consolidated financial statements june 30, 2005...

DEPAUL UNIVERSITY

Consolidated Financial Statements

June 30, 2005 and 2004

(With Independent Auditors’ Report Thereon)

Independent Auditors’ Report

The Board of Trustees DePaul University:

We have audited the accompanying consolidated balance sheets of DePaul University (the University) as of June 30, 2005 and 2004, and the related consolidated statements of activities and cash flows for the years then ended. These consolidated financial statements are the responsibility of the University’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DePaul University as of June 30, 2005 and 2004, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

September 28, 2005

KPMG LLP 303 East Wacker Drive Chicago, IL 60601-5212

KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.

DEPAUL UNIVERSITY

Consolidated Balance Sheets

June 30, 2005 and 2004

(In thousands)

Assets 2005 2004

Student receivables, net of allowance for doubtfulaccounts of $5,688 and $5,745, respectively $ 20,520 20,459

Other receivables, net of allowance for doubtfulaccounts of $14 and $380, respectively 3,787 5,537

Investments 310,419 267,400 Other assets 8,001 8,798 Contributions receivable, net of allowance for uncollectible pledges

of $431 and $402, respectively 3,792 5,376 Beneficial interest in trust — 1,685 Notes receivable, net of allowance for doubtful accounts of

$2,375 and $2,117, respectively 9,930 9,920 Land, buildings, and equipment, net of accumulated depreciation 371,520 303,128 Assets held for sale 10,352 598

Total assets $ 738,321 622,901

Liabilities and Net Assets

Liabilities:Accounts payable and accrued expenses $ 27,970 37,156 Deposits and deferred revenue 43,052 44,635 Capital lease obligations 1,434 432 Bonds and notes payable 243,970 171,604 Lease deposit 17,715 18,674 Government advances for student loans 7,534 7,284 Accrued postretirement benefits 35,073 31,390

Total liabilities 376,748 311,175

Net assets:Unrestricted 330,015 279,070 Temporarily restricted 12,094 13,690 Permanently restricted 19,464 18,966

Total net assets 361,573 311,726 Total liabilities and net assets $ 738,321 622,901

See accompanying notes to consolidated financial statements.

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DEPAUL UNIVERSITY

Consolidated Statements of Activities

Years ended June 30, 2005 and 2004

(In thousands)

2005 2004Temporarily Permanently Temporarily Permanently

Unrestricted restricted restricted Total Unrestricted restricted restricted Total

Operating revenue and other additions:Tuition and fees (net of $62,701 and

$59,088 in scholarships, respectively) $ 301,187 — — 301,187 292,247 — — 292,247 Government grants 16,271 — — 16,271 14,631 12 — 14,643 Private gifts and grants 6,365 2,264 — 8,629 5,807 3,051 — 8,858 Investment income 1,412 — — 1,412 494 — — 494 Endowment investment return used in operations 4,048 22 — 4,070 4,159 61 — 4,220 Auxiliary revenue 39,087 — — 39,087 40,305 — — 40,305 Other 7,851 — — 7,851 8,636 3 — 8,639 Net assets released from restrictions 4,033 (4,033) — — 3,516 (3,468) (48) —

Total operating revenue andother additions 380,254 (1,747) — 378,507 369,795 (341) (48) 369,406

Operating expenses and other deductions:Salaries and benefits 212,191 — — 212,191 213,968 — — 213,968 General expenses 52,353 — — 52,353 65,255 — — 65,255 Occupancy 33,813 — — 33,813 33,864 — — 33,864 Depreciation 20,431 — — 20,431 17,606 — — 17,606 Printing, postage, and supplies 11,529 — — 11,529 13,023 — — 13,023 Interest 9,805 — — 9,805 7,498 — — 7,498 Library materials 3,131 — — 3,131 2,915 — — 2,915

Total operating expenses andother deductions 343,253 — — 343,253 354,129 — — 354,129

Excess (deficiency) of operating revenue over expensesbefore loss on assets held for sale and impairment 37,001 (1,747) — 35,254 15,666 (341) (48) 15,277

Losses on assets held for sale and impaired assets:Loss on assets held for sale — — — — 1,117 — — 1,117 Loss on impairment of assets — — 1,685 1,685 13,498 — — 13,498

Total loss on assets held for saleand impaired assets — — 1,685 1,685 14,615 — — 14,615

Excess (deficiency) of operating revenue over expensesafter loss on assets held for sale and impairment 37,001 (1,747) (1,685) 33,569 1,051 (341) (48) 662

Nonoperating revenue (expenses):Net realized gain/investment income reinvested 4,055 151 3 4,209 2,817 — 5 2,822 Change in accumulated unrealized gain on investment 13,608 — — 13,608 27,016 — — 27,016 Gain/(loss) on sale/disposal of fixed assets (385) — — (385) 663 — — 663 Private gifts and grants — — 2,180 2,180 — — 249 249 Capital gifts 467 19 — 486 — 55 — 55 Capital gifts released from restrictions 19 (19) — — 55 (55) — — Loss on bond defeasance (3,820) — — (3,820) (5,184) — — (5,184)

Net nonoperating revenue 13,944 151 2,183 16,278 25,367 — 254 25,621

Increase (decrease) in net assets 50,945 (1,596) 498 49,847 26,418 (341) 206 26,283

Net assets at beginning of year 279,070 13,690 18,966 311,726 252,652 14,031 18,760 285,443 Net assets at end of year $ 330,015 12,094 19,464 361,573 279,070 13,690 18,966 311,726


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DEPAUL UNIVERSITY

Consolidated Statements of Cash Flows

Years ended June 30, 2005 and 2004

(In thousands)

2005 2004

Cash flows from operating activities:Increase in net assets $ 49,847 26,283 Adjustments to reconcile increase in net assets to

net cash provided by operating activities:Depreciation expense 20,431 17,606 Amortization of lease deposit (959) (959) Amortization of gain on sale-leaseback (836) (837) Loss on disposal of fixed assets 1,222 174 Loss on retirement of bonds — 456 Contributions restricted for long-term investment (2,199) (305) Net gain on investments (16,632) (29,578) Loss on bond defeasance 3,820 6,729 Realized gain on 2004AB bond escrow restructuring — (1,544) Loss on assets held for sale and impaired assets 1,685 14,615 Changes in assets and liabilities:

(Increase) decrease in student receivables (61) 1,068 Decrease in pledges and other receivables 3,324 9,589 Increase in deposits and deferred revenue (747) (2,189) Decrease in accounts payable and accrued expenses (9,186) (3,698) Increase in accrued postretirement benefits 3,683 4,007 Other, net 529 (489)

Net cash provided by operating activities 53,921 40,928

Cash flows from investing activities:Proceeds from sale of investments 379,157 325,940 Purchase of investments (405,544) (311,131) Purchase of land, buildings, and equipment (99,799) (8,145)

Net cash (used in) provided by investing activities (126,186) 6,664

Cash flows from financing activities:Net short-term borrowings under line of credit agreements — (38,000) Proceeds from issuance of notes and bonds payable 160,479 59,474 Payments on bonds and notes payable (87,595) (67,952) Construction and other liabilities — (1,234) Loss on bond defeasance (3,820) — Net payments on capital lease obligations 1,002 (185) Proceeds from contributions restricted for long-term investment 2,199 305

Net cash provided by (used in) financing activities 72,265 (47,592)

Net change in cash — —

Cash at beginning of year — — Cash at end of year $ — —

Supplemental disclosure of cash flow information:Cash paid during the year for interest $ 9,749 6,816


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DEPAUL UNIVERSITY

Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(In thousands)

5 (Continued)

(1) Organization

DePaul University, an Illinois not-for-profit corporation, was founded in 1898 as St. Vincent’s College by the Congregation of the Mission, an order of Roman Catholic priests, on Judeo-Christian principles and the heritage of St. Vincent DePaul. DePaul University’s stated goals are: to acquire, disseminate, and advance knowledge; to pursue learning; and to engage in liberal and professional studies. DePaul University, based in Chicago, IL, has developed into a major urban institution offering undergraduate and graduate degree-granting programs on eight campuses. Approximately 88% of DePaul's students are from the state of Illinois.

During fiscal year 2001, DePaul University merged Barat College into DePaul University. Barat College is a co-educational Catholic liberal arts college founded in 1858. During fiscal year 2004, the Board of Trustees of DePaul made the decision to cease all operations on the Barat Campus by June 30, 2005. See notes 12 and 13 for additional disclosures regarding the University’s disposition of the Barat assets.

(2) Summary of Significant Accounting Policies

The consolidated financial statements of DePaul University have been prepared on the accrual basis and include the accounts of DePaul University and Barat College (collectively known as the University). All inter-entity balances and transactions have been eliminated in consolidation. Significant accounting policies followed by the University are described below.

(a) Basis of Presentation

To ensure observance of limitations and restrictions placed on the use of resources available, the University maintains its accounts in accordance with the principles and practices of fund accounting. Fund accounting is the procedure by which resources for various purposes are classified for accounting purposes into funds that are maintained in accordance with activities or objectives of the University.

For external reporting purposes, the University’s consolidated financial statements have been prepared to focus on the organization as a whole and to present balances and transactions classified in accordance with the existence or absence of donor-imposed restrictions.

Net assets and related activity are classified as unrestricted, temporarily restricted, or permanently restricted as follows:

• Unrestricted – net assets that are not subject to donor-imposed restrictions.

• Temporarily Restricted – net assets that are subject to donor-imposed restrictions that will be met either by actions of the University or the passage of time.

• Permanently Restricted – net assets that are subject to donor-imposed restrictions to be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes.

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(In thousands)

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(b) Revenue

Revenue is reported as an increase in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or law. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between applicable classes of net assets.

Private gifts, including pledges, are recognized in the period received. Conditional pledges are not recognized until the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at estimated fair value at the date of donation. Contributions to be received after one year are discounted at an appropriate rate commensurate with the risks involved. The discount is recorded as additional contribution revenue in accordance with donor-imposed restrictions, if any, when the pledge is satisfied. An allowance for uncollectible pledges receivable is provided based upon management’s judgment and considering such factors as prior collection history, type of contribution, and nature of fund-raising activity.

Contributions received with donor-imposed restrictions that are met in the same year as the gift is received are reported as revenue of the unrestricted net asset class. Contributions of land, buildings, and equipment without donor-imposed restrictions concerning the use of such long-lived assets are reported as revenue of the unrestricted net asset class. Contributions of cash or other assets to be used to acquire land, buildings, and equipment without donor restrictions on use are reported as revenue of the temporarily restricted net asset class; the restrictions are considered to be released at the time of acquisition of such long-lived assets.

Student tuition and fees are recorded as revenue during the year the related academic services are rendered.

Deferred revenue consists primarily of tuition and fees paid in advance of the summer session.

Revenue from government grant agreements is recognized as it is earned through expenditure in accordance with the agreement.

(c) Spending Policy

The University has adopted a spending policy in support of current operational budget requirements. This policy currently allows for the spending of 4.5% of the average market value of pooled investments over a three-year period on those endowments that investment income has been designated to be used in operations. For those endowments which have been held under three years, earnings will be distributed as if the fair value at the start of the year had existed for a three year period. For those endowments received during the year, any earnings in excess of a predetermined amount will receive an earnings distribution. If pooled investment yields are in excess of the spending policy, such excess is returned to the pool and reinvested. If pooled investment yields are

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(In thousands)

7 (Continued)

not sufficient to support the spending policy, the yield shortfall is provided from realized capital gains.

(d) Operations

Operating results in the consolidated statements of activities reflect all transactions’ increasing or decreasing unrestricted net assets except those items of a capital nature, that is, associated with long-term investment or the acquisition of physical plant. In addition, losses on impairment of assets and assets held for sale are considered operating activities.

(e) Investments

Investments are stated at fair value, which is generally determined based on quoted market prices or estimated fair value.

(f) Land, Buildings, and Equipment

Physical properties are stated at cost or in the case of gifts, fair value at date of donation, less accumulated depreciation. Buildings and equipment are depreciated using the straight-line method over their estimated useful lives, which range from 15 to 60 years for buildings and improvements and from 3 to 7 years for equipment. Generally, leasehold improvements are depreciated over the lower of the lease of the estimated useful life of the assets.

Long-lived assets, such as buildings and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet. During fiscal year 2004 and 2005 Barat Campus and Discovery Ridge assets were revalued to reflect the current estimated fair value (see note 13, impairment of assets and assets held for sale).

(g) Income Taxes

The University and Barat College have received determination letters from the Internal Revenue Service indicating that they are tax-exempt organizations as provided in Section 501(c)(3) of the Internal Revenue Code of 1986 and, except for taxes pertaining to unrelated business income, are exempt from Federal and state income taxes. No provision has been made for income taxes in the accompanying consolidated financial statements as the University and Barat College have had no significant net unrelated business income.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

8 (Continued)

(h) Use of Estimates

Management of the University has made a number of estimates and assumptions relating to these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from these estimates.

(i) Refundable U.S. Government Grants

Funds provided by the United States Government under the Federal Perkins Loan Program and the Nursing Student Loan Program are loaned to qualified students and may be reloaned after collections. These funds are ultimately refundable to the government.

(j) Reclassifications

Certain amounts reported in fiscal year 2004 have been reclassified in order to conform to the fiscal year 2005 presentation.

(k) Related-party Transactions

The University obtains services from companies with which certain University trustees are associated. These services are negotiated at arm's length. Total fees for services rendered for the year ending June 30, 2005 totaled $832.

(3) Contributions Receivable

The following is a summary of contributions receivable as of June 30, 2005 and 2004:

2005 2004

Contributions receivable expected to be collected in:Less than one year $ 1,780 3,922 One to five years 2,241 1,754 Over five years 202 102

4,223 5,778

Less allowance for uncollectible contributions receivable (431) (402) Total $ 3,792 5,376

Contributions receivable are reported net of discounts of 2.52% to 7.02% or $297, and 3.18% to 7.02% or $341, as of June 30, 2005 and 2004, respectively.

As of June 30, 2005, the University has outstanding conditional contributions totaling approximately $1.4 million. The outstanding conditional contributions consist primarily of challenge grants which, if received, would generally be restricted for specific purposes stipulated by the donors, including facilities and general operating support of a particular department of the University.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

9 (Continued)

(4) Investments

Investments at June 30, 2005 and 2004 consist of the following:

2005 2004Cost Fair value Cost Fair value

Money market accounts anddemand notes $ 67,682 67,682 47,621 47,621

Government and corporate bonds/notes payable 60,537 59,845 67,692 65,863

Mutual funds – equity 123,903 134,034 105,605 106,822 Common and preferred stocks 36,736 47,452 38,700 45,757 Real estate 925 925 925 925 Other — — 46 46 Accrued interest 481 481 366 366

Total $ 290,264 310,419 260,955 267,400

2005 2004

Investment return:Pooled investments:

Interest and dividends $ 5,332 4,480 Realized gains on sale of investments 2,832 7,863

Pooled investment return available for payout 8,164 12,343

Less distributions available to support operations 4,070 4,220

Realized gains on pooled investmentsreinvested after payout 4,094 8,123

Unrealized gain on pooled investments 13,608 21,506 Net gain on pooled investments $ 17,702 29,629

Other investments:Interest and dividends $ 1,412 494 Realized gain (loss) on other investments 115 (5,301) Reduction in unrealized gain on other investments — 5,510

Total other investment gain, net $ 1,527 703

Amounts shown as operating income include return on short term investments as well as that amount determined, under the University’s budget policy, as endowment income to be used in operations.

The amount reflected in non-operating income, designated “Net realized gain/investment income reinvested,” reflects the realized gains and losses on all investments, net of the endowment income used in operations.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

10 (Continued)

The University’s investments are categorized as of June 30, 2005 and 2004 as follows:

2005 2004

Investments permanently restricted by donors $ 19,068 16,263 Investments functioning as endowment 232,830 214,198

Total investments subject to endowmentspending policy 251,898 230,461

Split interest agreements 3,158 3,116 Other securities 55,363 33,823

Total investments $ 310,419 267,400

Investments functioning as endowment are investments that are temporarily restricted by donors or are designated by the University for endowment purposes.

Investments include assets associated with split interest agreements. The University’s split interest agreements with donors consist of charitable gift annuities, pooled income funds, and charitable remainder trusts for which the University may or may not serve as trustee. Assets are invested and payments are made to beneficiaries in accordance with the respective agreements.

Under charitable remainder trusts and gift annuities, contribution revenue is recognized at the date the agreement is established, net of the liability that is recorded for the present value of the estimated future payments made to beneficiaries. The liabilities associated with charitable remainder trusts and gift annuities are recorded on the balance sheet at current fair value by discounting estimated cash flows using the prevailing rate as of the date of each agreement as published by the IRS. The anticipated future payments to the income beneficiaries are based either on their life expectancies, determined from the actuarial tables published by the IRS, or the term of the individual agreement. Under pooled income agreements, the principal received is recognized as revenue on the date received, discounted using the prevailing rate as published by the IRS. The discount is amortized on an annual basis either over the life expectancy of the donor, as determined from the IRS actuarial tables, or over the terms of the individual agreement. As of June 30, 2005, the University has a liability of $1,536 associated with its charitable remainder trusts and gift annuities, and deferred revenue of $86 from its pooled income agreement.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

11 (Continued)

(5) Land, Buildings, and Equipment

Land, buildings, and equipment at June 30, 2005 and 2004 consist of the following:

2005 2004

Land $ 54,053 40,105 Buildings 383,517 313,701 Equipment 83,874 81,350 Construction in-progress 4,057 2,475

Total 525,501 437,631 Less accumulated depreciation (153,981) (134,503)

Land, buildings, and equipment, net $ 371,520 303,128

Assets held for sale $ 10,352 598

(6) Leases

(a) Capital and Operating Leases

Future minimum lease payments under capital and operating leases as of June 30, 2005 are as follows:

Capital Operating

Year ending June 30:2006 $ 683 13,896 2007 572 6,227 2008 194 4,439 2009 3 2,370 2010 — 2,028 Thereafter — 10,238

Total minimum lease payments 1,452 $ 39,198

Less imputed interest (18)

Present value of minimum capitallease payments $ 1,434

The University has entered into various operating lease agreements for buildings that include options to extend the lease agreements as well as options to purchase the properties outright at their then-fair market value. In addition, the University generally retains the right of first refusal to purchase the properties should the owner decide to sell the buildings as well as options to cause the lessors to sell the properties to an unrelated third party. Certain of these lease agreements may include a separate

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ground lease whereby the owners of the buildings lease the underlying land from the University over a longer period of time.

In November 1998, the University entered into an $18,900 sale-leaseback transaction, whereby the University sold and leased back 13 existing properties at the Lincoln Park Campus. The transaction resulted in a $9,000 gain which has been deferred. In June 2003, this lease agreement was amended and restated. The remaining unamortized gain on the sale and accrued rent expense is being amortized over the term of the new lease including two, five-year renewal periods. The schedule of future minimum lease payments listed above includes lease obligations under the operating lease agreement through August 2008. If the lease is renewed for both five-year options, rent for the ten-year period from September 2008 through August 2018 will amount to $10,558. Rent expense under the lease for fiscal year 2005 was $1,078.

In November 1998, the University entered into a lease for property on the Lincoln Park Campus. The schedule of future minimum lease payment listed above includes lease obligations under the operating lease agreement through August 2008. If the lease is renewed for one available five-year option, rent for the five-year period from September 2008 through August 2013 will amount to $2,560. Rent expense under the lease for fiscal year 2005 was $524.

In August 1999, the University entered into a $9,901 sale-leaseback transaction, whereby the University sold and leased back a building at the Lincoln Park Campus. The transaction resulted in a $7,356 gain, which has been deferred. In June 2003, this lease agreement was amended and restated. The remaining unamortized gain and accrued rent expense is being amortized over the term of the new lease including two, five-year renewal periods. The schedule of future minimum lease payments listed above includes lease obligations under the operating lease agreement through August 2008. If the lease is renewed for both five-year options, rent for the ten-year period from September 2008 through August 2018 will amount to $8,980. Rent expense under the lease for fiscal year 2005 was $920.

The schedule of minimum lease payments includes amounts relating to three computer leasing transactions. In December 2004, the University entered into two sale-leaseback transactions, whereby the University sold and leased back computers. Additionally, the University entered into a third straight computer lease transaction. The remaining unamortized gain of $892 on the sale is being amortized over the term of the lease. All three transactions are capital leases and are included in the schedule of minimum lease payments.

During fiscal year 2005, the University purchased various properties that were previously rented under operating leases. Rent expense under these leases before acquisition was $1,883 in 2005 and $5,074 in 2004. See note 7, bonds and notes payable, for fiscal year 2005 borrowing to finance the purchase of these properties.

(b) MJH Educational Assistance Foundation

DePaul is affiliated with MJH Educational Assistance Foundation (MJH) and consents to the selection of one of the three seats on MJH’s board of directors. MJH is not consolidated in these financial statements as the University does not have direct control of MJH.

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(In thousands)

13 (Continued)

Summarized financial data for MJH is included below. MJH I through III below reflects activity through various operating leasing arrangements with the University. The bonds shown below are secured by the properties leased by the University. In addition, MJH IV is the development of student housing intended primarily for the use of DePaul’s students. The University is not constructing this project, does not own this property, and is not liable for repayment of any bonds or financing. The University has an agreement with MJH to provide non-monetary support for the project.

MJH previously accounted for depreciation and amortization based on guidance in Emerging Issues Task Force (EITF) No. 97-1. Effective January 1, 2003, MJH changed this method as the portion of EITF No. 97-1 related to depreciation and amortization was nullified by subsequently issued Financial Accounting Standards Board guidance. MJH has recognized a related cumulative effect of change in accounting method.

Statement of Financial Position

December 31, 2004 and 2003

(In thousands)

Assets2004 2003

MJH I-III MJH IV Total Total

Restricted cash $ 2,708 70,543 73,251 5,969 Net interest in real estate 37,035 13,946 50,981 78,084 Other assets 3,906 2,410 6,316 7,443

Total assets $ 43,649 86,899 130,548 91,496

Liabilities and Net Assets

Liabilities:Bonds payable $ 51,980 86,524 138,504 99,215 Other liabilities 1,205 377 1,582 6,435

Total liabilities 53,185 86,901 140,086 105,650

Net assets (liability):Unrestricted net assets (liability) (9,536) (2) (9,538) (14,154)

Total liabilities and net assets $ 43,649 86,899 130,548 91,496

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

14 (Continued)

Statement of Activities

December 31, 2004 and 2003

(In thousands)

2004 2003MJH I-III MJH IV Total Total

Revenue:Rent from DePaul $ 4,853 — 4,853 4,763 Gain on sale of capital assets 8,547 — 8,547 — Other revenue 326 — 326 462

Total revenue 13,726 — 13,726 5,225

Expenses:Interest expense 4,270 — 4,270 5,270 Depreciation 1,836 — 1,836 2,210 Other 3,002 2 3,004 3,406

9,108 2 9,110 10,886

Change in unrestricted net assets 4,618 (2) 4,616 (5,661)

Cumulative effect of change inaccounting method — — — 5,219

Net change in unrestricted net assets 4,618 (2) 4,616 (10,880)

Net deficit at beginning of year (14,154) — (14,154) (3,274)

Net deficit at end of year $ (9,536) (2) (9,538) (14,154)

During fiscal year 2005, DePaul purchased certain properties from MJH that were previously rented under operating lease agreements. See note 7 for bonds and notes payable.

(c) Lease Deposit

In February 1992, the University purchased certain property, commonly known as the Goldblatt’s Building, from the City of Chicago for $2,000. The University made real estate improvements to the property, which is now the DePaul Center.

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Prior to the purchase, the building was subdivided into separate properties. The University entered into an agreement to sell an Estate of Years, with respect to several of these properties, for a term of 30 years to the City of Chicago for a price of $28,780. Proceeds from the sale of the Estate of Years to the City of Chicago were received in full in 1994 and recorded on the balance sheet as a deposit. For financial reporting purposes, the transaction is treated as an operating lease; lease revenue of $960 and $960 was recognized in fiscal years 2005 and 2004, respectively.

(d) University Center of Chicago

During Fiscal Year 2004, the University entered into a multi-school agreement for student housing with two other Chicago institutions of higher education to build the nation’s largest joint student residence, known as University Center of Chicago (UCC). The facility, opened in August 2004, houses more than 1,680 students and live-in staff near the University’s downtown campus. The schools formed a not-for-profit corporation called Education Advancement Fund, Inc. (EAF) to develop, operate, and own UCC. DePaul is a 40.625% member of the EAF. DePaul agreed to pay EAF a maximum of $7,362 in rent and residential life expenses for DePaul’s proportionate interest (681 beds) in the premises for a one-year period commencing August 1, 2005. DePaul plans to occupy 511 beds and lease out the remaining 170 beds to other universities. In fiscal year 2006, DePaul will pay EAF approximately $6,728 and $522 for DePaul’s share of rent and residential life expenses, respectively. Fiscal year 2006 includes the remaining one month payment for rent and residential life expenses under the old commitment and 11 months of rent and residential life expenses under the current commitment. Fiscal year 2007 reflects $570 and $44 in rent and residential life expenses, respectively, for the remaining one month of the current commitment. This lease obligation is reflected in the future minimum lease payments above. Subsequently, DePaul has the option, but not the obligation, to continue to enter into this commitment for beds on a year-to-year basis. Such a commitment will result in a one-year unconditional obligation to pay the room rate for each of the beds and the cost of a residential life program in proportion to the commitment.

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16 (Continued)

(7) Bonds and Notes Payable

Bonds and notes payable at June 30, 2005 and 2004 consist of the following:

Interestrate Maturity Security 2005 2004

Illinois Finance Authority (IFA)Series 1992 Bonds variable — Irrevocable

letter of credit $ — 55,500 Series 1997 Bonds 4.35%-6.0% — General obligation — 47,880 Series 2004AB Bonds 3.88 - 5.38% 2020 General obligation 53,835 55,580 Series 2004CD Bonds 3.86%-5.625% 2020 General obligation 51,395 — Series 2005A Bonds 4.05%-5.00% 2019 General obligation 43,735 — Series 2005B Bonds variable 2026 General obligation 23,000 — Series 2005C Bonds variable 2026 General obligation 37,600 —

209,565 158,960

Unamortized discount/premium 8,325 4,236

Total IFA bonds payable 217,890 163,196 Other notes payable — 2005 Unsecured — 9 Notes payable 2.95 to 7.00% 2006-2020 Land and buildings 26,080 6,744 Notes payable to bank LIBOR + 0.875% 2007 Unsecured — 1,655

Total bonds and notes payable $ 243,970 171,604

In July of 2004, the University issued $51,395 in IFA general obligation bonds. The proceeds of the bonds were used for the purchase of several Lincoln Park Campus properties which were formerly leased, and to purchase a Loop Campus property.

In March 2005, the University issued $43,735 in IFA general obligation bonds, $23,000 in IFA auction rate general obligation bonds, and $37,600 in taxable auction rate general obligation bonds. The proceeds of the bonds were used for the defeasance of the 1992 and 1997 bond issues.

Long-term debt includes general obligation demand bonds, maturing on October 1, 2026. In the event that the agent is unable to remarket the bonds, the University would pay an amount equal to, or lower than, the maximum Select Auction Variable Rate Securities (SAVRS) rate.

Principal payments required for IFA bonds in each of the five years ending June 30, 2006 through 2010 are $6,355; $8,305; $8,700; $9,510; and $9,750, respectively.

As of June 30, 2005 and 2004, the University had lines of credit totaling $14,800 and $39,800, respectively, of which $0 and $0 was outstanding at June 30, 2005 and 2004, respectively. The lines of credit bear variable rates of interest ranging from LIBOR plus 0.5% to LIBOR plus 1%.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

17 (Continued)

Principal payments required for the notes payable in each of the 5 years ending June 30, 2006 through 2010 are $1,744; $1,834; $1,154; $1,215; and $1,278, respectively.

The estimated fair value of bonds and notes payable at June 30, 2005 is approximately $285,353. The estimated fair value has been determined by the University utilizing the estimated rate which would have to be paid to acquire essentially risk-free assets to extinguish the obligations. The estimate is not necessarily indicative of the amount that the University could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

(8) Retirement and Postretirement Programs

(a) Retirement Benefits

Retirement benefits for the academic and administrative staff are provided through the Teachers Insurance and Annuity Association (TIAA) and Fidelity Investments. The University contributed $8,055 and $7,782 to these plans in 2005 and 2004, respectively.

(b) Postretirement Benefits

The University sponsors a defined benefit postretirement medical plan for its faculty and staff. The plan is contributory, with retiree contributions adjusted annually to reflect the effects of medical inflation. It is the University’s intent to cover a portion of the cost of retirees’ health care coverage, with the remainder borne by the retirees through annual contributions, deductions, and co-payments. A reconciliation of the plan’s funded status with the accrued benefit cost shown on the balance sheets at June 30, 2005 and 2004 is presented below. The measurement date used to determine pension and other postretirement benefit measures for the pension plan and the postretirement benefit plan is June 30.

Reconciliation of Funded Status

2005 2004

Accumulated postretirement benefit obligation:Retirees $ 20,323 17,336 Fully eligible active plan participants 16,425 12,328 Other active plan participants 20,687 15,878

57,435 45,542

Unrecognized net loss (31,513) (24,433) Unrecognized prior service cost 9,151 10,281

Accrued postretirement benefits recognizedon the balance sheets $ 35,073 31,390

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

18 (Continued)

The components of net periodic postretirement benefit cost and the significant assumptions used in determining costs and obligations for the years ended June 30, 2005 and 2004 are as follows:

2005 2004

Service cost $ 1,648 1,826 Interest cost 2,904 2,423 Amortization of loss 1,441 1,054 Amortization of prior service cost (1,130) (583)

Net periodic postretirement benefit cost $ 4,863 4,720

Discount rate for costs 5.25% 6.25%Discount rate for obligations 5.25% 6.25%

Reconciliation of Benefit Obligation

2005 2004

Obligation at beginning of year $ 45,542 46,222 Service cost 1,648 1,826 Interest cost 2,904 2,423 Plan amendments — (10,806) Actuarial loss 8,521 6,589 Actual benefit payments net of contributions (1,180) (712) Accumulated Postretirement Benefit Obligation (APBO) $ 57,435 45,542

Reconciliation of Fair Value of Plan Assets

2005 2004

Fair value of plan assets at beginning of year $ — — Employer contributions 1,180 712 Participant contributions 243 230 Total benefit payments (1,423) (942) Fair value of plan assets at end of year $ — —

The Accumulated Postretirement Benefit Obligation (APBO) disclosed above is the actuarial present value of future benefits based on employees’ service rendered through June 30, 2005.

The Expected Postretirement Benefit Obligation (EPBO) of $73,458 is the actuarial present value as of June 30, 2005 of all benefits expected to be paid after retirement to employees and their dependents.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

19 (Continued)

The assumed healthcare cost trend rate for retirees and fully eligible active plan participants is 12% for fiscal 2005 grading down to 5% in fiscal 2012 and thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed healthcare cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 30, 2005 by $7,252 and the net periodic postretirement benefit cost for the year then ended by $489.

During fiscal year 2004, the University amended its benefit plan, reducing the total accumulated post-retirement benefit obligations. The most significant changes included a change from a Medicare coordination benefit to a Medicare carve-out benefit for the fully eligible active plan participants and other active plan participants as well as a cap on the employer subsidy for other active plan participants. This cap is equal to 80% of the funding rate at that time and will increase by the greater of the consumer price index or the University's weighted tuition increase. In addition, changes were made to increase the required plan participant contributions for prescription drugs consistent with the required contribution in the active employee medical plan.

The expected net benefit payments, for the next five fiscal years and thereafter, are as follows:

Year ending June 30:2006 $ 1,487 2007 1,712 2008 1,958 2009 2,213 2010 2,449 Thereafter 15,497

Based on an actuarial equivalence test performed on the University to determine if the current retiree medical plan design would qualify as at least actuarially equivalent to the proposed Medicare Part D plan, it was determined that the plan is actuarially equivalent and will be eligible for the employer subsidy provided by Medicare. This subsidy is 28% of the total eligible prescription costs between $250 and $5,000 per person. The result is a $6.2 million reduction in APBO as the subsidy offsets part of the University’s costs.

(9) Restrictions and Limitations on Net Asset Balances

Permanently restricted net assets consist of endowment funds and endowment pledges of $19,464 and $18,966 at June 30, 2005 and 2004, respectively. The income earned on the investment of permanently restricted endowment assets is generally available for use in providing scholarships and supporting the University’s education, research, and community development programs.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

20 (Continued)

Temporarily restricted net assets at June 30, 2005 and 2004 consist of the following:

2005 2004

Gifts and other unexpended resources available for:Research and other program support $ 3,540 4,906 Scholarship support 242 173

3,782 5,079

Annuity and life income funds 1,539 2,031 Term endowment funds 6,773 6,580

Total temporarily restricted net assets $ 12,094 13,690

(10) Net Assets Released from Restrictions

The sources of assets released from temporary donor restrictions by incurring expenses satisfying the restricted purposes or by the occurrence of events specified by donors during the years ended June 30, 2005 and 2004 are as follows:

2005 2004

Operating:Research and other program support $ 2,976 2,229 Public service 1,057 1,287

4,033 3,516

Nonoperating:Purchase of property and equipment 19 55

Total net assets released from restrictions $ 4,052 3,571

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

21 (Continued)

(11) Expenses by Functional Classification

Expenses are reported in the consolidated statements of activities by natural business category. The University’s primary program services are instruction, research, and public service. Expenses reported as academic support, student services, and auxiliary enterprises are incurred in support of these primary program services. For purposes of reporting fund-raising expenses, the University includes only those fund-raising costs incurred by its development office. The University’s operating expenses by functional classification for the years ended June 30, 2005 and 2004 are as follows:

2005 2004

Program services:Instruction $ 132,340 133,706 Academic support 46,915 46,805 Student service 28,369 29,948 Public service 10,620 10,331 Research 5,283 4,894 Auxiliary enterprises 45,049 50,142

Total program services 268,576 275,826

Support services:Institutional support 69,650 73,084 Fund-raising 5,027 5,219

Total support services 74,677 78,303

Loss on assets held for sale and impaired assets 1,685 14,615 Total expenses $ 344,938 368,744

(12) Commitment and Contingencies

The University is involved in various litigation proceedings arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the University’s financial position, statement of activities, or net assets.

During fiscal year 2005, DePaul entered into an agreement to sell certain academic assets related to the Barat College. Closing is expected during fiscal year 2006.

In July 2005, the University entered into a purchase and sale agreement to sell the Barat campus. These assets are classified as held for sale at June 30, 2005. It is expected that the sale of these assets will occur during calendar year 2005.

During August 2005, subsequent to fiscal year end, the University purchased 2 properties located on the Lincoln Park Campus for $2,545. The purchases were funded with University operating funds.

DEPAUL UNIVERSITY


June 30, 2005 and 2004

(In thousands)

22

(13) Impairment of Assets and Assets Held for Sale

In August 2004, the University sold the Discovery Ridge Learning Center in St. Genevieve, MO for $598 resulting in a $1,117 loss. The property was classified as held for sale as of June 30, 2004.

DePaul University’s Board of Trustees voted on February 11, 2004 to cease the operations of Barat Campus effective June 30, 2005. DePaul University is actively marketing Barat College, with selected assets, for sale. During fiscal year 2004 it was not expected that a sale would be completed in the one year period following June 30, 2004. As a result of the expected sale of Barat College and the relocation of other DePaul University programs, the campus assets were revalued to reflect the current estimated fair value and an impairment charge of $13,498 was recorded during the year ended June 30, 2004. As a sale of these assets is expected to be completed during the one year period following June 30, 2005, the assets are classified as held for sale as of June 30, 2005.

consolidated financial statements june 30, 2005...

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