Financial statements and report of independent certified public accountants Oklahoma State University June 30, 2006 and 2005

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1 Financial statements and report of independent certified public accountants Oklahoma State University June 30, 2006 and 2005

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3 C O N T E N T S Page MANAGEMENT S DISCUSSION AND ANALYSIS i REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1 FINANCIAL STATEMENTS STATEMENTS OF NET ASSETS 3 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS 4 STATEMENTS OF CASH FLOWS 5 NOTES TO FINANCIAL STATEMENTS 7 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 49 OKLAHOMA STATE UNIVERSITY FOUNDATION OSUF PHASE III STUDENT HOUSING L.L.C. OSU COWBOY GOLF, INC. EXHIBIT I EXHIBIT II EXHIBIT III SUPPLEMENTARY INFORMATION REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 AND THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 107 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 109 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 111 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 117 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS 120 DETAILED SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS CENTER FOR INNOVATION AND ECONOMIC DEVELOPMENT, INC. GENERAL UNIVERSITY SCHEDULE OF AGENCY ACRONYMS APPENDIX A APPENDIX B APPENDIX C

4 Oklahoma State University Management s Discussion and Analysis Overview of Financial Statements and Financial Analysis Oklahoma State University proudly presents its financial statements for fiscal year 2006, with comparative data presented for fiscal year The emphasis of discussions concerning these statements will be for the current year. There are three financial statements presented: the Statement of Net Assets; the Statement of Revenues, Expenses, and Changes in Net Assets; and, the Statement of Cash Flows. All dollar amounts in this discussion are presented in thousands of dollars. This discussion and analysis of the University s financial statements provides an overview of its financial activities for the year. Statement of Net Assets The Statement of Net Assets presents the assets (current and non-current), liabilities (current and non-current), and net assets (assets minus liabilities) as of the end of the fiscal year. The purpose of the Statement of Net Assets is to present to the readers of the financial statements a fiscal snapshot of the Oklahoma State University. The difference between current and non-current assets is discussed in the footnotes to the financial statements. From the data presented, readers of the Statement of Net Assets are able to determine the assets available to continue the operations of the institution. They are also able to determine how much the institution owes vendors, investors and lending institutions. Finally, the Statement of Net Assets provides a picture of the net assets (assets minus liabilities) and their availability for expenditure by the institution. Net assets are divided into three major categories. The first category, invested in capital assets, net of debt, provides the institution s equity in property, plant and equipment owned by the institution. The next category, restricted net assets is divided into two categories, nonexpendable and expendable. The corpus of non-expendable restricted resources is only available for investment purposes. Expendable restricted net assets are available for expenditure by the institution, but must be spent for purposes as determined by donors and/or external entities that have placed time or purpose restrictions on the use of the assets. The final category is unrestricted net assets. Unrestricted assets are available to the institution for any lawful purpose of the institution. The chart below is a summary of the Statement of Net Assets over the last five years.

5 Statement of Net Assets - Continued Statement of Net Assets (Thousands of Dollars) June Assets: Current assets $ 132,316 $ 145,199 $ 156,258 $ 178,829 $ 202,264 Capital assets, net 422, , , , ,267 Other assets 72,402 57,647 55,661 58, ,386 Total Assets 627, , , , ,917 Liabilities Current Liabilities 42,205 48,744 52,030 56,141 60,520 Noncurrent Liabilities 151, , , , ,036 Total Liabilities 193, , , , ,556 Net Assets Invested in capital assets, net of debt 327, , , , ,149 Restricted - expendable 30,697 26,426 31,360 32,315 29,214 Restricted - nonexpendable Unrestricted 73,804 78,794 85, , ,191 Total Net Assets $ 433,153 $ 416,390 $ 431,060 $ 455,198 $ 537,361 Total assets of the institution increased by $202,848. A review of the Statement of Net Assets will reveal that there are many offsetting variances, but the increase was primarily due to an increase in current assets of $23,435, an increase in capital assets net of depreciation of $69,975, and an increase of $120,459 in receivables from state agencies. $108,978 of this was the receivable created for the OCIA Capital Bonds issued by the State. These were offset by a decrease in non-current cash and cash equivalent and accounts receivable of $11,021 Total liabilities for the year increased by $120,685. The most significant cause for the increase was the corresponding $108,176 liability created for the OCIA Capital Bonds issued by the State. Other factors were the use of the ODFA master lease program in the amount of $12,523 and an increase in current liabilities of $4,379. These were offset by a decrease in non-current payables of $4,034. The combination of the increase in total assets and the increase in total liabilities nets to an increase in total net assets of $82,163. ii

6 Statement of Revenues, Expenses, and Changes in Net Assets While the comparisons are important indicators of activity during the year under audit, it is important to look at some of the operating and non-operating categories over time. One of the important measures of an institution s fiscal stability is how operating revenues compare to operating expenses. While public institutions will normally not have an excess of operating revenues over operating expenses (State appropriations are considered non-operating revenues under accounting principles generally accepted in the United States of America) it is important to understand the relationship of revenues to expenses over time. In the chart below, it can be seen that operating revenues for the University have increased, over time, slightly more per year than operating expenses. $800,000 Operating Revenues vs. Operating Expenses ($ in Thousands) $600,000 $400,000 $200,000 $ Revenues Expenses iii

7 Statement of Revenues, Expenses, and Changes in Net Assets- Continued To narrow the gap between operating revenues and operating expenses, tuition and fees, grants and contracts, and auxiliary enterprise revenues must increase in amounts greater than increases in operating expenses. Of particular interest is the relationship of State appropriations when compared to tuition and fees over the past five years. Note the relationship in the charts below. Fiscal years 2002 and 2003 showed tuition and fees increase by over 11% and State appropriations dropped over 5%. In 2004 tuition and fee revenues increased by more than 30% and State appropriations over 1%. This trend has continued. In fiscal year 2002, tuitions and fees were 27.4% of the State appropriation. In fiscal year 2006, it was 55%. State appropriations and tuition and fees are intensely interrelated in the revenue projections of the University. The charts below emphasize the changes we have seen in both tuition and fees and State appropriations. Tuition and Fees ($ in Thousands) $150,000 $100,000 $50,000 $ State Appropriations ($ in Thousands) $300,000 $200,000 $100,000 $ iv

8 Statement of Revenues, Expenses, and Changes in Net Assets- Continued Another important contributor to revenues is the research component of the University. Over the past five years grants and contracts have increased by approximately $30,000 (See chart below.) $150,000 Grants and Contracts ($ in Thousands) $100,000 $50,000 $ Auxiliary Enterprises (Residential Life, Student Union, Bookstore, Health, Physical Education and Recreation, Athletics, University Health Services, Fire Protection Publications, etc.) also have contributed positively to the Operating Revenues over time. $150,000 Auxiliary Enterprises ($ in Thousands) $100,000 $50,000 $ Unfortunately, even with the positive contributions of tuition and fees, grants and contracts, and auxiliary enterprises, the University has had to generate a positive balance in other revenues, expenses, gains and losses to generate a net increase in net assets in each of the years reviewed above. v

9 Statement of Cash Flows The final statement presented by the Oklahoma State University is the Statement of Cash Flows. The Statement of Cash Flows presents detailed information about the cash activity of the institution during the year. The statement is divided into five parts. Cash Flows (Thousands of Dollars) June Cash provided (used) by: Operating activities $ (196,694) $ (184,374) $ (194,291) $ (176,439) $ (195,469) Noncapital financing activities 226, , , , ,752 Investing activities 2,332 1,938 1,892 (2,464) (12,344) Capital and related financing activities (13,631) (35,367) (11,404) (13,249) (41,785) Net Change in Cash 18,209 (8,017) 3,349 22,625 (13,846) Cash, beginning of year 48,332 66,541 58,524 61,873 84,498 Cash, end of year $ 66,541 $ 58,524 $ 61,873 $ 84,498 $ 70,652 The first part deals with operating cash flows and shows the net cash used by the operating activities of the institution. The second section reflects cash flows from noncapital financing activities. This section reflects the cash received and spent for nonoperating, non-investing, and non-capital financing purposes. The third section reflects the cash flows from investing activities and shows the purchases, proceeds, and interest received from investing activities. The fourth section deals with cash flows from capital and related financing activities. This section deals with the cash used for the acquisition and construction of capital and related items. The fifth section reconciles the net cash used to the operating income or loss reflected on the Statement of Revenues, Expenses, and Changes in Net Assets. Determining Whether Certain Organizations Are Component Units The Governmental Accounting Standards Board (GASB) published GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units, which became effective in fiscal year 2004 and requires universities to include in their financial statements component unit financial information. Oklahoma State University has determined that the Oklahoma State University Foundation, OSUF Phase III Student Housing LLC, and OSU Cowboy Golf, Inc. meet the necessary criteria for inclusion. 1 The inclusion of these statements should not be interpreted that Oklahoma State University has access to the resources contained therein. 1 GASB Statement No. 39: 5. vi

10 Economic Outlook During fiscal year 2006, the University continued to see a recovery in its State appropriations. The University had suffered significant reductions in previous years. In fiscal year 2006 Oklahoma State University benefited from an increase of 8.9% and has now returned to approximately 6% above 2002 levels. While the institution remains at the bottom of the Big XII in tuition and mandatory fee costs, OSU and Oklahoma Higher Education are concerned about the large increases in tuition and mandatory fees over the past few years. As a percentage of per capita personal income OSU s tuition and fees are lower than all but two of the surrounding states. Should increases such as energy costs, salaries and Restore, Reward and Grow not be funded through increases in State Appropriations, tuition and fees will continue to escalate. The University is hopeful that with the increasing strength in the Oklahoma economy, the State will continue to increase State Appropriations for Higher Education. The University continues to develop scenarios to reduce costs while protecting the student experience. Reprogramming efforts will remain necessary to address critical funding issues required to support critical academic and research initiatives. Kathy Kamm Elliott, MBA, CPA Associate Vice President and Controller David C. Bossserman, Ph.D., CPA Vice President for Administration and Finance vii

11 Accountants and Business Advisors Report of Independent Certified Public Accountants Board of Regents Oklahoma Agricultural and Mechanical Colleges We have audited the accompanying statements of net assets of Oklahoma State University (a component unit of the State of Oklahoma) ( the University ) as of June 30, 2006 and 2005, and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended and the separately presented component units as of and for the years ended June 30, 2006 and 2005 (Oklahoma State University Foundation and OSUF Phase III Student Housing, L.L.C.), and as of and for the years ended December 31, 2005 and 2004 (OSU Cowboy Golf, Inc.), which collectively comprise the University s basic financial statements. These financial statements are the responsibility of the University s management. Our responsibility is to express an opinion on these financial statements based on our audits. Oklahoma State University Foundation ( University Foundation ), a not-for-profit Oklahoma Corporation organized to support the University, OSUF Phase III Student Housing L.L.C. ( OSUF Phase III ), a special purpose entity created for the benefit of the University Foundation, and OSU Cowboy Golf, Inc. ( Golf ), a not-for-profit Oklahoma corporation organized to support the University are component units of the University as defined by Governmental Accounting Standards Board ( GASB ) Statement No. 39, Determining Whether Certain Organizations are Component Units. The financial statements referred to above do not include the financial statements of the University Foundation, OSUF Phase III or Golf. Rather, complete sets of financial statements of the University Foundation, OSUF Phase III and Golf are presented separately. We did not audit the separately presented financial statements of the University Foundation, OSUF Phase III or Golf which statements reflect total assets of $374,591,039 and $320,012,636 as of June 30, 2006 and 2005, respectively, and total operating revenues of $155,129,425 and $84,939,594 for the years then ended for the University Foundation; total assets of $207,808,627 and $210,664,124 as of June 30, 2006 and 2005, respectively, and total operating revenues of $13,659,421 and $12,487,176 for the years then ended for OSU Phase III; and total assets of $214,509,000 and $21,144,000 as of December 31, 2005 and 2004, respectively, and total operating revenues of $3,098,000 and $3,410,000 for the years then ended for Golf. Those statements were audited by other auditors whose reports have been included in those separate sets of financial statements. Our opinion, insofar as it relates to the amounts included for the separately presented component units, is based on the reports of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America as established by the American Institute of Certified Public Accountants and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. Suite Leadership Square 211 N. Robinson Oklahoma City, OK T F W Grant Thornton LLP US Member of Grant Thornton International 1

12 In our opinion, based on our audits and the reports of other auditors, the financial statements of the University, referred to above present fairly, in all material respects, the financial position of Oklahoma State University and the separately presented component units as of June 30, 2006 and 2005 and December 31, 2005 and 2004 and the changes in their net assets and cash flows for the years ended June 30, 2006 and 2005 and December 31, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report, dated October 11, 2006 on our consideration of the University 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 the 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 read in conjunction with this report in considering the results of our audit. Management s discussion and analysis on pages i through vii is not a required part of the basic financial statements, but is supplementary information required by accounting principles generally accepted in the United States of America and the Governmental Accounting Standards Board. 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. Oklahoma City, Oklahoma October 11,

13 Oklahoma State University STATEMENTS OF NET ASSETS June 30, ASSETS Current Assets ($ in thousands) Cash and cash equivalents $ 42,361 $ 45,771 Accounts receivable, net 53,042 40,023 Investments 89,023 75,416 Interest receivable Current portion of student loans receivable, net 1,752 1,730 Inventories 12,711 12,973 Prepaid expenses 2,128 1,767 Other assets Total current assets 202, ,829 Noncurrent Assets Cash and cash equivalents 28,291 38,727 Investments 1,420 1,337 Accounts receivable 197 1,197 Receivables from state agencies 121, Loans to students, net 15,771 15,566 Other assets 1,262 1,135 Capital assets, net of accumulated depreciation 525, ,292 Total noncurrent assets 693, ,240 TOTAL ASSETS 895, ,069 LIABILITIES Current Liabilities Accounts payable 18,469 16,895 Deferred revenue 25,792 23,778 Assets held in trust for other institutions 3,563 3,545 Student and other deposits 2,007 1,838 Accrued compensated absences 8,003 7,478 Accrued workers' compensation claims 2,686 2,607 Total current liabilities 60,520 56,141 Noncurrent Liabilities Accrued compensated absences 9,484 8,936 Landfill closure and postclosure costs 2,937 2,937 Accrued workers' compensation claims 1,537 1,620 Deferred revenue Student deposits Revenue bonds payable 101, ,320 Accounts payable for noncurrent assets 5,001 5,305 Accrued interest payable 2,137 2,489 Federal loan program contribution payable 17,486 17,486 Notes payable 16,786 18,196 OCIA capital lease obligation 113,053 5,236 ODFA master lease program 26,434 13,911 Obligations under other capital leases 1, Total noncurrent liabilities 298, ,730 TOTAL LIABILITIES 358, ,871 NET ASSETS Invested in capital assets, net of debt 387, ,755 Restricted for: Nonexpendable Expendable Scholarships, research, instruction, and other Loans 2,310 2,221 Capital projects 22,187 24,888 Debt service 4,031 4,850 Unrestricted 120, ,328 TOTAL NET ASSETS $ 537,361 $ 455,198 The accompanying notes are an integral part of these statements. 3

14 Oklahoma State University STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS For the years ended June 30, ($ in thousands) Operating revenues Tuition and fees, net of scholarship allowances of $25,647 in 2006 and $30,176 in 2005 $ 129,677 $ 108,580 Federal appropriations 9,200 8,523 Federal grants and contracts 89,528 90,296 State and local grants and contracts 32,568 27,761 Nongovernmental grants and contracts 21,111 20,520 Sales and services of educational departments 22,283 16,612 Auxiliary enterprises charges Residential life, net of scholarship allowances of $668 in 2006 and $651 in ,449 28,535 Student union services, including bookstore sales; revenues totaling $17,406 in 2006 and $16,417 in 2005 are used as security for 2002 and 2004 Student Union Revenue Bonds, 2004 OKC Student Center Revenue Bonds, and 1995 Okmulgee Student Union Refunding Revenue Bonds 17,406 16,417 Health, physical education and recreation 2,944 3,145 Athletics, net of scholarship allowance of $1,679 in 2006 and $1,370 in 2005; revenues totaling $23,118 in 2006 and $27,041 in 2005 are used as security for Series 1998, 2003, and 2004 Athletic Facilities Revenue Bonds 23,118 27,041 University health services 34,830 18,993 Fire protection publications 9,418 9,713 Other auxiliary revenue 23,608 23,405 Interest earned on loans to students Other operating revenues 14,741 12,524 Total operating revenues 461, ,338 Operating expenses Compensation and employee benefits 391, ,923 Contractual services 89,883 69,150 Supplies and materials 45,956 38,564 Utilities 22,402 22,069 Communication 6,570 6,569 Other operating expenses 56,284 63,559 Scholarships and fellowships 49,675 39,799 Depreciation expense 32,114 33,736 Total operating expenses 694, ,369 Operating loss (233,346) (224,031) Nonoperating revenues (expenses) State appropriations 235, ,471 Gifts, including $9,342 in 2006 and $3,039 in 2005 used as security on the 1998, 2003, and 2004 Athletic Facilities Revenue Bonds 13,432 6,127 Investment income 2,467 3,180 Interest expense (8,637) (6,903) Net nonoperating revenues 242, ,875 Income (loss) before other revenues, expenses, gains and losses 9,636 (5,156) Capital from grants, gifts and affiliates 61,404 18,166 State appropriations restricted for capital purposes 6,802 6,503 Additions to permanent endowments 9 14 Loss on disposal of fixed assets (1,627) (1,904) Other additions, net 5,939 6,515 Net increase in net assets 82,163 24,138 Net assets Net assets - beginning of year 455, ,060 Net assets - end of year $ 537,361 $ 455,198 The accompanying notes are an integral part of these statements. 4

15 Oklahoma State University STATEMENTS OF CASH FLOWS For the years ended June 30, ($ in thousands) Cash flows from operating activities Tuition and fees $ 130,483 $ 105,130 Grants and contracts 152, ,303 Sales and services of educational activities 22,283 16,612 Auxiliary enterprise charges Residential life 29,567 29,049 Student union services 17,121 16,105 Health, physical education and recreation 2,960 3,119 Athletics 18,944 29,767 Interest earned on loans to students Other operating receipts 79,619 69,463 Payments to employees for salaries and benefits (379,171) (353,261) Payments to suppliers (269,825) (239,556) Loans issued to students and employees (5,026) (4,524) Collection of loans to students and employees 4,390 4,081 Net cash used by operating activities (195,469) (176,439) Cash flows from noncapital financing activities State appropriations 225, ,998 Gifts for other than capital purposes 10,272 6,027 Direct lending receipts 88,964 86,600 Direct lending payments (88,964) (86,600) Agency fund receipts 2,903 3,306 Agency fund payments (2,712) (2,787) Third party facility - receipts 13,090 12,286 Third party facility - payments (13,097) (12,053) Net cash provided by noncapital financing activities 235, ,777 Cash flows from investing activities Purchases of investments (18,662) (12,674) Proceeds from sales of investments 5,475 9,329 Interest received on investments Net cash used by investing activities (12,344) (2,464) Cash flows from capital and related financing activities Cash paid for capital assets (103,034) (46,283) Capital appropriations received 4,138 5,834 Capital from grants, gifts and affiliates received 61,554 18,059 Proceeds of capital debt 23,883 29,470 Repayments of capital debt and leases (27,584) (20,446) Interest paid on capital debt and leases (6,681) (6,398) Other sources 5,939 6,515 Net cash used by capital and related financing activities (41,785) (13,249) Net (decrease) increase in cash and cash equivalents (13,846) 22,625 Cash and cash equivalents, beginning of year 84,498 61,873 Cash and cash equivalents, end of year $ 70,652 $ 84,498 The accompanying notes are an integral part of these statements. 5

16 Oklahoma State University STATEMENTS OF CASH FLOWS - CONTINUED For the years ended June 30, RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES Operating loss (233,346) ($ in thousands) $ $ (224,031) Adjustments to reconcile operating loss to net cash used by operating activities Depreciation expense 32,114 33,736 On-behalf contributions to teachers' retirement system 10,424 8,473 Changes in assets and liabilities Accounts receivable (8,850) 2,965 Inventories 262 (900) Prepaid expenses (361) (353) Accounts payable and accrued expenses 1,570 1,201 Deferred revenue 1,858 1,325 Student and other deposits Compensated absences 1,073 1,024 Federal contribution payable Loans to students and employees (227) (87) Net cash used by operating activities $ (195,469) $ (176,439) NONCASH INVESTING, NONCAPITAL FINANCING, AND CAPITAL AND RELATED FINANCING TRANSACTIONS Fixed assets acquired by incurring capital lease obligations $ 904 $ 131 Change in accounts payable for capital assets $ (304) $ (1,984) Change in accounts receivable related to private gifts $ (3,169) $ (114) Change in receivable from state agency affecting proceeds of $ 120,459 $ 572 capital debt Change in fair value of investments recognized as a component $ (503) $ (2,336) of interest income Change in interest receivable affecting interest received $ (133) $ 37 Bond issuance costs reducing proceeds of long-term debt $ (144) $ 289 Change in accrued interest payable affecting interest paid $ 352 $ 177 Amortization of bond issuance costs reducing interest paid $ 52 $ 39 Interest on capital debt paid by state agency on behalf of University $ 2,304 $ 289 Principal on capital debt paid by state agency on behalf of University $ 360 $ 380 Gift of capital assets reducing proceeds of capital grants and gifts $ (85) $ (107) RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE STATEMENT OF NET ASSETS Cash and cash equivalents classified as current assets $ 42,361 $ 45,771 Cash and cash equivalents classified as noncurrent assets 28,291 38,727 $ 70,652 $ 84,498 The accompanying notes are an integral part of these statements. 6

17 Oklahoma State University NOTES TO FINANCIAL STATEMENTS ($ in thousands) June 30, 2006 and 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Oklahoma State University (the University ) is a modern comprehensive land grant university that serves the state, national and international communities by providing its students with academic instruction, by conducting research and other activities that advance fundamental knowledge and by disseminating knowledge to the people of Oklahoma and throughout the world. Reporting Entity: The financial reporting entity, as defined by Governmental Accounting Standards Board ( GASB ) Statement No. 14, The Financial Reporting Entity and GASB Statement No. 39, Determining Whether Certain Organizations are Component Units, consists of the primary government, organizations for which the primary government is financially accountable and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion could cause the financial statements to be misleading or incomplete. Accordingly, the financial statements include the accounts of all agencies of Oklahoma State University (the General University ), as the primary government, and the accounts of the Oklahoma State University Center for Innovation and Economic Development, Inc. ( CIED ), collectively referred to as the University. Further, the financial statements of all component units of the University meeting the criteria established by GASB Statement No. 39 have been presented separately. The General University includes Oklahoma State University - Stillwater; Oklahoma State University - Okmulgee; Oklahoma State University - Oklahoma City; the Center for Veterinary Health Sciences; the Agricultural Experiment Station; the Agricultural Extension Division; the Center for Health Sciences - Tulsa and Oklahoma State University - Tulsa. The General University is governed by the Board of Regents for the Oklahoma Agricultural and Mechanical Colleges ( Board of Regents ). The State of Oklahoma allocates and allots funds to each agency separately and requires that the funds be maintained accordingly. Because of this requirement, separate accounts are maintained for each agency. CIED was formed in 1967 as a nonprofit corporation to engage in research, extension and academic contractual arrangements for the benefit and advancement of the General University. CIED receives and administers funds from Federal and state organizations and from private sources for the purpose of carrying out the educational and research programs of the General University. CIED is governed by a board of directors comprised primarily of management of the General University. In addition, General University employees and facilities are used for virtually all activities of CIED. Accordingly, CIED has been reported as a blended component unit in the financial statements. Separate financial statements of CIED can be requested from the University s controller. In preparing the financial statements, all significant transactions and balances between agencies and between the General University and CIED are eliminated. The University is a component unit of the State of Oklahoma (the State ) and is included in the basic financial statements of the State of Oklahoma. 7

18 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Financial Statement Presentation: As a component unit of the State, the University presents its financial statements in accordance with the requirements of GASB Statement No. 34, Basic Financial Statements and Management Discussion and Analysis for State and Local Governments and GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The financial statement presentation required by GASB Statements No. 34 and 35 provides a comprehensive, entity-wide perspective of the University s assets, liabilities, net assets, revenues, expenses, changes in net assets and cash flows. Component Units: The Oklahoma State University Foundation ( the University Foundation ), OSUF Phase III Student Housing L.L.C. ( OSUF Phase III ) and OSU Cowboy Golf, Inc. ( Golf ) are private nonprofit organizations that report under Financial Accounting Standards Board ( FASB ) standards, including FASB Statement No. 117, Financial Reporting for Not-For-Profit Organizations, as such certain revenue recognition criteria and presentation features are different from GASB revenue recognition criteria and presentation features. Further, Golf operates under a December 31 fiscal year-end. No modifications have been made to the University Foundation s, OSUF Phase III s or Golf s financial information, which are separately presented, for these differences. Basis of Accounting: For financial reporting purposes, the University is considered a special-purpose government engaged only in business-type activities. Accordingly, the University s financial statements have been presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All significant intra-agency transactions have been eliminated. The University has the option to apply all FASB pronouncements issued after November 30, 1989, unless FASB conflicts with GASB. The University has elected to not apply FASB pronouncements issued after the applicable date. Cash Equivalents: The University considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Funds invested through the State Treasurer s Cash Management Program are considered cash equivalents. Investments: The University accounts for its investments at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Changes in unrealized gain (loss) on the carrying value of investments are reported as a component of investment income in the statements of revenues, expenses and changes in net assets. Accounts Receivable: Accounts receivable consist of tuition and fee charges to students and auxiliary enterprise services provided to students, faculty and staff, the majority of each residing in the State. Accounts receivable also include amounts due from the Federal government, state and local governments or private sources, in connection with reimbursement of allowable expenditures made pursuant to the University s grants and contracts. Accounts receivable are recorded net of estimated uncollectible amounts. The University determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the University s previous loss history, and the condition of the general economy and the industry as a whole. The University writes off specific accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. 8

19 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Inventories: Inventories are carried at the lower of cost or market on either the first-in, first-out ( FIFO ) basis or the average cost basis. Noncurrent Cash and Investments: Cash and investments that are externally restricted to make debt service payments, maintain sinking or reserve funds or to purchase or construct capital or other noncurrent assets, are classified as noncurrent assets in the statements of net assets. Capital Assets: Capital assets are recorded at cost at the date of acquisition, or fair market value at the date of donation in the case of gifts. Livestock for educational purposes is recorded at estimated fair value. For equipment, the University s capitalization policy includes all items with a unit cost of $5 or more, and an estimated useful life of greater than one year. Renovations to buildings, infrastructure and land improvements that significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense was incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 to 50 years for buildings, 20 to 25 years for infrastructure and land improvements, 10 years for library books and 5 to 7 years for equipment. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until placed in service. The University capitalizes interest as a component of capital assets constructed for its own use. In 2006, total interest incurred was $9,929, of which $1,292 was capitalized. In 2005, total interest incurred was $7,408, of which $505 was capitalized. Deferred Revenues: 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. Compensated Absences: The liability and expense incurred for employee vacation pay are recorded as accrued compensated absences in the statements of net assets, and as a component of compensation and benefit expense in the statements of revenues, expenses and changes in net assets. Noncurrent Liabilities: Noncurrent liabilities include (1) principal amounts of revenue bonds payable, notes payable and capital lease obligations; (2) estimated amounts for accrued compensated absences and other liabilities that will not be paid within the next fiscal year; and (3) other liabilities that, although payable within one year, are to be paid from funds that are classified as noncurrent assets. Net Assets: The University s net assets are classified as follows: Invested in capital assets, net of related debt: This represents the University s total investment in capital assets, net of outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of invested in capital assets, net of related debt. 9

20 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Net Assets - Continued: Restricted net assets - expendable: Restricted expendable net assets include resources in which the University is legally or contractually obligated to spend resources in accordance with restrictions imposed by external third parties. Restricted net assets - nonexpendable: Restricted nonexpendable net assets consist of endowment and similar type funds in which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may either be expended or added to principal. Unrestricted net assets: Unrestricted net assets represent resources derived from student tuition and fees, state appropriations and sales and services of educational departments and auxiliary enterprises. These resources are used for transactions relating to the educational and general operations of the University, and may be used at the discretion of the governing board to meet current expenses for any purpose. These resources also include auxiliary enterprises, which are substantially self-supporting activities that provide services for students, faculty and staff. 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 unrestricted resources, and then towards restricted resources. Income Taxes: The General University, as a political subdivision of the State, is excluded from Federal income taxes under Section 115(a) of the Internal Revenue Code, as amended. CIED is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code for activities which relate to its exempt purpose. Classification of Revenues: The University has classified its revenues as either operating or nonoperating revenues according to the following criteria: Operating revenues: Operating revenues include activities that have the characteristics of exchange transactions, such as (1) student tuition and fees, net of scholarship discounts and allowances, (2) sales and services of auxiliary enterprises, net of scholarship discounts and allowances, (3) most Federal, state and local grants and contracts and Federal appropriations and (4) interest on institutional student loans. Nonoperating revenues: Nonoperating revenues include activities that have the characteristics of nonexchange transactions, such as gifts and contributions, and other revenue sources that are defined as nonoperating revenues by GASB Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, and GASB Statement No. 34, such as State appropriations and investment income. 10

21 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Scholarship Discounts and Allowances: Student tuition and fee revenues, and certain other revenues from students, are reported net of scholarship discounts and allowances in the statements of revenues, expenses and changes in net assets. Scholarship discounts and allowances are the difference between the stated charge for goods and services provided by the University, and the amount that is paid by students and/or third parties making payments on the students behalf. Certain governmental grants, such as Pell grants, and other Federal, state or nongovernmental programs, are recorded as either operating or nonoperating revenues in the University s financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the University has recorded a scholarship discount and allowance. 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 certain reported amounts and disclosures; accordingly, actual results could differ from those estimates. New Pronouncements: In 2004, GASB issued Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. GASB Statement No. 43 establishes uniform financial reporting standards for OPEB plans and supersedes the interim guidance included in GASB Statement No. 26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans. The approach followed in this Statement generally is consistent with the approach adopted in GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, with modifications to reflect differences between pension plans and OPEB plans. The provisions of this Statement are effective for fiscal periods beginning after December 15, 2005, with earlier application encouraged. Management has not yet determined the effect this Statement will have on the University s financial condition or results of operations. In 2004, GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. GASB Statement No. 45 establishes standards for the measurement, recognition and display of OPEB expense/expenditures and related liabilities (assets), note disclosures and, if applicable, required supplementary information ( RSI ) in the financial reports of state and local governmental employers. The provisions of this Statement are effective for fiscal periods beginning after December 15, 2006, with earlier application encouraged. Management has not yet determined the effect this Statement will have on the University s financial condition or results of operations. 11

22 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED New Pronouncements - Continued: In 2006, GASB issued Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues. GASB No. 48 establishes criteria to ascertain whether the proceeds received should be reported as revenue or as a liability when governments exchange an interest in their expected cash flows from collecting specific receivables or specific future revenues for immediate cash payments. The requirements of this Statement are effective for financial statements for periods beginning after December 15, Management has not yet determined the effect this Statement will have on the University s financial condition or results of operations. NOTE 2 - CASH AND CASH EQUIVALENTS, OTHER DEPOSITS AND INVESTMENTS Cash and Cash Equivalents: At June 30, 2006 and 2005, the carrying amounts of the University s deposits with the State Treasurer and other financial institutions was $70,652 and $84,498, respectively. These amounts consisted of deposits with the State Treasurer ($67,014 and $80,261), U.S. financial institutions ($435 and $377), trustees related to the University s various bond indenture agreements ($3,046 and $3,701) and petty cash and change funds ($157 and $159). The State Treasurer requires that all state funds are either insured by the Federal Deposit Insurance Corporation ( FDIC ), collateralized by securities held by the cognizant Federal Reserve Bank or invested in U.S. Government obligations. The University s deposits with the State Treasurer are pooled with funds of other State agencies and then, in accordance with statutory limitations, placed in financial institutions or invested as the State Treasurer may determine, in the State s name. The University requires that balances on deposit with financial institutions be insured by the FDIC or collateralized by securities held by the cognizant Federal Reserve Bank, in the University s name. 12

23 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 2 - CASH AND CASH EQUIVALENTS, OTHER DEPOSITS AND INVESTMENTS - CONTINUED Deposits: At June 30, 2006 and 2005, the University held nonnegotiable certificates of deposit totaling $58 and $56, respectively. These certificates of deposit are fully insured by the FDIC. For financial reporting purposes, these deposits have been classified as investments. Investments: Credit Risk. State law limits investments in obligations of state and local governments to the highest rating from at least one nationally recognized rating agency acceptable to the State Treasurer. Additionally, it is the University s policy to limit its investments in municipal and corporate bonds to the top two ratings issued by nationally recognized statistical rating organizations. As of June 30, 2006 and 2005, the University s investments in municipal and corporate bonds were rated AAA by Standard & Poor s, and AAA by Moody s Investor Service. At June 30, the fair value of the University s investments consisted of the following: U.S. Government securities $ 47,657 $ 31,860 U.S. Treasury notes 33,787 35,792 Money funds 3,111 3,491 Municipal bonds 1,775 1,700 Corporate bonds and notes Equity securities 2,964 2,762 Certificates of deposit State Regents Endowment Trust funds Total investments $ 90,443 $ 76,753 13

24 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 2 - CASH AND CASH EQUIVALENTS, OTHER DEPOSITS AND INVESTMENTS - CONTINUED At June 30, 2006 and 2005, the University held investments in trust for two higher education institutions that are also under the governance of the Board of Regents. Such investments consist of U.S. Government securities and money market accounts. These investments are maintained in separate investment accounts for each participant. The fair value of U.S. Government securities at June 30, 2006 and 2005 was $3,342 and $3,134, respectively. These investments bear interest at rates from.875% to 6.625%, with maturities from July 2006 through October Investments in money market accounts totaled $221 and $411 at June 30, 2006 and 2005, respectively. Condensed statements of net assets and changes in net assets of the investments held in trust are as follows for the years ended June 30: Net assets held in trust at beginning of period $ 3,545 $ 2,872 Additional deposit of funds Net interest, realized gains and fees Net decrease in fair value (114) (39) Net assets held in trust at end of period $ 3,563 $ 3,545 14

25 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 2 - CASH AND CASH EQUIVALENTS, OTHER DEPOSITS AND INVESTMENTS - CONTINUED Interest Rate Risk. The University s investment policy does not specifically limit the investment portfolio to maturities of less than one year. The University is responsible for determining the operating cash flow requirements and insure that adequate funds are available to service the routine needs of the University. In determining liquidity needs, the appropriate mix of short-term, intermediate, and long-term investments will be evaluated. The University s Investment Committee is responsible for evaluating investment performance. The University s investments are categorized by maturity dates to reflect the fair values that are sensitive to changes in interest rates. The University s investment schedule by maturity date as of June 30, 2006 is as follows: Maturity year U.S. Government U.S. Municipal Corporate ending June 30 Securities Treasury Notes Bonds Bonds & Notes Total 2007 $ 3,522 $ 6,387 $ - $ 439 $ 10, ,440 3, , ,322 5, , ,571 3, , ,379 1, , ,980 12, , , , , , $ 47,657 $ 33,787 $ 1,775 $ ,726 Investments not subject to maturity dates: Equity securities 2,964 Money funds 3,111 Certificates of deposits 58 State Regents Endowment Trust Funds 584 Total investments $ 90,443 15

26 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 3 - ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at June 30: Student tuition and fees $ 6,490 $ 7,216 Auxiliary enterprises and other operating activities 30,599 20,311 Contributions and gifts 4,917 1,748 Federal appropriations Federal, state and private grants and contracts 17,411 18,100 59,693 47,549 Less allowance for doubtful accounts 6,454 6,329 Net accounts receivable $ 53,239 $ 41,220 NOTE 4 - INVENTORIES Inventories consisted of the following at June 30: Bookstore $ 2,823 $ 2,724 Livestock - College of Agriculture 1,866 1,949 Fire protection publications 5,028 5,849 Food services Physical plant Other 1,319 1,319 12,711 13,623 Less allowance for obsolete inventory Net inventory $ 12,711 $ 12,973 16

27 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 5 - LOANS RECEIVABLE Student loans made through the Federal Perkins Loan Program (the Program ) comprise substantially all of the loans receivable at June 30, 2006 and Under this Program, the Federal government provides funds for approximately 75% of the total contribution for student loans with the University providing the balance. Under certain conditions, such loans can be forgiven at annual rates of 10% to 30% of the original balance up to maximums of 50% to 100% of the original loan. The Federal government reimburses the University to the extent of 10% of the amounts forgiven for loans originated prior to July 1, 1993 under the Program. No reimbursements are provided for loans originated after this date. Amounts refundable to the Federal government upon cessation of the Program of approximately $17,486 at June 30, 2006 and 2005 are reflected in the accompanying statements of net assets as noncurrent liabilities. As the University determines that loans are uncollectible and not eligible for reimbursement by the Federal government, the loans are written off and assigned to the U.S. Department of Education. The allowance for uncollectible loans only applies to University funded loans and the University portion of Federal student loans, as the University is not obligated to fund the Federal portion of uncollected student loans. The University has provided an allowance for uncollectible loans, which, in management s opinion, is sufficient to absorb loans that will ultimately be written off. At June 30, 2006 and 2005, the allowance for uncollectible loans was approximately $293 and $231, respectively. 17

28 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 6 - CAPITAL ASSETS Following are the changes in capital assets for the years ended June 30: Balance Balance June 30, June 30, 2005 Additions Transfers Retirements 2006 Capital assets not being depreciated Land $ 10,452 $ 23,816 $ - $ - $ 34,268 Capitalized collections Livestock for educational purposes 1, (179) 1,299 Construction in progress 15,405 55,976 (12,684) - 58,697 Total capital assets not being depreciated $ 27,631 $ 79,792 $ (12,684) $ (179) $ 94,560 Other capital assets Non-major infrastructure networks $ 34,428 $ - $ 364 $ - $ 34,792 Land improvements 27, ,086-29,122 Buildings 601, ,800 (258) 612,906 Leasehold improvements 1, ,557 Furniture, fixtures and equipment 144,594 19,006 - (7,265) 156,335 Library materials 83,649 4, ,870 Total other capital assets 893,497 23,924 12,684 (7,523) 922,582 Less accumulated depreciation for Non-major infrastructure networks (22,586) (1,375) - - (23,961) Land improvements (15,984) (1,085) - - (17,069) Buildings (270,627) (13,818) - 3 (284,442) Leasehold improvements (112) (134) - (246) Furniture, fixtures and equipment (95,743) (11,435) - 6,072 (101,106) Library materials (60,784) (4,267) - - (65,051) Total accumulated depreciation (465,836) (32,114) - 6,075 (491,875) Other capital assets, net $ 427,661 $ (8,190) $ 12,684 $ (1,448) $ 430,707 Capital asset summary Capital assets not being depreciated $ 27,631 $ 79,792 $ (12,684) $ (179) $ 94,560 Other capital assets, at cost 893,497 23,924 12,684 (7,523) 922,582 Total cost of capital assets 921, ,716 - (7,702) 1,017,142 Less accumulated depreciation (465,836) (32,114) - 6,075 (491,875) Capital assets, net $ 455,292 $ 71,602 $ - $ (1,627) $ 525,

29 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 6 - CAPITAL ASSETS - CONTINUED Balance Balance June 30, June 30, 2004 Additions Transfers Retirements 2005 Capital assets not being depreciated Land $ 10,445 $ 152 $ - $ (145) $ 10,452 Capitalized collections Livestock for educational purposes 1, ,478 Construction in progress 47,647 31,467 (63,709) - 15,405 Total capital assets not being depreciated $ 59,855 $ 31,630 $ (63,709) $ (145) $ 27,631 Other capital assets Non-major infrastructure networks $ 32,212 $ - $ 2,216 $ - $ 34,428 Land improvements 24,400-3,468-27,868 Buildings 552, ,085 (8,992) 601,835 Leasehold improvements 1,183 - (60) - 1,123 Furniture, fixtures and equipment 138,968 9,362 - (3,736) 144,594 Library materials 80,570 3,089 - (10) 83,649 Total other capital assets 829,619 12,907 63,709 (12,738) 893,497 Less accumulated depreciation for Non-major infrastructure networks (21,001) (1,585) - - (22,586) Land improvements (15,065) (919) - - (15,984) Buildings (263,485) (14,425) - 7,283 (270,627) Leasehold improvements - (112) - - (112) Furniture, fixtures and equipment (87,076) (12,363) - 3,696 (95,743) Library materials (56,452) (4,332) - - (60,784) Total accumulated depreciation (443,079) (33,736) - 10,979 (465,836) Other capital assets, net $ 386,540 $ (20,829) $ 63,709 $ (1,759) $ 427,661 Capital asset summary Capital assets not being depreciated $ 59,855 $ 31,630 $ (63,709) $ (145) $ 27,631 Other capital assets, at cost 829,619 12,907 63,709 (12,738) 893,497 Total cost of capital assets 889,474 44,537 - (12,883) 921,128 Less accumulated depreciation (443,079) (33,736) - 10,979 (465,836) Capital assets, net $ 446,395 $ 10,801 $ - $ (1,904) $ 455,

30 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 7 - DEFERRED REVENUE Deferred revenue consists of the following at June 30: Prepaid tuition and fees $ 6,350 $ 6,273 Prepaid athletic ticket sales 7,755 5,941 Other auxiliary enterprises Grants and contracts 11,051 11,235 NOTE 8 - LONG-TERM LIABILITIES Long-term liability activity was as follows for the years ended June 30: $ 25,904 $ 24,049 Year ended June 30, 2006 Balance Balance Amounts June 30, June 30, Due within 2005 Additions Reductions 2006 one year Bonds and notes payable and capital lease obligations Revenue bonds payable $ 104,320 $ 14,000 $ (16,595) $ 101,725 $ 2,995 Notes payable 18,196 6,510 (7,920) 16,786 2,372 Capital lease obligations, including unexpended funds of $119,530 19, ,008 (3,358) 140,582 3,903 Total bonds, notes and capital leases 142, ,518 (27,873) 259,093 9,270 Other liabilities Accrued compensated absences 16,414 9,076 (8,003) 17,487 8,003 Landfill closure and postclosure costs 2, ,937 - Accounts payable for noncurrent assets 5,305 5,001 (5,305) 5,001 5,001 Federal loan program contribution payable 17, ,486 - Student deposits (80) Deferred revenue (271) Accrued interest payable 2, (591) 2,137 2,137 Accrued workers' compensation claims 4,227 2,682 (2,686) 4,223 2,686 Total other liabilities 49,447 17,204 (16,936) 49,715 18,022 Total $ 191,895 $ 161,722 $ (44,809) $ 308,808 $ 27,292 20

31 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 8 - LONG-TERM LIABILITIES - CONTINUED Year ended June 30, 2005 June 30, June 30, Due within 2004 Additions Reductions 2005 one year Bonds and notes payable and capital lease obligations Revenue bonds payable $ 93,955 $ 25,635 $ (15,270) $ 104,320 $ 2,835 Notes payable 20, (2,647) 18,196 3,011 Capital lease obligations, including unexpended funds of $986 19,894 2,947 (2,909) 19,932 2,988 Total bonds, notes and capital leases 134,534 28,740 (20,826) 142,448 8,834 Other liabilities Accrued compensated absences 15,390 8,502 (7,478) 16,414 7,478 Landfill closure and postclosure costs 2, ,937 - Accounts payable for noncurrent assets 7,289 5,305 (7,289) 5,305 5,305 Federal loan program contribution payable 17, ,486 - Student deposits (76) Deferred revenue (91) Accrued interest payable 2,312 2,489 (2,312) 2,489 2,304 Accrued workers' compensation claims 3,998 2,836 (2,607) 4,227 2,607 Total other liabilities 49,753 19,547 (19,853) 49,447 18,045 Total $ 184,287 $ 48,287 $ (40,679) $ 191,895 $ 26,879 Additional information regarding revenue bonds payable and notes payable is included at Note 9. Additional information regarding capital lease obligations is included at Note 10. Landfill Closure and Postclosure Costs: State laws and regulations require the University to place a final cover on its landfill site and to perform certain maintenance and monitoring functions, including evaluation of well water samples, at the site after closure. The landfill, containing radioactive and chemical waste, is no longer being used, but the University has not placed a final cover on it. Estimated closure and postclosure costs as of June 30, 2006 and 2005 are $2,937. Actual cost may differ due to inflation, changes in technology or changes in regulations. 21

32 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 9 - REVENUE BONDS AND NOTES PAYABLE Revenue Bonds Payable Revenue bonds payable consisted of the following at June 30: % - 5% Oklahoma State University Technical Branch - Okmulgee Student Union Refunding Revenue Bonds, Series 1995, issued in the original amount of $1,340 and mature in varying annual amounts to December 1, 2008 $ 395 $ % - 6.5% Utility System Revenue Bonds, Series 1998, issued in the original amount of $18,000 and mature in varying annual amounts to July 1, 2018 (defeased during the year ended June 30, 2006) - 14, % Athletic Facilities Revenue Bonds, Series 1998, 2003, and 2004 issued in the original amount of $75,425 and mature in varying amounts to August 1, ,255 59, % % Recreation Facilities Revenue Bonds, Series 2002, issued in the original amount of $21,860 and mature in varying amounts to July 1, ,845 21, % - 6% Student Union System Revenue Bonds of 2002 and 2004 issued in the original amount of $4,135 and mature in varying annual amounts to July 1, 2023 (Series 1978 defeased during the year ended June 30, 2005) 3,710 3, % Oklahoma State University - Oklahoma City Student Union Center Revenue Bonds, Refunding Series 2004, issued in the original amount of $1,895 and mature in varying annual amounts to July 1, ,630 1, %- 4.75% Oklahoma State University - Okmulgee Student Fee Revenue Bonds, Series 2004, issued in the original amount of $3,000 and mature in varying annual amounts to September 1, ,890 3, % - 5.0% Utility System Revenue Bonds, Refunding Series 2006, issued in the original amount of $14,000 and mature in varying annual amounts to July 1, , $ 101,725 $ 104,320

33 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 9 - REVENUE BONDS AND NOTES PAYABLE - CONTINUED Revenue Bonds Payable - Continued Principal and interest on these revenue bonds are collateralized by a pledge of revenues produced by the facilities constructed with the bond proceeds, student activity fees and facility fees, and/or a pledge of certain contributions made for the benefit of the University. Certain of these bonds payable are callable at the option of the Board of Regents. The University is required to maintain certain renewal and replacement and debt service reserves aggregating $794 in 2006 and $694 in The University s reserve balances exceeded these amounts at June 30, 2006 and The University has secured insurance contracts with insurance companies to cover the reserve requirements in the debt agreements of the Athletic Facilities Revenue Bonds, Series 1998, 2003, and 2004; the Recreation Facilities Revenue Bonds, Series 2002; the Oklahoma State University Okmulgee Student Fee Revenue Bonds, Series 2004; and the Utility System Revenue Bonds, Refunding Series Notes Payable Notes payable consisted of the following at June 30: CIED note payable, collateralized by vans, dated October, 2004, payable on demand, interest rate of 5.25% $ 69 $ 121 CIED multiple advance note payable collateralized by CIED s investments with UBS - Paine Webber, dated December 2002, line of credit cap of $2,007, payable on demand, variable interest rate (6.655% at June 30, 2006) 1,787 1,925 Total CIED notes payable 1,856 2,046 23

34 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 9 - REVENUE BONDS AND NOTES PAYABLE - CONTINUED Notes Payable - Continued University note payable, refunded during ,205 University note payable to refund note for renovations to Gallagher-Iba Arena, collateralized by a pledge of Section 13 funds, note is payable to Oklahoma Development Finance Authority ( ODFA ), principal payable in annual installments through July 2018, interest payable semiannually, variable annual interest rate, 2.0% at June 30, ,420 8,945 University note payable to refund note for construction of the Advanced Technology Research Center, collateralized by a pledge of Section 13 funds; note is payable to ODFA, principal payable in annual installments through July 2016, interest payable semiannually, variable annual interest rate, 4.0% at June 30, ,510 - Total University notes payable 14,930 16,150 Total notes payable $ 16,786 $ 18,196 Under the terms of loan agreements with the ODFA and related trust indentures, accounts have been established with the trustee bank into which all Section 13 and New College monies are deposited on a monthly basis for the benefit of the University. The University is required to make debt service payments to the trustee bank on June 15 and December 15, which are sufficient to meet the debt service requirements on July 1 and January 1 of each year. 24

35 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 9 - REVENUE BONDS AND NOTES PAYABLE - CONTINUED Maturity Information The scheduled maturities of the revenue bonds and notes payable are as follows: Year ending Total Total June 30 Bonds Notes principal Interest payments 2007 $ 2,995 $ 2,372 $ 5,367 $ 5,053 $ 10, ,095 1,099 4,194 4,964 9, ,220 1,135 4,355 4,812 9, ,190 1,170 4,360 4,654 9, ,305 1,205 4,510 4,490 9, ,575 6,730 24,305 19,662 43, ,200 3,075 20,275 14,557 34, ,215-16,215 10,587 26, ,945-18,945 6,397 25, ,985-15,985 1,513 17,498 Defeased Revenue Bonds Totals $101,725 $ 16,786 $118,511 $ 76,689 $195,200 In November 1995, the University defeased the Housing System Revenue Bonds of 1967A by placing funds in an irrevocable trust to provide all future debt service payments of the defeased bonds. These bonds have been escrowed to maturity (July 1, 2007) and the principal balance of the defeased 1967A bonds at June 30, 2006 was $140. In August 1998, the University defeased the Athletic System Revenue Bonds of 1996 by placing funds into escrow to provide future debt service payments. The 1996 Athletic bonds have been escrowed to maturity (January 1, 2012) and the principal balance of the defeased 1996 Athletic bonds at June 30, 2006 was $3,660. In January 2001, the University defeased the Housing System Revenue Bonds of 1965 by placing funds in escrow to provide future debt service payments. The 1965 bonds have been escrowed to maturity (July 1, 2005) and the principal balance of the defeased 1965 bonds at June 30, 2006 was zero. In December 2004, the University defeased a portion of the Athletic Facilities Revenue Bonds, Series 1998, by placing funds in an irrevocable trust to provide future debt service payments of the defeased bonds. These bonds have been escrowed to maturity (August 1, 2018) and the principal balance of the defeased 1998 bonds at June 30, 2006 was $11,

36 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 9 - REVENUE BONDS AND NOTES PAYABLE - CONTINUED Defeased Revenue Bonds - Continued In June 2006, the University defeased the Utility System Revenue Bonds of 1998 by placing funds in escrow to provide future debt service payments. The 1998 bonds were escrowed to the call date of July 1, 2006, at which time the remaining principal balance was paid. NOTE 10 - LEASE OBLIGATIONS Equipment Leases The University has acquired certain equipment under various lease-purchase contracts and other capital lease agreements. The cost of University assets held under capital leases totaled $2,462 and $2,867 as of June 30, 2006 and 2005, respectively. Accumulated amortization of leased equipment totaled $1,694 and $2,320 at June 30, 2006 and 2005, respectively. Oklahoma Capital Improvement Authority Leases In September 1999, the Oklahoma Capital Improvement Authority ( OCIA ) issued its OCIA Bond Issues, 1999 Series A, B and C. Of the total bond indebtedness, the State Regents for Higher Education allocated $7,850 to the University. Concurrently with the allocation, the University entered into three lease agreements with OCIA, providing for six projects that are being funded by the OCIA bonds. The lease agreements provide for the University to make specified monthly payments to OCIA over the respective terms of the agreements, which range from 5 to 20 years. The proceeds of the bonds and subsequent leases are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment for expenditures incurred in connection with the specific projects. These expenditures have been capitalized as investment in plant assets or recorded as noncapitalized expenditures, in accordance with University policy. The University has also recorded an asset for its pro-rata share of the bond issuance costs, and is amortizing that asset over the term of the lease agreement. At June 30, 2006 and 2005, the unamortized bond issuance costs totaled $29 and $36, respectively. In 2005 and 2006, the OCIA issued its State Facilities Revenue Bonds (Higher Education Project) Series 2005F and 2006D. Of the total bond indebtedness, the State Regents allocated approximately $108,225 to the University. Concurrently with the allocation, the University entered into two lease agreements with OCIA, for the projects being funded by the OCIA bonds. The lease agreements provide for the University to make specified monthly payments to OCIA over the respective terms of the agreements, which range from 25 to 30 years. The proceeds of the bonds and subsequent leases are to provide for capital improvements at the University. Through June 30, 2006 the University has drawn down $235 of its total allotment. The University has recorded a receivable totaling $107,990 at June 30, 2006, for its allotment not drawn down as of that date. 26

37 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 10 - LEASE OBLIGATIONS - CONTINUED Oklahoma Capital Improvement Authority Leases - Continued During the years ended June 30, 2006 and 2005, OCIA made lease principal and interest payments totaling $2,664 and $669, respectively, on behalf of the University. These on-behalf payments have been recorded as restricted State appropriations in the University s statements of revenues, expenses and changes in net assets. Oklahoma Development Finance Authority Master Lease Program In March 2001, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2001A. Of the total bond indebtedness, the State Regents for Higher Education allocated $5,560 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $535 and $578, respectively, of amounts restricted for the term of the loan. In August 2001, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2001B. Of the total bond indebtedness, the State Regents for Higher Education allocated $3,275 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $115 and $117, respectively, of amounts restricted for the term of the loan. In December 2001, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2001C. Of the total bond indebtedness, the State Regents for Higher Education allocated $1,949 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $136 and $139, respectively, of amounts restricted for the term of the loan. In April 2002, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2002A. Of the total bond indebtedness, the State Regents for Higher Education allocated $241 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $24 of amounts restricted for the term of the loan. In December 2002, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2002C. Of the total bond indebtedness, the State Regents for Higher Education allocated $450 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $41 of amounts restricted for the term of the loan. 27

38 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 10 - LEASE OBLIGATIONS - CONTINUED Oklahoma Development Finance Authority Master Lease Program - Continued In May 2003, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2003A. Of the total bond indebtedness, the State Regents for Higher Education allocated $4,086 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $290 of amounts restricted for the term of the loan. In August 2003, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2003B. Of the total bond indebtedness, the State Regents for Higher Education allocated $1,930 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $159 and $163, respectively, of amounts restricted for the term of the loan. In December 2003, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2003C. Of the total bond indebtedness, the State Regents for Higher Education allocated $3,041 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down the entire amount of its allotment. At June 30, 2006 and 2005, other assets include $308 and $310, respectively, of amounts restricted for the term of the loan. In August 2004, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2004B. Of the total bond indebtedness, the State Regents for Higher Education allocated $254 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down $254 and $65, respectively, of its allotment. At June 30, 2006, there are no amounts restricted for the term of the loan. In December 2004, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2004C. Of the total bond indebtedness, the State Regents for Higher Education allocated $1,242 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down $1,151 and $625, respectively, of its allotment. At June 30, 2006, there are no amounts restricted for the term of the loan. In May 2005, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2005A. Of the total bond indebtedness, the State Regents for Higher Education allocated $1,320 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006 and 2005, the University has drawn down $1,248 and $1,140, respectively, of its allotment. At June 30, 2006, there are no amounts restricted for the term of the loan. In August 2005, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2005B. Of the total bond indebtedness, the State Regents for Higher Education allocated $251 28

39 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 10 - LEASE OBLIGATIONS - CONTINUED Oklahoma Development Finance Authority Master Lease Program - Continued to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006, the University has drawn down $231 of its allotment. At June 30, 2006, there are no amounts restricted for the term of the loan. In December 2005, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2005C. Of the total bond indebtedness, the State Regents for Higher Education allocated $2,181 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006, the University has drawn down $1,900 of its allotment. At June 30, 2006, other assets include $23 of amounts restricted for the term of the loan. In May 2006, the ODFA issued the Oklahoma State System of Higher Education Master Lease Revenue Bonds, Series 2006A. Of the total bond indebtedness, the State Regents for Higher Education allocated $12,566 to the University. The proceeds of the bonds are to provide for capital improvements at the University. As of June 30, 2006, the University has drawn down $563 of its allotment. At June 30, 2006, other assets include $131 of amounts restricted for the term of the loan. In connection with the ODFA Master Lease Program, the University has recorded a receivable from ODFA, totaling $12,467 and $986 for the allotments not drawn down as of June 30, 2006 and 2005, respectively, and lease obligations payable to ODFA for the total amounts of the allotments, less cumulative repayments. Future minimum lease payments for all capital lease obligations as of June 30, 2006 are as follows: Equipment ODFA OCIA Total Year ending June 30 leases leases leases Interest payments 2007 $ 336 $ 3,037 $ 578 $ 5,676 $ 9, ,880 1,545 6,357 11, ,736 1,604 6,182 10, ,620 1,548 5,974 10, ,222 1,588 5,795 9, ,847 9,912 27,836 44, ,742 11,173 23,927 37, ,350 12,459 20,459 36, ,840 16,623 43, ,842 4,863 50,705 Totals $ 1,095 $ 26,434 $113,053 $123,692 $264,274 29

40 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 11 - FUNDS HELD IN TRUST BY OTHERS Beneficial Interest in State School Land Funds The University has a beneficial interest in the Section Thirteen Fund State Educational Institutions and the New College Fund held in the care of the Commissioners of the Land Office as Trustees. The University has the right to receive annually 30% of the distributions of income produced by Section Thirteen Fund State Educational Institutions assets and 100% of the distribution of income produced by the University s New College Fund. The University received $3,737 and $3,863 during the years ended June 30, 2006 and 2005 respectively, which is restricted to the acquisition of buildings, equipment or other capital items. Present State law prohibits the distribution of any corpus of these funds to the beneficiaries. The total trust fund for the University, held in trust by the Commissioners of the Land Office, is approximately $85,367 and $77,671 as of June 30, 2006 and 2005, respectively. Oklahoma State Regents Endowment Trust Fund The State has matched contributions received under the Endowed Chair Program. The State match amount, plus retained accumulated earnings, totaled approximately $57,938 and $46,541 at June 30, 2006 and 2005, respectively, and is invested by the Oklahoma State Regents on behalf of the University. The University is entitled to receive an annual distribution on these funds; however, since legal title of the State match amount is retained by the Oklahoma State Regents, such funds have not been reflected in the accompanying financial statements. With regard to private matching funds, approximately $2,511 and $2,340 from donor matching funds and $426 and $384 in institutional matching funds as of June 30, 2006 and 2005, respectively, are on deposit with the Oklahoma State Regents for Higher Education, with the remaining matching funds of approximately $72,860 and $60,395 as of June 30, 2006 and 2005, respectively, held by the Oklahoma State University Foundation. NOTE 12 - RETIREMENT PLANS Through June 30, 1996, the University provided eligible employees the opportunity to participate in a defined contribution plan, the TIAA-CREF plan, and two defined benefit plans, the Teachers Retirement System of Oklahoma (the OTRS ) and the Supplemental Retirement Plan. Effective June 30, 1996, the University terminated the Supplemental Retirement Plan such that no future retirees will be eligible to receive benefits under the plan. The TIAA-CREF and the OTRS plans are integrated with the University s ongoing retirement program. Effective July 1, 1993, these eligibility requirements were modified; however, any employee eligible under the previous requirements was included in the modified plan pursuant to a grandfather provision. Eligible employees include all faculty, exempt and nonexempt continuous regular staff who are at least age 26 with one year of service and scheduled to work at least 1,560 hours annually. Employees hired after June 30, 2004, are not eligible for the integrated plan. 30

41 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 12 - RETIREMENT PLANS - CONTINUED The University s retirement program requires the University to contribute 11.5% of salary for employees hired on or after July 1, 1993, and for employees hired before July 1, 1993, the University pays the first $1.5 of the OTRS cost in the fiscal year plus 10% of salary over $7.8 up to $48 and 11.5% on salary over $48. These retirement contributions are first distributed to the OTRS on mandatory members and optional members who were grandfathered July 1, 1993, as determined by the calculation of OTRS contributions as defined below (see Cost Sharing Multiple-Employer PERS). Any remaining retirement contributions are distributed to the TIAA-CREF plan. Effective July 1, 2004, eligible new hires must make a one-time irrevocable election. Eligible employee must choose either the Alternate Retirement Plan (ARP) or OTRS. For those electing OTRS, the University will contribute the required member and employer contributions. For those electing the ARP, the University contributes 11.5% of salary. All ARP contributions are forwarded to TIAA-CREF. Should the eligible new hire not make an election within 90 days of hire, he/she will be default enrolled in OTRS. Regardless of the election of the new hire, the University makes contributions retroactive to the date of hire. The ARP does have a 100% cliff vesting provision of 2 years. Defined Contribution Plan On May 8, 1971, the University approved a contract providing for a funded plan for staff retirement, the TIAA-CREF plan. The TIAA-CREF, which is a defined contribution plan qualified under Internal Revenue Code Section 401(a), provides an annuity in the name of the employee based upon contributions made by the University. All contributions to the TIAA-CREF are fully vested immediately. The University s total payroll for the years ended June 30, 2006 and 2005 was approximately $307,408 and $290,012, respectively. The University s contributions to the TIAA-CREF were calculated using the base salary amount of approximately $227,232 and $214,614 in 2006 and 2005, respectively. The University funded mandatory participant contributions to the TIAA-CREF of approximately $13,638 and $11,982 in 2006 and 2005, respectively, which represents approximately 6% of covered payroll. Employees may voluntarily contribute, on a pre-tax basis, to the 403(b) Supplemental Tax Deferred Annuity Program or the 457(b) Deferred Compensation Plan, but such contributions are not considered part of the University s retirement program. As of June 30, 2006, and 2005, the TIAA-CREF held no related party investments of the University. 31

42 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 12 - RETIREMENT PLANS - CONTINUED Oklahoma Teachers Retirement System ( OTRS ) Plan Description The University contributes to the OTRS, a cost-sharing multiple-employer defined benefit pension plan sponsored by the State of Oklahoma. The OTRS provides retirement, disability and death benefits to plan members and beneficiaries. The benefit provisions are established and may be amended by the legislature of the State. Title 70 of the Oklahoma Statutes, Sections through , as amended, assigns the authority for management and operation of the OTRS to the Board of Trustees of the OTRS. The OTRS issues a publicly available financial report that includes financial statements and supplementary information for the OTRS. That report may be obtained by writing to Teachers Retirement System of Oklahoma, P.O. Box 53524, Oklahoma City, Oklahoma or by calling (877) (toll free). Funding Policy Employees of the University, as OTRS members, are required to contribute to the plan at a rate established by the legislature of the State. For the year ended June 30, 2006, the contribution rate for the system members of 7% is applied to their maximum salary contribution election of either $72.5 or $89 or applied to their total compensation for those employees who began participating after June 30, For the year ended June 30, 2005, the contribution rate for the system members of 7% is applied to their maximum salary contribution election of either $67.5 or $84 or applied to their total compensation for those employees who began participating after June 30, The University made the majority of the system member s required contributions on behalf of its employees in 2006 and For 2006 and 2005, the local employer contribution rate due from the University was 7.05% for employees participating in OTRS. In addition, the University is required to contribute 2.5% for some employees who elect not to participate in OTRS due to the one-time irrevocable election provision which became effective July 1, The corresponding contributions for employer fees paid by the University for the years ended June 30, 2006, and 2005, were $15,080 and $14,392, respectively. The State is also required to contribute to the OTRS on behalf of participating employers. For the year ended June 30, 2006, the State contributed 4%, and for the year ended June 30, 2005, the State contributed 3.75% of State revenues from sales and use taxes and individual income taxes to the OTRS on behalf of participating employers. The University has estimated the amounts contributed to the OTRS by the State on its behalf by multiplying the ratio of its covered salaries to total covered salaries for the OTRS for the year by the applicable percentage of taxes collected during the year. For the years ended June 30, 2006, and 2005, the total amount contributed to the OTRS by the State on behalf of the University was approximately $12,068 and $10,242, respectively. These on-behalf payments have been recorded as both revenues and expenses in the statements of revenues, expenses and changes in net assets. The University s contributions to the OTRS for the years ended June 30, 2006, and 2005, were $14,260 and $13,495, respectively, equal to the required contributions for OTRS members for each year. 32

43 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 12 - RETIREMENT PLANS - CONTINUED Supplemental Retirement Plan Plan Description The University sponsors the Supplemental Retirement Plan (the Plan ), a single-employer public employee retirement system, which was approved in 1971 and terminated as of June 30, Individuals employed by the University on or after July 1, 1980, when the TIAA-CREF annuity contribution became fully funded, were ineligible for participation in the Plan. Benefits vested upon retirement. The Plan guaranteed eligible employees with 25 years of service, provided they continuously participated in TIAA/CREF and the OTRS, a level of annual retirement benefit if Social Security, the OTRS and the TIAA-CREF, when applicable, do not equal one-half of the average of the highest three years earnings. Authority to establish and amend benefit provisions rests with the Board of Regents. The Plan does not issue a stand-alone financial report. Funding Policy Contribution requirements of the University are established and may be amended by the Board of Regents. All contributions are made by the University. Benefits are funded under a pay as you go funding method; however, expenses are recorded as benefits accumulate. Annual Pension Cost and Net Pension Asset The University s annual pension cost and net pension asset of the Plan for the year ended June 30, 2006 were as follows: Annual required contribution $ 756 Interest on net pension obligation (105) Adjustment to annual required contribution 162 Annual pension cost 813 Contributions made 1,081 Increase in net pension asset 268 Net pension asset, beginning of year 1,317 Net pension asset, end of year $ 1,585 The net pension asset at June 30, 2006 and 2005 is included in prepaid expenses. 33

44 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 12 - RETIREMENT PLANS - CONTINUED Supplemental Retirement Plan - Continued The annual required contribution for the current year was determined as part of the June 30, 2006 actuarial valuation using the projected unit credit method. The actuarial assumptions included (a) an 8% investment rate of return and (b) 3.5% per year postretirement benefit increases. No projected salary increases are included as no current employees will be eligible for benefits. The investment rate of return includes an inflation component of 4%. The assumptions also include postretirement benefit increases, which will be funded by the University when granted. The Plan is an unfunded plan and, accordingly, no assets have been accumulated and no investment income is earned. The unfunded actuarial accrued liability is being amortized over ten years using the level dollar amortization method on a closed basis. Three Year Trend Information Fiscal year Annual pension Percentage of APC Net pension ended cost ( APC) contributed asset June 30, 2004 $ % $ 1,096 June 30, 2005 $ % $ 1,317 June 30, 2006 $ % $ 1,585 Schedule of Funding Progress Actuarial valuation date Unfunded actuarial accrued liability June 30, 2004 $ 5,892 June 30, 2005 $ 5,806 June 30, 2006 $ 5,481 The actuarial accrued liability is based on the projected unit credit method. 34

45 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 13 - RISK MANAGEMENT Due to the diverse risk exposure of the University and its constituent agencies, the insurance portfolio contains a comprehensive variety of coverage. Oklahoma Statutes require participation of all State agencies in basic general liability, tort claim coverage, directors and officers liability and property and casualty programs provided by the State of Oklahoma Department of Central Services Risk Management Division (the SRMD ). In addition to these basic policies, the University s Department of Risk and Property Management establishes guidelines in risk assessment, risk avoidance, risk acceptance and risk transfer. Oklahoma State University and individual employees are provided sovereign immunity when performing official business within the scope of their employment under the Oklahoma State Tort Claims Act. For risks not protected by sovereign immunity, it is the internal policy of the University s Risk and Property Management department to accept initial risk in the form of retention or deductibles only to the extent that funds are available from the University s general operations to maintain this risk. Beyond acceptable retention levels, complete risk transfer is practiced by purchasing conventional insurance coverage directly or through the SRMD. These coverages are outlined as follows: The buildings and contents are insured for replacement value. Each loss incident is subject to a $500 deductible. General liability and tort claim coverages (including comprehensive general liability, auto liability, personal injury liability, aircraft liability, watercraft liability, leased vehicles and equipment) are purchased by the University from the SRMD. To complement coverage provided by State Statute and to meet specific coverage requirements for special grants and/or contracts, additional coverage is purchased based on specific departmental and institutional needs and risks, but the related risks are not considered material to the University as a whole. Claim settlements have not exceeded insurance coverage in each of the past three fiscal years. Self-Funded Programs The University s life insurance program was self-funded through December 31, Effective January 1, 2004, life waivers for disabled employees and their dependents were all that remained in the self- funded plan. Reserves were established at the onset of disability to pay the claims. Effective January 1, 2004, the University s life coverage is handled through an insured plan. Through June 30, 1999, the University s health care programs were also self-funded. Effective July 1, 1999, the University terminated its self-insurance program, and is now participating in the State self-insurance program. The University believes that there is no exposure to pay run-off claims for the previous self-insured program at June 30,

46 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 13 - RISK MANAGEMENT - CONTINUED Self-Funded Programs - Continued The University s workers compensation program is self-funded and is administered by a third party. The University maintains a cash deposit with the administrator and reimburses the administrator for claims paid and administrative expenses on a monthly basis. Benefits provided are prescribed by State law and include lump-sum payments for rated disabilities, in addition to medical expenses and a portion of salary loss, resulting from a job-related injury or illness. The University records a liability for workers compensation in its financial statements based on annual actuarial valuations. As of June 30, 2006, and 2005, the accrued workers compensation liability totaled approximately $4,223 and $4,227, respectively, computed utilizing a discount rate of 5% for each year. The University s unemployment compensation insurance program is also self-funded. Unemployment benefits that separated employees receive are determined by Oklahoma Statutes and are administered by the Oklahoma Employment Security Commission ( OESC ). As a reimbursing employer, the University is billed quarterly by the OESC for benefits paid to former employees. The Board of Regents requires that the University maintain a minimum of $700 in reserve to cover claims. This minimum cash balance is considered each year during the rate-setting process. NOTE 14 - RELATED PARTY TRANSACTIONS A summary of related party transactions during the years ended June 30, 2006 and 2005, including a description of the relationship and operations, are as follows: The Oklahoma State University Foundation Nature of Relationship - The Oklahoma State University Foundation (the University Foundation ) is a notfor-profit corporation formed to promote and foster the educational, benevolent and scientific purposes of the University, and to create a fund to be used for any program, project or enterprise undertaken in the interest of the University, and to promote and foster educational and cultural interests in the State and southern and southwestern regions of the United States. The University Foundation is governed by an independent Board of Directors who maintain no position at the University. The University Foundation is the sole member of two limited liability companies formed to facilitate financing and constructing of student apartment projects at the University s campus in Okmulgee and Stillwater (see Note 15). Although the University does not control the timing or amount of receipts from the University Foundation, the majority of resources, or income thereon, that the University Foundation holds and invests are restricted to the activities of the University by the donors. Because these restricted resources held by the University Foundation can only be used by, or for the benefit of, the University, the University Foundation and its component units as defined by GASB Statement No. 39, Determining Whether Certain Organizations are Component Units are considered component units of the University and are separately presented. 36

47 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 14 - RELATED PARTY TRANSACTIONS - CONTINUED Description of Operations - The University Foundation acts largely as a fund-raising organization: soliciting, receiving, managing and disbursing contributions on behalf of the University. Most of the contributions received are designated by the donors to be used for specific purposes or by specific departments. In these instances, the University Foundation serves essentially as a conduit. Contributions that are not designated are used where the need is considered greatest, as determined by the University Foundation. Related party transactions and funds held of the University Foundation on behalf of the University are as follows during fiscal years: Dollar value of transactions for the year ended June 30 Funds disbursed to or on behalf of the University $ 85,237 $ 36,822 Funds collected from the University Nonmonetary goods distributed to the University 1, Funds held on behalf of or for the benefit of the University at June , ,437 Related party receivables and payables at June 30 Due to the University Due from the University The following table sets forth summary financial information of the University Foundation as of and for the years ended June 30 as derived from its audited financial statements as reported on by other auditors: Temporarily Permanently Total Total Unrestricted restricted restricted Income $ 111,892 $ 29,092 $ 14,146 $155,130 $ 84,939 Expenses 92, ,892 43,030 Change in net assets 19,000 29,092 14,146 62,238 41,909 Other gains (losses) (228) Change in net assets 19,000 29,092 14,146 62,238 41,681 Net assets, beginning of year 77,121 74, , , ,756 Net assets, end of year $ 96,121 $ 103,824 $ 157,730 $357,675 $295,437 37

48 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 14 - RELATED PARTY TRANSACTIONS - CONTINUED The Oklahoma State University Foundation - Continued In August 2003, in connection with the renovation of the football stadium, the University Foundation secured a $16,000 loan from a bank to assist the University in funding the project. In conjunction with this loan, the University Foundation and the University have entered into a financing agreement that grants the University Foundation a right of offset in current and future pledges received by the University Foundation toward the project and other funds held by the University Foundation for the benefit of the University Athletics Program, with certain limitations regarding seating revenue. For the years ended June 30, 2006 and 2005, the University received $2,000 and $14,000, respectively, which is reflected as capital from grants, gifts and affiliates in the Statement of Revenues, Expenses and Changes in Net Assets. As of June 30, 2006, $15,000 of funds held by the University Foundation for the benefit of the University Athletics Program has been used by the University Foundation to pay down the note. In March 2005, in connection with the renovation of the football stadium, the University Foundation agreed to provide up to $40,000 to assist the University in funding the project. The University Foundation and the University have entered into a financing agreement that grants the University Foundation a right of offset in current and future pledges received by the University Foundation toward the project and other funds held by the University Foundation for the benefit of the University Athletics Program. For the year ended June 30, 2006, the University received $21,685 which is reflected as capital from grants, gifts and affiliates in the Statement of Revenues, Expenses and Changes in Net Assets. OSU Cowboy Golf, Inc. Nature of Relationship - OSU Cowboy Golf, Inc. ( Golf ) is a not-for-profit Oklahoma corporation organized to support the University men s and women s golf teams, other athletic organizations affiliated with the University and other educational programs associated with the University. Golf changed its name to Cowboy Athletics, Inc. on May 9, Golf is governed by a nine-member Board of Directors, five of whom serve by virtue of their position at the University. One of the members is the president and CEO of the Foundation, and the remaining three members are elected by the members. Although the University does not control the timing or amount of receipts from Golf, the majority of resources, or income thereon, that Golf holds and invests are restricted to the activities of the University. Because these restricted resources held by Golf can only be used by, or for the benefit of, the University, Golf is considered a component unit of the University and is separately presented. Golf also operates a golf course ( Karsten Creek ) and related facilities in Stillwater, Oklahoma. The golf course is primarily utilized as a teaching and practice facility by the University for the men s and women s golf teams. Use of the course is also open to golf course members and others based on established membership and usage fee schedules. 38

49 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 14 - RELATED PARTY TRANSACTIONS CONTINUED OSU Cowboy Golf, Inc. - Continued Net assets held on behalf of or for the benefit of the University by Golf at December 31, 2005 and 2004 were $178,363 and $20,356, respectively. Net assets include a gift of $165,000 made directly to Golf instead of following normal processing through the University Foundation due to timing constraints of the gift receipt. The following table sets forth summary financial information of Golf as of December 31, and for the years then ended as derived from its audited financial statements as reported on by other auditors: Revenues $ 3,098 $ 3,410 Expenses 3,637 3,005 Net operating (loss) income (539) 405 Nonoperating revenues 158,546 4,008 Change in net assets 158,007 4,413 Net assets, beginning of year 20,356 15,943 Net assets, end of year $178,363 $ 20,356 39

50 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 14 - RELATED PARTY TRANSACTIONS - CONTINUED Oklahoma State University Alumni Association Nature of Relationship: Oklahoma State University Alumni Association (the Association ) is a not-for-profit corporation formed to provide a corporate body through which alumni may unify their efforts to promote and encourage the growth and development of the University. Description of Operations: The Association s revenues consist primarily of dues, investment earnings, support from the University, and revenue from Association sponsored activities. Funds are expended for any purpose consistent with promoting the primary objectives of the Association. Related party transactions and funds held of the Association on behalf of the University are as follows during fiscal years: Dollar value of transactions for the year ended June Funds disbursed to or on behalf of the University $ 31 $ 46 Funds collected from the University Related party receivables and payables at June 30 Due to the University - 2 Due from the University - 16 NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES The University had outstanding commitments under construction contracts of approximately $10,617 and $44,066 at June 30, 2006 and 2005, respectively. The University is party to various lawsuits arising out of the normal conduct of its operations. In the opinion of University management, the ultimate resolution of these matters will not have a material adverse effect upon the University s financial position. The University participates in certain Federal grant programs. These programs are subject to financial and compliance audits by the grantor or its representative. Such audits could lead to requests for reimbursement to the grantor agency for expenditures disallowed under terms of the grant. Management believes disallowances, if any, will not be material. 40

51 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES - CONTINUED On October 31, 2002, the Payne County Economic Authority issued its 2002 Series Variable Rate Demand Student Housing Revenue Bonds totaling $161,275, the proceeds of which were loaned to OSUF Phase III Student Housing, L.L.C. ( OSUF Phase III ), a special-purpose entity created for the benefit of the University Foundation. The loan to OSUF Phase III was made pursuant to a loan agreement dated October 1, 2002 to finance, construct and equip a student housing facility, remodel certain existing dormitories, finance existing bond indebtedness and construct appropriate dining facilities on the University s campus in Stillwater, Oklahoma. Assets related to the assumption and refinancing of existing bond indebtedness were acquired by OSUF Phase III, including approximately $76,000 of assets acquired and liabilities assumed of Stillwater Oklahoma Projects I and II ( Projects ). The University also entered into agreements to manage the operations and dining facilities of the Projects. The University s Board of Regents also entered into a ground lease agreement with OSUF Phase III, under which OSUF Phase III leased the land on which the facilities are located. The ground lease is for 30 years through 2037 and provides for an annual rental to the University equal to the net available cash flow from operations as defined in the agreement. Payments of $1,948 and $2,599 were received by the University during the years ended June 30, 2006 and 2005, respectively, under the ground lease agreement. Following is a summary of certain financial information for OSUF Phase III as of and for the years ended June 30 as derived from the audited financial statements as reported on by other auditors: Property and equipment $ 161,307 $ 134,774 Other assets 46,502 75,890 Total assets $ 207,809 $ 210,664 Bonds payable $ 217,655 $ 219,141 Other liabilities 4,358 24,219 Total liabilities 222, ,360 Member deficit (14,204) (32,696) Total liabilities and member deficit $ 207,809 $ 210,664 Revenues $ 13,659 $ 12,487 Expenses (15,196) (14,275) Other comprehensive gain (loss) 20,029 (21,313) Comprehensive gain (loss) $ 18,492 $ (23,101) 41

52 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES - CONTINUED The University has also entered into certain agreements with OSUF Okmulgee Student Housing, L.L.C. (the LLC ), a special-purpose entity created for the benefit of the University Foundation. The LLC was formed solely to facilitate financing and constructing of a student apartment project at the University s campus in Okmulgee, Oklahoma. The University entered into an agreement with the LLC to manage the operations of the project. The University s Board of Regents also entered into a ground lease agreement with the LLC, under which the LLC leased the land on which the facilities are located. The ground lease agreement is for 40 years through 2040 and provides for an annual rental to the University equal to the net available cash flow from operations as defined in the agreement. To the extent that cash flow from the project is not sufficient to pay its operating expenses, the University is required to pay such amounts from its unrestricted funds. The University received payments of approximately $480 and $180 for the years ended June 30, 2006 and 2005, respectively, under the ground lease agreement. The construction project has been financed largely from the proceeds of a series of primarily nontaxable and taxable long-term revenue bonds issued by Rural Enterprises of Oklahoma, Inc. ( REO ) on behalf of the LLC. The bonds are nonrecourse to REO and the LLC. In addition to the debt service reserves, the bonds are collateralized by the assignment of rents and leases, the LLC s rights under the construction contract for the project and a bond insurance policy. At such time as the financing for the project is paid in full, the mortgage will be cancelled and the LLC s interest in the facility and the underlying property will be conveyed to the University. Following is a summary of certain financial information for the LLC as of and for the years ended June 30 as derived from audited financial statements as reported on by other auditors: Property and equipment $ 9,913 $ 10,345 Other assets 3,611 3,571 Total assets $ 13,524 $ 13,916 Bonds payable $ 14,877 $ 15,148 Other liabilities Total liabilities 15,351 15,761 Member deficit (1,827) (1,845) Total liabilities and member deficit $ 13,524 $ 13,916 Revenues $ 1,845 $ 1,720 Expenses (1,827) (1,939) Net income (loss) $ 18 $ (219) 42

53 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES - CONTINUED During fiscal year 2006, the board of regents approved a campus master plan, which included the creation of an athletic village north of campus. The planned expansion includes approximately 100 acres of privately held property expected to be acquired by arms-length transactions. The land will be used to upgrade, recreate and expand virtually all athletic venues. In June 2006, the University Foundation, acting as an agent for the University, acquired approximately half of the land for $23,081. The acquisitions are reflected as capital from grants, gifts and affiliates in the Statement of Revenues, Expenses and Changes in Net Assets for the year ended June 30, Subsequent to year end, the University Foundation purchased an additional seven acres for $3,020 on behalf of the University. CIED leases space through three separate leases in a multi-tenant building owned by Oklahoma Technology & Research Park One, LLC ( OTRP One ). CIED leases approximately one half of the building under a tenyear lease agreement, beginning July 1, 2004 and expiring June 30, 2014, with several renewable options available. The lease calls for an annual base rent plus additional amounts as defined in the agreement. The annual rent is subject to adjustment as defined in the agreement. The schedule of future minimum lease payments does not include the effects, if any, of future adjustments. OTRP One secured financing for the building based upon the CIED lease and an additional agreement with CIED that will ensure the facility will have sufficient revenues to pay the debt service (the Contingent Deficiency Funding Agreement ). Under the Contingent Deficiency Funding Agreement, if OTRP One does not receive sufficient revenue to meet the required debt service ratio, CIED will be required to pay any monthly deficiency until OTRP One receives monthly rental payments that are sufficient to maintain the required debt service coverage ratio after expenses. Any payments required under the Contingent Deficiency Funding Agreement are to be reimbursed from future revenue from the multi-tenant building. No deficiency funding was required through June 30, CIED s estimated additional maximum exposure under the Contingent Deficiency Funding Agreement is $1,070. This amount has not been included in the following table of future minimum lease payments due to uncertainties relating to OTRP One s ability to secure additional tenants. Effective January 1, 2006 and July 1, 2006 CIED signed two agreements to lease the remaining space owned by OTRP One for a period of ten years. Future minimum payments under CIED s operating leases are as follows at June 30, 2006: Fiscal year ending June $ Thereafter 3,098 $ 7,691 43

54 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 16 - NATURAL CLASSIFICATIONS WITH FUNCTIONAL CLASSIFICATIONS The University s operating expenses by functional classification were as follows for the: Year ended June 30, 2006 Natural classification Compen- Contract- Other sation and ual Supplies and Commun- operating Functional classification benefits services materials Utilities ication expenses Scholarships Depreciation Total Instruction $ 161,145 $ 18,824 $ 5,888 $ 45 $ 1,361 $ 14,488 $ - $ - $ 201,751 Research 57,458 10,620 7, , ,328 Public service 46,303 2,581 1, , ,362 Academic support 32,416 4,550 3, , ,180 Student services 16,626 1, ,018 Institutional support 18, , , ,367 Operation of plant 10,622 11,375 1,278 14, ,515 Scholarships 1, ,675-51,094 Auxiliary enterprises 47,439 39,929 23,979 7,393 2,650 19, ,772 Depreciation ,114 32,114 Total expenses $ 391,617 $ 89,883 $ 45,956 $ 22,402 $ 6,570 $ 56,284 $ 49,675 $ 32,114 $ 694,501 Year ended June 30, 2005 Natural classification Compen- Contract- Other sation and ual Supplies and Commun- operating Functional classification benefits services materials Utilities ication expenses Scholarships Depreciation Total Instruction $ 147,263 $ 17,098 $ 5,697 $ 33 $ 1,396 $ 12,250 $ - $ - $ 183,737 Research 55,822 11,224 7, , ,889 Public service 40,992 2,326 1, , ,262 Academic support 29,651 3,483 2, , ,711 Student services 15,370 1, , ,539 Institutional support 17,104 1, , ,014 Operation of plant 10,363 9,816 1,402 15, , ,313 Scholarships 1, ,799-41,126 Auxiliary enterprises 45,138 22,159 19,935 6,375 2,805 22, ,042 Depreciation ,736 33,736 Total expenses $ 362,923 $ 69,150 $ 38,564 $ 22,069 $ 6,569 $ 63,559 $ 39,799 $ 33,736 $ 636,369 44

55 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 17 - SEGMENT INFORMATION The University issues revenue bonds to finance certain of its auxiliary enterprise activities. Investors in those bonds rely solely on the revenue generated by the individual activities for repayment. Descriptive information for each of the University s segments is shown below: Okmulgee Student Union Refunding Revenue Bonds, Series 1995 Okmulgee Student Union Refunding Revenue Bonds of 1995 refunded the previous bonds issued to build the student union on the Okmulgee campus. Utility System Revenue Bonds, Series 1998 The west side chilled water plant was built with funds provided by the Utility System Revenue Bonds of The bonds were refunded in fiscal year Athletic Facilities Revenue Bonds, Series 1998, 2003 and 2004 The Athletic Facilities Revenue Bonds, Series 1998, refunded the 1996 Athletic Bonds and provided new funds for the major renovation/expansion of Gallagher-Iba Arena. The Athletic Facilities Revenue Bonds, Series 2003 and 2004 provided new funds for the major renovation/expansion of Boone Pickens Stadium. Student Union Revenue Bonds, Series 2002 and 2004 Refunding of old bonds and new funding for renovation of the building was provided by the Student Union Revenue Bonds of 2002 and Recreation Facilities Revenue Bonds, Series 2002 The Recreation Facilities Revenue Bonds, Series 2002, refunded the outstanding Health, Physical Education and Recreation Bonds of 1989 and provided funds for the renovation and expansion of the Colvin Center. Oklahoma City Student Center Revenue Bonds, Refunding Series 2004 The Oklahoma City Student Center Revenue Bonds, Refunding Series 2004, refunded the Oklahoma City Student Center Revenue Bonds, Series Okmulgee Student Fee Revenue Bonds, Series 2004 The Okmulgee Student Fee Revenue Bonds, Series 2004, provided funds to construct and equip the Student Success Center and to repair or make additions to safety lighting and parking lots on the Okmulgee campus. Utility System Revenue Bonds, Refunding Series 2006 The Utility System Revenue Bonds, Refunding Series 2006 refunded the Utility System Revenue Bonds, Series

56 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 17 - SEGMENT INFORMATION - CONTINUED Condensed financial information for each of the University s segments follows: OKMULGEE ATHLETIC STUDENT UNION UTILITY SYSTEM FACILITIES REVENUE BONDS REVENUE BONDS REVENUE BONDS SERIES 1995 SERIES 1998 SERIES 1998,2003,2004 As of / Year ended As of / Year ended As of / Year ended June 30 June 30 June CONDENSED STATEMENT OF NET ASSETS Assets Current assets $ 51 $ 69 $ - $ 3,834 $ 13,726 $ 7,900 Noncurrent assets ,253 5,706 Capital assets 1,802 1,879-15, , ,933 Total assets 1,989 2,084-20, , ,539 Liabilities Interfund payables ,288 1,975 Current liabilities ,014 11,174 7,659 Long-term liabilities ,500 72,464 74,724 Total liabilities ,514 86,926 84,358 Net assets Invested in capital assets, net of related debt 1,407 1,364-1, ,910 47,743 Restricted (4,078) (1,303) Unrestricted , (2,259) Total net assets $ 1,567 $ 1,542 $ - $ 4,147 $103,429 $ 44,181 CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Operating revenues $ 248 $ 246 $ 17,410 $ 23,867 $ 27,324 $ 30,534 Operating expenses (124) (137) (19,642) (21,160) (30,030) (32,079) Depreciation (77) (77) - (1,077) (3,507) (2,844) Net operating income (2,232) 1,630 (6,213) (4,389) Nonoperating revenues/expenses Investment income Student Fees ,436 2,378 Gifts of equipment Gift income/non revenue receipts ,874 16,465 Interest expense (22) (26) (942) (721) (3,058) (3,502) Other (net) Transfers in (out) (5) - (975) (514) - - Change in net assets 25 8 (4,147) ,248 12,083 Net assets - beginning of year 1,542 1,534 4,147 3,558 44,181 32,098 Net assets - end of year $ 1,567 $ 1,542 $ - $ 4,147 $103,429 $ 44,181 CONDENSED STATEMENT OF CASH FLOWS Net cash flows provided by Operating activities $ 47 $ 44 $ 9,795 $ 2,716 $ (7,947) $ 1,794 Noncapital financing ,342 3,040 Capital and related financing (71) (71) (13,546) (2,398) (9,295) 643 Investment activities ,244 Net increase (decrease) in cash (19) (27) (3,749) 513 (7,838) 6,721 Cash - beginning of year ,749 3,236 11,073 4,352 Cash - end of year $ 35 $ 54 $ - $ 3,749 $ 3,235 $ 11,073 46

57 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 17 - SEGMENT INFORMATION - CONTINUED RECREATIONAL OKLAHOMA CITY STUDENT UNION FACILITIES STUDENT CENTER REVENUE BONDS REVENUE BONDS REVENUE BONDS SERIES 2002 and 2004 SERIES 2002 SERIES 2004 As of / Year ended As of / Year ended As of / Year ended June 30 June 30 June CONDENSED STATEMENT OF NET ASSETS Assets Current assets $ 6,433 $ 5,929 $ 79 $ 103 $ 1,766 $ 1,285 Noncurrent assets 1,674 1,314 2,404 2, Capital assets 13,515 12,771 25,823 26,519 3,101 3,216 Total assets 21,622 20,014 28,306 29,046 5,297 4,926 Liabilities Interfund payables Current liabilities 1,536 1, , Long-term liabilities 3,710 3,957 20,845 20,845 1,630 1,845 Total liabilities 5,306 5,244 21,490 21,938 1,650 1,866 Net assets Invested in capital assets, net of related debt 9,805 8,846 4,978 5,269 1,471 1,371 Restricted 1,614 1,004 1,854 1, Unrestricted 4,897 4,920 (16) 58 1,766 1,285 Total net assets $ 16,316 $ 14,770 $ 6,816 $ 7,108 $ 3,647 $ 3,060 CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Operating revenues $ 19,029 $ 18,109 $ 1,686 $ 1,730 $ 936 $ 652 Operating expenses (18,317) (16,297) (53) (405) (1) - Depreciation (389) (358) (818) (815) (115) (115 ) Net operating income 323 1, Nonoperating revenues/expenses Investment income Student Fees 68-1,840 1,798 - Gifts of equipment Gift income/non revenue receipts Interest expense (266) (288) (992) (1,005) (40) (42) Other (net) 1,133 (130) Transfers in (out) (144) 291 (2,094) (8,036) (200) 71 Change in net assets 1,132 1,336 (292) (6,688) Net assets - beginning of year 14,770 13,434 7,108 13,796 3,060 2,490 Net assets - end of year $ 15,902 $ 14,770 $ 6,816 $ 7,108 $ 3,647 $ 3,060 CONDENSED STATEMENT OF CASH FLOWS Net cash flows provided by Operating activities $ 884 $ 955 $ (1,016) $ (7,249) $ 459 $ 799 Noncapital financing (51) 1, Capital and related financing (325) (2,353) 971 5,806 4 (676) Investment activities Net increase (decrease) in cash (28) (1,397) Cash - beginning of year 2,664 2,265 2,405 3,802 1,432 1,305 Cash - end of year $ 3,187 $ 2,664 $ 2,377 $ 2,405 $ 1,902 $ 1,432 47

58 Oklahoma State University NOTES TO FINANCIAL STATEMENTS - CONTINUED ($ in thousands) June 30, 2006 and 2005 NOTE 17 - SEGMENT INFORMATION - CONTINUED OKMULGEE STUDENT FEE UTILITY SYSTEM REVENUE BONDS REVENUE BONDS SERIES 2004 SERIES 2006 As of / Year ended As of / Year ended June 30 June CONDENSED STATEMENT OF NET ASSETS Assets Current assets $ 716 $ 611 $ 1,328 $ - Noncurrent assets 488 2, Capital assets 2,760-15,461 - Total assets, 3,964 3,571 17,509 - Liabilities Interfund payables Current liabilities ,650 - Long-term liabilities 3,042 3,000 14,000 - Total liabilities 3,126 3,086 15,650 - Net assets Invested in capital assets, net of related debt 200 (193) 1,461 - Restricted (33) Unrestricted (83) - Total net assets $ 838 $ 485 $ 1,859 $ - CONDENSED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Operating revenues $ 348 $ 344 $ 6,751 $ - Operating expenses (1,314) (11) (4,580) - Depreciation expense - - (1,228) - Net operating income (966) Nonoperating revenues/expenses Investment income Student Fees Gift income Interest expense (117) (99) (239) - Other (net) 1,363 (244) Transfers in (out) (117) - Change in net assets ,859 - Net assets - beginning of year Net assets - end of year $ 839 $ 485 $ 1,859 $ - CONDENSED STATEMENT OF CASH FLOWS Net cash flows provided by Operating activities $ (1,075) $ 491 $ 1,234 $ - Noncapital financing (110) (243) Capital and related financing (1,253) 3,232 (1,461) - Investment activities Net increase (decrease) in cash (2,369) 3,531 1,044 - Cash - beginning of year 3, Cash - end of year $ 1,162 $ 3,531 $ 1,044 $ - 48

59 Accountants and Business Advisors Report of Independent Certified Public Accountants on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Board of Regents Oklahoma Agricultural and Mechanical Colleges We have audited the financial statements of Oklahoma State University (the University ) and the separately presented component units as of and for the years ended June 30, 2006 (Oklahoma State University Foundation and OSUF Phase III Student Housing, L.L.C.) and December 31, 2005 (OSU Cowboy Golf, Inc.) which collectively comprise the University s basic financial statements and have issued our report thereon dated October 11, Oklahoma State University Foundation ( University Foundation ), a not-for-profit Oklahoma corporation organized to support the University, OSUF Phase III Student Housing L.L.C. ( OSUF Phase III ), a special purpose entity created for the benefit of the University Foundation, and OSU Cowboy Golf, Inc. ( Golf ) a not-for-profit Oklahoma corporation organized to support the University, are component units of the University as defined by Governmental Accounting Standards Board ( GASB ) Statement No. 39, Determining Whether Certain Organizations are Component Units. The financial statements referred to above do not include the financial statements of the University Foundation, OSUF Phase III or Golf. Rather, complete sets of financial statements of the University Foundation, OSUF Phase III and Golf are presented separately. We did not audit the separately presented financial statements of the University Foundation, OSUF Phase III and Golf which statements reflect total assets of $374,591,039 as of June 30, 2006 and total operating revenues of $155,129,425 for the year then ended for the University Foundation; total assets of $207,808,627 as of June 30, 2006, and total operating revenues of $13,659,421 for the year then ended for OSU Phase III; and total assets of $214,509,000 as of December 31, 2005, and total operating revenues of $3,098,000 for the year then ended for Golf. Those statements were audited by other auditors whose reports have been included in those separate sets of financial statements. Our opinion, insofar as it relates to the amounts included for the separately presented component units, is based on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America as established by the American Institute of Certified Public Accountants and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the University s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide an opinion on the internal control over financial reporting. Accordingly, we express no such opinion. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. Suite Leadership Square 211 N. Robinson Oklahoma City, OK T F W Grant Thornton LLP US Member of Grant Thornton International 49

60 Compliance and Other Matters As part of obtaining reasonable assurance about whether the University s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance that is required to be reported under Government Auditing Standards and which is disclosed in the accompanying schedule of findings and questioned costs as item This report is intended solely for the information and use of the Fiscal Affairs Committee and Board of Regents, management and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Oklahoma City, Oklahoma October 11,

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