investment in educational plant 55,606,098 $ 64,784,

27 15. TEMPORARILY RESTRICTED NET ASSETS: Temporarily restricted net assets as of, are available for the following purposes: Purpose restrictions: Held by University: Scholarships $ 4,550,029 Educational programs: College of Business 77,400 College of Science and Math 57,792 College of Humanities and Social Sciences 31,248 College of Nursing 4,734 College of Fine Arts 109,827 College of Theology and Ministry 13,362 Library 17,212 Athletics 14,664 Capital projects 9,021,176 Other 629,510 14,526,954 Held by The Baptist Foundation of Oklahoma: Scholarships 8,240,133 Educational programs 978,966 Student loan programs 1,698,479 Faculty positions and development 1,401,192 Plant maintenance and improvements 803,445 Other 2,269,115 15,391,330 Held by the Oklahoma City Community Foundation: Scholarships 52,351 Educational programs 80,676 Lectureships 132,790 Professorships 12,849 Undesignated 77, ,

28 15. TEMPORARILY RESTRICTED NET ASSETS, continued: Time restrictions: Future interest in remainder interest trusts held by The Baptist Foundation of Oklahoma 202,149 Toland Trust 371, ,653 $ 30,848, PERMANENTLY RESTRICTED NET ASSETS (ENDOWMENT): Permanently restricted net assets held by the University include net assets that donors have given to fund future scholarships. These assets include cash funds waiting to be transferred to the Baptist Foundation of Oklahoma, as well as non-cash assets given by donors. Upon sale of these non-cash assets, the proceeds will be transferred to the Baptist Foundation of Oklahoma for investment, in accordance with the University's policies. Additionally, the University holds permanently restricted net assets for student loan programs. These funds have been distributed to the University by the Baptist Foundation of Oklahoma to be used for active lending to students. Permanently restricted net assets as of, are held by the following entities and restricted for the purposes shown below: Held by University: Scholarships $ 154,128 Student loan programs 1,185,265 1,339,393 Held by The Baptist Foundation of Oklahoma: Scholarships 47,343,374 Educational programs 7,147,724 Student loan programs 890,925 Faculty positions and development 12,864,148 Plant maintenance and improvement 986,047 Undesignated 10,909,756 Other 2,979,875 Future interest in remainder interest trusts 1,190,904 84,312,