UNIVERSITY OF SOUTH FLORIDA RESEARCH FOUNDATION, INC. (A Component Unit of the University of South Florida) Financial and Compliance Reports

Transcription

1 (A Component Unit of the University of South Florida) Financial and Compliance Reports For the Year Ended June 30, 2012

2 TABLE OF CONTENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) BASIC FINANCIAL STATEMENTS Statement of Net Assets Statement of Revenues, Expenses, and Changes in Net Assets Statement of Cash Flows Notes to Financial Statements SUPPLEMENTAL SCHEDULE Schedule of Functional Expenses REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

3 Report of Independent Certified Public Accountants To the Board of Directors of University of South Florida Research Foundation, Inc. Tampa, Florida We have audited the accompanying statement of net assets of the University of South Florida Research Foundation, Inc. (the "Research Foundation") as of June 30, 2012, and the related statements of revenues, expenses, and changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the Research Foundation'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 a 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 Research Foundation as of June 30, 2012, and the changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 14, the July 1, 2011 net assets have been restated to reflect errors in the June 30, 2011 financial statements. We audited the adjustments necessary to restate the July 1, 2011 net assets and, in our opinion, such adjustments are appropriate and have been properly applied. In accordance with Government Auditing Standards, we have also issued our report dated September 24, 2012, on our consideration of the Research Foundation s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

4 Accounting principles generally accepted in the United States of America require that the management s discussion and analysis information on pages 3 through 10 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Government Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any other assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Research Foundation s financial statements as a whole. The schedule of functional expenses is presented for purposes of additional analysis and is not a required part of the financial statements. The schedule of functional expenses is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Tampa, Florida September 24, 2012

5 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) Management s Discussion and Analysis The management s discussion and analysis (MD&A) provides an overview of the financial position and activities of the University of South Florida Research Foundation, Inc. (the Research Foundation ) for the fiscal year ended June 30, 2012, and should be read in conjunction with the financial statements and notes thereto. This overview is required by Governmental Accounting Standards Board ( GASB ) Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, as amended by GASB Statements Nos. 37 and 38. The MD&A, and financial statements and notes thereto, are the responsibility of the Research Foundation s management. Financial Highlights The Research Foundation s assets totaled $95.7 million at June 30, This balance reflects an increase of $556 thousand from the balance of total assets at the previous fiscal year end of June 30, Liabilities decreased by $2.6 million, or 4.6 percent, totaling $54.2 million as of June 30, 2012, compared to $56.8 million at June 30, As a result of the above, and corresponding excess of revenues over expenses as described below, the Research Foundation s net assets increased by $3.2 million, reaching a year-end balance of $41.4 million. The Research Foundation s operating revenues were $14.1 million for an increase of $2.9 million (26.1%) from the prior fiscal year. Operating expenses increased $818 thousand (10.3%) to $8.8 million for fiscal year Operating income for fiscal year 2012 was $5.3 million, for an increase of 65.6 percent from the prior fiscal year. Overview of Financial Statements Pursuant to GASB Statement No. 35, the Research Foundation s financial report includes three basic financial statements: the statement of net assets; the statement of revenues, expenses, and changes in net assets; and the statement of cash flows. The Statement of Net Assets The statement of net assets reflect the assets and liabilities of the Research Foundation, using the accrual basis of accounting, and present the financial position of the Research Foundation at a specified time. The difference between total assets and total liabilities, net assets, is one indicator of the Research Foundation s current financial condition. The changes in net assets that occur over time indicate improvement or deterioration in the Research Foundation s financial condition. 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) The following summarizes the Research Foundation s assets, liabilities, and net assets at June 30: (restated) ASSETS Current assets $ 27,770,097 $ 29,190,536 Restricted cash and cash equivalents 320,675 1,094,344 Capital assets, net 52,733,275 49,326,067 Long-term investment 509,936 1,588,185 Other non-current assets 14,333,994 13,912,473 Total Assets 95,667,977 95,111,605 LIABILITIES Current 12,407,573 14,081,750 Non-current 41,812,300 42,761,532 Total Liabilities 54,219,873 56,843,282 NET ASSETS Invested in capital assets, net of related debt 14,998,055 11,009,253 Unrestricted 26,450,049 27,259,070 Total Net Assets $ 41,448,104 $ 38,268,323 The Research Foundation s assets totaled $95.7 million at June 30, Current assets at June 30, 2012, decreased $1.4 million from June 30, 2011, due to a $830 thousand decrease in cash and $570 thousand decrease in investments. In fiscal year 2012, $1.0 million of investments were liquidated to provide funding for acquisition of capital assets. The decrease of $774 thousand in restricted cash was also for funding of capital assets additions. Total capital assets additions were $5.7 million in fiscal year Total additions less current year depreciation charges of $2.3 million account for a $3.4 million increase in net capital assets. The recorded cost of the long-term investment was reduced by $1.1 million to include the Research Foundation s proportionate share of the entity s operating losses through June 30, 2012, in addition to recognizing a valuation loss. The 2011 balance in other non-current assets reflects a restatement in the amount of $4.9 million due to the recognition of the Research Foundation s interest rate swaps as effective in accordance with Governmental Accounting Standards Board No. 53, Accounting and Financial Reporting for Derivative Instruments (see restatement footnote 14). The increase in other non-current assets in 2012 is primarily due to an increase in the deferred outflow account based on an unfavorable market value increase of the interest rate swap liabilities of $486 thousand. 4

7 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) Total liabilities decreased by $2.6 million which consisted of decreases in current liabilities of $1.7 million and $949 thousand in non-current liabilities, respectively. The decrease in current liabilities is attributed to decreases in accounts payable and other accrued liabilities due to University of South Florida totaling $1.2 million, and recognition of $416 thousand of deferred revenue. Revenue bond payments of $1.39 million less an unfavorable market value increase of the interest rate swap liabilities of $486 thousand account for the majority of the $949 thousand decrease in non-current liabilities. Net assets are reported in two major categories. The first category, invested in capital assets, net of related debt, provides the Research Foundation s equity in property, plant, and equipment owned by the Research Foundation and includes amounts representing restricted cash and cash equivalents. The second category is unrestricted net assets. Unrestricted net assets are available to the Research Foundation for any lawful purpose of the Research Foundation. The combination of changes in both the increase in total assets of $556 thousand, and the decrease in total liabilities of $2.6 million resulted in a net increase in total net assets of $3.2 million. The increase in total net assets is attributable to an increase in net assets invested in capital assets, net of related debt of $4.0 million, and a decrease in unrestricted net assets of $809 thousand. The Statement of Revenues, Expenses, and Changes in Net Assets The statement of revenues, expenses, and changes in net assets present the Research Foundation s revenue and expense activity, categorized as operating and non-operating. Revenues and expenses are recognized when earned or incurred, regardless of when cash is received or paid. The following summarizes the Research Foundation s activities for the 2012 and 2011 fiscal years ended June 30: (restated) Operating revenues $ 14,103,935 $ 11,182,357 Operating expenses 8,791,357 7,973,646 Operating income 5,312,578 3,208,711 Net non-operating revenues (expenses) (2,132,797) 52,867 Increase in net assets 3,179,781 3,261,578 Net assets, beginning of year 38,268,323 35,006,745 Net assets, end of year $ 41,448,104 $ 38,268,323 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) Operating Revenues GASB Statement No. 35 categorizes revenues as either operating or non-operating. Operating revenues generally result from exchange transactions where each of the parties to the transaction either give up or receive something of equal or similar value. The following summarizes the operating revenues by source that were used to fund operating activities during the 2012 and 2011 fiscal years ended June 30: Increase % (Decrease) Change Royalties, licenses and option fees $ 1,526,031 $ 1,317,531 $ 208, % Other license fees 416, , % Contracts and grants 578, ,415 (55,922) -8.8% Administrative fees 385, ,058 (36,014) -8.6% Economic development support 2,780, ,695 2,223, % Incubator sponsor revenue 1,000,000 1,000, % Incubator program revenue 289, ,418 (20,005) -6.5% Property rental revenues 7,128,691 6,527, , % Total Operating Revenues $ 14,103,935 $ 11,182,357 $ 2,921, % The Research Foundation s operating revenues totaled $14.1 million for fiscal year 2012, representing an increase of $2.9 million or 26.1% from the prior fiscal year. Economic Development Support revenue increased $2.2 million in fiscal year 2012 from fiscal year This revenue represents funds received pursuant to a grant disbursement agreement to provide bioscience research and development grant funds in the total amount of $6.0 million that commenced in fiscal year 2009, and is the source of funds for facility construction and capital equipment specifically related to the grant. Property rental revenue was $7.1 million for an increase of $601 thousand (9.2%) in fiscal year Increased revenue is primarily due to additional occupancy. Royalties, licenses and option fee revenue from intellectual property increased $208 thousand (15.8%) to $1.5 million. Acting as an agent for the University, the Research Foundation also invoiced certain intellectual property licensees for reimbursement of patent costs of $958 thousand in fiscal year 2012, an increase of 108.6% or $499 thousand from $459 thousand invoiced in fiscal year The invoiced amounts for patent costs are not reflected in the Research Foundation s operating revenues. 6

9 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) Operating Expenses Expenses are categorized as operating or non-operating. The majority of the Research Foundation s expenses are operating expenses as defined by GASB Statement No. 35. GASB gives financial reporting entities the choice of reporting operating expenses in the functional or natural classifications. The Research Foundation has chosen to report the expenses in their natural classification on the statements of revenues, expenses, and changes in net assets. The following summarizes the operating expenses for the 2012 and 2011 fiscal years ended June 30: Increase % (Decrease) Change Inventor royalties $ 457,373 $ 526,220 $ (68,847) -13.1% Inventing department and other royalties 219, , , % Other intellectual property costs 558, , , % Contracts and grants 578, ,415 (55,922) -8.8% University support 61, ,960 (98,870) -61.8% Incubator program expenses 1,176,769 1,331,253 (154,484) -11.6% Property rental expenses 4,716,383 3,945, , % Management and general 1,023,153 1,111,847 (88,694) -8.0% Total Operating Expenses $ 8,791,357 $ 7,973,646 $ 817, % Overall operating expenses increased by $818 thousand (10.3%) from fiscal year 2011 to a total of $8.8 million for fiscal year Increase in property rental expenses of $771 thousand (19.5%) is largely due to non-cash depreciation charges (increase of $409 thousand) and additional utilities ($225 thousand) attributed to increased occupancy. Operating expenses for intellectual property primarily include royalty payments to the individual creator(s) and to their University departments and colleges which collectively increased $31 thousand (4.8%) to $677 thousand in fiscal year 2012 from $646 thousand in fiscal year Commencing in fiscal year 2012, the Research Foundation distributed 10% of intellectual property net revenues to colleges, which totaled $61 thousand. Other intellectual property costs include legal fees associated with license preservation of $462 thousand and technology costs of $95 thousand for fiscal year

10 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) Non-Operating Revenues and Expenses Certain revenue sources that the Research Foundation relies upon to provide funding for operations, including investment income, are defined by GASB as non-operating. Non-operating expenses include capital financing costs and other costs related to capital assets. The following summarizes the Research Foundation s non-operating revenues and expenses for the 2012 and 2011 fiscal years: 2011 Increase % 2012 (restated) (Decrease) Change Non-Operating Revenues (Expenses): Investment income (loss) $ (605,174) $ 1,884,877 $ (2,490,051) % Interest income 4, , % Interest expense (1,727,925) (1,832,592) (104,667) 5.7% Other income 195, , % Total Non-Operating Revenues (Expenses) $ (2,132,797) $ 52,867 $ (2,185,664) % Net non-operating revenue (expense) decreased $2.2 million from the prior fiscal year. Fiscal year 2012 resulted in a net expense of ($2.1 million), as compared to $53 thousand net revenue for fiscal year A net investment loss of $605 thousand, largely attributed to $1.1 million loss on MESI (other investment) was recognized in fiscal year 2012 as compared to $1.9 million investment income for fiscal year The Statements of Cash Flows The statements of cash flows provide information about the Research Foundation s financial results by reporting the major sources and uses of cash. This statement will assist in evaluating the Research Foundation s ability to generate net cash flows, its ability to meet its financial obligations as they come due, and its need for external financing. Cash flows from operating activities show the net cash provided by the operating activities of the Research Foundation. Cash flows from the capital and related financing activities include all property funds and related long-term debt activities. Cash flows from the investing activities show the net source and use of cash related to purchasing or selling investments, and the receipt of income on those investments. 8

11 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) The following summarizes cash flows for the 2012 and 2011 fiscal years: Cash provided (used) by: Operating activities $ 6,024,847 $ 3,316,818 Capital and related financing activities (8,830,456) (7,062,468) Investing activities 1,200,313 2,031,806 Net decrease in cash and cash equivalents (1,605,296) (1,713,844) Cash and cash equivalents, at beginning of year 3,888,438 5,602,282 Cash and cash equivalents, end of year $ 2,283,142 $ 3,888,438 Fiscal year 2012 generated a positive cash flow from operations of $6.0 million, which increased $2.7 million (81.7%) from the previous fiscal year. The $6.0 million positive cash flow from operations, together with cash provided from investing activities of $1.2 million in fiscal year 2012, was used to fund capital expenditures of $5.7 million, not otherwise funded from restricted cash bond proceeds ($774 thousand), and for debt service of $3.1 million. Capital Assets and Debt Administration Capital Assets At June 30, 2012, the Research Foundation had $64.4 million in capital assets, less accumulated depreciation of $11.7 million, for net capital assets of $52.7million. Depreciation expense for the fiscal years ended June 30, 2012 and 2011 totaled $2.3 million and $1.9 million, respectively. The following table summarizes the Research Foundation s capital assets, net of accumulated depreciation, as of June 30: Land $ 8,739,633 $ 8,739,632 Construction in process ,500 Buildings, net 40,429,383 37,417,732 Equipment, net 3,563,739 3,136,203 Total capital assets, net $ 52,733,275 $ 49,326,067 Additional information about the Research Foundation s capital assets is presented in the notes to the financial statements. Debt Administration 9

12 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) As of June 30, 2012, the Research Foundation had $37.9 million in outstanding bonds representing a decrease of $1.4 million, or 3.6%, from the prior fiscal year balance of $39.3 million. Additional information about the Research Foundation s long-term debt is presented in the notes to the financial statements. Economic Factors That Will Affect the Future The USF Research Park brings University faculty and private sector scientists and entrepreneurs side-by-side to share innovations and make advancements in both the laboratory and in the marketplace. The Research Park is finding success with its mission as evidenced by its housing of the top 5 funded University faculty and 9 of the top 20 faculty for FY11, in its research facilities. Additionally, a private sector tenant continues to demonstrate positive job creation and collaboration with University faculty on grant proposals. Leases for existing structures and ground lease transactions within the Research Park are a significant source of revenue for the organization. The Research Foundation expects continued growth from existing facilities, within the confines of available space. At the close of fiscal year 2012, existing Research Park buildings are 96% occupied. New facilities are needed to increase capacity for interdisciplinary laboratories, office space and an expanded business incubator. Further growth is dependent on marketing efforts and market conditions. The Research Foundation and University are jointly pursuing a research facility aimed at the rehabilitation of military veterans and their reintegration into civilian life. While this is a multi-year acquisition endeavor, at the time of its opening, it is anticipated to be the only facility of its kind. The Research Foundation s economic outlook is also related to continuing growth of intellectual royalty and licensing income. These income sources are expected to increase in FY The revenue from administrative fees to meet operational overhead costs is earned through the execution of contracts and grants, including clinical trials. This revenue source continues to decline as new research contracts are placed with the University, rather than the Research Foundation. Operating Profits are invested in the research infrastructure throughout the University System. In line with revenue growth strategies, new infrastructure investments by the Research Foundation will be reviewed for return on investment. Net operating profits will be available for future research infrastructure investment. Request for Information This financial report is designed to provide a general overview of the Research Foundation s finances for all those interested. Questions concerning any of the information provided in this report, or request for additional information should be addressed in writing to the Chief Financial Officer, USF Research Foundation, Inc., 3802 Spectrum Blvd., Suite 100, Tampa, FL

13 STATEMENT OF NET ASSETS ASSETS Current Assets: Cash and cash equivalents $ 1,962,467 Investments 25,082,006 Accounts receivable, net 588,302 Other current assets 137,322 Total Current Assets 27,770,097 Non-Current Assets: Capital assets, net 52,733,275 Restricted cash and cash equivalents 320,675 Developer rights to Research Park, net 7,920,624 Other investment 509,936 Non-current property rent accrual and other receivables 666,082 Deferred outflow of resources - interest rate swap 5,367,300 Long-term portion of unamortized loan costs, net 379,988 Total Non-Current Assets 67,897,880 Total Assets 95,667,977 LIABILITIES Current Liabilities: Accounts payable and accrued liabilities 2,542,501 Due to University of South Florida 7,415,755 Current portion of revenue bonds payable 1,435,000 Deferred revenues 1,014,317 Total Current Liabilities 12,407,573 Non-Current Liabilities: Revenue bonds payable, less current portion 36,445,000 Derivative investment - interest rate swap liability 5,367,300 Total Non-Current Liabilities 41,812,300 Total Liabilities 54,219,873 NET ASSETS Invested in capital assets, net of related debt 14,998,055 Unrestricted 26,450,049 Total Net Assets $ 41,448,104 The accompanying notes to the financial statements are an integral part of this statement. 11

14 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS YEAR ENDED Operating Revenues: Royalties, licenses, and option fees $ 1,942,031 Contracts and grants 578,493 Administrative fees 385,044 Economic development support 2,780,263 Incubator sponsor revenue 1,000,000 Incubator program revenue 289,413 Property rental revenues 7,128,691 Total Operating Revenues 14,103,935 Operating Expenses: Inventor royalties 457,373 Inventing department and other royalties 219,583 Other intellectual property costs 558,513 Contracts and grants 578,493 University support 61,090 Incubator program expenses 1,176,769 Property rental expenses 4,716,383 Management and general 1,023,153 Total Operating Expenses 8,791,357 Operating Income 5,312,578 Non-Operating Revenues (Expenses): Investment loss (605,174) Interest income 4,571 Interest expense (1,727,925) Other income 195,731 Total Non-Operating Revenues (Expenses) (2,132,797) Increase in net assets 3,179,781 Total net assets, beginning of year, as restated (see Note 14) 38,268,323 Total net assets, end of year $ 41,448,104 The accompanying notes to the financial statements are an integral part of this statement. 12

15 STATEMENT OF CASH FLOWS YEAR ENDED Cash flows from operating activities: Royalties, licenses, and option fees $ 1,292,174 Property rental receipts 7,050,324 Contract and grant receipts 504,727 Administrative fee receipts 385,044 Economic development support 2,815,479 Incubator program and sponsor receipts 1,488,706 Total Receipts 13,536,454 Intellectual property disbursements (2,293,894) Contract and grant disbursements (578,493) Property rental disbursements (2,257,146) Incubator program disbursements (1,176,769) University support, management and general (1,205,305) Net cash provided by operating activities 6,024,847 Cash flows from capital and related financing activities: Acquisition of capital assets (5,747,268) Principal payments on revenue bonds (1,390,000) Interest paid on revenue bonds and swap liabilities (1,693,188) Net cash used in capital and related financing activities (8,830,456) Cash flows from investing activities: Interest income 4,582 Other income 195,731 Proceeds from sales of investment 4,000,000 Purchase of investments (3,000,000) Net cash provided by investing activities 1,200,313 Net decrease in cash and cash equivalents (1,605,296) Cash and cash equivalents, beginning of year 3,888,438 Cash and cash equivalents, end of year $ 2,283,142 Cash and cash equivalents: Unrestricted $ 1,962,467 Restricted $ 320,675 2,283,142 (continued) The accompanying notes to financial statements are an integral part of this statement. 13

16 STATEMENT OF CASH FLOWS (CONTINUED) YEAR ENDED Reconciliation of net operating revenues (expenses) to net cash provided by operating activities: Operating income $ 5,312,578 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization expense 2,479,764 Change in assets and liabilities: Accounts receivable and other receivables (57,728) Other current assets 44,147 Accounts payable and accrued liabilities (186,666) Due to University of South Florida (1,002,482) Deferred revenue (564,766) Net cash provided by operating activities $ 6,024,847 Supplemental Disclosure of Noncash Investing Activities Net unrealized loss on investments $ 605,174 The accompanying notes to financial statements are an integral part of this statement. 14

17 NOTES TO FINANCIAL STATEMENTS Note 1 Organization Nature of Entity The University of South Florida Research Foundation, Inc. (the Research Foundation ) was established to promote, encourage, and enhance the research activities of University of South Florida faculty, staff, and students. The Research Foundation provides a mechanism for the funding of licensed research and development activities at the University of South Florida (the University ). The Research Foundation is a direct support organization of the University as provided for under Section , Florida Statutes. The Research Foundation was formed to provide broad and flexible financial mechanisms to administer private research contracts and grants including corporate and private foundationsponsored programs. The Research Foundation assists the University in the commercialization of University inventions including license agreements, and receipt and distribution of royalties related to intellectual property. The Research Foundation works in cooperation with the University s Division of Patents and Licensing ( DPL ) in obtaining the rights to patents and copyrights for these properties, and licensing them to commercial enterprises. Revenues generated from the commercialization of intellectual property include license fees, options-to-license fees, and royalties. Net proceeds from Research Foundation activities are used to further research and other endeavors at the University. DPL reviews all intellectual property developed at the University to determine if the University wishes to retain its rights and interests. On intellectual work that shows the potential for University benefit, DPL obtains patents and copyrights, assuming all costs, to include attorneys fees and patent application fees. All rights are retained by the University. The University licenses the entire right, title and interest in and to the intellectual property to the Research Foundation. The patent costs recovered by the Research Foundation are repaid to the University. Net proceeds from the commercialization of the intellectual property are shared on a percentage basis among the inventors, a research fund in the department where the inventor is employed, a research fund for the college, and the Research Foundation. The Research Foundation also owns and manages real property assets that include the USF Research Park and various buildings located on the property. Activities within the USF Research Park generate revenue primarily through long-term leases of facilities utilized by the University research enterprise and private sector entities seeking research relationships with the University. Reporting Entity Criteria for defining the reporting entity are identified and described in the GASB s Codification of Governmental Accounting and Financial Reporting Standards, Section 2100 and These criteria were used to evaluate potential component units for which the primary government is financially accountable and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the primary government s financial statements to be misleading or incomplete. Based on the application of these criteria, the Research Foundation is a component unit of the University, and its financial balances and activity are reported in the University s Comprehensive Annual Financial Report by discrete presentation. 15

18 NOTES TO FINANCIAL STATEMENTS Note 1 Organization (continued) Blended Component Units Based on the application of the criteria for determining component units, CAUSF Research, LLC and CAUSF Office, LLC are included within the Research Foundation s reporting entity as blended component units. CAUSF Research, LLC and CAUSF Office, LLC were established in 2004 as financing vehicles for construction of buildings. The Research Foundation is the sole member of each LLC. Note 2 Summary of significant accounting policies Basis of Presentation The financial statements of the Research Foundation conform to accounting principles generally accepted in the United States of America as prescribed by Governmental Accounting Standards Board statements. The Research Foundation financial statements are presented in the form of a single enterprise fund. Basis of Accounting The financial statements of the Research Foundation have been prepared using the flow of economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. Cash and Cash Equivalents The Research Foundation considers all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents. Investments Investments in money markets are recorded at cost, which approximates fair value. Investments in short term bond index funds and pooled accounts are recorded at fair value, as determined by quoted market prices. All investment income of the enterprise fund, including changes in the fair value of investments, is reported under non-operating revenues in the Statements of Revenues, Expenses and Changes in Net Assets. Accounts Receivable Accounts receivable are recorded at net realizable value. The Research Foundation s policy is to provide an allowance for accounts receivable that are not expected to be collected based on aging of the account and specific review of the customer. Accounts receivable are charged off against the allowance for doubtful accounts when it is determined that the receivable will not be collected. The Research Foundation does not typically charge interest on past-due receivables and does not require collateral for accounts receivable. 16

19 NOTES TO FINANCIAL STATEMENTS Note 2 Summary of significant accounting policies (Continued) Capital Assets Capital assets are recorded at cost. Buildings are depreciated on a straight-line basis using estimated useful lives generally ranging from 30 to 39.5 years. Consistent with University policy, depreciation of research buildings is based on componentization over the estimated useful life of its components which range from years. Equipment is depreciated on a straight-line basis over estimated useful lives ranging from 5 to 20 years. Costs greater than $1,000 are capitalized. The cost of maintenance and repair of capital assets is charged to expense as incurred, while costs of renewals and betterments are capitalized. When capital assets are replaced, retired, or otherwise disposed of, the costs of such capital assets and the related accumulated depreciation are deducted from the respective asset and accumulated depreciation accounts. Interest expense on borrowings incurred during the construction or upgrade of qualifying assets is capitalized and added to the cost of the underlying assets. Capitalized interest was $100,919 for the year ended June 30, Income Taxes The Research Foundation has been recognized by the Internal Revenue Service as a tax-exempt organization described in Section 501(c)(3) of the Internal Revenue Code and Chapter of the Florida Statutes, respectively. The Research Foundation periodically assesses whether it has incurred income tax expense or related interest or penalties in accordance with accounting for uncertain tax positions. No such amounts were recognized in fiscal year Revenue Recognition Revenues are recognized in accordance with timing stipulated in license agreements. Revenue associated with the license of intellectual properties is recognized when determinable and collectable, at the time the underlying property is delivered to the extent that amounts are in excess of amounts payable to the University for its costs. The Research Foundation must be able to and be reasonably expected to enforce payment of contract fees before revenues are recognized. Rental income is recognized when billed and expenses are recognized when incurred in accordance with the underlying lease agreement. In agreements where rent holidays are provided to the lessee, the Research Foundation recognizes rent on a straight-line basis. The effects of scheduled future minimum rent increases are recognized at the time they become effective. Administrative fees from research and development and contracts and grants are deemed to be earned when the Research Foundation has incurred expenditures in compliance with the specific agreement terms. Funds received for which expenditures have not yet been made are recorded on the statement of net assets as due to the University of South Florida or as deferred revenue if the Research Foundation is named as the contracting party. 17

20 NOTES TO FINANCIAL STATEMENTS Note 2 Summary of significant accounting policies (Continued) Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events The Research Foundation evaluated all events and transactions that occurred from July 1, 2012 through September 24, 2012, the date the financial statements were available for issuance. During this period there were no material recognizable subsequent events. Note 3 Investments and other investment At June 30, 2012, the Research Foundation has the following investments and maturities: Years Fair Market Less Than More Than Value Money Market Accounts $ 942,471 $ 942,471 $ - $ - $ - Short-Term Bond Index Funds 11,242, ,907 10,909,468 16,863 - Pooled Investment: Money Market Funds 56,514 56, Bond Mutual Funds 1,972, ,972,991 - Partnership Funds 2,353,929 no maturity - - Equity Mutual Funds 8,513,863 8,513, $ 25,082,006 $ 9,828,755 $ 10,909,468 $ 1,989,854 $ - 18

21 NOTES TO FINANCIAL STATEMENTS Note 3 Investments and other investment (Continued) Pooled investments represent the Research Foundation s interest in the USF Foundation s Agency Investment Program (the Program ). The Program consists of an agency investment fund (the Fund ) which includes USF Foundation funds as well as funds invested by the Research Foundation and other University Direct Support Organizations. No specific investments are assigned to the Research Foundation, rather the value of the Research Foundation s investment is equal to the total Fund net asset value times the Research Foundation s units as a percentage of total units outstanding. The Program pays a quarterly dividend based on the results of the Fund. Such dividends can either be withdrawn or reinvested. In addition, with sixty days notice, the Research Foundation may withdraw either a portion of or its entire investment in the Program; however, the Research Foundation is limited to one withdrawal, other than any quarterly dividend, per calendar year. Other Investment In May 2009 the Research Foundation acquired 364 shares of Mote Environmental Services, Inc. ( MESI ) for a cost of approximately $2.0 million. The Research Foundation owns approximately 27% of the outstanding stock and is deemed to have the ability to exercise significant influence over MESI s operating and financial policies. The Research Foundation accounts for its investment in MESI using the equity method. In fiscal year 2012, an investment loss of $1,078,249 was recorded which represents the Research Foundation s proportionate share of net loss reported by MESI through June 30, 2012 and an impairment write down based on a decrease in the value of the investment. The balance of the investment is $509,936 at June 30, Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of the Research Foundation s investment in a single issuer. The Research Foundation s investment policy provides that the maximum amount that may be invested in the securities of an individual issuer not backed by the full faith and credit of the U.S. Government shall not exceed one percent of the market value of its investment portfolio. Direct investments in securities of the U.S. Government, Government agencies and State of Florida Investment Pools, or Pooled Funds comprised solely of U.S. Government Securities are not subject to these restrictions. Custodial Credit Risk Custodial credit risk is the risk of loss attributed to the magnitude of the Research Foundation s investment held by an outside party. At June 30, 2012, the book balance of deposits was $2,283,142 and the bank balance was $3,755,739. The Research Foundation s bank balances are fully insured by the Federal Deposit Insurance Corporation under the Dodd-Frank Wall Street Reform and Consumer Protection Act issued on November 9, 2010, which provided for unlimited insurance coverage through December 31, 2012 on noninterest bearing accounts. 19

22 NOTES TO FINANCIAL STATEMENTS Note 3 Investments and other investment (Continued) Interest Rate and Credit Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Research Foundation has responded to the declining economic market and has invested funds into money market accounts and short-term bond index accounts. Overall, the Research Foundation limits the fixed income portfolio (United States Treasury securities, United States government agency obligations, mortgage-backed securities, corporate debt, State and municipal securities investments) to a weighted average duration of less than five years. The Research Foundation s investment policy provides for interest rate risk. The risk varies depending on the type of investment. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The Research Foundation s investment policy provides that all fixed income security investments at time of purchase, shall be rated in the top three rating classifications as defined by both Moody s and Standard and Poor s. Eligible investments for long-term funds authorize pooled funds which are professionally managed and registered with the Securities and Exchange Commission, and invested in various indexed and actively managed funds. The Research Foundation s investment policy provides for credit rate risk. The risk varies depending on the type of investment. At June 30, 2012, the Research Foundation has the following debt instrument quality ratings: Fair Market Less than Value AAA AA A A rated Not rated Prime Money Market $ 942,471 $ 942,471 $ - $ - $ - $ - Short-Term Bond Index 11,242, , ,659 1,350, ,540 8,003,349 Money Market Funds 56, ,514 Bond Mutual Funds 1,972, ,965 29, , , ,651 $ 14,214,214 $ 1,640,933 $ 705,494 $ 1,566,187 $ 1,576,086 $ 8,725,514 Debt instruments whose quality is not rated includes $8,655,633 of US Government/Agency and $69,882 otherwise not rated securities. 20

23 NOTES TO FINANCIAL STATEMENTS Note 4 Accounts receivable Accounts receivable consist of the following at June 30, 2012: Royalty and license fees $ 571,899 Property leases 87,123 Incubator leases 1,841 Other receivables 42,439 Allowance for doubtful accounts (115,000) $ 588,302 Note 5 Capital assets Capital assets consist of the following at June 30, 2012: Beginning Ending Balance Increases Decreases Balance Capital assets not being depreciated: Land $ 8,739,633 $ - $ - $ 8,739,633 Construction in process 32,500 - (31,980) 520 Total capital assets not being depreciated: 8,772,133 - (31,980) 8,740,153 Capital assets being depreciated: Buildings 46,116,104 4,900,279 (41,255) 50,975,128 Equipment 3,826, ,224-4,746,964 Total capital assets being depreciated: 49,942,844 5,820,503 (41,255) 55,722,092 Less accumulated depreciation for: Buildings (8,698,373) (1,847,372) - (10,545,745) Equipment (690,537) (492,688) - (1,183,225) Total accumulated depreciation (9,388,910) (2,340,060) - (11,728,970) Total capital assets being depreciated, net 40,553,934 3,480,443 (41,255) 43,993,122 Total capital assets, net $ 49,326,067 $ 3,480,443 $ (73,235) $ 52,733,275 21

24 NOTES TO FINANCIAL STATEMENTS Note 6 Developer rights to research park Other non-current assets include development rights for the acre USF Research Park of Tampa Bay, formerly known as the University Technology Center, which the Research Foundation has accounted for as a prepaid lease. The intent of the Board of Trustees of the Internal Improvement Trust Fund when granting these rights was for a research and development park to be at the entrance to the University campus. While it is expected that the development rights will be renewed beyond the current 2081 expiration, the value of the rights are being amortized on a straight line basis over 72 years. Annual amortization expense was $115,912 for fiscal year Note 7 Accounts payable and accrued liabilities Accounts payable and accrued liabilities consist of the following at June 30, 2012: Vendors payable $ 175,135 Interest payable 175,895 Inventor royalties payable 1,958,386 Escrow payable 63,680 Other royalties payable 24,277 Other payables 145,128 $ 2,542,501 Note 8 Revenue bonds payable In 1999, the Research Foundation financed and refinanced capital improvements at the University Technology Center Research and Development Park, now referred to as the USF Research Park of Tampa Bay, completed the acquisition of the development rights to 35 acres of land, refinanced existing University Technology Center Buildings I and II, now referred to as 3702 Spectrum and 3650 Spectrum respectively, and refinanced the previously acquired development rights to lots 6 and 7 in the Research Park through the issuance of $11,500,000 Variable Rate Demand Revenue Bonds (USF Research Park of Tampa Bay Project) Series 1999 Bonds. The 1999 Bonds were issued pursuant to a Trust Indenture dated November 23, 1999, between the Research Foundation and the Trustee. The bonds are required to have a letter of credit which requires periodic renewal. The Research Foundation has a letter of credit through December 15, The USF Foundation has also guaranteed the indebtedness of the Research Foundation to the related bank associated with this letter of credit. 22

25 NOTES TO FINANCIAL STATEMENTS Note 8 Revenue bonds payable (Continued) In August 2004, the Research Foundation financed construction of the 3720 Spectrum building and 3802 Spectrum building through the issuance of three Variable Rate Demand Revenue Bonds. The Research Foundation entered into an agreement designating Bank of America, N.A. to serve as Letter of Credit Provider for the 2004 bonds. The letter of credit expires on August 15, The closing of the 2004 bonds was completed on August 24, 2004, with Bond funds being deposited with a trustee. At June 30, 2012, the balance in the Deposit with Trustee was $28,959, as well as $291,716 of funds to be used to make a required principal payment. Both of these amounts have been reported in restricted cash and cash equivalents on the statement of net assets. Variable Rate Demand Revenue Bonds consist of the following as of June 30, 2012: Variable Rate Demand Revenue Bonds (University Technology Center Research and Development Park Project), Series 1999 bonds, interest rate option is 67% of USD-LIBOR-BBA, and changes weekly. The interest rate was 0.33% at June 30, The Bonds mature December 1, 2019 and are secured by lease assignments in addition to guarantee by USF Foundation. Variable Rate Demand Revenue Bonds (Interdisciplinary Research Building Project) Series 2004A. The bonds' rate of interest is variable and paid monthly. The floating interest rate option is calculated by the Remarketing Agent as a minimum annual rate that would allow the bonds to be sold at par, not to exceed 12%, and changes weekly. The interest rate was 0.37% at June 30, The bonds mature August 1, 2034 and are secured by lease assignments. Variable Rate Demand Revenue Bonds (Interdisciplinary Research Building Project) Series 2004B. The Bonds' rate of interest is variable and paid monthly. The floating interest rate option is calculated by the Remarketing Agent as a minimum annual rate that would allow the bonds to be sold at par, not to exceed 12%, and changes weekly. The interest rate was 0.37% at June 30, The bonds mature August 1, 2015 and are secured by lease assignments. Variable Rate Demand Revenue Bonds (Multi-Tenant Office Building Project) Series 2004C. The bonds' rate of interest is variable and paid monthly. The floating interest rate option is calculated by the Remarketing Agent at a minimum annual rate that would allow the bonds to be sold at par, not to exceed 12% and changes weekly. The interest rate was 0.37% at June 30, The bonds mature August 1, 2034 and are secured by lease assignments. Amounts due June 30, 2011 Increases Reductions June 30, 2012 within one year 1999 $ 7,600,000 $ - $ (700,000) $ 6,900,000 $ 700, A 18,455, ,455, B 2,580,000 - (495,000) 2,085, , C 10,635,000 - (195,000) 10,440, ,000 Total $ 39,270,000 $ - $ (1,390,000) $ 37,880,000 $ 1,435,000 23

26 NOTES TO FINANCIAL STATEMENTS Note 8 Revenue bonds payable (Continued) The indenture agreements contain liquidity covenant requirements to maintain a ratio of cash and cash equivalents plus investments to operating expenses minus depreciation and amortization plus interest expense plus fees for the letters of credit plus current maturities of long-term debt, to be equal to or greater than 1.25 to The Research Foundation is not in violation of the liquidity covenant ratio at June 30, The following is a schedule of maturities and interest expense: Year Maturities Interest 2013 $ 1,435,000 $ 133, ,580, , ,630, , ,680, , ,835, , ,265, , ,755, , ,530, , ,170,000 26,117 $ 37,880,000 $ 1,612,058 Future obligations of interest expense are based on variable rates in effect as of June 30, 2012, and may not be representative of actual rates in those later periods. Total interest expense which includes interest for the variable rate demand revenue bonds and interest rate swap agreements, as further discussed in Note 9, was $1,828,884 for fiscal year Included in interest expense is $990,817 of interest attributed to tax exempt bonds for fiscal year $100,959 of interest attributed to tax exempt bonds, less tax exempt bond interest income of $40 was capitalized in the net amount of $100,919 for fiscal year

27 NOTES TO FINANCIAL STATEMENTS Note 9 Derivative instruments In 2001 and in 2006, the Research Foundation entered into interest rate swap agreements to limit the effect of changes in interest rates on its variable rate demand revenue bonds (see Note 8). The terms of the swap provide that the Research Foundation pays monthly a fixed rate (see table below) and receive monthly a variable rate equal to 67% of the on-month London Interbank Offer Rate (LIBOR). The effect of the agreements is to set the interest rates at a fixed rate through the term of the swap agreements. The fair value of the swap agreements are estimated taking into account current interest rates and the credit worthiness of the counterparties. The fair values and key terms of the Research Foundation s swap agreements at June 30, 2012, are as follows: Notional Effective Maturity Fixed Estimated Bonds Amount Date Date Rate Fair Value Series 1999 $ 6,900,000 06/01/01 12/01/ % $ (1,078,310) Series 2004A 18,455,000 04/01/06 08/01/ % (2,290,138) Series 2004B 2,085,000 04/01/06 08/01/ % (155,400) Series 2004C 10,440,000 04/01/06 08/01/ % (1,843,452) $ 37,880,000 $ (5,367,300) Because interest rates have continued to decline since the Research Foundation entered into the swap agreements, the swap agreements have a negative fair value as of June 30, 2012 and as such are presented as a non-current liability in the accompanying statement of net assets. The reported fair values are calculated using the marked-to-market method by an independent third party. Credit Risk: Because the swaps have a negative fair value, the Research Foundation is exposed to the credit risk of Bank of America in the amount of the swap s fair value. Bank of America has ratings of Baa2 (long-term) and P-2 (short-term) by Moody s Investors Services and A- (long-term) and A-2 (short-term) by Standard & Poor s. Basis Risk: The Research Foundation is exposed to basis risk because the variable rate payments payable to it are calculated on the basis of a 67% of LIBOR (a taxable rate index) and the Research Foundation s variable rate interest obligations on the bonds is determined in the tax-exempt market. Should the relationship between LIBOR and the tax-exempt market change and move to converge, or should the bonds trade at levels worse (higher in rate) in relation to the tax-exempt market, the Research Foundation s all-in costs would increase. Termination Risk: The swaps do not contain any out-of-the-ordinary termination events that would expose the Research Foundation to significant termination risk. 25

28 NOTES TO FINANCIAL STATEMENTS Note 9 Derivative instruments (Continued) Total interest expense as disclosed in Note 8 includes interest under terms of the swap agreements of $1,554,914 for fiscal year The following is a schedule of expected future interest payments required under the swap agreements as of June 30, 2012: Year Amount 2013 $ 1,566, ,493, ,414, ,338, , ,532 Note 10 Commitments and contingencies Under the terms of a Grant agreement, the Research Foundation leases office space under a noncancellable lease. Rent expense was $402,139 for fiscal year The following is a schedule of approximate future minimum rentals under the lease at June 30, Year Amount 2013 $ 67,861 Note 11 Lease revenue The Research Foundation leases grounds, office, and laboratory space to customers, primarily in the technology research and development industry, under operating leases. Initial lease terms generally range from 36 to 120 months. 26

29 NOTES TO FINANCIAL STATEMENTS Note 11 Lease revenue (Continued) Investments in assets subject to operating leases are as follows at June 30, 2012: Buildings, at cost $ 50,975,130 Lease origination costs, net 49,719 Accumulated depreciation (10,545,745) Net investments in assets subject to operating leases $ 40,479,104 Depreciation expense related to the buildings leased to other parties was $1,847,372 for fiscal year Future minimum lease payments expected to be received under noncancelable operating leases as of June 30, 2012, are as follows: Total Related Year Amount Party 2013 $ 7,117,889 $ 5,762, ,694,492 5,637, ,156,741 5,197, ,735,372 4,851, ,413,308 4,715,789 Note 12 Related party transactions The Research Foundation leases a building to the University under a master lease agreement that is in effect through 2036 or the expiration of the revenue bonds, if earlier (see Note 8). Other operating leases for research laboratories and office space, which expire through fiscal year 2021, are also in effect with various departments of the University. Total rent revenues from the University were $5,781,328 for fiscal year On behalf of the University, the Research Foundation invoices intellectual property licensees for reimbursement of patent costs due the University. Total amounts invoiced of $958,255 in fiscal year 2012 are not reflected in the accompanying statement of revenues and expenses. In fiscal year 2012, the Research Foundation paid $1,120,269 to the University for patent costs recovered from intellectual property receipts. Outstanding receivables for reimbursement of patent costs and related payables for amounts collected are included in the due to University payable. 27

30 NOTES TO FINANCIAL STATEMENTS Note 12 Related party transactions (Continued) Under an agreement with the University, the Research Foundation manages the fiscal operations and services of the USF Tampa Bay Technology Incubator Program on behalf of the University. The Research Foundation received $700,000 for the Incubator program during fiscal year 2012 from the University. Under agreements with the University, the Research Foundation has been engaged to manage the construction of research facility infrastructure build-out within the Research Park that will be used by the University. In fiscal year 2012, the Research Foundation received $3,109,286 from the University for certain construction project expenses. Costs paid by the University are recorded on the University s records and are not reflected in the accompanying statement of net assets. The Research Foundation received management fees of $31,400 during fiscal year In accordance with agreements, the Research Foundation has custodial responsibilities for certain clinical and non-clinical contracts and grants and to process sponsor invoicing and related expenditures. In fiscal year 2012, the Research Foundation processed $3,829,537 in clinical contract payments to another University direct service organization, and $244,809 of non-clinical grant expenditures on behalf of the University. These contract and grant receipts and expenditures are not reflected in the accompanying statement of revenues, expenses and changes in net assets. The Research Foundation received administrative fees under these agreements of $241,427 in fiscal year By agreement, the Research Foundation has custodial responsibility of the proceeds from the sales of Graphicstudio artwork and disbursement of related expenditures. In fiscal year 2012, $1,343,032 of cash receipts and $1,169,231 of disbursements were processed through the Research Foundation. These amounts are not reflected in the accompanying statement of revenues, expenses and changes in net assets. The Research Foundation received $105,627 in administrative fees in fiscal year 2012 for the services. The custodial cash balance at June 30, 2012 of $463,666 is included in due to University payable. The due to University payable includes funds held on behalf of University faculty, department and colleges that will be utilized to support their research and education activities in the amount of $5,394,243 as of June 30, The Research Foundation distributed royalties from intellectual property net revenue to inventor s departments and to college research funds of $203,629 and $36,436, respectively, during fiscal year All personnel of the Research Foundation are employees of the University and as such, employee benefits and compensated absences are accounted for on the University s books. The University tracks, administers, and reports all payroll and fringe benefit costs. On a monthly basis, the Research Foundation reimburses the University for salary and fringe benefit costs. For fiscal year 2012, the Research Foundation reimbursed the University $992,859 for salary and fringe benefit costs. Certain University equipment is also provided to the Research Foundation for the employees use. 28

31 NOTES TO FINANCIAL STATEMENTS Note 13 Venture investment fund The Board of Directors adopted a resolution on November 21, 1996 establishing a venture investment fund with implementation to be retroactive to July 1, The purpose of the fund is to assist faculty in development and business activities in which the Research Foundation may participate in future revenues generated from the commercialization of the projects. The fund is to be administered under the guidance and final approval of the Executive Committee of the Board of Directors. An initial allocation of $100,000 plus 25% of annual long-term investment income forms the financial basis of the fund. Investment loss of $605,174 was realized during fiscal year 2012 and, accordingly, $-0- was allocated to the fund during the year. The balance allocated to the venture investment fund is $2,496,300 at June 30, Note 14 Restatement Net assets as of July 1, 2011 have been restated to properly reflect the correction of an error in the Research Foundation s determination of the effectiveness of their interest rate swaps under GASB 53, Accounting and Financial Reporting for Derivative and Instruments. The effect of this adjustment on the financial statements was an understatement of net assets at July 1, The effects of this adjustment to the previously issued financial statements are as follows: Net assets at July 1, 2011, as previously stated $ 33,386,791 Correction of understatement of deferred outflow - interest rate swap 4,881,532 Net assets at July 1, 2011, as restated $ 38,268,323 Income and increase in net assets and deferred outflow-interest rate swap as previously reported in the June 30, 2011 issued financial statements were overstated by $569,587 and understated by $4,881,532, respectively. 29

32 SCHEDULE OF FUNCTIONAL EXPENSES YEAR ENDED Program Services Operating Costs Total Salary and Wages $ 403,039 $ 362,161 $ 765,200 Fringe Benefits 104, , ,409 Independent Contractor 5,720 23,077 28,797 Professional Fees 80, , ,103 Advertising - Promotional 13,774-13,774 Student Stipends 4,000-4,000 Telephone 11,210 14,512 25,722 Postage 98 3,521 3,619 Printing and Reproduction 1, ,145 Repairs and Maintenance 1,268 13,584 14,852 Travel 10,914 7,164 18,078 Banking Service Charges 33,961 3,323 37,284 Materials & Supplies 87,717 28, ,992 University Support 12,937-12,937 Fixed Price Project Rollover 6,866-6,866 Rental of Buildings 402, ,139 Cellular Telephones 5,426-5,426 Sales Tax 20, ,372 Depreciation Expense 2,339, ,340,060 Amortization Expense 139, ,704 Utilities 1,499,099-1,499,099 Repairs & Maintenance 810, ,967 Lease Commissions 42,407-42,407 Insurance 317,744 20, ,142 Real Estate Taxes 139, ,640 Subscriptions & Memberships 2,100 3,063 5,163 Contract & Grant Admin Fees 37,991-37,991 Royalty Expense 676, ,956 Technology Expense 94,974-94,974 Technology Licensing Expense 461, ,539 Total Functional Expenses $ 7,768,204 $ 1,023,153 $ 8,791,357 30

33 Independent Auditor s 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 Board of Directors University of South Florida Research Foundation, Inc. Tampa, Florida We have audited the financial statements of University of South Florida Research Foundation, Inc. and subsidiaries (the Research Foundation ) as of and for the year ended June 30, 2012, and have issued our report thereon dated September 24, We conducted our audit in accordance with auditing standards generally accepted in the United States of America as established by the American Institute of Certified Public Accountants and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control over Financial Reporting Management of the Research Foundation is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Research Foundation s internal control over financial reporting as a basis for designing our audit procedures for the purpose of expressing an opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Research Foundation s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Research Foundation s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be significant deficiencies, or material weaknesses and therefore, there can be no assurance that all deficiencies, or material weaknesses have been identified. However, as described below we identified a deficiency in internal control over financial reporting that we consider to be a material weakness. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the following to be a material weakness: 31