Audit report, Georgia Technology Authority, a component unit of the state of Georgia, year ended June 30, 2004

STATE OF GEORGIA
DEPARTMENT OF AUDITS AND ACCOUNTS
Russell W. Hinton State Auditor
AUDIT REPORT GEORGIA TECHNOLOGY AUTHORITY A COMPONENT UNIT OF THE STATE OF GEORGIA
YEAR ENDED JUNE 30, 2004

GEORGIA TECHNOLOGY AUTHORITY
-TABLE OF CONTENTS-
SECTION I FINANCIAL INDEPENDENT AUDITOR'S REPORT ON BASIC FINANCIAL STATEMENTS ACCOMPANIED BY REQUIRED SUPPLEMENTARY INFORMATION AND SUPPLEMENTARY INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS EXHIBITS BASIC FINANCIAL STATEMENTS A BALANCE SHEET PROPRIETARY FUND-ENTERPRISE FUND B STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUND-ENTERPRISE FUND C STATEMENT OF CASH FLOWS PROPRIETARY FUND-ENTERPRISE FUND D NOTES TO THE FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION SCHEDULE
1 RECONCILIATION OF SALARIES

Page
1 5
16 18 20 22
39

SECTION II

INTERNAL CONTROL AND COMPLIANCE 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

43

SECTION Ill

AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS

SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS

49

GEORGIA TECHNOLOGY AUTHORITY

-TABLE OF CONTENTS-

SECTION IV

CURRENT YEAR FINDINGS AND QUESTIONED COSTS

SCHEDULE OF FINDINGS AND QUESTIONED COSTS

53

SECTION I FINANCIAL

DEPARTMENT OF AUDITS AND ACCOUNTS

254 Washington Street. S.W., Suite 214

RussELL W. HINTON
STATE AUDITOR (404) 656-2174

Atlanta, Georgia 30334-8400

March 4, 2005
Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia Members of the Georgia Technology Authority
and Honorable Thomas E. Wade, Chief Information Officer and Executive Director
INDEPENDENT AUDITOR'S REPORT ON BASIC FINANCIAL STATEMENTS ACCOMPANIED BY REQUIRED SUPPLEMENTARY INFORMATION AND SUPPLEMENTARY INFORMATION
Ladies and Gentlemen:
We have audited the accompanying basic financial statements of the Georgia Technology Authority, a component unit of the State of Georgia, as of and for the year ended June 30, 2004, as listed in the table of contents. These financial statements are the responsibility of the Authority's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 provides ~ reasonable basis for our opinions.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Georgia Technology Authority, as of June 30, 2004, and the changes in its financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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In accordance with Government Auditing Standards, we have also issued a report dated March 4, 2005 on our consideration of the Georgia Technology Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report considering the results of our audit.
The management's discussion and analysis on pages 5 through 13 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.
Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Georgia Technology Authority's basic financial statements. The accompanying supplementary information (Schedule 1) is presented for purposes of additional analysis and is not a required part of the basic financial statements. The accompanying supplementary information (Schedule 1) has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, such information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Respectfully submitted,

RWH:jbw

ssell W. Hinton, CPA, CGFM State Auditor

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Georgia Technology Authority Management's Discussion and Analysis For the Fiscal Year Ended June 30, 2004
Georgia Technology Authority (GTA or Authority) provides this narrative to supplement the financial statements that follow this section. The Authority's basic financial statements are reported as a special purpose government (component unit of the State of Georgia) engaged in business-type activities and are comprised of fund financial statements for proprietary (enterprise) funds.
GTA derives its primary revenues from billings to customers for services. GTA's major revenue producing services are: Telecommunications Voice and Data services, Data Center and Information Resource Management services, and Information Sales. GTA's customer base includes state, federal, and local governmental entities, as well as private industry.
GTA also performs regulatory activities including Enterprise IT Planning, Enterprise IT Value Management and Stewardship in the areas of IT procurement and project management, Enterprise Contracts and Licenses Administration, Enterprise Security, Portal Services, and IT Professional Services.
The Governmental Accounting Standards Board requires enterprise funds to account for their activities in the same manner as a commercial enterprise using an "economic resources measurement focus" and the "accrual" basis of accounting. The economic resources measurement focus requires us to recognize all assets and liabilities, both short-term and long-term, on our Balance Sheet. It also requires us to capitalize and depreciate certain assets, and recognize other deferrals. The accrual basis of accounting requires us to recognize revenues when earned, not when cash is received; and to recognize expenses when incurred, not when cash is paid out. The purpose behind all this is to recognize the total cost of doing business and to measure the ability of the Authority to meet its future obligations-the same as with private industry.
Basic Financial Statements:
The basic financial statements required to be presented by an enterprise fund are the Balance Sheet; Statement of Revenues, Expenses, and Changes in Fund Net Assets; and the Statement of Cash Flows.
Balance Sheet
The Balance Sheet shows assets and liabilities separated into their current and noncurrent portions. The difference between total assets and total liabilities equals Net Assets. Net Assets will be subdivided into three categories: the amount invested in capital assets, amounts restricted, and amount unrestricted. By comparing Net Assets between fiscal periods, the reader will be able to see how the financial position of the Authority has changed. See following for a summary comparative Balance Sheet for Fiscal Year (FY) 2004 and 2003.
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Balance Sheet (Rounded to nearest thousand)

Assets Current Assets Capital Assets, Net

FY 2004 $91,197,000
31,041,000

FY 2003 $80,427,000
39,965,000

Total Assets

$122,238,000 $120,392,000

Liabilities and Net Assets Liabilities
Current Liabilities Non-current Liabilities

$5,797,000 4,240,000

$5,616,000 6,400,000

Total Liabilities

$10,037,000 $12,016,000

Net Assets Invested in Capital Assets, Net Restricted Unrestricted

$26,431,000 17,666,000 68,104,000

$33,224,000 20,087,000 55,065,000

Total Net Assets

$112,201,000 $108,376,000

Total Liabilities and Net Assets $122,238,000 $120,392,000

Overall, current assets increased by 13% in FY 2004 due to an increase in cash and cash equivalents of $5,433,000, an increase in accounts receivable of $5,960,000, and a decrease in Telecom shelf stock inventory of ($640,000). Current assets at the end of FY 2004 are made up of cash and cash equivalents-BO%, accounts receivable-18%, and consumable telecommunications shelf stock inventory for resale-2%. Cash equivalents consisted of funds invested short-term in Georgia Fund 1, managed by the Office of Treasury and Fiscal Services.
Non-current assets are made up of GTA's capital assets consisting primarily of data center equipment, software licenses, telecommunication systems, desktop and other equipment, land and buildings. Net Book Value of the total inventory decreased by 22% as can be seen in the following table:

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Changes to Capital Asset Inventories
Beginning Capital Asset Balance Transfers In Prior Period Adjustments Purchases Net Retirements Current Yr Depreciation Prior Year Accumulated Depr
Net Book Value and Ending Balance FY 2004 (not netted against related debt)
Net Book Value and Ending Balance FY 2003 Decrease Percent

FY 2004 $106,519,085.85
149,384.00 900,418.15 9,423,742.24 -792,034.20 -18,605,265.35 -66,554,242.56 $31,041,088.13
$39,964,843.29 22%

Ending Capital Asset Value at Historical Cost Less: Total Accumulated Depreciation Net Book Value and Ending Balance FY 2004
Percent Depreciated

$110,400,336.01 -79,359,247.88 $31,041,088.13
72%

The prior period adjustment is to record the value of land and buildings for GTA's Milledgeville and Albany regional offices. It was determined when reviewing real estate rentals that these locations were state owned and not leased. Since the Department of Administrative Services (DOAS) did not include these properties on its asset inventory, GTA did not record the value when assets were transferred from DOAS on July 1, 2001. This oversight was corrected in FY 2004.

Most capital assets are depreciated over a 5 year period. At the end of FY 2004, the overall capital asset inventory was 72% depreciated whereas at the end of FY 2003, depreciation was at 62%. Experience may prove that a 5 year depreciation period will not reflect the true life of the capital asset inventory. If such is found to be the case, GTA will make prospective adjustments to extend the lives of certain assets in the FY 2005 or FY 2006 time periods.

Noncurrent liabilities decreased by 34% due primarily to an annual payment being made against the Oracle software license installment purchase. The installment purchase contract was set up originally for annual payments over a five year period. The final annual payment will be made in FY 2006.

Net assets consist of capital assets, net of related debt; funds restricted for the Universal Services Fund; and funds unrestricted. The capital asset decrease of 20% is due to factors shown in the table above less related debt on the assets. Additional information on long term debt is included in the notes to the financial statements. The decrease of 12% or ($2,421,000) in restricted funds is due to draws made against the Universal Services Fund (USF) to cover expenditures made for the PeopleSoft upgrades.

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The funding of the PeopleSoft upgrades from the USF was approved by the General Assembly in the 2003 legislative session. GTA discussed the PeopleSoft upgrade in the Management Discussion and Analysis (MD&A) supplement for FY 2003.

Statement of Revenues, Expenses, and Changes in Fund Net Assets

The purpose of the Statement of Revenues, Expenses and Changes in Fund Net Assets is to present revenues and expenses from operations, revenues and expenses from non-operating activities, capital contributions given or received, other transfers in or out, and the resulting change in net assets. The change in net assets is added to or subtracted from the net assets balance brought forward from the previous fiscal year to obtain the balance of net assets at the end of the fiscal year. Below is a summary comparative Statement of Revenues, Expenses, and Changes in Fund Net Assets for FY 2004 and 2003.

Statement of Revenues, Expenses, and Changes in Fund Net Assets (Rounded to the nearest thousand)
Operating Revenues

FY 2004 $198,869,000

FY 2003 $207,891,000

Operating Expenses General and Administrative Goods and Services Depreciation Total Operating Expenses

$73,487,000 104,396,000
18,605,000 $196,488,000

$80,544,000 107,694,000
17,566,000 $205,804,000

Operating Income Nonoperating Revenues (Expenses)

$2,381,000 -329,000

$2,087,000 56,000

Income Before Contributions and Transfers
Capital Contributions Transfers
Changes in Net Assets Net Assets July 1 Prior Period Adjustments

$2,052,000

$2,143,000

149,000.00

29,000.00

724,000.00 -1,970,000.00

$2,925,000

$202,000

108,376,000.00 109,114,000.00

900,000.00

-940,000.00

Net Assets June 30

$112,201,000 $108,376,000

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Operating revenues decreased overall by 4% in FY 2004 due to several up and down fluctuations in revenues. Telecommunication revenues decreased by $8,033,000 reflecting mostly reductions in long distance rates. GTA completed the dismantlement of the old GIST long distance proprietary network in FY 2004. All on-net long distance was migrated to the public switch and rates were reduced substantially. This accounts for more than half of the decrease. Other categories in which telecommunication revenues showed a decline included regular long distance, GSAMS video conferencing systems, pagers, radios, and data circuits. Revenues from "basic telephone" service remained relatively stable.
Computer Services revenues declined by $4,106,000 due mostly to a reduction in central computer mainframe billings. GTA believes that this is due to agencies working to reduce inefficiencies in use of the mainframe systems or moving applications to distributed computing environments.
MVR data sales showed a marked increase of over $3,000,000. GTA and DMVS developed an application to provide this service online which increased sales along with convenience.
Operating expenses showed an overall decrease of 5% in FY 2004. In the General and Administrative category, the 9% decrease occurred mostly in Per Diem and Fees ($6,555,000). The difference is attributable to more Per Diem and Fee funds being spent in FY 03 on development work for the State Portal.
In the Goods and Services category, there was an overall decrease of 3% in FY 2004 which is a combination of up and down fluctuations in various expenses. Telecommunications services for resale decreased by approximately ($8,000,000) due to closing or disconnecting various services and incurring less wire and cable job expenses in FY 2004 over FY 2003. Significant increases occurred in computer software and software maintenance, $3,742,000, and computer hardware maintenance, $3,345,000. More software and software maintenance was purchased either for modernization of the Data Center or for the State Portal. FY 2004 represented the first year hardware maintenance had to be purchased for hardware added at the Data Center to host new applications that are under development. Depreciation expense increased by 6% due to additions to the capital asset inventory.
GTA received $21,171,786 in transfers from the State of Georgia General Fund in FY 2004. Of this amount, $15,448,100 represented the annual operating advance against customer billings. This advance has traditionally been referred to as "Indirect Funds". To offset this cash advance, GTA issues credits against certain customer billings over the course of the fiscal year. Due to the much shorter fiscal year-end closing cycle under PeopleSoft business rules, this indirect funding, that was historically used to address a year-end cash flow shortfall, will be discontinued in FY 2006. The remaining $5,723,686 received from the General Fund was for operation of the State's financial and human resource systems (PeopleSoft).
Total transfers reflect a net positive increase of $723,686. This increase is partly due to
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transferring less undesignated, unreserved fund balance to the General Fund in FY 2004. GTA transferred $7,716,828 in FY 2003 and $5,000,000 in FY 2004. GTA also paid a one time settlement to Sprint Communications in FY 2003 of $2,900,000.
The correction of a prior period error of $900,000 represents adjustments made to the capital asset inventory. GTA added the value of land and buildings for the Milledgeville and Albany regional offices as discussed previously. GTA also received capital contributions of returned GSAMS equipment from several sites where service was disconnected. This equipment was recorded on GTA's inventory as depreciated from the original "in-service" date requiring a prior period adjustment.
Statement of Cash Flows
The Statement of Cash Flows is useful for several reasons. It may indicate an entity's ability to generate future cash flows or pay its debt service. It also explains reasons for differences between cash flows from operations and operating income. The statement must contain the following categories of cash flows: cash flows from operating activities, cash flows from noncapital financing activities, cash flows from capital and related financing activities, and cash flows from investing activities. Also on the statement is a reconciliation of Operating Income to Net Cash provided by or used in Operating Activities. The Statement of Cash Flows is presented in its entirety in the section that follows this MD&A supplement and will not be reproduced in this section.
Net cash received from operations in FY 2004 decreased by $8,129,000, or 34%. This decrease is due to revenue decreases discussed previously and a fluctuation in timing of cash receipts from customers.
Net cash provided by noncapital financing activities was a positive $724,000 in FY 2004 compared to a negative ($4,870,000) in FY 2003. The change was due to fewer funds being transferred to the State of Georgia General Fund in FY 2004 and the one time settlement paid to Sprint Communications in FY 2003 as discussed previously.
Net cash used in capital and related financing activities increased by a modest 3%. This is due to a decrease in principal and interest payments on installment purchases coupled with an increase in acquisitions of capital assets.
Cash flows from interest on investments decreased by 18% due to a decline in interest rates during FY 2004. GTA receives investment income from cash in banks and from Georgia Fund 1 investments.
Economic Factors
Data Center Relocation
Subsequent to June 30, 2004, GTA located a suitable facility to relocate the State's data center from the Archives building. A lease of the facility began on February 1, 2005. GTA estimates that it will incur one-time costs of approximately $27,000,000 to move the
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data center. Of this amount, it is estimated that $6,000,000 will be spent for network

and fiber connections. Since GTA will occupy space at Archives and the new data

center concurrently, GTA estimates that it will spend $3,100,000 for duplicate rent and

energy during the transition. Since not all current data center employees will move to

the new data center, GTA may continue to lease space at Archives. GTA estimates that

it will pay $3,800,000 to the relocation vendor to accomplish the move, and $14,100,000

in hardware and software upgrades. These expenditures have received OPB approval

and will be funded by GTA's unreserved fund balance. The funds will be budgeted in

FY 2005 and FY 2006 as incurred. Completion of the move is expected to be in the

mid-FY 2006 time period.



Universal Services Fund

In addition to approval by the USF Governing Board to fund $12,651,250 for PeopleSoft upgrades, the following expenditures have since been approved: $5,000,000 for DHR's Child Welfare System; $2,020,000 for a new Procurement System; and $353,231 for project managers for the Governor's New Georgia Commission enterprise IT initiatives. These expenditures will essentially deplete the fund.

New Georgia Commission Initiatives

The Governor's New Georgia Commission has established certain initiatives that will include participation by GTA. These initiatives are: Performance of an independent telecommunications expenditure audit, purchase of enterprise architecture software, consolidation of e-mail systems and agency servers, implementation of a thin client strategy to lower the cost of desk top hardware, and standardization of IT consulting contracts. The estimated cost for these initiatives is $14,400,000. The Commission estimates that the State will save $24,000,000 from these initiatives. GTA will fund $4,000,000 of the $14,400,000 from Information Sales revenue in FY 2006. State appropriations will be needed to cover the remainder.

State Accounting Office

Subsequent to FY 2004 year-end, the Financial System Services Section of GTA was transferred to the State Accounting Office (SAO) which at the same time became an administratively attached agency to GTA. The SAO will become an independent state entity on July 1, 2005. At that time, GTA will transfer approximately $8,500,000 of its budget to the SAO. This will include all costs associated with operating the financial systems including 69 staff positions, rent, computers, maintenance agreements, telecommunications, etc. GTA will continue to host all server hardware at the data center.

GTA will begin billing agencies for PeopleSoft usage on July 1, 2005. This revenue, net of operating expenses, will be transferred to the SAO when received. GTA will also continue to transfer funds from the USF to the SAO as expenditures for the PeopleSoft upgrade continue beyond the end of FY 2005.

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MPLS
As stated in last year's MD&A, GTA planned to award a contract to replace its frame relay wide area data network with the more advanced Multi-Protocol Label Switching (MPLS) technology. The contract was awarded in the second quarter of FY 2005 to BellSouth. Implementation of the new data network began with expedited orders from customers in November 2004. The estimated completion date for the cutover of all state sites currently on the frame network is December 2005.
The MPLS contract includes a variety of connectivity choices-DSL, Frame Relay, Point to Point, ATM, Metro Ethernet, and a great variety of port speeds, several classes of service, and features. This gives agencies the opportunity to tailor bandwidth needs at every site. More expensive bandwidth can be placed in high traffic areas offset by lower end circuits where traffic is less. The experience so far has been an overall increase in bandwidth for the State within the same cost. Agencies have reported far better performance with their new connections.
The variety of choices has also presented financial risks in pricing MPLS products appropriately and affordably. The final mix of circuit types that customers ultimately purchase will not be known until further along into the implementation or when the cutover is complete. To mitigate this risk, GTA used a flat dollar markup applied with little variation to all circuits. This may have affected the affordability of certain low end bandwidth for some customers and caused higher end bandwidth to not recover a proportional share of revenue. Also, GTA will bear the cost of maintaining dual networks until post-implementation. GTA must ensure that post-implementation support costs are reduced appropriately to reflect an outsourced managed network.
Other Services
GTA has lost some telecommunications customers to other service providers. Since the end of FY 2004, Southern Polytechnic State University, State University of West Georgia, and Abraham Baldwin Agricultural College, among others, have chosen premise based systems and trunking provided by outside vendors. This trend may continue and will affect GTA expenses/revenues and possibly rates charged to other customers. GTA's Centrex rates, which represent the majority of the basic telephone service received by the State, include certain fixed costs. If volume decreases continue, these fixed costs will have to be spread over fewer units, thus driving up rates unless cost savings elsewhere can be found to offset the increase. GTA will continue to closely monitor the effects of this trend.
In general, GTA provides services in a very competitive market and has certain inherent structural characteristics which make it more difficult for GTA to provide products at prevailing market prices. Among these are, limited access to alternative capital (i.e., equity or bond issuance for working capital), the inability to experience an operating loss, limited customer base, increased security costs associated with public safety issues, and
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constraints in pricing applicable to the Federal Office of Management and Budget circular A-87. This circular specifies that all costs, .direct and indirect, must be traceable back to products or services in an equitable fashion so that no product or service is inappropriately subsidizing another product or service. Therefore, GTA cannot offer preferential pricing to any customer and cannot offer products below cost (i.e. cannot have a "loss leader") as is typical in private industry. Rate Changes. Budget reductions in FY 2005 included $3,200,000 in agency telecommunication budgets. GTA was able to provide $1,300,000 in one-time credits in the 2nd quarter of FY 2005 derived from renegotiated contract rates with carriers to help offset these budget reductions. Permanent rate adjustments will be made by GTA for FY 2006 and reviewed annually going forward.
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BASIC FINANCIAL STATEMENTS -15-

GEORGIA TECHNOLOGY AUTHORITY BALANCE SHEET
PROPRIETARY FUND-ENTERPRISE FUND JUNE 30, 2004

EXHIBIT"A"

ASSETS
Current Assets Cash and Cash Equivalents Accounts Receivable Prepaid Items Inventories
Total Current Assets
Noncurrent Assets Capital Assets Land Buildings Less: Accumulated Depreciation Computer Software Less: Accumulated Depreciation Machinery and Equipment Less: Accumulated Depreciation
Total Noncurrent Assets
Total Assets

$

73,299,516.20

16,363,892.31

16,864.50

1,516,237.61

$

91,196,510.62

$

31,197.76

1,020,441.00

-448,029.80

39,328,937.59

-33,063,631. 76

70,019,759.66

-45,847,586.32

$

31,041,088.13

$

122,237,598.75

The notes to the financial statements are an integral part of this statement. - 16 -

GEORGIA TECHNOLOGY AUTHORITY BALANCE SHEET
PROPRIETARY FUND-ENTERPRISE FUND JUNE 30, 2004

EXHIBIT"A"

LIABILITIES AND NET ASSETS

Current Liabilities Accounts Payable Salaries/Withholdings Payable Compensated Absences Payable Accrued Interest Payable Capital Leases/Installment Purchases Payable

$

1,188,158.65

43,151.68

2,093,383.28

227,410.30

2,244,916.00

Total Current Liabilities
Noncurrent Liabilities Compensated Absences Payable Capital Leases/Installment Purchases Payable

$- - - 5-,7-97,-01-9.9-1

$

1,873,939.47

2,365,707.00

Total Noncurrent Liabilities Total Liabilities

$- - - 4-,2-39,-64-6.4-7 $- - -1-0,0-36-,66-6.3-8

Net Assets Invested in Capital Assets, Net of Related Debt Restricted for: Universal Service Fund Distance Learning and Telemedicine Unrestricted
Total Net Assets

$

26,430,465.13

17,666,054.73 68,104,412.51

$

112,200,932.37

Total Liabilities and Net Assets

$

122,237,598.75

The notes to the financial statements are an integral part of this statement. - 17 -

GEORGIA TECHNOLOGY AUTHORITY STATEMENT OF REVENUES, EXPENSES AND
CHANGES IN FUND NET ASSETS PROPRIETARY FUND-ENTERPRISE FUND
YEAR ENDED JUNE 30, 2004

EXHIBIT"B"

OPERATING REVENUES
Sales and Charges for Services
OPERATING EXPENSES
General and Administrative Goods and Services Depreciation
Total Operating Expenses
Operating Income
NONOPERATING REVENUES (EXPENSES)
Interest and Other Investment Income Interest Expense Loss on Capital Asset Disposals
Total Nonoperating Revenues (Expenses)
Income Before Contributions and Transfers

$ 198,869,243.61

$ 73,487,023.11
104,395,632.18 18,605,265.35

$ 196,487,920.64

$

2,381,322.97

$

709,752.99

-257,636.08

-781,821.70

$

-329, 704. 79

$

2,051,618.18

The notes to the financial statements are an integral part of this statement. - 18 -

GEORGIA TECHNOLOGY AUTHORITY STATEMENT OF REVENUES, EXPENSES AND
CHANGES IN FUND NET ASSETS PROPRIETARY FUND-ENTERPRISE FUND
YEAR ENDED JUNE 30, 2004

EXHIBIT"B"

CAPITAL CONTRIBUTIONS From Various Sources Capital Assets
TRANSFERS Transfers In Transfers Out Total Transfers
Changes in Net Assets TOTAL NET ASSETS - JULY 1
Adjustments Correction of Prior Period Error
TOTAL NET ASSETS - JUNE 30

$

149,384.00

$ 21,171,786.00 -20,448, 100.00

$

723,686.00

$

2,924,688.18

108,375,826.04

900,418.15

$ 112,200,932.37

The notes to the financial statements are an integral part of this statement. - 19 -

GEORGIA TECHNOLOGY AUTHORITY STATEMENT OF CASH FLOWS
PROPRIETARY FUND-ENTERPRISE FUND YEAR ENDED JUNE 30, 2004

EXHIBIT"C"

CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Customers Cash Paid to Vendors Cash Paid to Employees
Net Cash Received from Operating Activities
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES
Transfer In - State of Geogia General Fund Transfer Out - State of Georgia General Fund
Excess Funds Indirect Funding Transfer Out - State of Georgia Higher Education Fund
Net Cash Received in Noncapital Financing Activities
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES
Principal Paid on Capital Leases/Installment Purchases Interest Paid on Capital Leases/Installment Purchases Acquisition and Construction of Capital Assets
Net Cash Used In Capital and Related Financing Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Interest on Investments
Net Cash Provided by Investing Activities
Net Increase in Cash and Cash Equivalents
CASH AND CASH EQUIVALENTS - JULY 1

$ 192,909,191.26 -127,930,783.80 -49,072,314.12
$ 15,906,093.34

$ 21,171,786.00
-5,000,000.00 -11,865, 100.00
-3,583,000.00
$ ___7_2_3.,_6,_8_6_o._o

$ -2, 130,291.00
-362,709.00 -9,413,529.74
$ -11,906,529.74

$

709,752.99

$

709,752.99

$

5,433,002.59

67,866,513.61

CASH AND CASH EQUIVALENTS - JUNE 30

$ 73,299,516.20

The notes to the financial statements are an integral part of this statement. - 20 -

GEORGIA TECHNOLOGY AUTHORITY STATEMENT OF CASH FLOWS
PROPRIETARY FUND-ENTERPRISE FUND YEAR ENDED JUNE 30, 2004

EXHIBIT"C"

RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Operating Income
Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities: Depreciation Changes in Assets and Liabilities: Increase in Accounts Receivable Increase in Prepaid Items Decrease in Inventories Increase in Liabilities (Other than Customer Deposits)
Total Adjustments

$

2,381,322.97

---'---'---

$ 18,605,265.35
-5, 960,052.35 -16,864.50 640,143.14
256,278.73
$ 13,524,770.37

Net Cash Provided by Operating Activities

$ 15,906,093.34

The notes to the financial statements are an integral part of this statement. - 21 -

GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. REPORTING ENTITY The Georgia Technology Authority (Authority) is an instrumentality of the State of Georgia and a public corporation created for the purposes of operating the state's data center and telecommunications network and coordinating the purchase of technology resources for state government. The management of the business and affairs of the Authority is vested in a twelve (12) member Board of Directors. The Board of Directors of the Authority consists of seven (7) members appointed by the Governor, two (2) members appointed by the Lieutenant Governor, two (2) members appointed by the Speaker of the House of Representatives, and one (1) non-voting member appointed by the Chief Justice of the Georgia Supreme Court. At June 30, 2004, there were eleven (11) appointed members of the Board of Directors. The Authority is considered a component unit of the State of Georgia for financial reporting purposes because of the significance of its legal, operational and financial relationship with the State of Georgia. These reporting relationships are defined in Section 2100 of the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards.
B. BASIS OF PRESENTATION The Authority reports its financial position and the results of its operations under accounting principles generally accepted in the United States of America for a special purpose government engaged in business-type activities utilizing the following major fund:
PROPRIETARY FUND TYPE Enterprise Fund Enterprise funds account for activities for which the intent of management is to recover, primarily through user charges, the cost of providing goods or services to the general public, or where sound financial management dictates that periodic determinations of results of operations are appropriate.
C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. Proprietary fund types are reported using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of cash flows.
The Authority has elected to follow generally accepted accounting principles prescribed by the GASS as well as Statements and Interpretations of the Financial Accounting Standards Board, Accounting Principles Board Opinions and Accounting Research Bulletins of the Committee on Accounting Procedure issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements.

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
C. MEASUREMENT FOCUS AND BASIS OF ACCOUNTING Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's ongoing operations. The principal operating revenue of the Authority's' enterprise fund is charges to customers for sales and services. Operating expenses include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.
D. ASSETS, LIABILITIES AND NET ASSETS CASH AND CASH EQUIVALENTS Cash and Cash Equivalents include currency on hand, demand deposits with banks and other financial institutions, and the State investment pool that has the general characteristics of demand deposit accounts in that the Authority may deposit additional cash at any time and also may withdraw cash at any time without prior notice or penalty. The aforementioned definitions were applied in the preparation of the Statement of Cash Flows.
The State investment pool (Georgia Fund 1) is an external investment pool that is not registered with the Securities and Exchange Commission (SEC) but does operate in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940. The State of Georgia's Office of Treasury and Fiscal Services (OTFS) manages Georgia Fund 1 in accordance with policies and procedures established by State law and the State Depository Board, the oversight Board for OTFS. This investment is valued at the pool's share price, $1.00 per share.
The Authority does not have any risk exposure related to investments in derivatives or similar investments in Georgia Fund 1 as the investment policy of OTFS does not provide for investments in derivatives or similar investments through the Georgia Fund 1.
ACCOUNTS RECEIVABLE Accounts receivable arising from operations are reported at gross value. Based on management's evaluation that amounts uncollectible are not material, no provision has been made for such amounts.
Accounts receivable include amounts due from other funds reported within the primary government of the State of Georgia for telecommunications and data processing services provided by the Authority. See Note 6.
PREPAID ITEMS Payments made to vendors for services that will benefit periods beyond June 30, 2004, are recorded as prepaid items.
INVENTORIES Inventories are valued at cost, using the first-in/first-out (FIFO) method. Items included in inventories are recorded as inventories at the time of purchase and are recorded as expense based on consumption.

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

D. ASSETS, LIABILITIES AND NET ASSETS CAPITAL ASSETS Capital assets, which include land, buildings, machinery and equipment and computer software, are recorded in the Balance Sheet at historical cost. Donated capital assets are recorded at fair market value on the date donated and disposals are deleted at recorded cost. Buildings are capitalized when the cost exceeds $100,000.00. Machinery and equipment are capitalized when the cost of individual items exceeds $5,000.00. The purchase or development of computer software is capitalized when the cost exceeds $1,000,000.00. The costs of normal maintenance and repairs that do not add to the value of assets or materially extend asset lives are not capitalized.

Applicable capital assets of the Authority are depreciated using the straight-line method over the following estimated useful lives:

Assets

Years

Buildings

30

Computer Software

5

Machinery and Equipment

5

LONG-TERM OBLIGATIONS Long-term debt is recognized as a liability of proprietary fund types if those liabilities are expected to be financed from proprietary fund operations.

NET ASSETS The difference between fund assets and liabilities is "Net Assets". Net assets are reported in three categories:

Net Assets Invested in Capital Assets, Net of Related Debt consists of capital assets, net of accumulated depreciation and reduced by outstanding balances for bonds, notes and other debt that are attributed to the acquisition, construction, or improvement of those assets.

Restricted Net Assets result when constraints placed on net asset use are either externally imposed by creditors, granters, contributors, and the like, or imposed by law through constitutional provisions or enabling legislation. The Authority reports the following restricted net assets:

Universal Service Fund - Georgia Distance Learning and Telemedicine - represents funds restricted in accordance with Official Code of Georgia Annotated (OCGA) Sections 50-5-109 through 50-5-202, the Georgia Distance Learning and Telemedicine Act of 1992.

Unrestricted Net Assets consist of net assets that do not meet the definition of the two preceding categories. Unrestricted net assets often are designated, indicating they are not available for general operations. Such designations have internally imposed constraints on resources, but can be removed or modified.

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
E. REVENUES AND EXPENSES COMPENSATED ABSENCES Compensated absences represent obligations of the Authority relating to employee's rights to receive compensation for future absences based upon services already rendered. This obligation relates only to vesting accumulated annual leave. Annual leave is recorded as an expense as earned.
F. CAPITAL CONTRIBUTIONS Capital Contributions are comprised of net capital assets transferred from the Medical College of Georgia, Wayne Memorial Hospital and Satilla Regional Medical Center. These capital contributions have been included in current year additions to capital assets and accumulated depreciation in Note 8.
G. TRANSFERS Transfers include the receipt of operating funds from DOAS in accordance with the Appropriations Act, transfer of funds determined by the Authority to be in excess of those needed for the corporate purposes of the Authority to the State Treasury in accordance with OCGA 50-25-4(b), and transfers of indirect funding to entities within the primary government of the State of Georgia.

NOTE 2: BUDGETS
The annual budget of the Authority is prepared on a basis consistent with accounting practices prescribed or permitted by statutes and regulations of the State of Georgia. The legal level of budgetary control is the Authority level by expenditure object class. The budget is submitted by the Authority and approved by the Georgia General Assembly and the Governor. Supplementary and amended budget requests may be submitted during the fiscal year using the same process used for original budget requests. There is no legal prohibition regarding overexpenditure of the aggregate budget.

NOTE 3: PRIOR PERIOD ADJUSTMENT
In fiscal year 2004, capital assets and accumulated depreciation were restated to correct the balances for items previously unreported. Beginning net assets was increased by $900,418.15 as a result of this correction.

NOTE 4: STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY
STATE OF GEORGIA COLLATERALIZATION STATUTES AND POLICIES Funds of the State 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
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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 4: STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY
enumerated in OCGA Section 50-17-59:
(1) Bonds, bills, 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 of the 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 or securities guaranteed 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 Corporation, or the Federal National Mortgage Association.
(6) Guarantee or insurance of accounts provided by the Federal Deposit Insurance Corporation.
OCGA Section 45-8-11 provides that the Authority may waive the requirements for security in the case of operating funds placed in demand deposit checking accounts.

NOTE 5: CUSTODIAL CREDIT RISKS OF CASH DEPOSITS AND INVESTMENTS
CATEGORIZATION OF DEPOSITS For purposes of analysis of custodial credit risk, cash deposits consist of all bank balances which include demand deposits and/or interest bearing accounts. The bank balances as of June 30, 2004, are categorized below in order to provide information about the extent to which such deposits are exposed to custodial credit risk.
Category 1 - Amounts covered by depository insurance or collateralized with securities (at market value) held by the Authority or by its agent in the Authority's name.
Category 2 - Amounts collateralized with securities (at market value) held by the pledging financial institution's trust department or agent in the Authority's name.

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 5: CUSTODIAL CREDIT RISKS OF CASH DEPOSITS AND INVESTMENTS

Category 3 -

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

Cash Deposits

Carrying Amount
$9,137 682.09

Bank Balances
$10,897,213.49

Risk Categories

2

3

$100,000.00 10.Q.Q $10 797 213.49

CATEGORIZATION OF INVESTMENTS Investments held in the OTFS State Investment Pool are presented as a cash equivalent on the Authority's balance sheet. The carrying amount of the investment balance as of June 30, 2004, is shown below and is not subject to risk categorization.

Type of Investment

Carrying Amount

Georgia Fund 1

$ 64,161,834.11

NOTE 6: ACCOUNTS RECEIVABLE
Receivables at June 30, 2004 consist of the following:
Intergovernmental Federal
State of Georgia General Fund Component Units Regents of the University System of Georgia Colleges and Universities Department of Technical and Adult Education Internal Service Fund
Other

$

39,050.91

$ 10,515,636.28
5,679.86
160,430.36 72,614.31
142,097.86
$ 10,896,458.67
$ 5,428,382.73
$ 16,363,892.31

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 7: TRANSFERS Transfers during the year ended June 30, 2004, consist of the following:

Transfers In Department of Administrative Services

$ 21,171,786.00

Transfers Out

Excess Funds

Office of Treasury and Fiscal Services $ -5,000,000.00

Indirect Funding

Department of Corrections

-450,000.00

Department of Human Resources

-5,620, 100.00

Department of Labor

-100,000.00

Department of Motor Vehicle Safety

-1,960,000.00

Department of Natural Resources

-200,000.00

Department of Public Safety

-990,000.00

Department of Revenue

-2,545,000.00

Georgia Institute of Technology

-1, 129,800.00

Georgia State University

-500,000.00

Medical College of Georgia

-693,500.00

University of Georgia

-1,259,700.00

$ -20,448, 100.00

Total Transfers

$

723,686.00

NOTE 8: CAPITAL ASSETS

As mentioned in Note 3, correction of prior year errors resulted in adjustments to beginning balances:

Balance July 1, 2003

Restatements

Balance {Restated) July 1, 2003

Capital Assets Not Being Depreciated:

Land

$

0.00 $

31,197.76 $

31,197.76

Capital Assets Being Depreciated: Buildings Computer Software Machinery and Equipment
Total Capital Assets Being Depreciated

$

$

39,328,937.59

67,190,148.26

$

106,519,085.85 $

1,020,441.00 $
105,290.10 1,125,731.10$

1,020,441.00 39,328,937.59 67,295,438.36 107,644,816.95

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 8: CAPITAL ASSETS

EXHIBIT"D"

Less Accumulated Depreciation For: Buildings Computer Software Machinery and Equipment
Total Accumulated Depreciation
Total Capital Assets Being Depreciated, Net
Total Capital Assets, Net

Balance July 1, 2003

Restatements

Balance (Restated) July 1, 2003

$

-414,015.08 $

$

-25, 197,844.28

-41,356,398.28

157,504.37

$

-66,554,242.56 $

-256,510.71 $

$

39,964,843.29 $

869,220.39 $

$

39,964,843.29 $

900,418.15 $

-414,015.08 -25,197,844.28 -41,198,893.91 -66,810,753.27
40,834,063.68
40,865,261.44

Capital asset activity for the year ended June 30, 2004, was as follows:

(Restated) July 1, 2003

Additions

Deletions

Balance June 30, 2004

Capital Assets Not Being Depreciated

Land

$

31,197.76 $

Capital Assets Being Depreciated Buildings Corrputer Software Machinery and Equiprrent
Total Capital Assets Being Depreciated

$ 1,020,441.00 39,328,937.59 67,295,438.36 $
$ 107,644,816.95 $

0.00 $- - - -0.0-0 $---'3-1,-19-7-.76-
$ 1,020,441.00 39,328,937.59
9,573, 126.24 $ -6,848,804.94 70,019,759.66
9,573,126.24 $ -6,848,804.94 $ 110,369,138.25

Less Accumulated Depreciation For: Buildings Corrputer Software Machinery and Equiprrent
Total Accumulated Depreciation

$ -414,015.08 $

-34,014.72

-25,197,844.28 -7,865,787.48

-41,198,893.91 -10,705,463.15 $

$ -66,810,753.27 $ -18,605,265.35 $

$
6,056,770.74 6,056,770.74 $

-448,029.80 -33,063,631. 76 -45,847,586.32 -79,359,247.88

Total Capital Assets Being Depreciated, Net

$ 40,834,063.68 $ -9,032,139.11 $ -792,034.20 $ 31,009,890.37

Total Capital Assets, Net

$ 40,865,261.44 $ -9,032, 139.11 $ -792,034.20 $ 31,041,088.13

NOTE 9: OPERATING LEASES
The Authority has entered into certain agreements to lease copiers, telecommunications equipment and real estate which are classified as operating leases. Future minimum commitments for operating leases as of June 30, 2004, are listed below. Amounts are included only for multi-year leases and for cancellable leases for which an option to renew for the subsequent fiscal year has been exercised.
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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 9: OPERATING LEASES
Fiscal Year Ending June 30

Amount

2005 2006

$ 4,309,380.80 269,106.84

$ 4,578,487.64

Expenditures for rental of equipment and real property under operating leases for the year ended June 30, 2004, totaled $6,171,717.75.
NOTE 10: LONG-TERM DEBT
Long-term obligations at June 30, 2004, and changes for the fiscal year then ended are as follows:

July 1, 2003

Increases

Decreases

June 30, 2004

Amounts Due Within One Year

Compensated Absences $ Capital leases
$

4,171,052.69 $ 6,740,914.00

2,592,872.55 $

=========== 10,911,966.69 $

2,592,872.55 $

-2,796,602.49 $ -2, 130,291.00
-4,926,893.49 $

3,967,322.75 $ 4,610,623.00
8,577,945.75 $

2,093,383.28 2,244,916.00
4,338,299.28

COMPENSATED ABSENCES Compensated absences are liquidated by the fund they are reported in and do not have scheduled future debt service requirements beyond one year.

CAPITAL LEASES The Authority acquires certain computer software and equipment through multi-year capital leases with varying terms and options. At June 30, 2004, future minimum commitments under capital leases were as follows:

Fiscal Year Ending June 30

Amount

2005 2006

$ 2,493,000.00 2,492,999.00

Total Minimum Lease Payments

$ 4,985,999.00

Less: Imputed Interest

-375,376.00

Present Value of Minimum Lease Payments $ 4,610,623.00

Interest due on August 1, 2004, in the amount of $227,410.30 was recorded as a liability of the Enterprise Fund at June 30, 2004.

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 11: RISK MANAGEMENT
PUBLIC ENTITY RISK POOL
The Department of Community Health administers for the State of Georgia a program of health benefits for the employees of units of government of the State of Georgia, units of county government and local education agencies located within the State of Georgia. This plan is funded by participants covered in the plan, by employers' contributions paid by the various units of government participating in the plan, and appropriations made by the General Assembly of Georgia. The Department of Community Health has contracted with various outside parties to process claims in accordance with the State Employees' Health Benefit Plan as established by the Department. Details on the liability for unpaid claims are disclosed in the State of Georgia Comprehensive Annual Financial Report for the year ended June 30, 2004
OTHER RISK MANAGEMENT
The Authority is exposed to various risks of loss related to torts: theft of, damage to, and destruction of assets; errors and omission; and injuries to employees. The State of Georgia utilizes self-insurance programs established by individual agreement, statute or administrative action, to provide property insurance covering fire and extended coverage and automobile insurance and to pay losses that might occur from such causes; liability insurance for employees against personal liability for damages arising out of performance of their duties; survivors benefits for eligible members of the Employees' Retirement System: consolidating processing of unemployment compensation claims against State agencies and the payment of sums due to the Department of Labor; and workers' compensation insurance coverage for employees of the State and for the receipt of benefits as prescribed by the workers' compensation statutes of the State of Georgia. These self-insurance funds are accounted for as internal service funds of the State of Georgia where assets are set aside for claim settlements. The majority of the risk management programs are funded by assessments charged to participating organizations. A limited amount of commercial insurance is purchased by the self-insurance funds applicable to property, employee and automobile liability, fidelity and certain other risks to limit the exposure to catastrophic losses. Otherwise, the risk management programs service all claims against the State for injuries and property damage. Financial information relative to the self-insurance funds will be presented in the State of Georgia Comprehensive Annual Financial Report for the year ended June 30, 2004.

NOTE 12: RETIREMENT PLANS
EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA
Plan Description The Authority participates in the Employees' Retirement System of Georgia (ERS), a singleemployer, defined benefit plan established by the General Assembly of Georgia for the purpose of providing retirement allowances for employees of the State of Georgia.
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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 12: RETIREMENT PLANS
EMPLOYEES' RETIREMENT SYSTEM 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 ten (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 sixty-five (65). If ten (10) years of service is completed and age sixty (60) is reached, the member may retire with a reduced benefit. Additionally, there are certain provisions allowing for retirement after twenty-five (25) years of service regardless of age.
Retirement benefits paid to members are based upon a formula which considers the monthly average of the member's highest twenty-four (24) 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 statute, 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 Authority's payroll for the year ended June 30, 2004, for employees covered by ERS was $36,772,734.06. The Authority's total payroll for all employees was $37,318,126.39.
Under the old plan, member contributions consist of four percent (4%) of annual compensation up to $4,200.00 and six percent (6%) of annual compensation in excess of $4,200.00. Of these member contributions, the employee pays the first one and one-quarter percent (1.25%) and the employer pays the remainder on behalf of the employee. Under the new plan, member contributions consist solely of one and one-quarter percent (1.25%) of annual compensation paid by employee. The Authority is also required to contribute at a specified percentage of active member payroll determined annually by actuarial valuation.

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 12: RETIREMENT PLANS

EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA

For the year ended June 30, 2004, the ERS employer contribution rate for the Authority amounted to 10.46% 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 $4,305,116.72, of which $3,845,253.22 was made by the Authority and $459,863.50 was made by employees. These contributions met the requirements of the plan. There is no net pension obligation for the plan. Employer contributions (annual pension cost) for the current fiscal year and the preceding two fiscal years are as follows:

Fiscal Year

Annual Pension Cost (APC)

Percentage of APC
Contributed

Net Pension Obligation

2004 $ 3,845,253.22

100%

NIA

2003

4,250,122.75

100%

N/A

2002

4,027,942.65

100%

N/A

The required contribution for 2004 was determined as part of the June 30, 2003, actuarial valuation using the entry age actuarial cost method. The actuarial assumptions included (a) 7.25% investment rate of return, (b) projected salary increases ranging from 5.45% to 9.25% per year. Both (a) and (b) included an inflation component of 3.75%. The assumptions did not include postretirement cost-of-living adjustments. The actuarial value of assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a five-year period. The unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll on an open basis. The employer contributions are projected to liquidate the actuarial accrued funding excess within 10 years based upon the actuarial valuation at June 30, 2003.

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.

GEORGIA DEFINED CONTRIBUTION PLAN

Plan Description The Authority participates in the Georgia Defined Contribution Plan ("GDCP") which is a single-employer defined contribution plan established by the Georgia General Assembly 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 Employees' Retirement System Board of Trustees.

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT"D"

NOTE 12: RETIREMENT PLANS

GEORGIA DEFINED CONTRIBUTION PLAN

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. If a member has less than $ 3,500 credit to his/her account, the Board has th~ 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.

The Employees' Retirement System of Georgia (ERS) issues a financial report each fiscal year which may be obtained through ERS.

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. Upon termination of employment, the amount of the member's account is refundable upon request by the member. The Authority's payroll for the year ended June 30, 2004, for employees covered by GDCP was $57,844.59. The Authority's total payroll for all employees was $37,318,126.39.

Total contributions made by employees during fiscal year 2004 amounted to $4,339.08 which represents 7.5% of covered payroll. These contributions met the requirements of the plan.

TEACHERS' RETIREMENT SYSTEM OF GEORGIA

Plan Description The Authority also participates in the Teachers' Retirement System of Georgia (TRS), a cost-sharing, multiple-employer defined benefit pension plan established by the General Assembly of Georgia for the purpose of providing retirement allowances and other benefits for teachers of the State of Georgia. TRS provides service 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 TRS.

Benefits A member is eligible for normal service retirement after 30 years of creditable service, regardless of age, or after 10 years of service and attainment of age 60. A member is eligible for early retirement after 25 years of creditable service.

Normal retirement (pension) benefits paid to members are equal to 2.0% of the average of the member's 2 highest paid consecutive years of service multiplied by the number of years of creditable service up to 40 years. Early retirement benefits are reduced by the lesser of 1/12 of 7.0% for each month the member is below age 60, or by 7.0% for each year or

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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004

EXHIBIT "D"

NOTE 12: RETIREMENT PLANS

fraction thereof by which the member has less than 30 years of service. It is also assumed that certain cost-of-living adjustments, based on the CPI, will be made in future years. Retirement benefits are payable monthly for life. Death, disability and spousal benefits are also available.

Funding Policy Employees of the Authority who are covered by TRS are required by State statute to contribute 5% of their gross earnings to TRS. The Authority 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 is 9.24% for covered employees. Employer contributions for the current fiscal year and the preceding two fiscal years are as follows:

Fiscal Year

Percentage Contributed

Required Contribution

2004 2003 2002

100.00% $ 100.00% 100.00%

3,711.48 7,832.16 7,198.38

NOTE 13: POSTEMPLOYMENT BENEFITS
In addition to the pension benefits described in Note 12, the State of Georgia provides postretirement health care benefits through the State Health Benefit Plan to retirees pursuant to OCGA Section 45-18. An individual eligible for these benefits must have been a full time employee at the time of retirement of either the State of Georgia or a county social service agency and must be receiving monthly retirement benefits from either the ERS or a county employees' retirement system. The State Health Benefit Plan (Plan) is a public entity risk pool funded by employee and employer contributions. Employees and retirees subject to the Plan contribute amounts determined by the Department of Community Health for various health insurance plans. The various agencies of the State contribute to the health insurance fund based upon amounts recommended by the Department of Community Health and set forth in the State of Georgia's Appropriations Act. The plan is funded on a "pay-as-you-go" basis. Expenses of the Plan include provisions for incurred but not reported claims. The portion of employer contributions and expenses attributable to postretirement health care benefits cannot be reasonably estimated.
NOTE 14: LEAVE POLICIES
Employees earn ten hours of sick leave each month with a maximum accumulation of ninety days. Unused accumulated sick leave does not vest with the employee and is forfeited upon
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GEORGIA TECHNOLOGY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2004 NOTE 14: LEAVE POLICIES
retirement or termination of employment. Employees earn annual leave ranging from ten to fourteen hours each month depending upon the employees' length of continuous State service with a maximum accumulation of forty five days. Employees are paid for unused accumulated annual leave upon retirement or termination of employment. See Note 1E - Compensated Absences. Certain employees who retire with one hundred and twenty days or more of forfeited annual and sick leave are entitled to additional service credit in the Employees' Retirement System of Georgia. NOTE 15: CONTINGENCIES Litigation, claims and assessments filed against the Authority, 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.
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SUPPLEMENTARY INFORMATION - 37 -

GEORGIA TECHNOLOGY AUTHORITY RECONCILIATION OF SALARIES YEAR ENDED JUNE 30, 2004

SCHEDULE "1"

Total per Annual Supplement
Accruals Salaries Payable June 30, 2003 June 30, 2004
Compensated Absences Payable June 30, 2003 June 30, 2004
Total per Report

$

37,517,716.20

-39,079.28 28,741.62
-3,874,642.53 3,685,390.38
$ 37,318,126.39

See notes to the financial statements.

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SECTION II INTERNAL CONTROL AND COMPLIANCE REPORT
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DEPARTMENT OF AUDITS AND ACCOUNTS

254 Washington Street, S.W., Suite 214

RussELL W. HINTON
STATE AUDITOR (404) 656-2174

Atlanta, Georgia 30334-8400

March 4, 2005

Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia Members of the Georgia Technology Authority
and Honorable Thomas E. Wade, Chief Information Officer and Executive Director
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 Georgia Technology Authority, a component unit of the State of Georgia, as of and for the year ended June 30, 2004, and have issued our report thereon dated March 4, 2005. 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.
Internal Control Over Financial Reporting
In planning and performing our audit, we considered the Georgia Technology Authority'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 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 Georgia Technology Authority'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-980-04-01.

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A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. However, we believe that the reportable condition described is not a material weakness. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Georgia Technology Authority'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 management, members of the Authority and management of the State of Georgia, and is not intended to be and should not be used by anyone other than these specified parties.
Respectfully submitted,
~IA'l.~::k.
Russell W. Hinton State Auditor, CPA, CGFM RWH:jbw
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SECTION Ill AUDITEE'S RESPONSE TO PRIOR YEAR FINDINGS AND QUESTIONED COSTS
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GEORGIA TECHNOLOGY AUTHORITY AUDITEE'S RESPONSE
SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2003

PRIOR YEAR FINANCIAL STATEMENTS FINDINGS AND QUESTIONED COSTS

FINDING CONTROL NUMBER AND STATUS

FS-980-02-02 FS-980-03-01

Previously Reported Corrective Action Implemented Previously Reported Corrective Action Implemented See Comments Below

AUDITEE'S COMMENTS
Finding Control Number FS-980-03-01 EXPENSES/LIABILITIES/DISBURSEMENTS Inadequate Accounting Procedures
GTA implemented additional internal controls to correct the inadequate accounting procedures related to wire and cable vendor billings. To summarize, GTA requires certain dual signatures in the regional offices and certain paperwork that gives adequate evidence the work was performed and accepted by the customer. The Billing Manager reviews the paperwork and determines that the work got billed to the customer by the regional office before approval is given to the Accounts Payable unit to pay the vendor invoice. GTA ceased doing business with the vendor in question immediately which was before the end of fiscal year 2003. GBI and the Attorney General were brought in to investigate and bring legal action against appropriate parties. Legal action was brought against appropriate parties and has yet to be resolved as of April 5, 2005.

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SECTION IV CURRENT YEAR FINDINGS AND QUESTIONED COSTS
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GEORGIA TECHNOLOGY AUTHORITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2003

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

CAPITAL ASSETS/PROPERTY MANAGEMENT Inadequacies in Operation of Property Management System Finding Control Number: FS-980-04-01 Reportable Condition

Condition:

Our examination included a review of the internal accounting controls used by the Georgia Technology Authority in maintaining their capital assets inventory and also included testing the system for compliance with State laws and regulations. Our examination noted the Authority did not prepare timely reconciliations of capital asset balances to the asset management module. Extensive post close analysis and adjustments were provided by the Director of Finance.

Criteria:

Generally Accepted Accounting Principles (GAAP) require the maintenance of a system of accounting for capital asset acquisition, depreciation, and disposition. The State of Georgia Accounting Procedures Manual (Manual) indicates that state organizations included in the State's Appropriations Act must maintain accounting records which will provide sufficient information to report on both the accrual and budgetary basis.

Cause:

Management's failure to follow capital asset accounting procedures as detailed in GAAP and the Manual.

Effect:

Failure to maintain accurate capital asset records may result in inaccurate internal management reports and resulting decisions concerning current and future capital asset needs, and possible misappropriation of assets.

Recommendation:

The Authority should implement controls to provide for adequate review and monitoring of postings to the general ledgers. Such controls should include considering the reasonableness of amounts posted to asset, contra-asset, operating expenses, and gain/loss on capital asset accounts related to the accounting for machinery and equipment transactions.

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