University of Georgia, Athens, Georgia, report on audit of financial statements for fiscal year ended June 30, 2004

STATE OF GEORGIA DEPARTMENT OF AUDITS AND ACCOUNTS
UNIVERSITY OF GEORGIA
ATHENS, GEORGIA REPORT ON AUDIT OF THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2004
Russell W. Hinton State Auditor

UNIVERSITY OF GEORGIA - TABLE OF CONTENTS -

SECTION I

FINANCIAL

INDEPENDENT AUDITOR'S COMBINED REPORT ON BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

REQUIRED SUPPLEMENTARY INFORMATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

BASIC FINANCIAL STATEMENTS

EXHIBITS

A STATEMENT OF NET ASSETS

3

B STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS

4

C STATEMENTOFCASHFLOWS

6

D NOTES TO THE FINANCIAL STATEMENTS

8

SUPPLEMENTARY INFORMATION

SCHEDULES

SCHEDULES OF REVENUES AND EXPENDITURES COMPARED TO

BUDGET - (NON-GAAP BASIS)

1

RESIDENT INSTRUCTION

43

2

LOTTERY FOR EDUCATION

44

3

OTHER ORGANIZED ACTIVITIES

45

4 RECONCILIATION OF SALARIES AND TRAVEL

53

SECTION II
COMPLIANCE AND INTERNAL CONTROL REPORT
REPORT 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

UNIVERSITY OF GEORGIA - TABLE OF CONTENTS -
SECTION III AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS
SECTION IV CURRENT YEAR FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS

SECTION I FINANCIAL

Russell W. Hinton
STATE AUDITOR
(404) 656-2174

DEPARTMENT OF AUDITS AND ACCOUNTS
254 Washington Street, S.W., Suite 214 Atlanta, Georgia 30334-8400
January 20, 2005

Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia Members of the Board of Regents of the University System of Georgia
and Honorable Michael F. Adams, President University of Georgia
INDEPENDENT AUDITOR'S COMBINED REPORT ON BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
Ladies and Gentlemen:
We have audited the accompanying basic financial statements of the University of Georgia, an organizational unit ofthe State ofGeorgia, and its' aggregate discretely presented component units as ofand for the year ended June 30, 2004, as listed in the table ofcontents. These financial statements are the responsibility ofthe University ofGeorgia's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements ofthe University ofGeorgia's discretely presented component units. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for the University of Georgia Research Foundation, Inc., the University of Georgia Athletic Association, Inc. and the University of Georgia Foundation is based on the reports of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted in the United States ofAmerica and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General ofthe United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. 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 audit and the reports ofother auditors provide a reasonable basis for our opinions.
As discussed in Note 1, the financial statements ofthe University ofGeorgia are intended to present the financial position and changes in financial position (including cash flows) ofonly that portion of
04ARL-61X

the business-type activities of the State of Georgia that is attributable to the transactions of the University of Georgia. They do not purport to, and do not, present fairly the financial position and changes in financial position (including cash flows) of the State of Georgia, in conformity with accounting principles generally accepted in the United States of America.
In our opinion, based on our audit and the reports ofother auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Georgia and of its aggregate discretely presented component units as of June 30, 2004, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the University adopted the provisions of the Governmental Accounting Standards Board, Statement Number 39, Determining Whether Certain Organizations are Component Units during the year ended June 30, 2004.
In accordance with Government Auditing Standards, we have also issued our report dated January 20, 2005, on our consideration of the University's internal control over financial reporting and our test of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part ofan 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 is not a required part ofthe basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We and the other auditors 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 this information and express no opinion on it.
Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the University's basic financial statements. The accompanying supplementary information (Schedules 1 through 4) is presented for purposes of additional analysis and is not a required part ofthe basic financial statements. Such information has been subjected to the auditing procedures applied by us in the audit ofthe basic financial statements and, in our opinion, based on our audit, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Respectfully submitted,

RWH:gp 04ARL-61X

Russell W. Hinton State Auditor

REQUIRED SUPPLEMENTARY INFORMATION

UNIVERSITY OF GEORGIA
Management's Discussion and Analysis

Introduction

The University of Georgia was incorporated by an act of the General Assembly on January 27, 1785. Georgia became the first state to charter a state-supported university.

The University of Georgia, a land-grant and sea-grant university with state-wide commitments and responsibilities, is the state's flagship institution of higher education. It is also the state's oldest, most comprehensive, and most diversified institution of higher education. Its motto, "to teach, to serve, and to inquire into the nature of things," reflects the University's integral and unique role in the conservation and enhancement of the state's and nation's intellectual, cultural, and environmental heritage. As a comprehensive land-grant and sea-grant institution, the University of Georgia offers baccalaureate, master's, doctoral and professional degrees in the arts, humanities, social sciences, biological sciences, physical sciences, agricultural and environmental sciences, business, environmental design, family and consumer sciences, forest resources, journalism and mass communication, education, law, pharmacy, social work, and veterinary medicine.

The student population continues to grow, increasing by almost 1,600 students over a three-year period, while the number of faculty have slightly decreased.

Faculty

Students

FY2004 FY2003 FY2002

1,754 1,790 1,801

33,878 32,941 32,317

Overview ofthe Financial Statements and Financial Analysis

The University of Georgia is proud to present its financial statements for fiscal year 2004. The emphasis of discussions about these statements will be on current year data. 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. This discussion and analysis of the University's financial statements provides an overview of its financial activities for the year with comparable data provided for fiscal year 2003.

Statement ofNet Assets

The Statement of Net Assets presents the assets, liabilities, and net assets of the University as of the end of the fiscal year. The Statement of Net Assets is a point of time financial statement. The purpose of the Statement of Net Assets is to present to the readers of the financial statements a fiscal snapshot of the University of Georgia. The Statement of Net Assets presents end-of-year

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data concerning Assets (current and noncurrent), Liabilities (current and noncurrent), and Net Assets (assets minus liabilities). The difference between current and noncurrent assets will be discussed in the Notes 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.

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 asset category is restricted net assets, which is divided into two categories, nonexpendable and expendable. The corpus of nonexpendable 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 net assets are available to the institution for any lawful purpose of the institution.

Statement of Net Assets, Condensed

June 30, 2004

June 30, 2003

Assets Current Assets Capital Assets, Net Other Assets

$ 135,612,765.45 912,119,052.26 124,093,395.94

$ 156,211,420.13 773,889,413.66 88,703,354.39

Total Assets

$1,171,825,213.65 $1,018,804,188.18

Liabilities Current Liabilities Noncurrent Liabilities

$ 100,823,985.22 $ 119,150,600.58

73,675,768.50

36,599,784.82

Total Liabilities

$ 174,499,753.72 $ 155,750.385.40

Net Assets Invested in Capital Assets, Net of Debt Restricted - Nonexpendable Restricted - Expendable Restricted - Capital Projects Unrestricted

$ 837,741,091.00 39,805,097.20 53,135,898.44 225,602.92 66,417,770.37

$ 750,659,767.72 37,440,283.45 27,873,667.73 920.93 47,079,162.95

Total Net Assets

$ 9971325A59.93 $ 863,053,802.78

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The total assets of the institution increased by $153,021,025.47. A review of the Statement of Net Assets will reveal that the increase was primarily due to an increase of $138,229,638.60 of investment in plant, net of accumulated depreciation. The consumption of assets follows the institutional philosophy to use available resources to acquire and improve all areas of the institution to better serve the instruction, research and public service missions of the institution. The total liabilities for the year increased by $18,749,368.32. The primary cause for the increase was in noncurrent liabilities, primarily $37,075,983.68 in capital payables, which contributed to the increase in invested in capital assets, net of debt. The combination of the increase in total assets of $153,021,025.47 and the increase in total liabilities of $18,749,368.32 yields an increase in total net assets of $134,271,657.15. The increase in total net assets is primarily in the category of invested in capital assets, net of debt in the amount of $87,081,323.28. Statement ofRevenues, Expenses and Changes in Net Assets Changes in total net assets as presented on the Statement of Net Assets are based on the activity presented in the Statement of Revenues, Expenses and Changes in Net Assets. The purpose of the statement is to present the revenues received by the institution, both operating and nonoperating, and the expenses paid by the institution, operating and nonoperating, and any other revenues, expenses, gains and losses received or spent by the institution. Generally speaking operating revenues are received for providing goods and services to the various customers and constituencies of the institution. Operating expenses are those expenses paid to acquire or produce the goods and services provided in return for the operating revenues, and to carry out the mission of the institution. Nonoperating revenues are revenues received for which goods and services are not provided. For example state appropriations are nonoperating because they are provided by the Legislature to the institution without the Legislature directly receiving commensurate goods and services for those revenues.
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Statement of Revenues, Expenses and Changes in Net Assets, Condensed

June 30, 2004

June 30, 2003

Operating Revenues Operating Expenses

$ 516,740,861.37 $ 470,867,187.56

938,898,788.27

932,878,916.14

Operating Loss

$ -422,157,926.90 $ -462,011,728.58

Nonoperating Revenues and Expenses

439,467,429.30

429,238,760.07

Income (Loss) Before Other Revenues, Expenses, Gains or Losses

$ 17,309,502.40 $ -32,772,968.51

Other Revenues, Expenses, Gains or Losses 114,252,783.04

51,209,122.05

Increase (Decrease) in Net Assets

$ 131,562,285.44 $ 18,436,153.54

Net Assets at Beginning of Year, as Originally Reported

$ 863,053,802.78 $ 784,308,969.41

Prior Period Adjustment

2,709,371.71

60,308,679.83

Net Assets at Beginning of Year Restated

$ 865,763,174.49 $ 844,617,649.24

Net Assets at End of Year

$ 9972325A59.93 $ 863,053,802.78

The Statement of Revenues, Expenses and Changes in Net Assets reflects a positive year with an increase in the net assets at the end of the year. Some highlights of the information presented on the Statement of Revenues, Expenses and Changes in Net Assets are as follows:

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Revenue By Source For The Years Ended June 30, 2004 and June 30, 2003

Operating Revenue Tuition and Fees Federal Appropriations Grants and Contracts Sales and Services of Educational Departments Auxiliary Other
Total Operating Revenue
Nonoperating Revenue State Appropriations Grants and Contracts Gifts Investment Income Other
Total Nonoperating Revenue
Capital Grants and Gifts Federal State Other
Total Capital Grants and Gifts
Total Revenues

June 30, 2004

June 30, 2003

$ 158,061,164.07 10,242,489.28
223,268,311.92

$ 136,583,384.62 11,179,824.24
211,326,674.58

11,924,414.11 89,502,873.67 23,741,608.32

11,529,211.23 81,325,866.62 18,922,226.27

$ 516,740,861.37 $ 470,867,187.56

$ 396,939,319.13 22,345,981.87 8,770,610.51 3,441,694.21 11,669,019.05

$ 412,856,623.55 4,249,937.34 7,111,340.11 4,108,468.80 2,338,686.31

$ 443,166,624.77 $ 430,665,056.11

$

114,277.85

72,682,973.34

41,455,531.85

$ 1,180,083.95 50,029,038.10

$ 114,252,783.04 $ 51,209,122.05

$1207421602269.18 $ 95227412365.72

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Expenses (By Functional Classification) For The Years Ended June 30, 2004 and June 30, 2003

June 30, 2004

June 30, 2003

Operating Expenses Instruction Research Public Service Academic Support Student Services Institutional Support Plant Operations and Maintenance Scholarships and Fellowships Auxiliary Enterprises

$ 192,411,258.48 261,396,541.85 132,224,608.90 86,567,257.55 25,905,469.68 69,500,257.02 73,464,538.81 19,298,310.93 78,130,545.05

$ 189,508,229.27 254,581,254.04 140,658,248.39 84,231,992.93 23,936,608.34 72,894,324.31 66,069,922.68 23,424,695.67 77,573,640.51

Total Operating Expenses

$ 938,898,788.27 $ 932,878,916.14

Nonoperating Expenses Interest Expense (Capital Assets)

3,699,195.47

1,426,296.04

Total Expenses

$ 942,597,983.74 $ 934,305,212.18

Tuition and fees increased by approximately $21 million from fiscal year 2003 to fiscal year 2004, a result of a 6% increase in general tuition, increased out-of-state fees, and small increases in mandatory fees applied to an increased student enrollment. Contracts and grants revenues increased from approximately $211 million in fiscal year 2003 to approximately $223 million in fiscal year 2004, continuing a trend of increased research activity at the University. Auxiliary revenues increased by approximately $8.2 million (approximately 10%), mostly attributable to increased revenues from increased participation in Food Services meal plan options. Auxiliary Bookstore revenues decreased by approximately $3.8 million due to the management of the University Bookstore being transferred to a private vendor during December 2003. Under nonoperating revenues (expenses) state appropriations decreased by $15,917,304.42. The reduction of state appropriations system-wide, due to a sluggish economy, has created a challenge for all institutions of the University System of Georgia and, thus, for the University of Georgia. The University's state appropriations decreased from approximately $413 million to approximately $397 million, indicative of a series of budget reductions related to lagging state revenues. Fiscal year 2004 nonoperating grants and contracts reflect approximately $18 million increase over fiscal year 2003 due to more nonexchange sponsored activities. State capital gifts shows a significant increase, from approximately $1.2 million in fiscal year 2003 to approximately $72.7 million in fiscal year 2004, which approximately $57.2 million was from GSFIC funded Student Learning Center and MRR funds for major capital projects. Finally, the Other Capital Grants and Gifts category for fiscal year 2004 reflects approximately $41.4 million of which approximately $37.2 million were funds expended by the University of Georgia Athletic Association, Inc. on athletic facilities owned by the University.

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The compensation and employee benefits category decreased by $2,568,093.96. The decrease reflects a reduction of staff and related benefit costs due to budget constraints.

Utilities decreased by $527,972.64 during the past year. The decrease was primarily associated with increased efficiencies in utilities and the cost savings from reducing heating and air during the holidays.

Statement ofCash Flows

The final statement presented by the University of Georgia 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. 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, noninvesting, and noncapital financing purposes. The third 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 fourth section reflects the cash flows from investing activities and shows the purchases, proceeds, and interest received from investing activities. 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.

Cash Flows for the Years Ended June 30, 2004 and June 30, 2003, Condensed

June 30, 2004

June 30, 2003

Cash Provided (Used) By: Operating Activities Noncapital Financing Activities Capital and Related Financing Activities Investing Activities

$ -341,903,550.64 432,718,008.05 -62, 750,260.52 -51,889,424.81

$ -397,358,115.99 439,237,251.08 -79,051,319.00 69,743,902.94

Net Change in Cash Cash, Beginning of Year

$ -23,825,227.92 $ 32,571,719.03

96,530,585.51

63,958,866.48

Cash, End of Year

$ 72,705,357.59 $ 96.530.585.51

Capital Assets

The University added several significant facilities in fiscal year 2004, including the Student Learning Center and the Complex Carbohydrate Research Center. The Myers Hall dormitory reopened after a $17.1 million dollar major renovation. Several projects funded by the University of Georgia Athletic Association, Inc. include a major improvement/expansion to the Indoor Tennis Facility; improvements to the Soccer/Softball Complex; and expansion to the North Stands at Sanford Stadium.

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For additional information concerning Capital Assets, see Notes 1, 6, 8, and 9 in the Notes to the Financial Statements.
Long-Term Debt
The University of Georgia had a total Long-Term Debt of $96,333,680.28 of which $22,657,911.78 was reflected as current liability at June 30, 2004.
For additional information concerning Long-Term Debt see Notes 1 and 8 in the Notes to the Financial Statements.
Component Units
In compliance with GASB Statement No. 39, the University of Georgia has included the financial statements and notes for all required component units for fiscal year 2004. The University of Georgia Foundation had investments of approximately $421.8 million and longterm debt of approximately $194 million (Bonds Payable) as of June 30, 2004. The University of Georgia Research Foundation, Inc. had investments approximately $22.6 million. The University of Georgia Athletic Association, Inc., had cash equivalents of approximately $46.5 million and long-term debt of approximately $84.1 million. Details are available in Note 1, Summary of Significant Accounting Policies and Note 15, Component Units.
Economic Outlook
The University of Georgia ended fiscal year 2004 in the midst of a sluggish economic recovery which continues to depress state revenue growth. As a result, state funding for fiscal year 2004 declined from the previous year.
At the outset of fiscal year 2004, the University had significant vacant faculty lines due to the need to reduce expenditures. On the positive side, because of internal redirection of funds and a modest 5% increase in tuition, authorization was given to fill 70 of those vacant faculty lines. This action will significantly contribute to the instruction mission of University of Georgia. Furthermore, the faculty and staff continued to do an outstanding job of securing external funding for research and sponsored programs. This category of funding rose by over $33 million.
The University will continue to monitor its resources. Hiring for vacant positions will continue to be limited to mission critical positions and the replacement of equipment will be further postponed.
Michael F. Adams, President University of Georgia
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BASIC FINANCIAL STATEMENTS - 1-

UNIVERSITY OF GEORGIA STATEMENT OF NET ASSETS
JUNE 30. 2004

EXHIBIT"A"

ASSETS
Current Assets Cash and Cash Equivalents Short-Term Investments Accounts Receivable, Net Federal Financial Assistance Other Due from Component Units Due from Primary Government Pledges Receivable Inventories Other Assets
Total Current Assets
Noncurrent Assets Cash and Cash Equivalents Due from Component Units Investments Investments in Real Estate Notes Receivable, Net Pledges Receivable Capital Assets, Net
Total Noncurrent Assets
Total Assets
LIABILITIES
Current Liabilities Accounts Payable and Accrued Liabilities Deposits Deferred Revenue Notes Payable to Primary Government Other Liabilities Deposits Held for Other Organizations Due to Component Units Due to Primary Government Long-Term Liabilities (Current Portion) Compensated Absences (Current Portion)
Total Current Liabilities
Noncurrent Liabilities Compensated Absences Notes Payable to Primary Government Liabilities under Split-Interest Agreements Long-Term Liabilities
Total Noncurrent Liabilities
Total Liabilities
NET ASSETS
Invested in Capital Assets, Net of Related Debt Restricted for:
Nonexpendable Expendable Capital Projects Unrestricted

UNIVERSITY OF GEORGIA

UNIVERSITY OF GEORGIA RESEARCH
FOUNDATION, INC.

COMPONENT UNITS UNIVERSITY OF GEORGIA ATHLETIC
ASSOCIATION, INC.

UNIVERSITY OF GEORGIA
FOUNDATION

$ 72,582,844.09 $

17,542,686.24 20,618,654.25 18,775,806.00

3,156,341.35 2,936,433.52
$ 135,612,765.45 $

$

122,513.50

2,946,082.00

110,824,705.36 $

10,200,095.08

912,119,052.26

$ 1,036,212,448.20 $

$ 1,171,825,213.65 $

1,565,608.00 $
16,035,708.00 461,625.00
29,523,297.00 47,586,238.00 $

46,525,928.00 $ 4,914,050.00 45,646,290.00

4,538,465.00

2,671,301.00

8,505,934.36

177,286.00

46,163,874.00

51,241,679.00 $ 107,901,449.36

22,579,629.00
653,241.00 $ 23,232,870.00 $ 70,819,108.00 $

$ 149,636,944.00

376,151,339.00 19,498,544.00 160,872.00 17,896,069.64
172,529,619.00

149,636,944.00 $ 586,236,443.64

200,878,623.00 $ 694,137,893.00

$ 19,930,292.38 $ 997,900.00
44,091,777.39
1,013,443.57 11,671,035.10
461,625.00 1,620,313.93 21,037,597.85 $ 100,823,985.22 $
$ 13,598,771.20
60,076,997.30
$ 73,675,768.50 $ 174,499,753.72 $

2,790,792.00 $ 11,857,346.00 19,225,453.00
18,497,348.00
52,370,939.00 $

9,780,303.00 $ 8,637,414.00
17,688,873.00 278,458.00
10,869,511.00

1,074,518.00 2,237,031.00

1,085,732.00 61,683.00

31,059,183.00 $ 20,654,340.00

$
$ 52,370,939.00 $

2,946,082.00

$ 12,889,212.00

80,203,556.00

208,931,587.00

83,149,638.00 $ 221,820z799.00

114,208,821.00 $ 242,475,139.00

$ 850,421,741.03 $
39,805,097.20 53, 135,898.44
225,602.92 53,737,120.34

653,241.00 $ 17.794,928.00

72,007,278.00 $ 2,620,403.00

12,057,852.00

241,202,041.00 202,946,373.00

2,604,672.00

4,893,937.00

Total Net Assets

$ 997,325,459.93 $

18,448 169.00 $

86,669,802.00 $ 451,662,754.00

The notes to the financial statements are an integral part of this statement. -3-

UNIVERSITY OF GEORGIA STATEMENT OF REVENUES. EXPENSES AND CHANGES IN NET ASSETS
YEAR ENDED JUNE 30. 2004

EXHIBIT"B"

OPERATING REVENUES
Student Tuition and Fees Less: Scholarship Allowances Less: Uncollectible Accounts
Gifts and Contributions Endowment Income (Per Spending Plan) Federal Appropriations Grants and Contracts
Federal State Local Sales and Services of Educational Departments Auxiliary Enterprises Residence Halls Bookstore Food Services Parking/Transportation Health Services Intercollegiate Athletics Other Organizations Other Operating Revenues
Total Operating Revenues
OPERATING EXPENSES
Salaries Faculty Staff
Employee Benefrts Travel Scholarships and Fellowships Utilities Supplies and Other Services Depreciation Payments to or on the Behalf of the University of Georgia
Total Operating Expenses
Operating Income (Loss)
NONOPERATING REVENUES {EXPENSES)
State Appropriations Grants and Contracts
Federal Local Gifts Interest and Other Investment Income Interest Expense (Capital Assets) Other Nonoperating Revenues
Net Nonoperating Revenues
Income (Loss) Before Other Revenues, Expenses, Gains, or Losses
Capital Grants and Gifts Federal State Other
Additions to Permanent Endowments
Total Other Revenues
Increase (Decrease) in Net Assets

UNIVERSITY OF GEORGIA

COMPONENT UNITS

UNIVERSITY OF

UNIVERSITY OF

GEORGIA

GEORGIA

RESEARCH

ATHLETIC

FOUNDATION, INC. ASSOCIATION, INC.

UNIVERSITY OF GEORGIA
FOUNDATION

$ 211,122,877.84 -53,003,562.40 -58,151.37

10,242,489.28
138,514,500.78 44,713,971.68 40,039,839.46 $ 11,924,414.11
27,463,347.08 8,634,434.15
23,410,134.70 12,705,696.82 14,152,647.49
3,136,613.43 23,741,608.32
$ 516,740,861.37 $

121,470,080.00
$ 9,601,824.00 131,071,904.00 $

$ 13,950,247.00 12,059,000.00
54,706,045.00 7,515,126.00
54,706,045.00 $ 33,524,373.00

$ 124,678,584.90 379,841,103.35 125,984,790.98 10,930,775.66 25,319,696.19 25,428,707.45 189,964,707.61 $ 56,750,422.13
$ 938,898,788.27 $
$ -422,157,926.90 $

9, 169,694.00 $ 122,545,220.00 131,714,914.00 $
-643,010.00 $

$

721,078.00

175,024.00

8,419,802.55 4,349,859.00 33,681,388.45

72,397.00 6,753,479.00 2,350,555.00 21,164,809.00

46,451,050.00 $ 31,237,342.00

8,254,995.00 $ 2,287,031.00

$ 396,939,319.13
176,801.00 22,169,180.87
8,770,610.51 3,441,694.21 $ -3,699, 195.47 11,669,019.05
$ 439,467,429.30 $

$ 17,309,502.40 $

$

114,277.85

72,682,973.34

41,455,531.85

$ 114,252,783.04 $ 131,562,285.44 $

$ 693,110.00 1,015,009.00 1,708,119.00 $ 1,065,109.00 $
1,065,109.00 $

1,260,561.00 622,875.00 $ -896,780.00 704,856.00

55,229,187.00 -2,552,923.00

1,691,512.00 $ 52,676,264.00

9,946,507.00 $ 54,963,295.00

$ 19,857,359.00 $ 19,857,359.00 9,946,507.00 $ 74,820,654.00

-4-

UNIVERSITY OF GEORGIA STATEMENT OF REVENUES. EXPENSES AND CHANGES IN NET ASSETS
YEAR ENDED JUNE 30. 2004

EXHIBIT"B"

Net Assets Net Assets - Beginning of Year, as Originally Reported Prior Period Adjustments - See Note 1
Net Assets - Beginning of Year, Restated
Net Assets - End of Year

UNIVERSITY OF GEORGIA

COMPONENT UNITS

UNIVERSITY OF

UNIVERSITY OF

GEORGIA

GEORGIA

RESEARCH

ATHLETIC

FOUNDATION, INC. ASSOCIATION. INC.

UNIVERSITY OF GEORGIA
FOUNDATION

$ 863,053,802.78 $ 2,709,371.71
$ 865,763,174.49 $

17,383,060.00 $ 17,383,060.00 $

76,723,295.00 $ 376,842,100.00 76,723,295.00 $ 376,842,100.00

$ 997,325,459.93 $

18448169.00 $

86,669,802.00 $ 451,662,754.00

The notes to the financial statements are an integral part of this statement. -5-

UNIVERSITY OF GEORGIA STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30. 2004
CASH FLOWS FROM OPERATING ACTIVITIES Tuition and Fees Federal Appropriations Grants and Contracts (Exchange) Sales and Services of Educational Departments Payments to Suppliers Payments to Employees Payments for Scholarships and Fellowships Loans Issued to Students and Employees Collection of Loans to Students and Employees Auxiliary Enterprise Charges: Residence Halls Bookstore Food Services Parking/Transportation Health Services Other Organizations Other Receipts (Payments)
Net Cash Provided (Used) by Operating Activities
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State Appropriations Agency Funds Transactions Gifts and Grants Received for Other than Capital Purposes
Net Cash Flows Provided (Used) by Noncapital Financing Activities
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital Grants and Gifts Received Proceeds from Sale of Capital Assets Purchases of Capital Assets Principal Paid on Capital Debt and Leases Interest Paid on Capital Debt and Leases
Net Cash Provided (Used) by Capital and Related Financing Activities
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales and Maturities of Investments Interest on Investments Purchase of Investments
Net Cash Provided (Used) by Investing Activities
Net Increase (Decrease) in Cash
Cash and Cash Equivalents - Beginning of Year
Cash and Cash Equivalents - End of Year
-6 -

EXHIBIT"C"
$ 151,662,033.44 12,525,997.30
258,604,101.16 9,428,198.74
-353,885, 728. 72 -507, 170,749.04
-25,319,696.19 -3,006,228.00 2,708,131.57
28,442,587.17 13,121,103.75 23,423,230.22 13,353,682.56 15,117,606.78
3,010,970.95 16,081,207.67
$ -341,903,550.64
$ 396,939,319.13 5,578,454.81
30,200,234.11
$ 432,718,008.05
$ 21,433,506.04 55,918.68
-78,892,241.58 -1,648,248.19 -3,699,195.47
$ -62,750,260.52
$ 114,887,095.94 2,729,190.38
-169,505,711.13
$ -51,889,424.81
$ -23,825,227.92
96,530,585.51
$ 72,705,357.59

UNIVERSITY OF GEORGIA STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30. 2004

EXHIBIT"C"

RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Operating Income (Loss) Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities Depreciation Change in Assets and Liabilities: Accounts Receivable, Net Inventories Other Assets Accounts Payable Deferred Revenue Other Liabilities Compensated Absences

$ -422,157,926.90
56,750,422.13
619,946.94 5,277,988.79
-830,748.00 2,088,605.98 -20,998,585.86 38,933,124.71 -1,586,378.43

Net Cash Provided (Used) by Operating Activities

$ -341,903,550.64

NONCASH ACTIVITY NONCASH INVESTING, NONCAPITAL FINANCING, AND CAPITAL AND RELATED FINANCING TRANSACTIONS Fixed Assets Acquired by Incurring Capital Lease Obligations Change in Fair Market Value of Investments Recognized as a Component of Interest Income Gift of Capital Assets Reducing Proceeds of Capital Grants and Gifts

$ 39,155,000.00 $ -1,243,921.74 $ -75,507,714.36

The notes to the financial statements are an integral part of this statement. -7-

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30. 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS The University of Georgia serves the state, and national communities by providing its students with academic instruction that advances fundamental knowledge, and by disseminating knowledge to the people of Georgia and throughout the country.
REPORTING ENTITY The University of Georgia is one of thirty-four (34) State supported member institutions of higher education in Georgia which comprise the University System of Georgia, an organizational unit of the State of Georgia. The accompanying financial statements reflect the operations of the University of Georgia as a separate reporting entity.
The Board of Regents has constitutional authority to govern, control and manage the University System of Georgia. This authority includes but is not limited to the power to designate management, the ability to significantly influence operations, the authority to control institutions' budgets, the power to determine allotments of State funds to member institutions and the authority to prescribe accounting systems and administrative policies for member institutions. The University of Georgia does not have authority to retain unexpended State appropriations (surplus) for any given fiscal year. Accordingly, the University of Georgia is considered an organizational unit of the Board of Regents of the University System of Georgia reporting entity for financial reporting purposes because of the significance of its legal, operational, and financial relationships with the Board of Regents as defined in Section 2100 of the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards.
The Board of Regents of the University System of Georgia (and thus the University of Georgia) is required to implement GASB Statement No. 39 Determining Whether Certain Organizations are Component Units - an amendment ofStatement No. 14, for fiscal year 2004. This statement requires the inclusion of the financial statements for foundations and affiliated organizations that qualify as component units in the Annual Financial Report for the institution. These statements (Statement of Net Assets and Statement of Revenues, Expenses and Changes in Net Assets) are reported discretely in the University's financial statements. For fiscal year 2004, the University of Georgia is reporting the activity for the University of Georgia Foundation, the University of Georgia Research Foundation, Inc. and the University of Georgia Athletic Association, Inc.
See Note 15, for additional component unit disclosures.
FINANCIAL STATEMENT PRESENTATION In June 1999, the GASB issued Statement No. 34, Basic Financial Statements and Management Discussion and Analysis for State and Local Governments. This was followed in November 1999 by GASB Statement No. 35, Basic Financial Statements and Management's Discussion and Analysis for Public Colleges and Universities. The State of Georgia implemented GASB Statement No. 34 as of and for the year ended June 30, 2002. As an organizational unit of the State of Georgia, the University also adopted GASB Statements No. 34 and No. 35 as amended
- 8-

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION by GASB Statements No. 37 and No. 38. The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) as prescribed by the GASB and are presented as required by these standards to provide a comprehensive, entity-wide perspective of the University's assets, liabilities, net assets, revenues, expenses, changes in net assets, cash flows, and replaces the fund group perspective previously required.
GAAP requires that the reporting of summer school revenues and expenses be between fiscal years rather than in one fiscal year. Due to the lack of materiality, Institutions of the University System of Georgia will continue to report summer revenues and expenses in the year in which the predominant activity takes place.
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, except as noted in the preceding paragraph. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All significant intra-university transactions have been eliminated.
The University has the option to apply all Financial Accounting Standards Board (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.
RESTATEMENT OF PRIOR YEAR NET ASSETS - BEGINNING OF YEAR In the initial year of implementation of GASB Statement No. 35, Basic Financial Statements and Management's Discussion and Analysis for Public Colleges and Universities, the University included a certain capital asset in its depreciable capital assets listing that should have been identified as being Construction in Progress.
As the result of the University's inclusion of this asset as non-depreciable Construction in Progress, net assets at July 1, 2003 were increased by $982,458.27 for the effect on accumulated depreciation.
Additionally, in the initial year of implementation of GASB Statement No. 35, the University failed to capitalize certain equipment items, including leases, which qualified as capital assets under the University's asset capitalization policies. Inclusion of these assets resulted in an increase in net assets at July 1, 2003 of $1,726,913.44.
CASH AND CASH EQUIVALENTS Cash and Cash Equivalents consist of petty cash, demand deposits and time deposits in authorized financial institutions, and cash management pools that have the general characteristics of demand deposit accounts. This includes the State Investment Pool.
-9-

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SHORT-TERM INVESTMENTS Short-Term Investments consist of investments of 90 days - 13 months. This would include certificates of deposits or other time restricted investments with original maturities of six months or more when purchased. Funds are not readily available and there is a penalty for early withdrawal.
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. The Board of Regents Legal Fund is included under Investments.
ACCOUNTS RECEIVABLE Accounts receivable consists of tuition and fees charged to students and auxiliary enterprise services provided to students, faculty and staff, the majority of each residing in the State of Georgia. Accounts receivable also includes 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 grant and contracts. Accounts receivable are recorded net of estimated uncollectible amounts.
INVENTORIES Consumable supplies are carried at the average cost basis.
Resale Inventories are valued at cost using the average-cost basis.
NONCURRENT CASH AND INVESTMENTS Cash and investments that are externally restricted and cannot be used to pay current liabilities are classified as noncurrent assets in the Statement ofNet 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. For equipment, the University's capitalization policy includes all items with a unit cost of $5,000.00 or more, and an estimated useful life of greater than one year. Renovations to buildings, infrastructure, and land improvements that exceed $100,000.00 and 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 60 years for buildings, 20 to 25 years for infrastructure and land improvements, 10 years for library books, and 3 to 20 years for equipment.

- 10 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CAPITAL ASSETS To obtain the total picture of plant additions in the University System, it is necessary to look at the activities of the Georgia State Financing and Investment Commission (GSFIC) - an organization that is external to the System. GSFIC issues bonds for and on behalf of the State of Georgia, pursuant to powers granted to it in the Constitution of the State of Georgia and the Act creating the GSFIC. The bonds so issued constitute direct and general obligations of the State of Georgia, to the payment of which the full faith, credit and taxing power of the State are pledged.
Effective July 1, 2001, the GSFIC retains construction in progress on their books throughout the construction period and transfers the entire project to the University of Georgia when complete. For the year ended June 30, 2004, GSFIC transferred capital additions valued at $72,682,973.34 to the University of Georgia.
DEPOSITS Deposits represent good faith deposits from students to reserve housing assignments m a University residence hall.
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 Employee vacation pay is accrued at year-end for financial statement purposes. The liability and expense incurred are recorded at year-end as accrued vacation payable in the Statement of Net Assets, and as a component of compensation and benefit expense in the Statements of Revenues, Expenses and Changes in Net Assets. The University of Georgia had accrued liability for compensated absences in the amount of $36,222,747.48 as of July 1, 2003. For fiscal year 2004, $23,591,864.62 was earned in compensated absences and employees were paid $25,178,243.05, for a net decrease of $1,586,378.43. The ending balance as of June 30, 2004 in accrued liability for compensated absences was $34,636,369.05.
NONCURRENT LIABILITIES Noncurrent liabilities include (1) liabilities that will not be paid within the next fiscal year; (2) capital lease obligations with contractual maturities greater than one 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:

- 11 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NET ASSETS Invested in capital assets, net ofrelated 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. The term "debt obligations" as used in this definition does not include debt of the GSFIC as discussed previously in Note 1 - Capital Assets Section.

Restricted net assets - nonexpendable: Nonexpendable restricted 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. The University may accumulate as much of the annual net income of an institutional fund as is prudent under the standard established by Code Section 4415-7 of Annotated Code of Georgia.

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.

The University's Expendable Restricted Net Assets include the following:

June 30, 2004

Restricted - E&G and Other Organized Activities Federal Loans Institutional Loans

$34,265,420.97 10,197,995.09 8,672,482.38

Total Restricted Expendable

$53.135.898.44

Restricted net assets - expendable - Capital Projects: This represents resources for which the University is legally or contractually obligated to spend resources for capital projects in accordance with restrictions imposed by external third parties.

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 those purposes, except for unexpended state appropriations (surplus) of $9,675,169.74. Unexpended state appropriations must be refunded to the Board of Regents of the University System of Georgia, Administrative Central Office for remittance to the Office of Treasury and Fiscal Services. These resources also include auxiliary enterprises, which are substantially self-supporting activities that provide services for students, faculty and staff.

- 12 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NET ASSETS The University's Unrestricted Net Assets includes the following items which are quasi-restricted by management.

June 30, 2004

R& R Reserve Reserve for Encumbrances Reserve for Inventory Other Unrestricted

$ 6,447,250.12 31,321,967.15 1,487,000.00 14,480,903.07

Total Unrestricted Net Assets

$53,737,120.34

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 University of Georgia, as a political subdivision of the State of Georgia, is excluded from Federal income taxes under Section 115(1) of the Internal Revenue Code, as amended.

CLASSIFICATION OF REVENUES The University has classified its revenues as either operating or nonoperating revenues in the Statement of Revenues, Expenses and Changes in Net Assets 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 allowances, (2) sales and services of auxiliary enterprises, (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 No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, and GASB No. 34, such as state appropriations and investment income.

SCHOLARSHIP ALLOWANCES Student tuition and fee revenues, and certain other revenues from students, are reported at gross with a contra revenue account of scholarship allowances in the Statement of Revenues, Expenses and Changes in Net Assets. Scholarship 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

- 13 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SCHOLARSHIP ALLOWANCES 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 contra revenue for scholarship allowances.
NOTE 2: CASH AND CASH EQUIVALENTS; OTHER DEPOSITS; AND INVESTMENTS
STATE OF GEORGIA COLLATERALIZATION STATUTES AND POLICIES Funds belonging to the State of Georgia (and thus the University of Georgia) cannot be placed in a depository paying interest longer than ten days without the depository providing a surety bond to the State. In lieu of a surety bond, the depository may pledge as collateral any one or more of the following securities as enumerated in the Official Code of Georgia Annotated Section 50-1759:
1. Bonds, bill, certificates of indebtedness, notes, or other direct obligations of the United States or of the State of Georgia.
2. Bonds, bills, certificates of indebtedness, notes, or other obligations of the counties or municipalities ofthe State of Georgia.
3. Bonds of any public authority created by the laws of the State of Georgia, providing that the statute that created the authority authorized the use of the bonds for this purpose.
4. Industrial revenue bonds and bonds of development authorities created by the laws of the State of Georgia.
5. Bonds, bills, certificates of indebtedness, notes, or other obligations of a subsidiary corporation of the United States government, which are fully guaranteed by the United States government both as to principal and interest, or debt obligations issued by the Federal Land Bank, the Federal Home Loan Bank, The Federal Intermediate Credit Bank, the Central Bank for Cooperatives, the Farm Credit Banks, the Federal Home Loan Mortgage Association, and the Federal National Mortgage Association.
6. Guarantee or insurance of accounts provided by the Federal Deposit Insurance Corporation.
As authorized in the Official Code of Georgia Annotated Section 50-17-53, the State Depository Board has adopted policies that allow agencies of the State of Georgia (and thus the University of Georgia), the option of exempting demand deposits from the collateral requirements.
The Treasurer of the Board of Regents is responsible for all details relative to furnishing the required depository protection for all units of the University System of Georgia.
- 14 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 2: CASH AND CASH EQUIVALENTS; OTHER DEPOSITS; AND INVESTMENTS

CATEGORIZATION OF DEPOSITS The University's cash deposits are categorized by risk as follows:

Category 1 - Amounts covered by depository insurance or collateralized with securities (at fair value) held by the entity or by its agent in the entity's name.

Category 2 - Amounts collateralized with securities (at fair value) held by the pledging financial institution's trust department or agent in the entity's name.

Category 3 - Amounts collateralized with securities (at fair value) held by the pledging financial institution, or by its trust department or agent but not in the entity's name, and amounts uncollateralized.

At June 30, 2004, the University's cash deposits were as follows:

Carrying Amount

Bank Balances

Risk Categories

2

3

Cash Deposits Investment Portfolio
Accounts

$ 8,815,866.74 $10,184,037.86 $ 117,936.74 $ 9,291,557.71 $ 774,543.41 5,874,050.43 5,874,050.43 5,874,050.43

Total Cash Deposits $14 689 917.17 $16.058 088 29 $ 5.991.987.17 $ 9.291.557,71 $ 774.543.41

CATEGORIZATION OF INVESTMENTS The University's investments are categorized as to credit risk within the three categories described below:

Category 1 - Insured or registered, or securities held by the entity or its agent in the entity's name.

Category 2 - Uninsured and unregistered, with securities held by the counter party's trust department or agent in the entity's name.

Category 3 - Uninsured and unregistered, with securities held by the counter party, or by its trust department or agent, but not in the entity's name.

At June 30, 2004, the University's investments consisted of the following:

- 15 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 2: CASH AND CASH EQUIVALENTS: OTHER DEPOSITS: AND INVESTMENTS

CATEGORIZATION OF INVESTMENTS

Tme of Investments

Risk Categories 2

Common Stock Corporate Bonds U.S. Government Securities and
Corporate Obligations

$ 838,596.17 $ 7,884,474.94 $ 205,500.00 6,269,890.85
38,241,846.46 92,548,702.00

Totals

$ 32 285,242.63 $1Q6,703,Q61.12 $

Investments Not Subject to Categorizations: Board of Regents Legal Fund Investment Portfolio Accounts Mutual Funds Real Estate State Investment Pool

Total Investments

Carrying

3

Amount

0.00 $ 8,723,071.11 6,475,390.85

130,790,548.46

0,QQ $145,989,010.42

4,738,317.33
4,747,324.13 240,469.38
8,169,790.74
$163,884.912.0Q

Funds invested in an investment pool managed by another governmental entity are not required to be categorized since the University did not own any specific, identifiable investment securities of the pool.

NOTE 3: ACCOUNTS RECEIVABLE

The University's Accounts receivable consisted of the following at June 30, 2004.

Student Tuition and Fees Auxiliary Enterprises and Other Operating Activities Federal Financial Assistance Other
Less Allowance for Doubtful Accounts

$ 1,434,963.63 2,068,368.56 17,542,686.24 17,905,066.62
$38,951,085.05 789,744.56

Net Accounts Receivable

$38.161.340.49

NOTE 4: INVENTORIES

Inventories consisted of the following at June 30, 2004.

Food Services Physical Plant Other
Total

$ 629,922.57 973,131.67
1,553,287.11
$ 3,156,341.35

- 16 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 5: NOTES/LOANS RECEIVABLE

Notes/Loans receivable primarily consist of student loans made through the Federal Perkins Loan Program (the Program) comprise substantially all of the loans receivable at June 30, 2004. The Program provides for cancellation of a loan at rates of 10% to 30% per year up to a maximum of 100% if the participant complies with certain provisions. The Federal government reimburses the University for amounts cancelled under these provisions. 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 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, 2004 the allowance for uncollectible loans was $676,538.26.

NOTE 6: CAPITAL ASSETS

Following are the changes in the University's capital assets for the year ended June 30, 2004:

Beginning Balance July 1, 2003 (Restated)

Additions

Reductions

Ending Balance June 30, 2004

Capital Assets, Not Being Depreciated:

Land

$ 16,503,497.32 $ 1,832,136.44

$ 18,335,633.76

Capitalized Collections

8,311,881.93

1,763,327.79

10,075,209.72

Construction Work-In-Progress

28,321,480.87 26,210,381.92 $ 22,796,105.85

31,735,756.94

Total Capital Assets Not Being Depreciated

$ 53,136,860.12 $ 29,805,846.15 $ 22,796,105.85 $ 60,146,600.42

Capital Assets, Being Depreciated: Infrastructure Building and Building Improvements Facilities and Other Improvements Equipment Capital Leases Library Collections

$ 32,621,533.86 738,208,786.42 108,372,023.86 282,739,173.63 3,216,013.40 167,532,182.89

$ 4,120,261.50 124,961,303.31 25,792,186.43 18,076,874.41 960,834.95 12,633,755.06

$ 16,939.50
13,460,204.03 35,622.72
273,087.00

$ 36,741,795.36 863,153,150.23 134,164,210.29 287,355,844.01 4,141,225.63 179,892,850.95

Total Assets Being Depreciated

$1,332,689,714.06 $186,545,215.66 $ 13,785,853.25 $1,505,449,076.47

Less: Accumulated Depreciation:

Infrastructure

$ 10,831,498.01

Buildings and Building Improvements 252,800,737.69

Facilities and Other Improvements

21,450,508.99

Equipment

203,705,114.13

Capital Leases

775,228.99

Library Collections

119,664,701.00

$ 1,057,167.14 20,383,929.08 2,863,230.92 22,370,362.88 1,118,523.11 8,957,209.00

$

1.56

13,753.12

-25,391.32

12,211,462.99

28,672.96

273,087.00

$ 11,888,663.59 273,170,913.65 24,339,131.23 213,864,014.02 1,865,079.14 128,348,823.00

Total Accumulated Depreciation

$ 609,227,788.81 $ 56,750,422.13 $ 12,501,586.3 I $ 653,476,624.63

Total Capital Assets, Being Depreciated,

Net

$ 723,461,925.25 $129,794,793.53 $ 1,284,266.94 $ 851,972,451.84

Capital Assets, Net

$ 116 528,785.37 $152,600,632.68 $ 24 080 372 72 $ 212 ll2 052 26

- 17 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 7: DEFERRED REVENUE

The University's Deferred revenue consisted of the following at June 30, 2004.

Prepaid Tuition and Fees Research Other Deferred Revenue
Totals
NOTE 8: LONG-TERM LIABILITIES

$16,867,448.96 9,792,664.87 17,431,663.56
$44,091,777.39

The University's Long-Term liability activity for the year ended June 30, 2004 was as follows:

Beginning Balance July 1, 2003

Additions

Reductions

Ending Balance June 30, 2004

Current Portion

Leases Lease Obligations

$ 23,229,645.94 $ 40,115,913.48 $ 1,648,248.19 $ 61,697,311.23 $ 1,620,313.93

Other Liabilities Compensated Absences

36,222,747.48 23,591,864.62 25,178,243.05 34,636,369.05 21,037,597.85

Total Long-Term Obligations $ 52 452,323.42 $ 63,707,778 IQ $ 26,826,421 24 $ 96,333,68Q,28 $ 22 651 21 l 18

NOTE 9: LEASE OBLIGATIONS

The University of Georgia is obligated under various operating leases for the use of real property (land, buildings, and office facilities) and also is obligated under capital leases and installment purchase agreements for the acquisition of real property.

CAPITAL LEASES The University of Georgia occupies four real properties and holds various equipment items under capital leases. The real property leases expire in fiscal years 2011, 2032, 2033, and 2034. The equipment capital leases expire between 2005 and 2009. Expenditures for fiscal year 2004 were $5,347,443.66, of which $3,699,195.47 represented interest and $1,648,248.19 represented principal paid on capital leases. Interest rates range from 2.25 percent to 8.36 percent. The carrying values of assets held under capital lease, including the current liability portion, at June 30, 2004 were $61,697,311.23.

All four of the University of Georgia's current real property capital leases are with the University of Georgia Real Estate Foundation (UGAREF), a related entity. In June of 2001, the University of Georgia entered into a capital lease with the UGAREF whereby the University leases a building for a 10-year period that began June 1, 2001 and expires June 30, 2011. In August of 2001, the University of Georgia entered into a second capital lease with the UGAREF, whereby the University leases the Carlton Street Parking Deck for a 30-year period that began September 30, 2001 and expires August 31, 2031. In November of 2002, the University of Georgia entered into the third capital lease with the UGAREF whereby the University leases the

- 18 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 9: LEASE OBLIGATIONS

CAPITAL LEASES East Village Parking Deck for a 30-year period that began on November 1, 2002 and expires July 31, 2032. In September of 2003, the University of Georgia entered into the fourth capital lease with the University of Georgia Real Estate Foundation, whereby, the University leases the Complex Carbohydrate Research Center for a 30-year period that began on September 25, 2003 and expires September 30, 2033. The outstanding liability at June 30, 2004 on these capital leases is $61,697,311.23.

OPERATING LEASES The University of Georgia is Lessee under a number of one-year operating leases, which generally provide for four (4) renewal option periods. All agreements are cancellable if the State of Georgia does not provide adequate funding, but that is considered a remote possibility. In the normal course of business, operating leases are generally renewed or replaced by other leases. Operating leases are generally payable on a monthly basis. Properties are leased for a variety of functions, from farm acreage to office space to parking lots.

Noncancellable operating lease expenditures in 2004 were $2,477,327.34 for real property.

FUTURE COMMITMENTS Future commitments for capital leases (which here and on the Statement of Net Assets include other installment purchase agreements) and for noncancellable operating leases having remaining terms in excess of one year as of June 30, 2004, were as follows:

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020 through 2024 2025 through 2029 2030 through 2034
Total Minimum Lease Payments
Less: Interest Less: Executory Costs (If Paid)
Principal Outstanding

Real Property

Capital

Operating

Leases

Leases

$ 6,179,061.13 5,925,285.24 5,765,145.01 5,658,127.72 5,593,301.45
25,832,086.83 24,621,301.00 24,621,301.00 24,621,301.00 18,155,522.60

$2,885,693.71

$146,972,432.98 $2,885,693.71

80,596,245.75 4,678,876.00

$ 61.697.311.23

- 19 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 10: RETIREMENT PLANS

TEACHERS RETIREMENT SYSTEM OF GEORGIA

Plan Description The University of Georgia participates in the Teachers Retirement System of Georgia (TRS), a cost-sharing multiple-employer defined benefit pension plan established by the Georgia General Assembly. TRS provides retirement allowances and other benefits for plan participants. TRS provides service retirement, disability retirement, and survivor's benefits for its members in accordance with State statute. The Teachers Retirement System of Georgia issues a separate stand alone financial audit report and a copy can be obtained from the Georgia Department of Audits and Accounts.

Funding Policy Employees of the University of Georgia who are covered by TRS are required by State statute to contribute 5% of their gross earnings to TRS. The University of Georgia makes monthly employer contributions to TRS at rates adopted by the TRS Board of Trustees in accordance with State statute and as advised by their independent actuary. For fiscal year 2004, the employer contribution rate was 9.24% for covered employees. Employer contributions for the current fiscal year and the preceding two fiscal years are as follows:

Fiscal Year
2004 2003 2002

Percentage Contributed
100% 100% 100%

Required Contribution
$29,085,698.09 $29,871,955.92 $29,156,597.85

EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA

Plan Description The University of Georgia participates in the Employees' Retirement System of Georgia (ERS), a single-employer defined benefit pension plan established by the General Assembly of Georgia for the purpose of providing retirement allowances for employees of the State of Georgia.

The benefit structure of ERS is defined by State statute and was significantly modified on July 1, 1982. Unless elected otherwise, an employee who currently maintains membership with ERS based upon State employment that started prior to July 1, 1982, is an "old plan" member subject to the plan provisions in effect prior to July 1, 1982. All other members are "new plan" members subject to the modified plan provisions.

Under both the old plan and new plan, members become vested after 10 years of creditable service. A member may retire and receive normal retirement benefits after completion of 10 years of creditable service and attainment of age 65. If 10 years of service is completed and age 60 is reached, the member may retire with a reduced benefit. Additionally, there are certain provisions allowing for retirement after 25 years of service regardless of age.
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UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 10: RETIREMENT PLANS
EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA
Plan Description Retirement benefits paid to members are based upon a formula which considers the monthly average of the member's highest twenty-four consecutive calendar months of salary, the number of years of creditable service, and the member's age at retirement. Postretirement cost-of-living adjustments are also made to member's benefits. The normal retirement pension is payable monthly for life; however, options are available for distribution of the member's monthly pension at reduced rates to a designated beneficiary upon the member's death. Death and disability benefits are also available through ERS.
In addition, the ERS Board of Trustees created the Supplemental Retirement Benefit Plan (SRBP) effective January 1, 1998. The SRBP was established as a qualified governmental excess benefit plan in accordance with Section 415 of the Internal Revenue Code (IRC) as a portion of ERS. The purpose of SRBP is to provide retirement benefits to employees covered by ERS whose benefits are otherwise limited by IRC 415.
The ERS issues a financial report each fiscal year, which may be obtained through ERS.
Funding Policy As established by State statue, all full-time employees of the State of Georgia and its political subdivisions, who are not members of other state retirement systems, are eligible to participate in the ERS. Both employer and employee contributions are established by State statute. The University's payroll for the year ended June 30, 2004, for employees covered by ERS was $528,087.31. The University's total payroll for all employees was $504,519,688.25.
Under the old plan, member contributions consist of 7.16% of annual compensation. Of these member contributions, the employee pays the first 1.5% and the University pays the remainder on behalf of the employee. Under the new plan, member contributions consist solely of 1.5% of annual compensation paid by employee. The University also is required to contribute at a specified percentage of active member payroll determined annually by actuarial valuation. For the year ended June 30, 2004, the ERS employer contribution rate for the University amounted to 10.41% of covered payroll and included the amounts contributed on behalf of the employee under the old plan referred to above. Employer contributions are also made on amounts paid for accumulated leave to retiring employees.
Total contributions to the plan made during fiscal year 2004 amounted to $63,171.74, of which $55,250.57 was made by the University and $7,921.17 was made by employees. These contributions met the requirements of the plan.
Actuarial and Trend Information Actuarial and historical trend information is presented in the ERS June 30, 2004, financial report, which may be obtained through ERS.
- 21 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 10: RETIREMENT PLANS
REGENTS RETIREMENT PLAN
Plan Description The Regents Retirement Plan, a single-employer defined contribution plan, is an optional retirement plan that was created/established by the Georgia General Assembly in O.C.G.A. 4721-1 et.seq. and is administered by the Board of Regents of the University System of Georgia. O.C.G.A. 47-3-68(a) defines who may participate in the Regents Retirement Plan. An "eligible university system employee" is a faculty member or a principal administrator, as designated by the regulations of the Board of Regents. Under the Regents Retirement Plan, a plan participant may purchase annuity contracts for the purpose of receiving retirement and death benefits. Benefits depend solely on amounts contributed to the plan plus investment earnings. Benefits are payable to participating employees or their beneficiaries in accordance with the terms of the annuity contracts.
Funding Policy The University of Georgia makes monthly employer contributions for the Regents Retirement Plan at rates adopted by the Teachers Retirement System of Georgia Board of Trustees in accordance with State Statute and as advised by their independent actuary. For fiscal year 2004, the employer contribution was 10.03% of the participating employee's earnable compensation. Employees contribute 5% of their earnable compensation. Amounts attributable to all plan contributions are fully vested and nonforfeitable at all times.
The University of Georgia and the covered employees made the required contributions of $10,545,444.34 (10.03%) and $5,256,469.62 (5%), respectively.
GEORGIA DEFINED CONTRIBUTION PLAN
Plan Description The University of Georgia participates in the Georgia Defined Contribution Plan (GDCP) which is a single-employer defined contribution plan established by the General Assembly of Georgia for the purpose of providing retirement coverage for State employees who are temporary, seasonal, and part-time and are not members of a public retirement or pension system. GDCP is administered by the Board of Trustees of the Employees' Retirement System of Georgia.
Benefits A member may retire and elect to receive periodic payments after attainment of age 65. The payment will be based upon mortality tables and interest assumptions to be adopted by the Board of Trustees. If a member has less than $3,500.00 credited to his/her account, the Board of Trustees has the option of requiring a lump sum distribution to the member in lieu of making periodic payments. Upon the death of a member, a lump sum distribution equaling the amount credited to his/her account will be paid to the member's designated beneficiary. Benefit provisions are established by State statute.
- 22 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 10: RETIREMENT PLANS
GEORGIA DEFINED CONTRIBUTION PLAN
Contributions and Vesting Member contributions are seven and one-half percent (7.5%) of gross salary. There are no employer contributions. Contribution rates are established by State statute. Earnings are credited to each member's account in a manner established by the Board of Trustees. Upon termination of employment, the amount of the member's account is refundable upon request by the member.
Total contributions made by employees during fiscal year 2004 amounted to $1,343,368.89 which represents 7.5% of covered payroll. These contributions met the requirements of the plan.
NOTE 11: RISK MANAGEMENT
The University System of Georgia offers its employees and retirees access to two different selfinsured healthcare plan options - a PPO/PPO Consumer healthcare plan, and an indemnity healthcare plan. The University of Georgia and participating employees and retirees pay premiums to either of the self-insured healthcare plan options to access benefits coverage. The respective self-insured healthcare plan options are included in the financial statements of the Board of Regents of the University System of Georgia - University System Office. All units of the University System of Georgia share the risk of loss for claims associated with these plans. The reserves for these two plans are considered to be a self-sustaining risk fund. Both selfinsured healthcare plan options provide a maximum lifetime benefit of $2,000,000.00 per person. The Board of Regents has contracted with Blue Cross Blue Shield of Georgia, a wholly owned subsidiary of WellPoint, to serve as the claims administrator for the two self-insured healthcare plan products. In addition to the two different self-insured healthcare plan options offered to the employees of the University System of Georgia, two fully insured HMO healthcare plan options are also offered to System employees.
The Department of Administrative Services (DOAS) has the responsibility for the State of Georgia of making and carrying out decisions that will minimize the adverse effects of accidental losses that involve State government assets. The State believes it is more economical to manage its risks internally and set aside assets for claim settlement. Accordingly, DOAS processes claims for risk of loss to which the State is exposed, including general liability, property and casualty, workers' compensation, unemployment compensation, and law enforcement officers' indemnification. Limited amounts of commercial insurance are purchased applicable to property, employee and automobile liability, fidelity and certain other risks. The University of Georgia, as an organizational unit of the Board of Regents of the University System of Georgia, is part of the State of Georgia reporting entity, and as such, is covered by the State of Georgia risk management program administered by DOAS. Premiums for the risk management program are charged to the various state organizations by DOAS to provide claims servicing and claims payment.
- 23 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 11: RISK MANAGEMENT
A self-insured program of professional liability for its employees was established by the Board of Regents of the University System of Georgia under powers authorized by the Official Code of Georgia Annotated Section 45-9-1. The program insures the employees to the extent that they are not immune from liability against personal liability for damages arising out of the performance of their duties or in any way connected therewith. The program is administered by DOAS as a Self-Insurance Fund.
NOTE 12: CONTINGENCIES
Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies. This could result in refunds to the grantor agency for any expenditures that are disallowed under grant terms. The amount of expenditures which may be disallowed by the grantor cannot be determined at this time although the University of Georgia expects such amounts, if any, to be immaterial to its overall financial position.
Litigation, claims and assessments filed against the University of Georgia (an organizational unit of the Board of Regents of the University System of Georgia), if any, are generally considered to be actions against the State of Georgia. Accordingly, significant litigation, claims and assessments pending against the State of Georgia are disclosed in the State of Georgia Comprehensive Annual Financial Report for the fiscal year ended June 30, 2004.
NOTE 13: POST-EMPLOYMENT BENEFITS OTHER THAN PENSION BENEFITS
Pursuant to the general powers conferred by the Official Code of Georgia Annotated Section 203-31, the Board of Regents of the University System of Georgia has established group health and life insurance programs for regular employees of the University System of Georgia. It is the policy of the Board of Regents to permit employees of the University System of Georgia eligible for retirement or that become permanently and totally disabled to continue as members of the group health and life insurance programs. The policies of the Board of Regents of the University System of Georgia define and delineate who is eligible for these post-employment health and life insurance benefits. Organizational units of the Board of Regents of the University System of Georgia pay the employer portion for group insurance for affected individuals. With regard to life insurance, the employer covers the total cost for $25,000.00 of basic life insurance. If an individual elects to have supplemental, and/or, dependent life insurance coverage, such costs are borne entirely by the employee.
As of June 30, 2004, there were 3,413 employees who had retired or were disabled that were receiving these post-employment health and life insurance benefits. For the year ended June 30, 2004, the University of Georgia recognized as incurred $15,100,470.96 of expenditures, which was net of $5,426,626.76 of participant contributions.

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UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 14: NATURAL CLASSIFICATIONS WITH FUNCTIONAL CLASSIFICATIONS

The University's operating expenses by functional classification are shown below:

Statement of Operating Expenses - Natural vs Functional Classifications For the Fiscal Year Ended June 30, 2004

Functional Classification

Natural Classification

Instruction

Research

Public Service

Academic Support

Student Services

Salaries Faculty Staff
Employee Benefits Travel Scholarships and
Fellowships Utilities Supplies and Other
Services Depreciation

$ 74,066,380.91 56,817,713.34 25,142,605.21 2,352,135.51

$ 47,619,743.00 100,393,480.92 30,655,936.07 4,779,426.62

$ 1,559,950.68 73,013,355.55 22,458,526.43 2,698,089.22

$ 969,617.81 43,941,532.14 10,533,067.53 527,747.45

$ 415,134.40 11,532,687.52 2,767,621.69 132,366.19

3,044,789.65 1,420,589.29

1,115,844.93 1,358,299.32

43,890.00 1,176,137.82

2,515.00 610,076.13

1,321,500.00 199,579.14

15,980,740.18 13,586,304.39

59,694,305.53 15,779,505.46

27,554,324.58 3,720,334.62

17,388,700.62 12,594,000.87

8,855,498.42 681,082.32

Total Operating Expenses

$192 41125848 $261396541 85 $132 224 608 90 $ 86 567 257 55 $ 25 905 469.68

Natural Classification
Salaries Faculty Staff
Employee Benefits Travel Scholarships and
Fellowships Utilities Supplies and Other
Services Depreciation
Total Operating Expenses

Institutional Support

Functional Classification

Plant

Operations and Scholarships

Auxiliary

Maintenance and Fellowships

Enterprises

Total Operating Expenses

$ 37,021,333.06 $27,216,949.69

19,769,633.80

7,939,159.12

285,966.47

29,795.82

$ 47,758.10 29,904,051.13 6,718,241.13 125,248.38

$124,678,584.90 379,841,103.35 125,984,790.98
10,930,775.66

200.00 462,702.33

$19,298,310.93 15,550,167.94

492,645.68 4,651,155.48

25,319,696.19 25,428,707.45

8,315,674.71 3,644,746.65

20,551,338.62 2,177,127.62

31,624,124.95 189,964,707.61 4,567,320.20 56,750,422.13

$ 69 500 257 02 $ 73 464 538 81 $ 19 298 310 93 $ 78 130 545 05 $938 828 788 27

NOTE 15: COMPONENT UNITS

The University of Georgia Research Foundation, Inc. The University of Georgia Research Foundation, Inc. (the "Research Foundation") is a legally separate, tax-exempt component unit of the University of Georgia (the "University"). The Research Foundation serves to enhance the research mission of the University by securing sponsored research funding and by providing funding of special research initiatives. All University intellectual property developed through these research programs are managed by the Research Foundation. The eighteen-member board of directors consists of designated University personnel, appointees of several University constituent groups, and individuals selected by the Research Foundation itself. Although the University does not control the timing or amount of receipts from the Research Foundation, all sponsored research awards are subcontracted to the University and other resources and related income are restricted to benefit the research mission of the University. Consequently, the Research Foundation is considered a component unit of the University and is discretely presented in the University's financial statements.

- 25 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

The University of Georgia Research Foundation, Inc. The Research Foundation is considered a special purpose government entity engaged only in business-type activities and is required to follow all applicable GASB pronouncements. The Research Foundation's fiscal year is July 1 through June 30.

During fiscal year 2004, the Research Foundation transferred approximately $120 million in sponsored research to the University and shows a net payable to the University at June 30 related to this activity. Approximately $9 million in Research Foundation assets are invested with the University of Georgia Foundation, a component unit of the University. Complete financial statements for the Research Foundation can be obtained from the Treasurer's office at 456 East Broad Street, Athens, GA 30602.

CATEGORIZATION OF DEPOSITS The Research Foundation's cash deposits are categorized by risk as follows:

Category 1 - Amounts covered by depository insurance or collateralized with securities (at fair value) held by the Research Foundation or by its agent in the Research Foundation's name.

Category 2 - Amounts collateralized with securities (at fair value) held by the pledging financial institution's trust department or agent in the Research Foundation's name.

Category 3 - Amounts collateralized with securities (at fair value) held by the pledging financial institution, or by its trust department or agent but not in the Research Foundation's name, and amounts uncollateralized.

Cash Deposits as of June 30, 2004 are as follows:

Carrying Amount

Bank Balances

Risk Categories

2

3

Cash Deposits Investment Portfolio
Accounts

$ 806,312.50 $ 133,850.68 $ 100,000.00 $ 33,850.68

759,295.50

759,295.50

$ 759,295.50

Total Cash Deposits $ 1 565.608 00 $ 893 146 l 8 $ JOO 000 00 $ 33.850 68 $ 759 295 50

CATEGORIZATION OF INVESTMENTS The Research Foundation's investments are categorized as to credit risk within the three categories described below:

Category 1 - Insured or registered, or securities held by the Research Foundation or its agent in the Research Foundation's name.

-26-

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

CATEGORIZATION OF INVESTMENTS Category 2 - Uninsured and unregistered, with securities held by the counter party's trust
department or agent in the Research Foundation's name.

Category 3 - Uninsured and unregistered, with securities held by the counter party, or by its trust department or agent, but not in the Research Foundation's name.

At June 30, 2004, the Research Foundation's investments consisted of the following:

Tyne of Investments

Corporate Bonds

$

U. S. Government Securities and

Corporate Obligations

Totals

$

Investments Not Subject to Categorizations: Investment Portfolio Accounts Mutual Funds Other

Total Investments

Risk Categories

2

3

Carrying Amount

0.00 $

0.00 $ 5,267,769.00 $ 5,267,769.00

6,146,746.00 6,146,746.00

Q,0Q $

Q.00 $ 11414515.QQ $ 11,414,515.00

2,132,610.00 9,032,504.00
$ 22,579,629,Q0

The University of Georgia Athletic Association, Inc. The University of Georgia Athletic Association, Inc. (the "Association") is a legally separate, tax-exempt component unit of the University of Georgia (the "University"). The Association was organized in 1928 as a not-for-profit corporation to promote intercollegiate athletic sports representing the University. The twenty-member board of the directors consists of faculty, staff, students, and alumni of the University. Although the University does not control the timing or amount of receipts from the Association, the majority of resources or income thereon that the Association holds and invests are restricted to the athletic activities of the University. Because these restricted resources held by the Association can only be used by, or for the benefit of, the University and their management role is significant to the accomplishment of the University's mission, the Association is considered a component unit of the University and is discretely presented in the University's financial statements.

For financial reporting purposes, the Association is considered a special purpose government agency engaged only in business type activities, as defined by GASB Statement 34. The Association's fiscal year is July 1 through June 30.

During the year ended June 30, 2004, the Association made payments to the University for services such as food services, parking services, health services, tuition, gas, electricity, security, and golf course maintenance. These payments totaled $2,908,945.24 and were recognized as expenses of the Association. Capital assets net of accumulated depreciation of $149.6 million

- 27 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30. 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

The University of Georgia Athletic Association, Inc. are included in the financial statements of the Association. These capital assets, excluding moveable equipment, are included in the University's report. Complete financial statements for the Association can be obtained from the Treasurer's office at 456 East Broad Street, Athens, GA 30602.

Deposits and Investments At year end, the book carrying amount of the Association's deposits, excluding restricted cash and cash equivalents, was $46,525,928.00. The bank balance was $49,157,519.00. The Association's bank balance is classified as follows at June 30:

Cash Deposits

Carrying Amount

Bank Balances

Risk Categories

2

3

$46.525.928.00 $49 157 519.00 $ 300 000,00 $42.551.961.00 $ 6 305.558,00

Long-Term Liabilities for Component Units

Long-Term Liabilities
Note Payable to bank in 20 semi-annual principal payments of$340,000.00 plus interest beginning January 1, 1995. Interest is paid at a fixed rate of 5.98%. The Association has assigned all proceeds expected to be received from certain sky suites as collateral for the loan.
Note Payable to bank in 40 semi-annual principal payments of$320,000.00 plus interest beginning January 1, 2001. Interest is payable at interest rate ranging from 5.30% to 8.50%, adjusted monthly, based on an adjusted thirty-day LIBOR rate ofLIBOR plus 0.50% (5.30% at June 30, 2004).
Note Payable to the University of Georgia over 20 years in annual payments of$477,917.00 at a fixed rate of 6.186% beginning in 1996.
Note Payable to vendor over 10 years in annual payments of$94,518.00 through 2008. The implicit interest rate is 8.5% and the note is secured by a first priority purchase money security interest on equipment with a net book value of$1,0l 1,626.00.
Revenue Bonds Payable
Total Debt - University of Georgia Athletic Association, Inc.

2004
$ 340,000.00
10,560,000.00 3,224,540.00
378,074.00 70,000,000.00 $84 502 614.00

Changes in Long-Term liabilities for Athletic Association, Inc. for the fiscal year ended June 30, 2004 are shown below:

Athletic Association Long-Term Debt

Beginning Balance July 1, 2003

Additions

Reductions

Ending Balance June 30, 2004

Amounts Due Within
One Year

$ 50 179 369 00 $ 36 000,000.00 $ 1.676.755 00 $84,502 614 00 $ 1352976.00

- 28 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Long-Term Liabilities for Component Units The annual debt service requirements at June 30, 2004 are as follows:

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020 through 2024 2025 through 2029 2030 through 2034

PrinciQal

Interest

Total

$ 1,352,976.00 1,030,201.00 1,048,490.00 1,067,912.00 994,016.00 4,849,019.00 3,200,000.00 960,000.00
70,000,000.00

$ 1,511,293.00 1,459,620.00 1,406,939.00 1,353,128.00 1,298,115.00 5,617,851.00 4,495,422.00 3,875,958.00 3,850,000.00 1,690,333.00

$ 2,864,269.00 2,489,821.00 2,455,429.00 2,421,040.00 2,292,131.00 10,466,870.00 7,695,422.00 4,835,958.00 3,850,000.00 71,690,333.00

$ 84!502!614.00 $26!558!659.00 $111!061!273.00

Due to the fact that the revenue bonds have a variable rate, the interest used above for the revenue bonds was based on the interest rate in effect as of June 30, 2004.

The University of Georgia Foundation The University of Georgia Foundation (the "Foundation") is a legally separate, tax-exempt component unit of the University of Georgia. The Foundation was chartered in 1937 to receive and administer contributions for the support of the academic programs of the University of Georgia (the "University"). The 55-member Board of Trustees have fiduciary responsibility for managing the Foundation's assets. The Foundation Executive Committee is composed of the chairman, vice-chairman, secretary, treasurer, the chairman from each of the other standing trustee committees and two at-large members. Although the University does not control the timing or amount of receipts from the Foundation, the majority of resources or income thereon that the Foundation holds and invests are restricted to the activities of the University by the donors. Because these restricted resources held by the Foundation can only be used by, or for the benefit of, the University, the Foundation is considered a component unit of the University and is discretely presented in the University's financial statements.

The Foundation is a private nonprofit organization that reports under 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. The FASB reports were reclassified to the GASB presentation for external financial reporting purposes. The Foundation's fiscal year is July 1 through June 30.

- 29 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

The University of Georgia Foundation During the year ended June 30, 2004, the Foundation distributed $12,382,773.00 to the University for scholarships and donor-restricted support. Facilities valued at $85 million and the associated long-term debt are included in the financial statements of the Foundation. The corresponding capital leases and associated long-term debt are included in the University's report. Complete financial statements for the Foundation can be obtained from the Foundation office at 394 South Milledge Avenue, Athens, GA 30602.

CATEGORIZATION OF DEPOSITS The Foundation's cash deposits are categorized by risk as follows:

Category 1 - Amounts covered by depository insurance or collateralized with securities (at fair value) held by the Foundation or by its agent in the Foundation's name.

Category 2 - Amounts collateralized with securities (at fair value) held by the pledging financial institution's trust department or agent in the Foundation's name.

Category 3 - Amounts collateralized with securities (at fair value) held by the pledging financial institution, or by its trust department or agent but not in the Foundation's name, and amounts uncollateralized.

Cash Deposits as of June 30, 2004 are as follows:

Carrying Amount

Bank Balances

Risk Categories

2

3

Cash Deposits Investment Portfolio
Accounts

$ 4,914,050.00 $ 4,664,470.00 $ 200,000.00 $ 45,646,290.00 45,646,290.00 11,447,454.00

0.00 $ 4,464,470.00 34,198,836.00

Total Cash Deposits $5Q,56Q,34Q QQ $5Q,31Q,16Q QQ $11,641454 QQ $

QQQ $38,663 3Q6 QQ

CATEGORIZATION OF INVESTMENTS The Foundation's investments are categorized as to credit risk within the three categories described below:

Category 1 - Insured or registered, or securities held by the Foundation or its agent in the Foundation's name.

Category 2 - Uninsured and unregistered, with securities held by the counter party's trust department or agent in the Foundation's name.

Category 3 - Uninsured and unregistered, with securities held by the counter party, or by its trust department or agent, but not in the Foundation's name.

- 30 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

CATEGORIZATION OF INVESTMENTS At June 30, 2004, the Foundation's investments consisted of the following:

Tyge of Investments

Risk Categories

2

3

Carrying Amount

Common Stock Corporate Bonds U. S. Government Securities Certificates of Deposit Split-Interest Investments

$ 3,292,851.00 417,705.00 795,689.00 88,387.00
6,227,726.00

$ 273,486.00 296,245.00
371,134.00 6,525,667.00

$ 153,111.00 $ 3,719,448.00

59,543.00

773,493.00

795,689.00

4,678.00

464,199.00

3,587,656.00 16,341,049.00

Totals

$ 10,822,358.QO $ 1466,532.00 $ 3 804 988.QQ $ 22,093,878.00

Investments Not Subject to Categorizations: Investment Portfolio Accounts Mutual Funds Long-Term Investment Pool

1,215,668.00 352,841,793.00

Total Investments

$376 151 339 QQ

Long-Term Liabilities for Component Units Long-Term liability activity for the year ended June 30, 2004 was as follows:

- 31 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Long-Term Liabilities for Component Units

Beginning Balance July 1, 2003

Additions

Reductions

Ending Balance June 30, 2004

Principal due Within
One Year

$25,620,000.00 bond issue: Par value of bonds outstanding Cost of bond issuance, net of accumulated amortization of$27,593.00 and $17,487.00

$ 25,125,000.00 -285 704.00

$515,000.00 $ 24,610,000.00

-10,106.00

-275,598.00

Total $25,620,000.00 bonds payable

$ 24,839,296.00

$ 504,894.00 $ 24,334,402.00

$39,155,000.00 bond issue: Par value of bonds outstanding Bond premium, net of accumulated amortization of$12,135.00 and $2,923.00 Cost of bond issuance, net of accumulated amortization of$91,289.00 and $21,675.00

$ 39,155,000.00 147,362.00
-1,115,123.00

$ 39,155,000.00 $ 740,000.00

$ 9,212.00

138,150.00

-69 614.00 -1,045,509.00

Total $39,155,000.00 bonds payable

$ 38,187,239.00

$ -60,402.00 $ 38,247,641.00 $ 740 000.00

$99,860,000.00 bond issue: Par value of bonds outstanding Bond premium, net of accumulated amortization of$146,083.00 and $38,005.00 Cost of bond issuance, net of accumulated amortization of$214,632.00 and $55,747.00

$ 99,860,000.00 1,916,546.00 -2,817,849.00

$ 99,860,000.00

$108,078.00

1,808,468.00

-158,885.00 -2,658,964.00

Total $99,860,000.00 bonds payable

$ 98,958,697.00

$ -50 807.00 $ 99,009,504.00

$8,215,000.00 bond issue Par value of bonds outstanding Bond discount, net of accumulated amortization of$7,341.00 and $0.00 Cost of bond issuance, net of accumulated amortization of$17,955.00 and $0.00

$ 8,215,000.00 -107,509.00 -259,306.00 $

$ 90,000.00 $ 8,125,000.00 $ 230,000.00

-7,341.00

-I 00, 168.00

-8 403.00 -17,955.00

-249 754.00

Total $8,215,000.00 bonds payable

$ 7 848 185.00 $ -8 403.00 $ 64 704.00 $ 7 775 078.00 $ 230,000.00

$25,970,000.00 bond issue: Par value of bonds outstanding Bond discount, net of accumulated amortization of$1,274.00 and $0.00 Cost of bond issuance, net of accumulated amortization of$9,244.00 and $0.00
Total $25,970,000.00 bonds payable
Total bonds payable
$73,100,000.00 revolving credit agreement $1,900,000.00 credit agreement $300,000.00 credit agreement
Total revolving credit agreements
$1,800,000.00 note payable $880,000.00 note payable
Total notes payable

$ 25,970,000.00

$ 25,970,000.00

-166,793.00 $ -1,274.00

-165,519.00

-1,184,485.00

-9 244.00 -1,175,241.00

$24,618,722.00 $ -10,518.00 $ 24,629,240.00

$169,833,417.00 $24,610,319.00 $ 447 871.00 $193,995,865.00 $ 970 000.00

$ 11,953,536.00 $ 1,636,000.00

43,634.00 200 000.00

$ 11,997,170.00 1,636,000.00 200,000.00

$ 13,589,536.00 $ 243,634.00

$ 13,833,170.00

$ 1,446,250.00 856 237.00

$ 89,000.00 $ 1,357,250.00 $ 89,000.00

25,203.00

831 034.00

26,732.00

$ 2,302,487.00

$114,203.00 $ 2,188,284.00 $ 115,732.00

Total Long-Term Debt - University of Georgia

Foundation

$185,725,440 00 $ 24 853 253.0Q $ 562,074.00 $21Q 017,319.00 $ 1 085,732.0Q

$25,620,000.00 Bond Issue - In 2001, the Development Authority of the Unified Government of Athens - Clarke County, Georgia (the "Development Authority") issued Revenue Bonds (UGA Real Estate Foundation, Inc. Project), Series 2001 (the "2001 Bonds") and entered into an

- 32 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Debt Obligations agreement (the "2001 Loan Agreement") to loan $25,620,000.00 to the Real Estate Foundation. The 2001 Bonds are secured by a letter of credit issued on behalf of the Real Estate Foundation in favor of the Development Authority under the Real Estate Foundation's $73.1 million credit agreement discussed below. The Foundation has guaranteed the obligations, including the letter of credit, under the Real Estate Foundation's $73.1 million revolving credit agreement. During 2002, the Real Estate Foundation used the proceeds of this loan to fund purchases and improvements of certain properties.

Borrowings under the 2001 Loan Agreement bear interest payable monthly at a formula rate adjusted each week (1.08% and 1% at June 30, 2004 and 2003, respectively). The loan matures in 2031, subject to certain early repayment provisions. During the years ended June 30, 2004 and 2003, principal payments of $515,000.00 and $495,000.00, respectively, were made.

At June 30, 2004, the Real Estate Foundation had an outstanding interest rate swap agreement effectively changing the interest rate exposure on 2001 Loan Agreement from variable to a 1.75% fixed rate until February 1, 2005. The fair value of the termination cost of the interest rate swap as of June 30, 2004 and 2003 was $48,489.00 and $209,254.00, respectively, and was recorded as an accrued liability in accordance with SFAS No. 133. The Real Estate Foundation recorded a gain of $160,765.00 and a loss of $209,254.00 for the years ended June 30, 2004 and 2003, respectively, as an adjustment to interest expense related to this swap.

Annual debt service requirements to maturity for the $25,620,000.00 2001 Revenue Bond Issue are as follows:

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020 through 2024 2025 through 2029 2030 through 2034

$25,620,000.00 Bond Issue

Principal

Interest*

Total

$ 24,610,000.00

$ 265,788.00 265,788.00 265,788.00 265,788.00 265,788.00
1,328,940.00 1,328,940.00 1,328,940.00 1,328,940.00
465,129.00

$ 265,788.00 265,788.00 265,788.00 265,788.00 265,788.00
1,328,940.00 1,328,940.00 1,328,940.00 1,328,940.00 25,075,129.00

$ 24,610,000.00 $ 7,109,829.00 $ 31,719,829.00

* Interest is calculated using rate in effect at June 30, 2004, which was 1.08%.

- 33 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Debt Obligations $39,155,000.00 Bond Issue - In 2002, the Development Authority issued Educational Facilities Revenue Bonds (UGAREF CCRC Building, LLC Project), Series 2002 (the "CCRC Bonds") and entered into an agreement (the "CCRC Loan Agreement") to loan $39,155,000.00 to UGAREF CCRC Building, LLC (a single-member limited liability company owned by the Real Estate Foundation) (the "CCRC Entity"). Payment of principal and interest under the CCRC Bonds is insured by a financial guaranty insurance policy and secured by certain real property constituting the facility and by the CCRC Entity's interest in certain rents and leases derived from the facility. During the years ended June 30, 2004 and 2003, the CCRC Entity used the proceeds of this loan to fund construction of the facility.

Borrowings under the CCRC Loan Agreement bear interest payable semiannually on December 15 and June 15 at fixed rates ranging from 2.5% to 5% depending on the term. Principal payments are due on December 15 starting in 2004 and continuing through fiscal year 2033.

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020 through 2024 2025 through 2029 2030 through 2033

$39,155,000.00 Bond Issue

Princi:gal

Interest

Total

$ 740,000.00 $ 1,747,014.00 $ 2,487,014.00

760,000.00

1,728,264.00

2,488,264.00

780,000.00

1,709,014.00

2,489,014.00

800,000.00

1,688,264.00

2,488,264.00

825,000.00

1,664,889.00

2,489,889.00

4,545,000.00 7,891,118.00 12,436,118.00

5,570,000.00 6,872,146.00 12,442,146.00

7,085,000.00 5,356,316.00 12,441,316.00

9,025,000.00 3,403,519.00 12,428,519.00

9,025,000.00

928,419.00 9,953,419.00

$ 39! 155!000.00 $32!988!963 .00 $ 72!143!963.00

$99,860,000.00 Bond Issue - In 2002, the Housing Authority of the City of Athens, Georgia issued Student Housing Lease Revenue Bonds (UGAREF East Campus Housing, LLC Project), Series 2002 (the "Housing Bonds") and entered into an agreement (the "Housing Loan Agreement") to loan $99,860,000.00 to UGAREF East Campus Housing, LLC (a single-member limited liability company owned by the Real Estate Foundation) (the "Housing Entity"). Payment of principal and interest under the Housing Bonds is insured by a financial guaranty insurance policy and secured by certain real property constituting the facilities and by the Housing Entity's interest in certain rents and leases derived from the facility. During the years ended June 30, 2004 and 2003, the Housing Entity used the proceeds of this loan to fund construction of certain real estate projects.

- 34 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Debt Obligations Borrowings under the Housing Loan Agreement bear interest payable semiannually on December 1 and June 1 at fixed rates ranging from 3% to 5.25% depending on the term. Principal payments are due on December 1 starting in 2005 and continuing through 2033.

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020 through 2024 2025 through 2029 2030 through 2033

$99,860,000.00 Bond Issue

Princi:gal

Interest

Total

$ 1,825,000.00 1,875,000.00 1,935,000.00 2,000,000.00 11,110,000.00 13,550,000.00 17,715,000.00
22,510,000.00 27,340,000.00

$ 4,791,550.00 4,764,175.00 4,708,675.00 4,651,525.00 4,590,000.00 21,703,300.00 18,945,806.00 14,899,681.00 9,758,000.00 3,451,250.00

$ 4,791,550.00 6,589,175.00 6,583,675.00 6,586,525.00 6,590,000.00 32,813,300.00 32,495,806.00 32,614,681.00 32,268,000.00 30,791,250.00

$ 99,860,000.00 $92,263,962.00 $192,123,962.00

$8,215,000.00 Bond Issue - In 2003, the Oconee County Industrial Development Authority issued Revenue Bonds (UGAREF Gainesville Campus, LLC Project), Series 2003 (the "Gainesville Campus Bonds") and entered into an agreement (the "Gainesville Campus Loan Agreement") to loan $8,215,000.00 to UGAREF Gainesville Campus, LLC (a single-member limited liability company owned by the Real Estate Foundation) (the "Gainesville Campus Entity"). Payment of principal and interest under the Gainesville Campus Bonds is insured by a financial guaranty insurance policy and secured by certain real property constituting the facility and by the Gainesville Campus Entity's interest in certain rents and leases derived from the facility. During the year ended June 30, 2003, the Gainesville Campus Entity used the proceeds of this loan to fund the purchase of a facility and land.

Borrowings under the Gainesville Campus Loan Agreement bear interest payable semiannually on December 15 and June 15 at fixed rates ranging from 2.2% to 4.375% depending on the term. Principal payments are due on December 15 starting in 2003 and continuing through fiscal year 2028. During the year ended June 30, 2004, a principal payment of $90,000.00 was made.

- 35 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Debt Obligations

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020 through 2024 2025 through 2028

$8,215,000.00 Bond Issue

Princi12al

Interest

Total

$ 230,000.00 $ 293,529.00 $ 523,529.00

240,000.00

288,241.00

528,241.00

250,000.00

282,729.00

532,729.00

250,000.00

277,104.00

527,104.00

260,000.00

271,431.00

531,431.00

1,380,000.00 1,248,046.00 2,628,046.00

1,620,000.00

997,113.00 2,617,113.00

1,975,000.00

635,728.00 2,610,728.00

1,920,000.00

172,375.00

2,092,375.00

$ 8!125!000.00 $ 4A66!296.oo $ 12!591 !296.00

$25,970,000.00 Bond Issue - In 2004, the Development Authority issued $25,545,000.00 of Educational Facilities Revenue Bonds (UGAREF Coverdell Building, LLC Project), Series 2004A, and $425,000.00 of Educational Facilities Taxable Revenue Bonds (UGAREF Coverdell Building, LLC Project), Series 2004B (collectively, the "Coverdell Bonds"). The Development Authority entered into an agreement (the "Coverdell Loan Agreement") to loan $25,970,000.00 to UGAREF Coverdell Building, LLC (a single-member limited liability company owned by the Real Estate Foundation) (the "Coverdell Entity"). Payment of principal and interest under the Coverdell Bonds is insured by a financial guaranty insurance policy and secured by certain real property constituting the facility and by the Coverdell Entity's interest in certain rents and leases derived from the facility. During the year ended June 30, 2004, the Coverdell Entity used the proceeds of this loan to fund construction of the facility.

Borrowings under the Coverdell Loan Agreement bear interest payable semiannually on December 15 and June 15 at fixed rates ranging from 2.5% to 5% depending on the term. Principal payments are due on December 15 starting in 2006 and continuing through fiscal year 2035.

- 36 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Debt Obligations

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020 through 2024 2025 through 2029 2030 through 2034 2035

$25,970,000.00 Bond Issue

Principal

Interest

Total

$ 1,295,161.00 $ 1,295,161.00

1,165,645.00

1,165,645.00

$ 460,000.00 1,159,003.00

1,619,003.00

500,000.00 1,146,110.00

1,646,110.00

510,000.00 1,133,485.00

1,643,485.00

2,810,000.00 5,409,525.00

8,219,525.00

3,430,000.00 4,789,699.00

8,219,699.00

4,300,000.00 3,926,248.00

8,226,248.00

5,435,000.00 2,785,731.00

8,220,731.00

6,920,000.00 1,298,938.00 8,218,938.00

1,605,000.00

40,125.00

1,645,125.00

$ 25,970,000.00 $ 24,149,670.00 $ 50,119,670.00

$73,100,000.00 Revolving Credit Agreement - During the year ended June 30, 2002, the Real Estate Foundation established a $50 million revolving credit agreement with a bank which was later increased to a limit of $75 million. The agreement expires November 30, 2005. In connection with establishing a separate $1.9 million credit agreement discussed below, the credit limit on the revolving credit agreement is effectively reduced to $73.1 million. The revolving credit agreement provides for direct borrowings or letters of credit at the Real Estate Foundation's option. Credit available under the revolving credit agreement is reduced by outstanding borrowings and outstanding letters of credit.

At June 30, 2004, amounts outstanding or issued under this agreement included borrowings of $11,997,170.00 and a letter of credit and bank credit reserves of $25,485,347.00, resulting in $35,617,483.00 available as borrowing capacity under this line. Borrowings under the revolving credit agreement bear interest at the bank's 30-day London Interbank Offered Rate ("LIBOR") rate plus 32 basis points (or .325%). At June 30, 2004 and 2003, the rates applicable to the borrowings were 1.45% and 1.65%, respectively. The Foundation has guaranteed the obligations of the Real Estate Foundation under this revolving credit agreement.

$1,900,000.00 Credit Agreement - During the year ended June 30, 2003, the Real Estate Foundation established a $1.9 million credit agreement with a bank which expires July 29, 2007. The credit agreement provides for direct borrowings for the purchase and improvement of a property in Cortona, Italy. At June 30, 2004, amounts outstanding under this agreement were $1,636,000.00 with $264,000.00 available as borrowing capacity. Borrowings under the credit

- 37 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Debt Obligations agreement bear interest at the bank's 30-day LIBOR rate plus 45 basis points (or .45%). At June 30, 2004 and 2003, the rates applicable to the borrowings were 1.81 % and 1.57%, respectively. The Foundation has guaranteed the obligations of the Real Estate Foundation under this credit agreement.

$300,000.00 Credit Agreement - During the year ended June 30, 2003, the Foundation established a $0.3 million credit agreement with a bank which expires June 30, 2009. The credit agreement provides for direct borrowings for the purchase and improvement of a property in Costa Rica. At June 30, 2004, amounts outstanding under this agreement were $200,000.00 with $100,000.00 available as borrowing capacity. Borrowings under the credit agreement bear interest at the bank's 30-day LIBOR rate plus 45 basis points (or .45%). Interest is payable monthly until June 1, 2005. Thereafter, principal and interest will be due on a monthly basis, using a 19-year amortization until expiration. At June 30, 2004, the rate applicable to the borrowings was 1.61 %.

$11,000,000.00 Credit Agreement - During the year ended June 30, 1994, the Foundation established an $11 million revolving credit agreement with a bank that expired on June 30, 2003. The outstanding balance was paid in full during 2003. The University of Georgia Research Foundation, Inc. ("Research Foundation") had agreed to pay the interest costs on borrowings related to this agreement. During the year ended June 30, 2003, the Research Foundation, Inc. paid interest of $4,724.00.

$1,800,000.00 Note Payable - During the year ended June 30, 2000, the Foundation signed a $1.8 million promissory note agreement with a bank, which expires on December 31, 2019. At June 30, 2004, $1,357,250.00 was outstanding under this agreement. Interest is charged at a fixed rate of 7.13%. Principal payments in the amount of $22,250.00 are payable quarterly.

Year Ending June 30: 2005 2006 2007 2008 2009 2010 through 2014 2015 through 2019 2020

$1,800,000.00 Note Payable

Princi:Qal

Interest

Total

$ 89,000.00 $ 94,842.00 $ 183,842.00

89,000.00

88,571.00

177,571.00

89,000.00

82,187.00

171,187.00

89,000.00

75,804.00

164,804.00

89,000.00

69,420.00

158,420.00

445,000.00

251,349.00

696,349.00

445,000.00

91,763.00

536,763.00

22,250.00

399.00

22,649.00

$ 1,357!250.00 $ 754!335.00 $ 2,111,585.00

- 38 -

UNIVERSITY OF GEORGIA NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 15: COMPONENT UNITS

Debt Obligations $880,000.00 Note Payable - During the year ended June 30, 2002, the Foundation borrowed $880,000.00 from a bank, which expires on May 1, 2007. At June 30, 2004, $831,034.00 was outstanding under this agreement. Interest is charged at the bank's 30-day LIBOR rate plus 0.45% or 1.56% and 1.77% at June 30, 2004 and 2003, respectively. Principal and interest are payable monthly.

At June 30, 2004, the Foundation had an outstanding interest rate swap agreement effectively changing the interest rate exposure on the $880,000.00 note payable from variable to a 5.9% fixed rate over the term of the note payable. The fair value of the termination cost of the interest rate swap as of June 30, 2004 and 2003 was $39,855.00 and $114,329.00, respectively, and was recorded as an accrued liability in accordance with SFAS No. 133. The Foundation recorded a gain of $74,474.00 and a loss of $114,329.00 for the years ended June 30, 2004 and 2003, respectively, as an adjustment to interest expense related to this swap.

Year Ending June 30: 2005 2006 2007

$880,000.00 Note Payable

Princi~al

Interest

Total

$ 26,732.00 $ 13,311.00 $ 40,043.00

28,352.00

12,869.00

41,221.00

775,950.00

12,426.00

788,376.00

$ 831,034.00 $ 38,606.00 $ 869,640.00

- 39 -

SUPPLEMENTARY INFORMATION - 41 -

UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GAAP BASIS} RESIDENT INSTRUCTION
YEAR ENDED JUNE 30. 2004

SCHEDULE "1"

REVENUES
State Appropriations Other Revenues Retained

BUDGET

ACTUAL (1)

VARIANCEFAVORABLE (UNFAVORABLE}

$ 311,344,702.00 $ 311,344,702.00 $

0.00

665,319,059.00

411,201,345.18

-254,117,713.82

$ 976,663,761.00 $ 722,546,047.18 $ -254,117,713.82

EXPENDITURES
Personal Services: Education, General and Departmental Services Sponsored Operations
Operating Expenses: Education, General and Departmental Services Sponsored Operations
Capital Outlay Special Funding Initiative Office of Minority Business Enterprise Forestry Research Research Consortium

$ 421,233,813.00 $ 389,243,960.26 $

95,000,000.00

86,380,855.42

31,989,852.74 8,619,144.58

125,401,008.00 245,000,000.00
83,435,942.00 1,885,425.00 545,020.00 1,305,831.00 2,856,722.00

117,626,091.84 104,107,227.09
5,661,512.86 1,886,902.50
545,020.00 955,831.00 2,856,722.00

7,774,916.16 140,892,772.91
77,774,429.14 -1,477.50 0.00
350,000.00 0.00

$ 976,663,761.00 $ 709,264,122.97 $ 267,399,638.03

Excess of Revenues over Expenditures

$ 13,281,924.21 $ 13,281,924.21

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

-43-

UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GMP BASIS) LOTTERY FOR EDUCATION YEAR ENDED JUNE 30. 2004

SCHEDULE "2"

CARRY-OVER FROM PRIOR YEAR Transfer from Reserved Fund Balance

BUDGET

ACTUAL (1)

VARIANCEFAVORABLE (UNFAVORABLE)

$

1,538,231.00 $ 1,638,711.40 $ - - -100-,48-0.4-0

EXPENDITURES
Equipment, Technology and Construction Trust Fund

$

1,538,231.00 $ 1,638,711.40 $ - - --100-,48-0.4-0

Excess of Revenues over Expenditures

$

0.00 $ = = = = =0.0=0

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

- 44 -

UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GAAP BASIS) OTHER ORGANIZED ACTIVITIES
YEAR ENDED JUNE 30. 2004

SCHEDULE "3"

AGRICULTURAL EXPERIMENT STATION
REVENUES
State Appropriations Other Revenues Retained

BUDGET

ACTUAL (1)

VARIANCEFAVORABLE (UNFAVORABLE)

$ 43.074,977.00 $ 43,074,977.00 $ 39,894,190.00 42,587,625.62

0.00 2,693,435.62

EXPENDITURES
Personal Services: Education, General and Departmental Services Sponsored Operations
Operating Expenses: Education, General and Departmental Services Sponsored Operations

$ 82,969,167.00 $ 85,662,602.62 $

2,693,435.62

----'----''----

$ 40,784,018.00 $ 40,251,399.06 $ 13,500,000.00 13,082,886.57
14,185,149.00 11,868,235.22 14,500,000.00 15,872,707.42

532,618.94 417,113.43
2,316,913.78 -1,372,707.42

$ 82,969,167.00 $ 81,075,228.27 $ _ _1.:.,.,8=-:9:.=3.!.:,9:.=.3=-:8.~73=-

Excess of Revenues over Expenditures

$ 4,587,374.35 $ ===4,=58=7:!:,3=7=4=.3=5

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

-45-

UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GMP BASIS} OTHER ORGANIZED ACTIVITIES
YEAR ENDED JUNE 30. 2004

SCHEDULE "3"

ATHENS AND TIFTON VETERINARY LABORATORIES REVENUES
Other Revenues Retained

BUDGET

ACTUAL (1)

VARIANCEFAVORABLE (UNFAVORABLE)

$ 5,053,970.00 $ 6,332,825.35 $

1,278,855.35

---'---''----

EXPENDITURES
Personal Services: Sponsored Operations
Operating Expenses: Sponsored Operations

$ 3,215,473.00 $ 3,050,457.80 $ 1,838,497.00 1,805,727.14

165,015.20 32,769.86

Excess of Revenues over Expenditures

$ 5,053,970.00 $ 4,856,184.94 $ - - - -1'97-,7-85-.0-6
$ 1,476,640.41 $ ==1=,4=7=6=,6=4=0.,,.,4=1

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

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UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GAAP BASIS) OTHER ORGANIZED ACTIVITIES
YEAR ENDED JUNE 30. 2004

SCHEDULE "3"

COOPERATIVE EXTENSION SERVICE
REVENUES
State Appropriations Other Revenues Retained

BUDGET

ACTUAL (1)

VARIANCEFAVORABLE (UNFAVORABLE)

$ 36,143,638.00 $ 36,143,638.00 $ 25,719,137.00 23,406,325.61

0.00 -2,312,811.39

EXPENDITURES
Personal Services: Education, General and Departmental Services Sponsored Operations
Operating Expenses: Education, General and Departmental Services Sponsored Operations

$ 61,862,775.00 $ 59,549,963.61 $

-2,312,811.39

-----'---''----

$ 40,850,268.00 $ 39,973,486.14 $ 8,500,000.00 8,322,343.09

6,512,507.00 6,000,000.00

5,731,541.42 5,169,964.95

876,781.86 177,656.91
780,965.58 830,035.05

$ 61,862,775.00 $ 59,197,335.60 $ _ _2....,.6. _6_5.:....,4_3_9._40_

Excess of Revenues over Expenditures

$ 352,628.01 $ ======35=2=,6=2=8.=0=1

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

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UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GAAP BASIS} OTHER ORGANIZED ACTIVITIES
YEAR ENDED JUNE 30. 2004

SCHEDULE "3"

MARINE INSTITUTE
REVENUES
State Appropriations Other Revenues Retained

BUDGET

ACTUAL{1l

VARIANCEFAVORABLE {UNFAVORABLE}

$ 996.208.00 $ 996,208.00 $

767,633.00

394,216.57

0.00 -373,416.43

$ 1,763,841.00 $ 1,390,424.57 $ _ _ _-.:;_37;.:3;.?.,4.;.:1-=.6:..:.4-=-3

EXPENDITURES
Personal Services: Education, General and Departmental Services Sponsored Operations
Operating Expenses: Education, General and Departmental Services Sponsored Operations

$ 720,869.00 $ 724,018.38 $

575,000.00

247,648.20

342,972.00 125,000.00

287,881.58 96,849.74

-3,149.38 327,351.80
55,090.42 28,150.26

$ 1,763,841.00 $ 1,356,397.90 $ _ _ _4..:.;0:..;.7.!.,44.;.:-=.3.:..;.1.:.0

Excess of Revenues over Expenditures

$

34,026.67 $ ===.,;;3~4,:,;;,0=2=6.=6=7

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

-48-

UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GAAP BASIS) OTHER ORGANIZED ACTIVITIES
YEAR ENDED JUNE 30, 2004

SCHEDULE "3"

MARINE RESOURCES EXTENSION CENTER
REVENUES
State Appropriations Other Revenues Retained

BUDGET

ACTUAL (1)

VARIANCEFAVORABLE (UNFAVORABLE)

$ 1,550,755.00 $ 1,550,755.00 $

5,929,800.00

4,144,977.44

0.00 -1, 784,822.56

$ 7,480,555.00 $ 5,695,732.44 $ _ _-_1__,,7_.8..c4_:,..8;._2_2_:...5..:6....

EXPENDITURES
Personal Services: Education, General and Departmental Services Sponsored Operations
Operating Expenses: Education, General and Departmental Services Sponsored Operations

$ 1,560,861.00 $ 1,554,762.67 $

730,000.00

608,400.60

919,694.00 4,270,000.00

690,426.70 2,742,919.49

6,098.33 121,599.40
229,267.30 1,527,080.51

$ 7,480,555.00 $ 5,596,509.46 $ _ _1.;.:..;.;88;_:4;.!_;,0;_:4.;.;5.;.;54.:..

Excess of Revenues over Expenditures

$

99,222.98 $ ==~9~9,~22;;;;2;,;,;.9~8

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

-49-

UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GAAP BASIS) OTHER ORGANIZED ACTIVITIES
YEAR ENDED JUNE 30. 2004

SCHEDULE "3"

VETERINARY MEDICINE EXPERIMENT STATION REVENUES
State Appropriations
EXPENDITURES Personal Services:
Education, General and Departmental Services Operating Expenses:
Education, General and Departmental Services Agricultural Research

BUDGET

ACTUAL (1)

VARIANCEFAVORABLE (UNFAVORABLE)

$ 3,461,327.00 $ 3,461,327.00 $ - - - - - -0.0-0

$ 2,286,216.00 $ 2,230,281.93 $

189,913.00 985,198.00

245,847.07 985,198.00

55,934.07
-55,934.07 0.00

$ 3,461,327.00 $ 3,461,327.oo $ _ _ _ _ _o._oo_

Excess of Revenues over Expenditures

$

0.00 $

0.00

=======

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

- 50 -

UNIVERSITY OF GEORGIA SCHEDULE OF REVENUES AND EXPENDITURES COMPARED TO
BUDGET - (NON-GAAP BASIS) OTHER ORGANIZED ACTIVITIES
YEAR ENDED JUNE 30. 2004

SCHEDULE "3"

VETERINARY MEDICINE TEACHING HOSPITAL REVENUES
State Appropriations Other Revenues Retained
CARRY-OVER FROM PRIOR YEAR Transfer From Reserved Fund Balance

BUDGET

ACTUAL (1}

VARIANCEFAVORABLE {UNFAVORABLE}

$ 492,975.00 $ 492,975.00 $ 7,600,000.00 7,188,844.81
$ 8,092,975.00 $ 7,681,819.81 $

0.00 -411,155.19
-411,155.19

111,392.00

111,392.00

0.00

EXPENDITURES
Personal Services: Education, General and Departmental Services
Operating Expenses: Education, General and Departmental Services

----~-'--- $ 8,204,367.00 $ 7,793,211.81 $

-411,155.19

$ 4,004,424.00 $ 3,742,950.15 $ 4,199,943.00 4,051,782.13

261,473.85 148,160.87

$ 8,204,367.00 $ 7,794,732.28 $ _ ____;_40:..:9:.!.;,6:..:3~4;_;_.7=.2

Excess of Revenues over Expenditures

$

-1,520.47 $ ====-1;,,:,;,5;;;,;;2;,;;0;.,;.4.7..

(1) Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

See notes to the financial statements.

- 51 -

UNIVERSITY OF GEORGIA RECONCILIATION OF SALARIES AND TRAVEL
YEAR ENDED JUNE 30, 2004

SCHEDULE 411 11

Totals per Annual Supplement
Prepaid Salaries June 30, 2004 June 30, 2003
Accruals June 30, 2004 June 30, 2003 July 1, 2003 Accrual Adjustments
Compensated Absences June 30, 2004 June 30, 2003

SALARIES

TRAVEL

$ 505,407,067.56 $ 10,903,541.59

-1,244,368.00 1,294,705.81

3,696,760.24 -3,063,232.84
-97,599.90

27,234.07

32,174,982.86 -33,648,627 .48

$ 504,519,688.25 $ 10,930,775.66

See notes to the financial statements.

- 53-

SECTION II COMPLIANCE AND INTERNAL CONTROL REPORT

Russell W. Hinton
STATE AUDITOR
(404) 656-2174

DEPARTMENT OF AUDITS AND ACCOUNTS
254 Washington Street, S.W., Suite 214 Atlanta, Georgia 30334-8400
January 20, 2005

Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia Members of the Board of Regents of the University System of Georgia
and Honorable Michael F. Adams, President University of Georgia
REPORT 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
Ladies and Gentlemen:
We have audited the financial statements of the University of Georgia and its aggregate discretely presented component units as of and for the year ended June 30, 2004, which collectively comprise University of Georgia's basic financial statements and have issued our report thereon dated January 20, 2005. We did not audit the financial statements ofthe University ofGeorgia's discretely presented component units. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for the University of Georgia Research Foundation, Inc., the University ofGeorgia Athletic Association, Inc. and the University of Georgia Foundation 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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. The financial statements ofthe University of Georgia Athletic Association, Inc. and the University of Georgia Foundation were not audited in accordance with Government Auditing Standards.
Internal Control Over Financial Reporting
In planning and performing our audit, we considered the University ofGeorgia'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 assurance on the internal control over financial reporting. However, we noted a certain matter involving the internal control over financial reporting and its operation that we consider to be a reportable condition. Reportable conditions involve
2004YB-10

matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect the University of Georgia's ability to record, process, summarize and report financial data consistent with assertions of management in the financial statements. The reportable condition is described in the accompanying Schedule of Findings and Questioned Costs as item FS-518-04-01.
A material weakness is a reportable condition in which the design or operation of one or more ofthe internal control components does not reduce to a relatively low level the risk that misstatements 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. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However, we believe the reportable condition described above is not considered to be a material weakness.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the University of Georgia'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 no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
This report is intended solely for the information and use of the management and members of the Board of Regents of the University System of Georgia and is not intended to be and should not be used by anyone other than these specified parties.
Respectfully submitted,
~w.cB..k
Russell W. Hinton State Auditor
RWH:gp 2004YB-10

SECTION III AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS

UNIVERSITY OF GEORGIA AUDITEE'S RESPONSE
SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2004

PRIOR YEAR FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

FINDING CONTROL NUMBER AND STATUS

FS-518-03-01

Previously Reported Corrective Action Implemented

SECTION IV CURRENT YEAR FINDINGS AND QUESTIONED COSTS

UNIVERSITY OF GEORGIA SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30. 2004

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

ACCOUNTING CONTROLS Inadequate General Controls Reportable Condition Finding Control Number: FS-518-04-01

Condition:

Our examination ofthe University ofGeorgia (UGA) included a review and follow-up ofan Information Technology (IT) Audit report issued on July 30, 2004 by the Board ofRegents/University System ofGeorgia's Department of Internal Audit (DIA). Additionally two reports issued by UGA's Internal Audit Division (IAD), one related to the Financial Information System and the other related to the Boyd Data Center, were reviewed and follow-up was performed. The Boyd Data Center houses data for both UGA and 30 institutions which are part ofthe University System ofGeorgia. The reports issued by the DIA and IAD identified material weaknesses pertaining to general and application computer controls which we consider relevant to an audit of UGA's financial statements for fiscal year ended June 30, 2004.

Criteria:

NCGA Statement 1, paragraph 1, requires that a governmental accounting system make it possible both: (a) to present fairly and with full disclosure the funds of the governmental unit in conformity with generally accepted accounting principles; and (b) to demonstrate compliance with financerelated legal and contractual provisions.

Questioned Cost: NIA

Information:

Internal Control Weaknesses were identified in the following areas: Access to the Boyd Data Center is not adequately restricted or monitored
by UGA or University System personnel. Access controls currently in place do not provide the proper granularity necessary to monitor access by individual. The University of Georgia has developed and maintains its Financial Accounting System (System) in-house using programmers on staff. The University's staff has failed to adequately document the development of the System. Additionally, procedures for making changes to the System's source code are inadequate. There was no quality assurance function in place at June 30, 2004.

- 1-

UNIVERSITY OF GEORGIA SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

ACCOUNTING CONTROLS Inadequate General Controls Reportable Condition Finding Control Number: FS-518-04-01

Cause:

Management of the University of Georgia: Did not properly restrict access to the Boyd Data Center. Has not properly documented the development of the Financial
Accounting System and does not properly document changes made to the source code or financial data in the system.

Effect:

Without satisfactory access controls in place, the University places itselfin a position where losses, changes or misuses of data could occur and possibly not be detected.

Program change controls exist to minimize the risk that personnel can make unapproved changes to sources code which could compromise the integrity of the data processed by the system. Inadequate documentation ofthe Financial Accounting System's source code and changes made to that code places the University at risk for unauthorized, unapproved, and untested changes to occur and go undetected.

Recommendation:

Management should implement the corrective procedures recommended by the Board ofRegents Division oflntemal Audit and the University's Internal Audit Division to adequately restrict and monitor access to the Boyd Data Center, and to properly document and maintain information related to changes made to the Financial Accounting System's source code.

FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

No matters were reported.

-2-