GEORGIA REGENTS UNIVERSITY AUGUSTA, GEORGIA

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1 GEORGIA REGENTS UNIVERSITY AUGUSTA, GEORGIA REPORT ON AUDIT OF THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2013 Georgia Department of Audits and Accounts Greg S. Griffin State Auditor

2 GEORGIA REGENTS UNIVERSITY - TABLE OF CONTENTS - Page SECTION I FINANCIAL INDEPENDENT AUDITOR'S COMBINED REPORT ON BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION REQUIRED SUPPLEMENTARY INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS i BASIC FINANCIAL STATEMENTS EXHIBITS A STATEMENT OF NET POSITION 2 B STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION 3 C STATEMENT OF CASH FLOWS 4 D NOTES TO THE FINANCIAL STATEMENTS 7 SCHEDULES SUPPLEMENTARY INFORMATION 1 BALANCE SHEET (NON-GAAP BASIS) BUDGET FUND 32 2 SUMMARY BUDGET COMPARISON AND SURPLUS ANALYSIS REPORT (NON-GAAP BASIS) BUDGET FUND 33 3 STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES COMPARED TO BUDGET BY PROGRAM AND FUNDING SOURCE (NON-GAAP BASIS) BUDGET FUND 34 4 STATEMENT OF CHANGES TO FUND BALANCE BY PROGRAM AND FUNDING SOURCE (NON-GAAP BASIS) BUDGET FUND 36 5 RECONCILIATION OF BUDGET TO GAAP 38 6 RECONCILIATION OF SALARIES AND TRAVEL 41 SECTION II COMPLIANCE AND INTERNAL CONTROL REPORTS 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

3 GEORGIA REGENTS UNIVERSITY - TABLE OF CONTENTS - SECTION III FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS AND MANAGEMENT'S CORRECTIVE ACTION PLAN

4 SECTION I FINANCIAL

5 Greg S. Griffin STATE AUDITOR (404) DEPARTMENT OF AUDITS AND ACCOUNTS 270 Washington Street, S.W., Suite Atlanta, Georgia November 18, 2013 Honorable Nathan Deal, Governor Members of the General Assembly of Georgia Members of the Board of Regents of the University System of Georgia and Honorable Dr. Ricardo Azziz, President Ladies and Gentlemen: Report on the Financial Statements INDEPENDENT AUDITOR'S REPORT We have audited the accompanying basic financial statements (Exhibits A through D) of Georgia Regents University, a unit of the University System of Georgia, which is an organizational unit of the State of Georgia, as of and for the year ended June 30, Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility 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 from material misstatement. 13ARL-62

6 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to Georgia Regents University's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Georgia Regents University's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the basic financial statements referred to above present fairly, in all material respects, the respective financial position of Georgia Regents University as of June 30, 2013, and the respective changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1, the financial statements of Georgia Regents University are intended to present the financial position and changes in financial position and cash flows of only that portion of the business-type activities of the State of Georgia that is attributable to the transactions of Georgia Regents University. They do not purport to, and do not, present fairly the financial position of the State of Georgia as of June 30, 2013, the changes in its financial position or its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As described in Note 1 to the financial statements, in 2013, Georgia Regents University adopted new accounting guidance, GASB Statement No. 60, Service Concession Arrangements and GASB Statement No. 63, Reporting Deferred Outflows, Deferred Inflows, and Net Position. Our opinion is not modified with respect to these matters. As discussed in Note 1 to the financial statements, on January 8, 2013, Georgia Health Sciences University and Augusta State University merged to become Georgia Regents University. These financial statements contain the combined information of the two previous entities as Georgia Regents University. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis on pages i through vi be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental 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 inquires of management about the methods of preparing the information and comparing the information for consistency with management's responses to our

7 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 assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the basic financial statements of Georgia Regents University. The accompanying supplementary information (Schedules 1 through 6) is presented for purposes of additional analysis and is not a required part of the basic financial statements. The accompanying supplementary information (Schedules 1 through 6) is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting or other records used to prepare the basic financial statements or to the basic 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 basic financial statements taken as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 18, 2013, on our consideration of Georgia Regents University's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Georgia Regents University's internal control over financial reporting and compliance. Respectfully, GSG:as 13ARL-62 Greg S. Griffin State Auditor

8 REQUIRED SUPPLEMENTARY INFORMATION

9 GEORGIA REGENTS UNIVERSITY Management's Discussion and Analysis Introduction Georgia Health Sciences University, the oldest school of medicine in Georgia, was incorporated in 1828 as the Medical Academy of Georgia. The University has become known for its world-class instructional, clinical, and research programs. The University offers more than 40 academic programs in allied health sciences, dentistry, graduate studies, medicine, and nursing at the baccalaureate, masters, doctoral, and professional levels. Augusta State University is the primary public institution of higher learning in Georgia committed to the advancement of knowledge and the enrichment of its community. It is well known for its dedication to expanding educational opportunities for people of all ages and backgrounds. By resolution of the Board of Regents of the University System of Georgia on January 8, 2013, both institutions were consolidated and united to form Georgia Regents University which is one of the 31 institutions of higher education of the University System of Georgia. The wide range of educational opportunities attracts a highly qualified faculty and student body. A brief historical comparison of student levels is shown by the comparison numbers that follow. Students Students (Headcount) (FTE) Fiscal Year ,557 8,672 Fiscal Year ,689 8,754 Fiscal Year ,846 8,935 Overview of the Financial Statements and Financial Analysis Georgia Regents University is pleased to present its financial statements for fiscal year The emphasis of discussions about these statements will be on current year data. There are three financial statements presented: the Statement of Net Position; the Statement of Revenues, Expenses and Changes in Net Position; and the Statement of Cash Flows. This discussion and analysis of the University's financial statements provides an overview of its financial activities for the year. Comparative data is provided for fiscal year 2013 and fiscal year Statement of Net Position The Statement of Net Position presents the assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position of the University as of the end of the fiscal year. The Statement of Net Position is a point-of-time financial statement. The Statement of Net Position presents a fiscal snapshot of Georgia Regents University. The Statement of Net Position presents end-of-year data concerning assets (current and noncurrent) plus deferred outflows, and liabilities (current and noncurrent) plus deferred inflows, and net position (assets plus deferred outflows minus liabilities plus deferred inflows). The differences between current and noncurrent assets are discussed in the Notes to the Financial Statements. From the data presented, readers of the Statement of Net Position are able to determine the assets available to continue the operations of the institution and how much the institution owes vendors. Finally, the Statement of Net Position provides a picture of the net position (assets plus deferred outflows of resources minus liabilities plus deferred inflows of resources) and their availability for expenditure by the institution. Net position is divided into three major categories. The first category, i

10 net investment in capital assets, provides the institution's equity in property, plant, and equipment owned by the institution. The next category is restricted, which is divided into two categories, nonexpendable and expendable. The corpus of nonexpendable, restricted resources is available only for investment purposes. Expendable, restricted resources are available for expenditure by the institution, but must be spent for purposes as determined by donors and/or external entities that have placed time or purpose restrictions on the use of the assets. The final category is unrestricted. Unrestricted resources are available to the institution for any lawful purpose. Statement of Net Position, Condensed June 30, 2013 June 30, 2012 Assets Current Assets $ 118,061,072 $ 88,259,851 Capital Assets, Net 485,226, ,595,442 Other Assets 102,313, ,934,455 Total Assets $ 705,600,740 $ 697,789,748 Liabilities Current Liabilities $ 123,132,038 $ 132,594,491 Noncurrent Liabilities 69,644,066 71,383,619 Total Liabilities $ 192,776,104 $ 203,978,110 Net Position Net Investment in Capital Assets $ 428,889,825 $ 434,618,501 Restricted - Nonexpendable 1,864,982 1,706,914 Restricted - Expendable 49,422,282 61,549,822 Restricted - Capital Projects 34,905, ,103 Unrestricted -2,257,594-4,610,702 Total Net Position $ 512,824,636 $ 493,811,638 Total assets increased by $7,810,992, which was due to an increase of $29,801,221 in the category of Current Assets. The increase is mainly in the category of prepaid items. Total liabilities decreased for the year by $11,202,006. The combination of the increase in total assets of $7,810,992 and the decrease in total liabilities of $11,202,006 yields an increase in net position of $19,012,998. The increase in net position is primarily in the category of Restricted Capital Projects in the amount of $34,358,038. Statement of Revenues, Expenses and Changes in Net Position Changes in total net position as presented on the Statement of Net Position are based on the activity presented in the Statement of Revenues, Expenses and Changes in Net Position. The purpose of the statement is to present the revenues received by the institution, both operating and nonoperating, and the expenses paid by the institution, operating and nonoperating, and any other revenues, expenses, gains and losses received or spent by the institution. Generally, operating revenues are received for providing goods and services to the various customers and constituencies of the institution. Operating expenses are those expenses paid to acquire or produce the goods and services provided in return for the operating revenues, and to carry out the mission of the institution. ii

11 Nonoperating revenues are revenues received for which goods and services are not provided. For example state appropriations are nonoperating because they are provided by the Legislature to the institution without the Legislature directly receiving commensurate goods and services for those revenues. Statement of Revenues, Expenses and Changes in Net Position, Condensed June 30, 2013 June 30, 2012 Operating Revenues $ 522,505,092 $ 514,052,064 Operating Expenses 717,166, ,388,685 Operating Gain (Loss) $ -194,661,576 $ -200,336,621 Nonoperating Revenues and Expenses 203,319, ,040,401 Income (Loss) Before Other Revenues, Expenses, Gains or Losses $ 8,657,794 $ -19,296,220 Other Revenues, Expenses, Gains or Losses 10,355,204 93,004,200 Increase (Decrease) in Net Position $ 19,012,998 $ 73,707,980 Net Position at Beginning of Year 493,811, ,103,658 Net Position at End of Year $ 512,824,636 $ 493,811,638 The Statement of Revenues, Expenses and Changes in Net Position reflects a positive year, which is represented by an increase in net position at the end of the year. Some highlights of the information presented on this statement are as follows: iii

12 Revenue by Source For the Years Ended June 30, 2013 and June 30, 2012 June 30, 2013 June 30, 2012 Operating Revenue Tuition and Fees $ 72,453,759 $ 73,854,971 Grants and Contracts 424,467, ,473,291 Sales and Services of Educational Departments 9,819,487 9,334,559 Auxiliary 15,160,666 16,202,458 Other 603,501 1,186,785 Total Operating Revenue $ 522,505,092 $ 514,052,064 Nonoperating Revenue State Appropriations $ 161,880,219 $ 152,599,616 Grants and Contracts 19,889,409 16,442,353 Gifts 23,761,862 13,909,097 Investment Income 1,473,811 1,657,149 Other -244, ,289 Total Nonoperating Revenue $ 206,760,793 $ 184,449,926 Capital Grants and Gifts State $ 10,346,120 $ 92,559,012 Other Capital Gifts and Grants 9, ,188 Total Capital Grants and Gifts $ 10,355,204 $ 93,004,200 Total Revenues $ 739,621,089 $ 791,506,190 Expenses (By Functional Classification) For the Years Ended June 30, 2013 and June 30, 2012 June 30, 2013 June 30, 2012 Operating Expenses Instruction $ 141,423,407 $ 143,191,020 Research 48,157,202 50,920,549 Public Service 74,132,179 65,987,787 Academic Support 54,228,508 45,746,242 Student Services 6,847,220 6,889,966 Institutional Support 66,316,795 69,379,579 Plant Operations and Maintenance 34,285,130 35,738,043 Scholarships and Fellowships 9,617,703 11,058,412 Auxiliary Enterprises 15,604,660 15,550,856 Patient Care 266,553, ,926,231 Total Operating Expenses $ 717,166,668 $ 714,388,685 Nonoperating Expenses Interest Expense (Capital Assets) 3,441,423 3,409,525 Total Expenses $ 720,608,091 $ 717,798,210 iv

13 Operating revenues increased by $8,453,028 in fiscal year Revenues increased primarily in the category of grants and contracts. Nonoperating revenues increased by $22,310,867 for the year primarily as the result of $20,000,000 in gifts used to partially finance the GSFIC managed construction of the J. Harold Harrison Education Commons Building and an increase in state appropriations for special funding initiatives and the medical school expansion. The compensation and employee benefits category increased by $20,170,785 and primarily affected the Public Service, Academic Support, and Patient Care categories. Faculty personnel costs increased as the result of planned growth in both clinical and research faculty. The Cancer Center and the Department of Medicine recruited new faculty as the University works toward improving its research ranking and the ultimate designation as an NCI Cancer Center. The clinical operations continue to expand that staff to enhance several services including surgery, pediatrics, and gastroenterology. The Department of Psychiatry also experienced clinical growth as a new contract with the State of Georgia to manage its inpatient Psychiatric service was signed. Utilities decreased by $1,699,171 during the past year. The decrease was not significant and primarily associated with decreased electricity and fuel oil costs that were experienced during fiscal year Statement of Cash Flows The final statement presented by the Georgia Regents University is the Statement of Cash Flows. The Statement of Cash Flows presents detailed information about the cash activity of the institution during the year. The statement is divided into five parts. The first part deals with operating cash flows and shows the net cash used by the operating activities of the institution. The second section reflects cash flows from noncapital financing activities. This section reflects the cash received and spent for nonoperating, noninvesting, and noncapital financing purposes. The third section deals with cash flows from capital and related financing activities. This section deals with the cash used for the acquisition and construction of capital and related items. The fourth section reflects the cash flows from investing activities and shows the purchases, proceeds, and interest received from investing activities. The fifth section reconciles the net cash used to the operating income or loss reflected on the Statement of Revenues, Expenses and Changes in Net Position. v

14 Cash Flows for the Years Ended June 30, 2013 and 2012, Condensed June 30, 2013 June 30, 2012 Cash Provided (Used) By: Operating Activities $ -171,664,389 $ -171,705,185 Noncapital Financing Activities 199,516, ,485,500 Capital and Related Financing Activities -49,077,003-22,206,522 Investing Activities 19,807, ,224 Net Change in Cash $ -1,416,854 $ -2,999,983 Cash, Beginning of Year 22,793,663 25,793,646 Cash, End of Year $ 21,376,809 $ 22,793,663 Capital Assets Georgia Regents University acquired property from the Georgia State Properties Commission in fiscal year 2013 consisting of acres of land known as Georgia Golf Hall of Fame located at 1 Eleventh Street in Augusta, Richmond County, Georgia valued at $5,265,951. The University also had capital assets additions for buildings and building improvements in fiscal year Numerous projects were completed during the fiscal year totaling $7,994,703. The School of Dentistry was substantially completed in fiscal year 2012, and $141,961 of additional work was completed in the current year. Other on-going projects funded by the Georgia State Financing and Investment Commission (GSFIC) included $5,721,418. Projected funding by GSFIC for fiscal year 2014 will be approximately the same. For additional information concerning Capital Assets, see Notes 1, 6, 8, and 10 in the Notes to the Financial Statements. Long-Term Liabilities Georgia Regents University had Long-Term Liabilities of $90,564,039 of which $20,919,973 was reflected as current liability at June 30, For additional information concerning Long-Term Liabilities, see Notes 1 and 8 in the Notes to the Financial Statements. Economic Outlook Along with all other institutions of the University System of Georgia, the University continues to respond to pressures to hold costs to lower levels and tuition to very modest increases. For fiscal year 2014, the state appropriations budget was again reduced by 3% and undergraduate tuition was held to a 3.5% increase for continuing students. The longer-term outlook is somewhat more optimistic as the State and National economies continue to show promise of slow but positive growth and strong budget support for education is shown by Georgia Governor Nathan Deal and the General Assembly. Ricardo Azziz, M.D., President Georgia Regents University vi

15 BASIC FINANCIAL STATEMENTS - 1 -

16 GEORGIA REGENTS UNIVERSITY STATEMENT OF NET POSITION JUNE 30, 2013 EXHIBIT "A" ASSETS Current Assets Cash and Cash Equivalents $ 21,362,809 Accounts Receivable, Net (Note 3) Receivables - Federal Financial Assistance 7,428,431 Margin Allocation Funds 7,404,096 Receivables - Other 37,029,480 Inventories (Note 4) 1,265,842 Prepaid Items 43,570,414 Total Current Assets $ 118,061,072 Noncurrent Assets Noncurrent Cash $ 14,000 Investments (Externally Restricted) 21,413,240 Investments 77,555,907 Notes Receivable, Net 3,330,387 Capital Assets, Net (Note 7) 485,226,134 Total Noncurrent Assets $ 587,539,668 Total Assets $ 705,600,740 LIABILITIES Current Liabilities Accounts Payable $ 59,757,474 Salaries Payable 1,246,260 Contracts Payable 313,633 Deposits 85 Unearned Revenue (Note 8) 40,098,429 Deposits Held for Other Organizations 796,184 Lease Purchase Obligations 1,420,088 Compensated Absences 19,499,885 Total Current Liabilities $ 123,132,038 Noncurrent Liabilities Lease Purchase Obligations $ 54,916,221 Compensated Absences 14,727,845 Total Noncurrent Liabilities $ 69,644,066 Total Liabilities $ 192,776,104 NET POSITION Net Investment in Capital Assets $ 428,889,825 Restricted for: Nonexpendable 1,864,982 Expendable 49,422,282 Capital Projects 34,905,141 Unrestricted -2,257,594 Total Net Position $ 512,824,636 The notes to the financial statements are an integral part of this statement

17 GEORGIA REGENTS UNIVERSITY STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION YEAR ENDED JUNE 30, 2013 EXHIBIT "B" OPERATING REVENUES Student Tuition and Fees (Net of Allowance for Doubtful Accounts) $ 85,208,867 Less: Scholarship Allowances -12,755,108 Grants and Contracts Federal 52,831,517 Federal Stimulus 732,847 State 178,149,918 Other 192,753,397 Sales and Services 9,819,487 Rents and Royalties 568,851 Auxiliary Enterprises Residence Halls 3,975,361 Bookstore 3,225,114 Food Services 116,637 Parking/Transportation 2,265,451 Health Services 1,086,763 Intercollegiate Athletics 2,121,820 Other Organizations 2,369,520 Other Operating Revenues 34,650 Total Operating Revenues $ 522,505,092 OPERATING EXPENSES Salaries Faculty $ 178,882,424 Staff 198,692,542 Employee Benefits 110,845,159 Other Personal Services 373,798 Travel 3,599,327 Scholarships and Fellowships 10,663,246 Utilities 10,393,702 Supplies and Other Services 176,846,414 Depreciation 26,870,056 Total Operating Expenses $ 717,166,668 Operating Income (Loss) $ -194,661,576 NONOPERATING REVENUES (EXPENSES) State Appropriations $ 161,880,219 Grants and Contracts Federal 11,824,347 State 2,500 Other 8,062,562 Gifts 23,761,862 Investment Income (Endowments, Auxiliary and Other) 1,473,811 Interest Expense (Capital Assets) -3,441,423 Other Nonoperating Revenues -244,508 Net Nonoperating Revenues $ 203,319,370 Income (Loss) Before Other Revenues, Expenses, Gains, or Losses $ 8,657,794 Capital Grants and Gifts State $ 10,346,120 Other 9,084 Total Other Revenues, Expenses, Gains or Losses $ 10,355,204 Increase (Decrease) in Net Position $ 19,012,998 Net Position - Beginning of Year 493,811,638 Net Position - End of Year $ 512,824,636 The notes to the financial statements are an integral part of this statement

18 GEORGIA REGENTS UNIVERSITY STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 2013 EXHIBIT "C" CASH FLOWS FROM OPERATING ACTIVITIES Tuition and Fees $ 60,741,171 Federal Appropriations Grants and Contracts (Exchange) 428,018,230 Sales and Services 16,232,409 Payments to Suppliers -303,814,981 Payments to Employees -377,280,009 Payments for Scholarships and Fellowships -10,663,246 Loans Issued to Students and Employees -562,454 Collection of Loans to Students and Employees 1,179,229 Auxiliary Enterprise Charges: Residence Halls 3,749,844 Bookstore 2,625,729 Food Services 117,309 Parking/Transportation 2,269,787 Health Services 1,199,390 Intercollegiate Athletics 2,136,557 Other Organizations 2,423,619 Other Receipts (Payments) -36,973 Net Cash Provided (Used) by Operating Activities $ -171,664,389 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State Appropriations $ 161,880,219 Agency Funds Transactions -1,732,213 Gifts and Grants Received for Other than Capital Purposes 39,592,149 Other Nonoperating Receipts -223,284 Net Cash Flows Provided (Used) by Noncapital Financing Activities $ 199,516,871 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital Grants and Gifts Received $ 5,080,169 Proceeds from Sale of Capital Assets 557,397 Purchases of Capital Assets -15,473,814 Principal Paid on Capital Debt and Leases -799,332 Interest Paid on Capital Debt and Leases -3,441,423 Prepayment of Construction Costs Paid to Georgia State Financing and Investment Commission -35,000,000 Net Cash Provided (Used) by Capital and Related Financing Activities $ -49,077,003 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales and Maturities of Investments $ 19,500,000 Interest on Investments 354,269 Purchase of Investments -46,602 Net Cash Provided (Used) by Investing Activities $ 19,807,667 Net Increase (Decrease) in Cash $ -1,416,854 Cash and Cash Equivalents - Beginning of Year 22,793,663 Cash and Cash Equivalents - End of Year $ 21,376,

19 GEORGIA REGENTS UNIVERSITY STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 2013 EXHIBIT "C" RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Operating Income (Loss) $ -194,661,576 Adjustments to Reconcile Operating Income (loss) to Net Cash Provided (Used) by Operating Activities Depreciation 26,870,056 Change in Assets and Liabilities: Receivables, Net 4,491,779 Inventories -114,564 Prepaid Items 301,036 Notes Receivable, Net 616,775 Accounts Payable -2,352,972 Unearned Revenue -6,958,000 Other Liabilities -419,243 Compensated Absences 562,320 Net Cash Provided (Used) by Operating Activities $ -171,664,389 NONCASH ACTIVITY Fixed Assets Acquired by Incurring Capital Lease Obligations $ 159,206 Change in Fair Value of Investments Recognized as a Component of Interest Income $ 1,119,542 Gift of Capital Assets Reducing Proceeds of Capital Grants and Gifts $ 5,275,035 The notes to the financial statements are an integral part of this statement

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21 GEORGIA REGENTS UNIVERSITY EXHIBIT "D" NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 Note 1. Summary of Significant Accounting Policies Nature of Operations Georgia Regents University serves the local, state, and national communities by providing leadership and excellence in teaching, discovery, clinical care, and service as a student-centered comprehensive research university and academic health center, with a wide range of programs from learning assistance through postdoctoral studies. Reporting Entity On January 8, 2013, Georgia Health Sciences University and Augusta State University merged to become Georgia Regents University. Georgia Regents University is one of thirty-one (31) State supported member institutions of higher education in Georgia which comprise the University System of Georgia, an organizational unit of the State of Georgia. The accompanying financial statements reflect the operations of Georgia Regents University as a separate reporting entity. The Board of Regents has constitutional authority to govern, control and manage the University System of Georgia. This authority includes but is not limited to the power to designate management, the ability to significantly influence operations, the authority to control institutions' budgets, the power to determine allotments of State funds to member institutions and the authority to prescribe accounting systems and administrative policies for member institutions. Georgia Regents University does not have authority to retain unexpended State appropriations (surplus) for any given fiscal year. Accordingly, Georgia Regents University is considered an organizational unit of the Board of Regents of the University System of Georgia reporting entity for financial reporting purposes because of the significance of its legal, operational, and financial relationships with the Board of Regents as defined in Section 2100 of the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards. Legally separate, tax exempt Affiliated Organizations whose activities primarily support units of the University System of Georgia, which are organizational units of the State of Georgia, are considered potential Component Units of the State. See Note 17 for additional information. Financial Statement Presentation The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) as prescribed by the GASB and are presented as required by these standards to provide a comprehensive, entity-wide perspective of the University's assets, liabilities, net position, revenues, expenses, changes in net position and cash flows. Basis of Accounting For financial reporting purposes, the University is considered a special-purpose government engaged only in business-type activities. Accordingly, the University's financial statements have been presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All significant intra-university transactions have been eliminated. New Accounting Pronouncements In fiscal year 2013, the University adopted the Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements. The provisions of this Statement establish accounting and financial reporting standards for governments who enter into Service Concession Arrangements (SCA) with other governmental or nongovernmental entities. As of June 30, 2013, the University has not entered into any arrangements that meet the qualifications to be reported as a SCA in accordance with this standard

22 GEORGIA REGENTS UNIVERSITY EXHIBIT "D" NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 In fiscal year 2013, the University adopted the Governmental Accounting Standards Board (GASB) Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA Pronouncements. The provisions of this Statement incorporate certain accounting and financial reporting guidance into authoritative GASB literature. In fiscal year 2013, the University adopted the Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position. The provisions of this Statement establish financial reporting standards for the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government's net position. The University changed its presentation of net assets to net position for fiscal year There were no other applicable reporting changes for the University Cash and Cash Equivalents Cash and Cash Equivalents consist of petty cash, demand deposits, and time deposits in authorized financial institutions, and cash management pools that have the general characteristics of demand deposit accounts. This includes the State Investment Pool and the Board of Regents Short-Term Investment Pool. Investments Investments include financial instruments with terms in excess of 13 months, certain other securities for the production of revenue, land, and other real estate held as investments by endowments. The University accounts for its investments at fair value. Changes in unrealized gain (loss) on the carrying value of investments are reported as a component of investment income in the Statement of Revenues, Expenses and Changes in Net Position. The Board of Regents Total Return Fund and the Board of Regents Diversified Fund are included under Investments. Accounts Receivable Accounts receivable consists of tuition and fees charged to students and auxiliary enterprise services provided to students, faculty and staff, the majority of whom reside in the State of Georgia. Accounts receivable also includes amounts due from the Federal government, state and local governments, or private sources, in connection with reimbursement of allowable expenditures made pursuant to the University's grants and contracts. Accounts receivable are recorded net of estimated uncollectible amounts. Inventories Consumable supplies are recorded on the consumption method and are valued at the lower of cost or market using the first-in, first-out ("FIFO") basis. Resale inventories are valued at cost using the "first-in, first-out" method. Noncurrent Cash and Investments Cash and investments that are externally restricted and cannot be used to pay current liabilities are classified as noncurrent assets in the Statement of Net Position. Capital Assets Capital assets are recorded at cost at the date of acquisition, or fair market value at the date of donation in the case of gifts. For equipment, the University's capitalization policy includes all items with a unit cost of $5,000 or more, and an estimated useful life of greater than one year. Renovations to buildings, infrastructure, and land improvements that exceed $100,000 and/or significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense was incurred. Depreciation, which also includes amortization of intangible assets such as water, timber, - 8 -

23 GEORGIA REGENTS UNIVERSITY EXHIBIT "D" NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 and mineral rights, easements, patents, trademarks, and copyrights, as well as software, is computed using the straight-line method over the estimated useful lives of the assets, generally 40 to 60 years for buildings, 20 to 25 years for infrastructure and land improvements, 10 years for library books, and 3 to 20 years for equipment. Residual values generally are 10% of historical costs for infrastructure, buildings and building improvements, and facilities and other improvements. To fully understand plant additions in the University System, it is necessary to look at the activities of the Georgia State Financing and Investment Commission (GSFIC) - an organization that is external to the System. GSFIC issues bonds for and on behalf of the State of Georgia, pursuant to powers granted to it in the Constitution of the State of Georgia and the Act creating the GSFIC. These bonds constitute direct and general obligations of the State of Georgia, to the payment of which the full faith, credit and taxing power of the State are pledged. For projects managed by GSFIC, GSFIC retains construction-in-progress on its books throughout the construction period and transfers the entire project to the University when complete. For projects managed by the University, the University retains construction-in-progress on its books and is reimbursed by GSFIC. For the year ended June 30, 2013, GSFIC did not transfer any capital additions to Georgia Regents University. Deposits Deposits represent good faith deposits from students to reserve housing assignments in a University residence hall. Unearned Revenues Unearned Revenues include amounts received for tuition and fees and certain auxiliary activities prior to the end of the fiscal year but related to the subsequent accounting period. Unearned revenues also include amounts received from grant and contract sponsors that have not yet been earned. Compensated Absences Employee vacation pay is accrued at year-end for financial statement purposes. The liability and expense incurred are recorded at year-end as compensated absences in the Statement of Net Position, and as a component of compensation and benefit expense in the Statement of Revenues, Expenses and Changes in Net Position. Georgia Regents University had accrued liability for compensated absences in the amount of $33,665,409 as of July 1, For fiscal year 2013, $24,330,431 was earned in compensated absences and employees were paid $23,768,110, for a net increase of $562,321. The ending balance as of June 30, 2013 in accrued liability for compensated absences was $34,227,730. Noncurrent Liabilities Noncurrent liabilities include (1) liabilities that will not be paid within the next fiscal year; (2) capital lease obligations with contractual maturities greater than one year; and (3) other liabilities that, although payable within one year, are to be paid from funds that are classified as noncurrent assets. Net Position The University's net position is classified as follows: Net Investment in capital assets: This represents the University's total investment in capital assets, net of outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of the net investment in capital assets. The term "debt obligations" as used in this definition does not include debt of the GSFIC as discussed previously in Note 1 - Capital Assets section

24 GEORGIA REGENTS UNIVERSITY EXHIBIT "D" NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 Restricted net position - nonexpendable: Nonexpendable restricted net position consists of endowment and similar type funds, in which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may be either expended or added to principal. The University may accumulate as much of the annual net income of an institutional fund as is prudent under the standard established by Code Section of Annotated Code of Georgia. Restricted net position - expendable: Restricted expendable net position includes resources in which the University is legally or contractually obligated to spend in accordance with restrictions imposed by external third parties. Expendable Restricted include the following at June 30, 2013: Restricted - E&G and Other Organized Activities $ 35,367,625 Federal Loans 6,032,740 Institutional Loans 1,334,862 Quasi-Endowments 6,687,055 Total Restricted Expendable $ 49,422,282 Restricted net position - expendable - Capital Projects: This represents resources for which the University is legally or contractually obligated to spend resources for capital projects in accordance with restrictions imposed by external third parties. Unrestricted net position: Unrestricted net position represents resources derived from student tuition and fees, state appropriations, and sales and services of educational departments and auxiliary enterprises. These resources are used for transactions relating to the educational and general operations of the University, and may be used at the discretion of the governing board to meet current expenses for those purposes, except for unexpended state appropriations (surplus) of $232,745. Unexpended state appropriations must be refunded to the Board of Regents of the University System of Georgia, University System Office for remittance to the Office of the State Treasurer. These resources also include auxiliary enterprises, which are substantially self-supporting activities that provide services for students, faculty, and staff. Unrestricted resources include the following items which are quasi-restricted by management at June 30, 2013: R & R Reserve $ 2,724,019 Reserve for Encumbrances 16,309,058 Reserve for Inventory 154,886 Other Unrestricted -21,445,557 Total Unrestricted Net Position $ -2,257,594 When an expense is incurred that can be paid using either restricted or unrestricted resources, the University's policy is to first apply the expense towards unrestricted resources, and then towards restricted resources

25 GEORGIA REGENTS UNIVERSITY EXHIBIT "D" NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 Income Taxes Georgia Regents University, as a political subdivision of the State of Georgia, is excluded from Federal income taxes under Section 115(1) of the Internal Revenue Code, as amended. Classification of Revenues and Expenses The Statement of Revenues, Expenses and Changes in Net Position classify fiscal year activity as operating and nonoperating according to the following criteria: Operating Revenues: Operating revenue includes activities that have the characteristics of exchange transactions, such as (1) student tuition and fees, net of scholarship allowances, (2) certain Federal, state and local grants and contracts, and (3) sales and services. Nonoperating Revenues: Nonoperating revenue includes activities that have the characteristics of nonexchange transactions, such as gifts and contributions, and other revenue sources that are defined as nonoperating revenue by GASB No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, and GASB No. 34, such as state appropriations and investment income. Operating Expenses: Operating expense includes activities that have the characteristics of exchange transactions. Nonoperating Expense: Nonoperating expense includes activities that have the characteristics of nonexchange transactions, such as capital financing costs and costs related to investment activity. Scholarship Allowances Student tuition and fee revenues, and certain other revenues from students, are reported at gross with a contra revenue account of scholarship allowances in the Statement of Revenues, Expenses and Changes in Net Position. Scholarship allowances are the difference between the stated charge for goods and services provided by the University, and the amount that is paid by students and/or third parties making payments on the students' behalf. Certain governmental grants, such as Pell grants, and other Federal, state or nongovernmental programs are recorded as either operating or nonoperating revenues in the University's financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the University has recorded contra revenue for scholarship allowances. Note 2. Deposits and Investments Deposits The custodial credit risk for deposits is the risk that in the event of a bank failure, the University's deposits may not be recovered. Funds belonging to the State of Georgia (and thus the University) cannot be placed in a depository paying interest longer than ten days without the depository providing a surety bond to the State. In lieu of a surety bond, the depository may pledge as collateral any one or more of the following securities as enumerated in the Official Code of Georgia Annotated Section : 1. Bonds, bills, notes, certificates of indebtedness, or other direct obligations of the United States or of the State of Georgia. 2. Bonds, bills, notes, certificates of indebtedness or other obligations of the counties or municipalities of the State of Georgia

26 GEORGIA REGENTS UNIVERSITY EXHIBIT "D" NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 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 and debt obligations issued by the Federal Land Bank, the Federal Home Loan Bank, the Federal Intermediate Credit Bank, the Central Bank for Cooperatives, the Farm Credit Banks, the Federal Home Loan Mortgage Association and the Federal National Mortgage Association. 6. Guarantee or insurance of accounts provided by the Federal Deposit Insurance Corporation. The Treasurer of the Board of Regents is responsible for all details relative to furnishing the required depository protection for all units of the University System of Georgia. At June 30, 2013, the carrying value of deposits was $21,583,339 and the bank balance was $38,290,743. Of the University's deposits, $37,790,743 were uninsured. Of these uninsured deposits, $4,906,634 were collateralized with securities held by the financial institution's trust department or agent in the University's name, $32,884,109 were collateralized with securities held by the financial institution, by its trust department or agency, but not in the University's name. Investments Georgia Regents University maintains an investment policy which fosters sound and prudent judgment in the management of assets to ensure safety of capital consistent with the fiduciary responsibility each institution has to the citizens of Georgia and which conforms to Board of Regents investment policy. All investments are consistent with donor intent, Board of Regents policy, and applicable Federal and state laws

27 GEORGIA REGENTS UNIVERSITY EXHIBIT "D" NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2013 The University's investments as of June 30, 2013 are presented below. All investments are presented by investment type and debt securities are presented by maturity. Investment Maturity Fair Less Than More than Investment Type Value 4 months 4-12 months 1-5 Years 6-10 years 10 Years Debt Securities U. S. Agencies Explicitly Guaranteed $ 4,688,381 $ 564,174 $ 4,077,942 $ 46,265 Implicitly Guaranteed 44,314,222 $ 1,003,562 $ 873,348 4,278,751 7,131,666 31,026,895 Mutual Bond Fund 11,057,711 8,617,418 2,440,293 $ 60,060,314 $ 1,003,562 $ 873,348 $ 13,460,343 $ 13,649,901 $ 31,073,160 Other Investments Bond/Equity Mutual Funds 12,968 Equity Mutual Funds 5,252,482 Equity Securities - Domestic 16,137,606 Equity Securities - International 1,695,386 Real Estate Investment Fund 2,232,907 Investment Pools Board of Regents Short-Term Fund 4,632,096 Total Return Fund 496,353 Diversified Fund 8,174,497 Total Investments $ 98,694,609 The University does not have a formal policy addressing variable-rate securities. The University relies upon the judgment of its Investment Managers and the policies of the investment vehicles related to Georgia Regents University's investment assets. The Board of Regents Investment Pool is not registered with the Securities and Exchange Commission as an investment company. The fair value of investments is determined daily. The pool does not issue shares. Each participant is allocated a pro rata share of each investment at fair value along with a pro rata share of the interest that it earns. Participation in the Board of Regents Investment Pool is voluntary. The Board of Regents Investment Pool is not rated. Additional information on the Board of Regents Investment Pool is disclosed in the audited Financial Statements of the Board of Regents of the University System of Georgia - System Office (oversight unit). This audit can be obtained from the Georgia Department of Audits - Education Audit Division or on their web site at Interest Rate Risk Interest rate risk is the risk that changes in interest rates of debt investments will adversely affect the fair value of an investment. The University's Investment Policy and Guidelines manages interest rate risk by recognizing that short-term loss of principal may be necessary in order to achieve longterm safety and growth of principal; and that in order to maximize income from debt instruments with maturities longer than sixty days, market values may be exposed to short-term volatility. The Effective Duration of the Short-Term Fund is 0.56 years. Of the University's total investment of $4,632,096 in the Short-Term Fund, $4,063,691 is invested in debt securities