CORPORACION DEL CENTRO DE BELLAS ARTES DE PUERTO RICO (A Component Unit of the Commonwealth of Puerto Rico) FINANCIAL STATEMENTS WITH AUDITORS' REPORT

Transcription

1 CORPORACION DEL CENTRO DE BELLAS ARTES DE PUERTO RICO FINANCIAL STATEMENTS WITH AUDITORS' REPORT

2 CONTENTS Independent auditors' report 1 Required supplementary information Management's discussion and analysis 2-6 Basic financial statements: Statements of net assets 7 Statements of revenues, expenses and changes in fund net assets 8 Statements of cash flows 9-10 Notes to financial statements Page

3 Board of Directors Corporación del Centro de Bellas Artes de Puerto Rico San Juan, Puerto Rico INDEPENDENT AUDITORS' REPORT We have audited the accompanying basic financial statements of Corporación del Centro de Bellas Artes de Puerto Rico (a component unit of the Commonwealth of Puerto Rico) as of and for the years ended June 30, 2003 and 2002 as listed in the accompanying table of contents. These basic financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the basic financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of Corporación del Centro de Bellas Artes de Puerto Rico (a component unit of the Commonwealth of Puerto Rico) as of June 30, 2003 and 2002, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The Management's Discussion and Analysis included in pages 2 through 6, is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries to management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. September 9, 2003 Stamp number was affixed to the original of this report. 1

4 MANAGEMENT'S DISCUSSION AND ANALYSIS This section of Corporación del Centro de Bellas Artes' annual financial report presents our discussion and analysis of the corporation's financial performance during the fiscal years ended on June 30, 2003 and FINANCIAL HIGHLIGHTS 1) The corporation net assets increased $ 563,475 or 2.99 during the course of this year's operations. This change was occasioned by the new norms of facilities agreement established in the corporation. 2) During the year, the non-operating government grants increased in 108,569 or 4.10 in comparison with the previous year. 3) During the year, the corporation expenses increased in $373,975 or This increase was motivated by the implementation of the Plan of Reclassification and Remuneration of the career's employees. Although the salary increase of $100 monthly by government legislation and the Christmas Bonus increase in $150 by the government decision. Other factors, which contributed to the increase, was the payment liquidation of accumulated vacation and sick to the employees discharged and the increase in insurance policy cost. 4) The operating loss decrease $64,260 or 2.31 during the present year in comparison with the previous fiscal year. OVERVIEW OF THE FINANCIAL STATEMENTS Management's Discussion and Analysis introduces the Corporation's basic financial statements. The basic financial statements include: 1) Statement of net assets, 2) Statements of revenues, expenses and change in net assets, 3) Statement of cash flows and 4) Notes to the financial statements. 1) Statement of net assets. This statement includes all of the Corporation's assets an liabilities, with the difference reported as net asset. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Corporation as a whole is improving or deteriorating. 2) Statements of revenues, expenses and changes in net assets. This statement reports how the Corporation's net assets changed during the current fiscal year. All current year revenues and expenses are included regardless of when cash is received or paid. 3) Statement of cash flows. This statement provides information about transactions resulting in the flows of cash or equivalents. 4) Notes to financial statements. The accompanying notes to the financial statements provide information essential to a full understanding of the Corporation's financial statements. 2

5 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE CORPORATION Net assets - The corporation's net assets were $19,396,511 and $18,833,036 for fiscal years 2003 and 2002 respectively. (See Table I). TABLE I CORPORACION DEL CENTRO DE BELLAS ARTES DE PUERTO RICO NET ASSETS Total Change Current assets 885,556 $ 2,821,570 ( 68.61) Capital assets 17,994,364 18,145,584 ( 0.83) Other assets 3,211, , Total assets 22,091,771 21,375, Current liabilities 2,478,990 2,196, Non-current liabilities 216, ,643 ( 37.43) Total liabilities 2,695,260 2,542, Net assets Invested in capital assets, net of related debt 17,974,064 18,115,372 ( 0.78) Restricted 1,097, , Unrestricted (deficit) 324,833 ( 232,010 ) ( ) Total net assets $ 19,396,511 $ 18,833, Operating Revenues - The corporation's total revenues (excluding non-operating items) increased by (See table II). Most of the corporation's revenues come from rental of facilities, parking, sale of tickets and services to producers. Mostly the increase in revenues is due to the application of the new rental policies approved by Management. 3

6 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE CORPORATION (CONTINUED) The total expenses increased by $373,975 or The most significant expenses variances are explained as follows: Professional and consulting services - During this fiscal year the Corporation obtained the services of an architecture firm to help in the impermeabilization of the roof. Also the services of a marketing firm were acquired to promote the image of the center. Insurance - The increase in this account is due to the increase in the insurance policy cost by the market inflation. Bad debts expense - During this year, no increase in the allowance for bad debts was needed to cover for the possible loss on doubtful accounts receivable. The non-operating revenues increased by 7.92, because the Corporation received more interest income than in prior year due to high interest rate in deposits because of the economy. Legislative grants were deferred because capital projects will be completed in future years. 4

7 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE CORPORATION (CONTINUED) TABLE II CORPORACION DEL CENTRO DE BELLAS ARTES DE PUERTO RICO Changes in Net Assets Total Change Operating revenues: Rental of facilities $ 941,934 $ 347, Food and beverage 207, , Parking 449, , Sale of tickets 490, , Services to producers 124, ,911 ( 56.24) Assessments for special activities 33, ,293 ( 80.59) Other 46,181 96,366 ( 52.08) Total operating revenues 2,294,796 1,856, Operating expenses: Salaries, payroll taxes and fringe benefits 2,643,469 2,426, Professional and consulting services 250, , Water, electricity and telephone 557, , Repairs and maintenance 218, ,636 ( 5.75) Food and beverage 73,687 72, Security 156, , Insurance 271, , Depreciation and amortization 680, , Bad debts expense - 22,623 ( ) Advertising 59,254 52, Cultural contributions to producers 22,816 8, Other 74,577 88,026 ( 15.28) 5,007,162 4,633, Operating loss ( 2,712,366 ) ( 2,776,626 ) ( 2.31) Other non-operating revenues (expenses): Interest income 142,340 48, Governmental grants 2,753,569 2,645, Interest expense ( 3,394 ) ( 13,481 ) ( 74.82) Total other nonoperating revenues 2,892,515 2,680, Gain (Loss) before contributions 180,149 ( 96,276 ) ( ) Capital contributions 383, , Changes in net assets 563,475 67, Total net assets, beginning as restated 18,833,036 18,765, Total net assets, ending $ 19,396,511 $ 18,833,

8 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) FINANCIAL ANALYSIS OF THE CORPORATION (CONTINUED) Capital assets - The corporation had no significant change in capital assets during the current year, but as mentioned in non-operating revenues, the amount deferred refers to various projects which will be implemented during future years, such as a sound system for the shows in the facilities for $132,000, impermeability of the roof through a procurement for approximately $200,000, a cooling system and air conditioning system and construction of rehearsal rooms. See note 4 to the basic financial statements for additional information about changes in capital assets during the fiscal year. Long-term debt - No significant transactions occurred during the year. See note 5 to the basic financial statements for additional information about changes in long-term debts during the fiscal year. CONTACTING THE CORPORATION'S FINANCIAL MANAGEMENT This financial report is designed to provide a general overview of the corporation 's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Office of the Finance Director, Corporación Centro de Bellas Artes, PO Box Minillas Station, San Juan, Puerto Rico

9 STATEMENTS OF NET ASSETS - JUNE 30, 2003 AND 2002 ASSETS Current assets: Cash and cash equivalents $ 466,868 $ 2,666,151 Accounts receivable 235,731 38,427 Other assets, principally prepaid insurance 182, ,992 Total current assets 885,556 2,821,570 Noncurrent assets: Property and equipment 17,708,492 17,859,712 Art work 285, ,872 Certificates of deposit 3,211, ,181 Total noncurrent assets 21,206,215 18,553,765 LIABILITIES 22,091,771 21,375,335 Current liabilities: Accounts payable: Operational 177, ,507 Government entities 2,630 18,223 Compensated absences 109,000 61,000 Accrued expenses 53,563 50,543 Deposits from clients 485, ,533 Collections on behalf of producers 21, ,328 Deferred income 1,585,762 1,408,089 Current portion of capital lease obligations 11,104 9,912 Current portion of long-term debt 33, ,521 Total current liabilities 2,478,990 2,196,656 Noncurrent liabilities Capital lease obligations 9,196 20,300 Long-term debt - 33,371 Compensated absences 207, ,972 Total liabilities 2,695,260 2,542,299 NET ASSETS Investment in capital assets, net of related debt 17,974,064 18,115,372 Restricted for capital acquisitions 1,097, ,674 Unrestricted (deficit) 324,833 ( 232,010) $ 19,396,511 $ 18,833,036 See notes to financial statements. 7

10 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS Operating revenues: Rental of facilities $ 941,934 $ 347,447 Food and beverage 207, ,902 Parking 449, ,806 Sale of tickets 490, ,836 Services to producers 124, ,911 Assessments for special activities 33, ,293 Other 46,181 96,366 Total operating revenues 2,294,796 1,856,561 Operating expenses: Salaries, payroll taxes and fringe benefits 2,643,469 2,426,211 Professional and consulting services 250, ,860 Water, electricity and telephone 557, ,270 Repairs and maintenance 218, ,636 Food and beverage 73,687 72,234 Security 156, ,573 Insurance 271, ,825 Depreciation and amortization 680, ,555 Bad debts expense - 22,623 Advertising 59,254 52,034 Cultural contributions to producers 22,816 8,340 Other 74,577 88,026 Total operating expenses 5,007,162 4,633,187 Operating loss ( 2,712,366 ) ( 2,776,626) Nonoperating revenues (expenses): Interest income 142,340 48,831 Governmental grants 2,753,569 2,645,000 Interest expense ( 3,394 ) ( 13,481) Total nonoperating revenues 2,892,515 2,680,350 Income (loss) before contributions 180,149 ( 96,276) Capital contributions 383, ,397 Change in net assets 563,475 67,121 Total net assets, beginning 18,833,036 18,765,915 Total net assets, ending $ 19,396,511 $ 18,833,036 See notes to financial statements. 8

11 STATEMENTS OF CASH FLOWS Cash flows from operating activities: Receipts from customers $ 2,193,492 $ 1,838,462 Payments to suppliers ( 1,694,648 ) ( 1,523,596) Payments to employees ( 2,166,552 ) ( 2,036,193) Other payments ( 378,984 ) ( 456,594) Net cash used in operating activities ( 2,046,692 ) ( 2,177,921) Cash flows from non-capital financing activities: Governmental grants for operations 2,753,569 2,645,000 Governmental grants for betterments 465,000 1,000,000 Principal paid on debt ( 167,521 ) ( 262,865) Interest paid on debt ( 3,394 ) ( 9,477) Net cash provided by non-capital financing activities 3,047,654 3,372,658 Cash flows from capital and related financing activities: Purchase of capital assets ( 529,003 ) ( 223,843) Principal paid on debt ( 9,912 ) ( 8,847) Interest paid on debt - ( 4,005) Net cash used in capital and related financing activities ( 538,915 ) ( 236,695) Cash flows from investing activities: Interest received 142,340 48,831 Purchases of certificates of deposit ( 2,803,670 ) ( 408,181) Net cash used in investing activities (2,661,330) ( 359,350) Net increase (decrease) in cash and cash equivalents (2,199,283) 598,692 Cash and cash equivalents at beginning of year 2,666,151 2,067,459 Cash and cash equivalents at end of year $ 466,868 $ 2,666,151 Continued. 9

12 STATEMENTS OF CASH FLOWS (CONTINUED) Reconciliation of operating loss to net cash used in operating activities: Operating loss $( 2,712,366 ) $( 2,776,626) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation and amortization expense 680, ,555 Change in assets and liabilities: Decrease (increase) in: Accounts receivable ( 101,304) 4,525 Other assets ( 65,965 ) ( 6,482) Increase (decrease) in: Accounts payable ( 1,980) 12,202 Accrued expense ( 33,879 ) ( 100,323) Deposits from clients 310,845 33,808 Collections on behalf of producers ( 122,266) 6,420 Total adjustments 665, ,705 Net cash used in operating activities $( 2,046,692 ) $( 2,177,921) See notes to financial statements. 10

13 NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION: The Corporación del Centro de Bellas Artes de Puerto Rico (the Corporation) was created by Law No. 43 of May 12, 1980 of the Commonwealth of Puerto Rico to manage the Centro de Bellas Artes. The Corporation is a public corporation and an instrumentality of the Commonwealth of Puerto Rico. The Corporation commenced operations in April 1981, as part of the Arts and Cultural Development Administration. On July 1st, 1985, the Corporation was transferred to the Instituto de Cultura Puertorriqueña under Law No. 1 of July 31, 1985, which amended Law No. 43 of May 12, Financial reporting entity: The Corporation is a component unit of the Commonwealth of Puerto Rico. Financial independence: The Corporation is responsible for its debts and has the right to its surplus. No governmental agency receives the benefit nor can impose financial strains on the Corporation. Board of Directors: The Board of Directors is appointed by the Governor of the Commonwealth of Puerto Rico, with the counsel and approval of the Senate of Puerto Rico. The Board has the power to make decisions and is responsible for them. Designation of management: The Board of Directors appoints a General Manager. The General Manager selects the other members of management. The powers and functions of management reside within the legal limits of the Corporation, and they are responsible to the Board of Directors. Capacity to manage operations: The Corporation has the legal capacity to make significant decisions in the management of its operations. This legal capacity includes, but not limited, to the control of the assets, which include facilities and properties, make short-term loans, and contract and develop programs. 11

14 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Measurement focus, basis of accounting and financial statement presentation: The financial statements are presented on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States applicable to an enterprise fund. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Legislative grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been meet. The legislative grants and donations for permanent betterments or for any specific activity not used in the fiscal year are credited to a deferred income account and income when used. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the Corporation are rental of facilities, parking and sales of tickets. Operating expenses for enterprise funds include salaries, utilities and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. The Governmental Accounting Standard Board (GASB) issued in September 1993 Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting. This Statement requires that proprietary activities apply all applicable GASB pronouncements as well as Statements and Interpretations issued by the Financial Accounting Standards Board (FASB), Accounting Principles Board (APB) Opinions, and Accounting Procedures issued on or before November, and ARBs issued on or before November 30, 1989, a proprietary activity may also elect to apply all FASB Statements and Interpretations issued after November 30, 1989, except those that conflict with or contradict GASB pronouncements. The Corporation has elected to apply FASB Statements and Interpretations issued after November 30, Use of estimates in the preparation of financial statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures 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. 12

15 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Concentration of credit risk: The Corporation maintains cash on deposit with high credit financial institutions. The laws of the Commonwealth of Puerto Rico require that public funds deposited in commercial banks be collateralized when funds exceed the amount insured by the Federal Government. The securities pledged by the banks as collateral for those deposits are under the custody of the Secretary of the Treasury in the name of the Commonwealth of Puerto Rico. Cash and cash equivalents: Represent petty cash, checking and savings accounts, and certificates of deposit with original maturities of less than three months. At June 30, 2003 $1,097,614 was restricted for the realization of permanent work and betterments. Capital assets: Capital assets, which include land, building, betterments, and equipment donated to the Corporation by agencies of the Commonwealth of Puerto Rico are stated at estimated fair market value at the date those assets were donated; other purchased assets are stated at historical cost. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major outlays for capital assets, renewals and betterments are capitalized. Depreciation is computed on a straight-line basis over the following estimated useful lives: Assets Years Buildings and betterments 50 Furniture and equipment 10 Musical instruments 20 Recording equipment 5 Motor vehicles 5 Computer equipment 5 Telephone equipment 5 13

16 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Art work: The Corporation records donated art work at its fair market value at donation date, or at cost when it is purchased and is a nondepreciable capital asset. Compensated absences: The Corporation's employees accrue vacation benefits of 2.5 days per month, up to a maximum of 60 days, and sick leave benefits of 1.5 days per month, up to a maximum of 90 days. Accumulated vacations and sick leave amounted to $316,074 at June 30, Cultural contributions: As part of the commitment of the Corporation in the development of the arts, the Corporation grants cultural contributions. During the years ended June 30, 2003 and 2002 the Corporation granted contributions to producers of $22,816 and $ 8,340 respectively. 3. ACCOUNTS RECEIVABLE: Trade $ 212,857 $ 110,654 Governmental entities 100,498 5, , ,051 Less allowance for doubtful accounts ( 77,624 ) ( 77,624) $ 235,731 $ 38,427 14

17 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. CAPITAL ASSETS: Beginning Ending Balance Increases Decreases Balance Capital assets, not being depreciated: Land $ 2,593,000 $ - $ - $ 2,593,000 Capital assets, being depreciated: Buildings and betterments 23,979, ,485-24,130,359 Construction in Process - 50,498-50,498 Furniture and equipment 4,107, ,020-4,435,528 Musical instruments 250, ,400 Recording equipment 213, ,621 Motor vehicles 78, ,043 Total capital assets, being depreciated 28,629, ,003-29,158,449 Less accumulated depreciation for: Buildings and betterments 9,333, ,321-9,834,056 Furniture and equipment 3,504, ,382-3,671,701 Musical instruments 233,016 12, ,536 Recording equipment 213, ,621 Motor vehicles 78, ,043 Total accumulated depreciation 13,362, ,223-14,042,957 Total capital assets, net $17,859,712 $( 151,220 ) $ - $ 17,708,492 15

18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. CAPITAL LEASE: The Corporation has entered into a lease agreement as lessee for financing the acquisition of telephone equipment. These lease agreement qualify as capital lease for accounting purposes and, therefore, have been recorded at the present value of their future minimum payments as of the inception date. Obligation under capital lease, due in monthly installments of approximately $1,071, including interest of due until March The asset acquired through capital lease is as follows: Asset, Equipment $ 56,683 56,683 Less accumulated amortization 36,363 23,530 Total $ 20,320 $ 33,153 The future minimum lease payments obligation and the net present value of the minimum lease payments as of June 30, 2003, were as follows: Year ending June 30, Amount , ,639 Total lease payments 22,491 Less amounts representing interest 2,191 Present value of future minimum lease payments 20,300 Less current portion 11,104 $ 9,196 16

19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT: Unsecured note payable to the Puerto Rico Electricity and Power Authority, due in 21 monthly installments of $10,000 and 39 monthly installments of $11,475, including interest at 8 annually $ - $ 33,973 Payment plan with Treasury Department for public insurance, paid in a lump sum of $217,493 in September, 2000 and 36 monthly installments of $11,129 thereafter, non-interest bearing 33, ,919 Future scheduled maturities of long-term debt are as follows: $ 33,371 $ 200,892 Years ending June 30, Amount 2004 $ 33,371 Changes in long-term liabilities: Long-term liability activity for the year ended June 30, 2003 was as follows: Beginning Ending Due within Balance Additions Deductions Balance one year Note payable $ 33,973 $ - $ 33,973 $ - $ - Payment plan 166, ,548 33,371 33,371 Total 200, ,521 33,371 33,371 Capital leases 30,212-9,912 20,300 9,196 Compensated absences 352,792 85, , , ,000 Long-term liabilities $ 583,896 $ 85,937 $ 300,088 $ 369,745 $ 151,567 17

20 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. PENSION PLAN: The Corporation is a participant of the Retirement System of the Commonwealth of Puerto Rico and its instrumentalities, a cost sharing multiple-employer defined benefit retirement system. The plan covers substantially all governmental employees. This retirement system provides benefits for retirement, disability, death and an annuity to the employees of the Commonwealth of Puerto Rico that are not covered by any other retirement system. The retirement and related benefits provided by the system and the contributions required from the employees are stated in Law No. 447 of May 15, 1951, as amended. Members' contributions are or and the Corporation's contributions are of the gross salary. The participants who reach the age of 55 and who have completed at least 25 years of credited service or the participants who reached the age of 58 years (65 years for employees who are participants after March 31, 1990) and who have completed at least 10 years of credited service, have the right to an annual benefit payable monthly for life. The amount of the annuity is 1 1/2 of the average compensation by the number of years of credited service up to 20 years, plus 2 of the average compensation multiplied by the number of years of credited service in excess of 20 years. For those participant employees after March 31, 1990, the amount of the annuity is 1 1/2 of the compensation multiplied by the number of years for credited services. The annuity should not be less than $2,400 in any case. On September 24, 1999, an amendment to Act No. 447 of May 15, 1951, which created the System, was enacted with the purpose of establishing a new pension program (System 2000). System 2000 became effective on January 1, Employees participating in the current system as of December 31, 1999, elected either to stay in the defined benefit plan or transfer to the new program. Persons joining the government on or after January 1, 2000, were only allowed to become members of System

21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. PENSION PLAN (CONTINUED): System 2000 is a hybrid defined contribution plan, also known as a cash balance plan. Under this new plan, there will be a pool of pension assets, which will be invested by the System, together with those of the current defined benefit plan. Benefits at retirement age will not be guaranteed by the Commonwealth. The annuity will be based on a formula which assumes that each year the employee's contribution (with a minimum of of the employee's salary up to a maximum of 10) will be invested in an account which will either: (1) earn a fixed rate based on the two-year Constant Maturity Treasury Note or, (2) earn a rate equal to 75 of there turn of the System's investment portfolio (net of management fees), or (3) earn a combination of both alternatives. Participants will receive periodic account statements similar to those of defined contribution plans showing their accrued balances. Disability pensions will not be granted under System The employers' contribution (9.275 of the employee's salary) will be used to fund the deficiency of the defined benefit plan. System 2000 will reduce the retirement age from 65 years to 60 for those employees who joined the current plan on or after April 1, The pension expense for the years ended June 30, 2003, 2002 and 2001 was $ 140,365, $137,310 and $125,514, respectively. The amount of the total pension benefits obligation is based on a standardized measurement established by general accepted accounting principles that, with some exceptions, must be used by a public employee retirement system. The standardized measurement is the actuarial present value of credited projected benefits. This pension valuation method reflects the present value of estimated pension benefits that will be paid in future years as a result of employee services performed to date and is adjusted for the effects of projected salary increases. The significant actuarial assumptions used to determine the standardized measure of the pension benefits obligation are summarized below: Interest rate Salary increases Mortality Termination 8.5 a year 5.0 a year GAM'83 Mortality table set forward two years Medium Turnover Table commensurate with anticipated experience 19

22 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. PENSION PLAN (CONTINUED): Disability Retirement age Proportion of Participants with Spouses Number of Employees Electing Higher Contributions Cost-of-Living adjustment 65 of Third Railroad Retirement Table Rates Graded scale of retirement ages commensurate with anticipated experience 80 of participants assumed to be married, with wives assumed to be four years younger than husbands 15 of retiring employees assumed to pay retroactive contributions at retirement 3 every third year The required and realized contribution by the employees and the employer for the years ended June 30, is as follows: Required and realized contribution by the employees $ 122,209 $ 118,500 $ 103,544 that represents the total of payroll covered Required and realized contribution by the employer $ 139,888 $ 135,921 $ 119,159 that represents the total of payroll covered The financial statements and required supplementary information for the pension plan are available at the administration office of the Employees' Retirement System of the Government of Puerto Rico, P.O. Box Minillas Station, San Juan, Puerto Rico

23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. LEGISLATIVE GRANTS: The legislative grants represent the budgeted amounts approved by the Legislature of Puerto Rico for the operations of the Corporation. In addition to the budgeted grants of operational character, the Corporation received the following special grants during the years ended June 30, 2003 and 2002: Special grants for betterments $ 561,000 $ 1,000,000 Operating grants 2,753,569 2,645,000 Total governmental grants received 3,314,569 3,645,000 Less amount recorded as deferred income ( 558,120 ) ( 861,209) Add amount previously recorded as deferred revenue and reclassified to revenue this year 380,446 24,606 Less amount recorded as capital contributions ( 383,326 ) ( 163,397) Recorded as nonoperating revenues $ 2,753,569 $ 2,645, CONTINGENCIES: The Corporation is currently subject to claims and suits arising in the ordinary course of its business. The claims and litigation in which the Corporation is currently involved are not reasonably likely to have a material adverse effect on the Corporation's financial position. However, no assurance can be given as to the ultimate outcome with respect to such claims and litigation 21