University of Puerto Rico. Audited Financial Statements. June 30, Table of Contents

Transcription

1 Audited Financial Statements June 30, 2001 Table of Contents Report of Independent Auditors... 1 Audited Financial Statements Balance Sheets... 3 Statements of Changes in Fund Balances... 9 Statements of Current Funds Revenues, Expenditures, and Other Changes Statements of Activities and Changes in Net Assets (Discretely Presented Component Unit) Statements of Cash Flows (Discretely Presented Component Unit) Notes to Financial Statements Other Financial Information Revenues and Expenditures of Auxiliary Enterprises Investments Changes in Sinking Fund Reserves Student Tuition and Fees in Effect Report of Independent Auditors on Compliance and Internal Control Over Financial Reporting in Accordance with Government Auditing Standards

2 Report of Independent Auditors Board of Trustees University of Puerto Rico We have audited the accompanying balance sheets of the University of Puerto Rico (the University), a component unit of the Commonwealth of Puerto Rico, as of June 30, 2001 and 2000, and the related statements of changes in fund balances and current funds revenues, expenditures, and other changes for the years then ended, and the statements of activities and changes in net assets, and cash flows for the discretely presented component unit for the year ended June 30, These financial statements are the responsibility of the University's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Servicios Médicos Universitarios, Inc. (the Hospital), a discretely presented component unit as of and for the year ended June 30, Those financial statements were audited by other auditors whose report has been furnished to us, and included an explanatory paragraph stating that the discretely presented component unit has experienced recurring losses since it commenced operations and has a net capital deficiency that rise substantial doubt about its ability to continue as a going concern. Our opinion, insofar as it relates to data included for SMU is solely based on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States 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 audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Puerto Rico as of June 30, 2001 and 2000, and the changes in its fund balances, and its current fund revenues, expenditures and other changes for the years then ended, and changes in net assets, and cash flows for the discretely presented component unit for the year ended June 30, 2001 and 2000, in conformity with accounting principles auditing standards generally accepted in the United States. As discussed in Note 14 to the financial statements, the discretely presented component unit has experienced recurring losses since it commenced operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are described in Note 13. The 2001 financial statements do not include any adjustments that might result from the outcome of this uncertainty. -1-

3 Our audits were conducted for the purpose of forming an opinion on the financial statements of the University of Puerto Rico taken as a whole. The other financial information included in the table of contents is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued a report dated August 31, 2001on our consideration of the University s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with GAS and should be read in conjuction with this report in considering the results of our audit. August 31, 2001 Stamp No affixed to original of this report. -2-

4 Balance Sheets June Assets Current funds: Unrestricted: Cash and cash equivalents $ 47,446,382 $ 69,693,509 Accounts receivable from students, less allowance for doubtful accounts of $ 1,414,354 in 2001 and $1,444,600 in ,232,483 1,199,443 Other accounts receivable, less allowance for doubtful accounts of $ 6,077,720 in 2001 and $3,842,870 in ,228,359 2,724,161 Due from Commonwealth of Puerto Rico 34,787 18,042 Due from other funds 73,803,680 57,902,891 Inventories 5,697,367 5,015,250 Other assets 2,119,085 74,528 Total unrestricted 133,562, ,627,824 Restricted: Cash equivalents 9,407, ,254 Investments 2,483,055 1,565,158 Accounts receivable, less allowance for doubtful accounts of $ 20,619,015 in 2001 and $27,737,400 in ,093,129 86,849,070 Due from Federal Government 20,401,823 17,452,952 Inventories 58,546 58,667 Total restricted 126,444, ,892,101 Total current funds $260,006,537 $243,519,925 Loan fund: Cash $ 4,430,379 $ 2,687,860 Investments 868, ,388 Loans to students, less allowance for loan losses of $10,554,913 in 2001 and $10,574,912 in ,267,810 1,052,637 Total loan fund $ 7,566,325 $ 4,596,885-3-

5 June Liabilities and Fund Balances Current funds: Unrestricted: Accounts payable and accrued expenses $116,754,468 $116,170,202 Fund balance 16,807,675 20,457,622 Total unrestricted 133,562, ,627,824 Restricted: Accounts payable and accrued expenses 29,398,484 24,480,034 Due to other funds 66,303,679 57,302,891 Fund balance 30,742,231 25,109,176 Total restricted 126,444, ,892,101 Total current funds $260,006,537 $243,519,925 Loan fund: Fund balance: U.S. Government grants refundable $ 2,323,499 $ 2,217,392 University funds-restricted 5,242,826 2,379,493 Total fund balance 7,566,325 4,596,885 Total loan fund $ 7,566,325 $ 4,596,885 See accompanying notes. -4-

6 Balance Sheets - Continued June Assets Endowment and similar funds: Cash and cash equivalents $ 1,009,203 $ 3,334,989 Investments 21,721,936 20,200,463 Accounts receivable 1,346, ,670 Total endowment and similar funds $ 24,077,556 $ 23,779,122 Plant funds: Unexpended: Cash and cash equivalents $ 3,339,688 $ 8,848,407 Investments 97,128,360 - Account receivable other 971, ,595 Total unexpended 101,439,272 9,734,002 Renewal and replacement: Cash 14,001,014 18,582,118 Total renewal and replacement 14,001,014 18,582,118 Retirement of indebtedness: Cash 2, Investments 41,541,570 36,730,448 Interest receivable 782, ,506 Total retirement of indebtedness 42,326,789 37,089,831 Investment in plant: Land Buildings 34,797, ,563,050 34,095, ,954,269 Site improvements 72,447,684 52,073,824 Equipment and library books, net of accumulated depreciation of $1,238,135 in 2001 and $1,152,077in ,979, ,342,880 Construction in progress 95,580, ,570,377 Deferred issuance costs 3,503,798 2,424,351 Total investment in plant 876,871, ,461,573 Total plant funds $1,034,638,556 $880,867,524-5-

7 June Liabilities and Fund Balances Endowment and similar funds: Accounts payable $ 1,109,631 $ 153,927 Fund balance: Endowment 3,874,057 3,141,785 Term endowment 20,256 20,130 Quasi-endowment, unrestricted 19,073,612 20,463,280 Total fund balance 22,967,925 23,625,195 Total endowment and similar funds $ 24,077,556 $ 23,779,122 Plant funds: Unexpended: Accounts payable $ 16,222,090 $ 14,854,466 Bonds payable 91,481,061 - Fund deficit (6,263,879) (5,120,464) Total unexpended 101,439,272 9,734,002 Renewal and replacement: Reserve for future replacements 12,930,604 17,476,235 Due from other funds - 600,000 Fund balance 1,070, ,883 Total renewal and replacement 14,001,014 18,582,118 Retirement of indebtedness: Interest payable 1,993,251 1,460,188 Due to other funds 7,500,000 - Fund balance 32,833,538 35,629,643 Total retirement of indebtedness 42,326,789 37,089,831 Investment in plant: Note payable - 74,929,040 Bonds payable 376,427, ,741,185 Net investment in plant 500,443, ,791,348 Total investment in plant 876,871, ,461,573 Total plant funds $1,034,638,556 $880,867,524 See accompanying notes. -6-

8 Balance Sheets - Continued June Assets Agency funds: Cash $ 43,699 $ 18,981 Investments 28,808,119 30,201,673 Total agency funds $28,851,818 $30,220,654 Discretely presented component unit (Servicios Médicos Universitarios, Inc.): Current assets: Cash $ 2,338 $ 1,426 Receivables: Patient accounts receivable, less allowance for doubtful accounts of $16,503,645 in 2001 and $7,597,306 in ,321,876 4,017,073 Estimated third-party payor settlement-medicare 1,437,723 - Other receivables 2,303,263 1,638,942 12,062,862 5,656,015 Inventories 1,537, ,654 Prepaid expenses 614, ,859 Total current assets 14,217,313 6,801,954 Property and equipment: Building improvements 536, ,611 Machinery and equipment 1,739,278 2,432,768 Equipment under capital lease 1,051,149 - Construction in progress - 280,181 3,326,981 2,922,560 Less accumulated depreciation and amortization (1,311,627) (583,380) 2,015,354 2,339,180 Total discretely presented component unit $16,232,667 $ 9,141,134-7-

9 June Liabilities and fund balances Agency funds: Accounts payable and accrued expenses $ 37,464 $ 11,554 Deferred compensation payable 28,808,069 30,201,673 Assets held in custody for others 6,285 7,427 Total agency funds $ 28,851,818 $ 30,220,654 Discretely presented component unit (Servicios Médicos Universitarios, Inc.): Current liabilities: Bank overdraft $ 521,768 $ 129,385 Accounts payable 13,347,163 9,761,288 Accrued expenses 6,370,483 3,036,573 Interest payable 1,119, ,474 Current portion of capital lease obligation 205, ,245 Current long-term debt 35, ,527 Total current liabilities 21,600,206 13,547,492 Capital lease obligation, less current portion 532, ,695 Long-term debt, less current portion 13,632,329 9,657,673 Due to primary government 3,700,000 - Total liabilities 39,464,685 24,027,860 Deficiency in unrestricted net assets (23,232,018) (14,886,726) Total discretely presented component unit $ 16,232,667 $ 9,141,134 See accompanying notes. -8-

10 Statements of Changes in Fund Balances Years ended June 30, 2001 and Revenues and other additions: Current Funds Plant Funds Endowment Renewal Retirement Investment Loan and Similar And of In Unrestricted Restricted Funds Funds Unexpended Replacement Indebtedness Plant Unrestricted current fund revenues $ 698,681,055 $ - $ - $ - $ - $ - $ - $ - Commonwealth of Puerto Rico appropriations, grants and contracts - 44,546, , Federal grants and contracts - 191,309, , Private gifts, grants and contracts - 11,547, , Net investment income - 488,659 53,047-6,461,188-3,081,203 - Interest on loans receivable , Expended for plant facilities, including $26,205,855 charged to current expenditures ,629,956 36,853,848 Retirement of indebtedness ,760,000 Other - 51,274,471 2,107,513-74,058 2, Total revenues and other additions 698,681, ,167,073 2,479, ,671 7,139,374 5,632,281 3,081,203 55,613,848 Expenditures and other deductions: Educational and general expenditures 628,284, ,099, Auxiliary enterprises expenditures 9,002, Refunded to grantors - 491, Loan cancellations and assignments - - 2, Administrative and collection costs , Expended for plant facilities ,465,209 4,812, Retirement of indebtedness ,760,

11 Statements of Changes in Fund Balances (continued) Years ended June 30, 2001 and Current Funds Plant Funds Endowment Renewal Retirement Investment Loan and Similar And of in Unrestricted Restricted Funds Funds Unexpended Replacement Indebtedness Plant Interest on indebtedness $ - $ - $ - $ - $ - $ - $24,174,836 $ - Disposal of plant facilities ,661,349 Net investment loss ,438, Other ,366 Total expenditures and other deductions 637,286, ,590, ,794 1,438,105 11,465,209 4,812,740 42,934,836 7,961,715 Transfers among funds - additions/(deductions): Mandatory: Principal and interest (36,392,971) (664,557) - 37,057,528 - Restricted current matching grants (5,315,091) 4,777, ,000 (12,589) Other transfers: Unrestricted current funds (23,336,115) 18,279,174 1,458,225 (5,836) 3,859,566 (255,014) - - Total transfers (65,044,177) 23,056,854 1,458, ,164 3,182,420 (255,014) 37,057,528 - Net (decrease) increase for the year (3,649,947) 5,633,055 2,969,440 (657,270) (1,143,415) 564,527 (2,796,105) 47,652,134 Fund balances (deficit) at the beginning of year 20,457,622 25,109,176 4,596,885 23,625,195 (5,120,464) 505,883 35,629, ,791,348 Fund balances (deficit) at end of year $ 16,807,675 $30,742,231 $7,566,325 $22,967,925 $ (6,263,879) $1,070,410 $32,833,538 $500,443,482 See accompanying notes. -10-

12 Statements of Changes in Fund Balances (continued) Years ended June 30, 2001 and Revenues and other additions: Current Funds Plant Funds Endowment Renewal Retirement Investment Loan and Similar and of in Unrestricted Restricted Funds Funds Unexpended Replacement Indebtedness Plant Unrestricted current fund revenues $ 647,790,714 $ - $ - $ - $ - $ - $ - $ - Commonwealth of Puerto Rico appropriations, grants and contracts - 49,790, , Federal grants and contracts - 177,229, , Private gifts, grants and contracts - 10,123, , Investment income - 184,742 37,335 3,387,429 71,704-2,223,296 - Interest on loans receivable , Expended for plant facilities, including $31,877,900 charged to current expenditures ,969,702 7,022,881-32,920,504 Retirement of indebtedness ,652,000 Other - 56,735,388 3,137, ,505 19, Total revenues and other additions 647,790, ,064,098 3,828,452 3,807,809 4,485,757 7,042,873 2,223,296 47,572,504 Expenditures and other deductions: Educational and general expenditures 579,498, ,738, Auxiliary enterprises expenditures 10,181, Refunded to grantors - 1,467,584 41, Loan cancellations and assignments - - 2,354, Administrative and collection costs - - 5, Expended for plant facilities ,964,060-4,071,127 Retirement of indebtedness ,652,

13 Statements of Changes in Fund Balances (continued) Years ended June 30, 2001 and Current Funds Plant Funds Endowment Renewal Retirement Investment Loan and Similar and of In Unrestricted Restricted Funds Funds Unexpended Replacement Indebtedness Plant Interest on indebtedness ,021,482 - Disposal of plant facilities ,738,708 Other , ,085 Total expenditures and other deductions 589,680, ,206,181 3,390, ,964,060 32,673,482 33,025,920 Transfers among funds - additions/(deductions): Mandatory: Principal and interest (34,664,046) ,664,046 - Restricted current matching grants (6,030,398) 6,030, Other transfers: Unrestricted current funds (14,728,175) 12,447, ,754 14,416 1,603,413 (13,000) - - Total transfers (55,422,619) 18,477, ,754 14,416 1,603,413 (13,000) 34,664,046 - Net increase for the year 2,687,738 5,335,907 1,113,499 3,822,225 6,089,170 65,813 4,213,860 14,546,584 Fund balances (deficit) at the beginning of year 17,769,884 19,773,269 3,483,386 19,802,970 (11,209,634) 440,070 31,415, ,244,764 Fund balances (deficit) at end of year $ 20,457,622 $ 25,109,176 $4,596,885 $23,625,195 $ (5,120,464) $ 505,883 $35,629,643 $452,791,348 See accompanying notes. -12-

14 Statements of Current Funds Revenues, E xpenditures, and Other Changes Years ended June 30, 2001 and Unrestricted Restricted Total Unrestricted Restricted Total Revenues: Tuition and fees $ $ $ $ $ $ Commonwealth of Puerto Rico 62,193,857 6,723,481 68,917,338 63,915,059 5,709,994 69,625,053 appropriations, grants and contracts 620,851,050 56,701, ,552, ,226,000 55,434, ,660,878 Federal grants and contracts - 191,309, ,309, ,229, ,229,824 Private gifts, grants and contracts - 11,547,459 11,547,459-10,123,368 10,123,368 Sales and services of education 752,724 39,156,040 39,908, ,442 35,166,408 35,989,850 departments Sales and services of auxiliary 6,308,422-6,308,422 7,155,929-7,155,929 enterprises Investment income 5,925, ,659 6,414,036 6,311, ,742 6,495,812 Other sources 2,649,625 5,394,950 8,044,375 3,359,214 15,858,986 19,218,200 Total current revenues 698,681, ,321,985 1,010,003,0 647,790, ,708, ,498,914 Expenditures and mandatory transfers: Educational and general expenditures: 40 Instruction 268,172,007 29,737, ,909, ,626,553 25,131, ,758,202 Research 21,265,910 67,779,445 89,045,355 20,304,811 59,492,786 79,797,597 Public service 14,512,702 32,312,739 46,825,441 12,901,748 32,487,758 45,389,506 Academic support 72,450,724 6,511,748 78,962,472 67,337,949 5,929,745 73,267,694 Student services 36,278,333 3,337,922 39,616,255 33,381,024 2,800,306 36,181,330 Institutional support 116,380,431 7,012, ,392, ,491,996 5,280, ,772,374 Operation and maintenance of plant 87,977, ,682 88,705,971 80,675, ,182 81,117,479 Scholarships and fellowships 1,931, ,031, ,962,907 1,718, ,046, ,765,189 Hospitals - 35,355,478 35,355,478-32,035,104 32,035,104 Independent operations 12,515 1,582,679 1,595,194 22,157 1,537,162 1,559,319 Other deductions 9,303,500 1,709,706 11,013,206 5,038,238 15,555,100 20,593,338 Educational and general expenditures 628,284, ,099, ,384, ,498, ,738, ,237,

15 Statements of Current Funds Revenues, Expenditures, and Other C Years ended June 30, 2001 and 2000 hanges (continued) Unrestricted Restricted Total Unrestricted Restricted Total Mandatory transfers: Principal and interest $ 36,392,971 $ 34,664,046 $ - $ 34,664,046 Restricted current fund 36,392,971 5,315,091 (4,777,680) 36,392, ,411 6,030,398 (6,030,398) - matching grants Total educational and general expenditures and mandatory transfers 669,992, ,321, ,314, ,192, ,708, ,901,178 Auxiliary enterprises - 9,002,042-9,002,042 10,181,822-10,181,822 expenditures Total educational and mandatory 678,994, ,321, ,316, ,374, ,708, ,083,000 transfers Other transfers and Excess/(deficit) of restricted receipts over transfers to revenues - (12,154,912) (12,154,912) - (5,644,102) (5,644,102) Refunded to grantors - (491,207) (491,207) - (1,467,584) (1,467,584) Nonmandatory transfers (23,336,115) 18,279,174 (5,056,941) (14,728,175) 12,447,592 (2,280,583) Other Net (decrease) increase in fund balances $ (3,649,947) $ 5,633,055 $ 1,983,108 $ 2,687,738 $ 5,335,907 $ 8,023,645 See accompanying notes. -1-

16 Discretely Presented Component Unit (Servicios Médicos Universitarios, Inc.) Statements of Activities and Changes in Net Assets Year ended June Revenues: Net patient service revenue $ 29,953,311 $ 24,228,178 Premium revenue 17,921,734 5,537,743 Other revenue 2,120, ,914 Total revenues 49,995,242 30,656,835 Expenses: Salaries and benefits 14,468,915 13,259,929 Contract labor 3,793,876 6,204,278 Professional fees 23,189,465 4,586,144 Supplies 7,865,905 9,316,007 Utilities 2,045,125 1,626,904 Depreciation and amortization 728, ,797 Provision for doubtful accounts 5,145,252 8,730,807 Other 24, ,470 Total expenses 57,261,405 44,702,336 Decrease in unrestricted net assets from operations (7,266,163) (14,045,501) Interest expense 1,079, ,087 Decrease in unrestricted net assets (8,345,292) (14,584,588) Gain on early extinguishment of debt with a related party - 1,500,000 Net deficit at beginning of period (14,886,726) (1,802,138) Net deficit at end of period $(23,232,018) $(14,886,726) See accompanying notes. -9-

17 Discretely Presented Component Unit (Servicios Médicos Universitarios, Inc.) Statements of Cash Flows Year ended June Cash flows from operating activities Decrease in unrestricted net assets from operations $ (7,266,163) $(14,045,501) Adjustments to reconcile decrease in unrestricted net assets from operations to net cash used in operating activities: Depreciation and amortization 728, ,797 Interest (1,079,129) (539,087) Provision for doubtful accounts 5,145,252 8,730,807 Changes in operating assets and liabilities: Receivables Inventories (12,584,954) (827,649) (11,162,738) 18,887 Prepaid expenses 479, ,395 Accounts payable 2,926,116 3,657,182 Accrued expenses 4,366,766 4,432,079 Interest payable 809, ,474 Net cash used in operating activities (7,302,507) (7,685,705) Cash flows from capital a nd related financing activities Purchases of equipment (404,411) (1,103,264) Payments on long term debt and capital lease obligations (382,933) (210,857) (787,344) (1,314,121) Cash flows from non capital financing activities Bank overdraft 392, ,385 Proceeds from long term debt 3,998,380 9,634,002 Net (payments) advances to the University of Puerto Rico 3,700,000 (1,200,000) Net cash provided by financing activities 8,090,763 8,563,387 Net increase (decrease) in cash 912 (436,439) Cash at beginning of the period 1, ,865 Cash at the end of the period $ 2,338 $ 1,426 Supplemental disclosure of cash flow information: Interest paid $ 266,082 $ 228,613 Supplemental noncash disclosure of financing activities: Capital lease obligations for equipment acquired $ - $ 1,051,149 Insurance policy premium financed $ 659,758 $ 413,228 Acquisition of equipment, $315,846 was financed and $284,154 included in accrued expenses. $ - $ 600,000 See accompanying notes. -10-

18 Notes To Financial Statements June 30, Reporting Entity and Summary of Significant Accounting Policies Reporting Entity The University of Puerto Rico (the University) is a public corporation of the Commonwealth of Puerto Rico (the Commonwealth) governed by a thirteen-member Board of Trustees, of which ten are appointed by the Governor of Puerto Rico and confirmed by the Senate of Puerto Rico. The remaining members of the Board consist of one fulltime student and two term professors. The original members were appointed by the Governor for terms from four to eight years. Upon expiration of their terms, the new members will be appointed for a period of six years. The terms for the student and professors are for one year. The University is exempt from the payment of taxes on its revenues and properties. The University is a component unit of the Commonwealth and is presented as a public university fund in the general purpose financial statements of the Commonwealth. The financial reporting entity of the University consists principally of the Río Piedras, Mayagüez and Medical Sciences campuses; the University Colleges with units in Cayey, Humacao, Ponce, Bayamón, Aguadilla, Arecibo, Carolina and Utuado; and the Central Administration. Appropriations from the Commonwealth are the principal source of revenues of the University and are supported by Act No. 2 of January 20, 1966, as amended. Under the Act, the Commonwealth appropriates for the University an amount equal to 9.60% of the average total amount of annual revenues collected under the laws of the Commonwealth in the two fiscal years immediately preceding the current fiscal year. In addition, the Commonwealth has appropriated amounts for general current obligations for capital improvement programs, and for loans and financial assistance to students. Discretely Presented Component Unit Disclosures: A discretely presented component unit is an entity whose operations are separate from the University s but over whom the University has significant accountability. The following is treated as a discretely presented component unit: Servicios Médicos Universitarios, Inc.: The University has a separate non-profit corporation, Servicios Médicos Universitarios, Inc. (the Hospital), which is fiscally dependent on the University, to operate and administer three hospital facilities acquired by the University. The Hospital is legally separated from the University and is governed by a separate board. Complete financial statements of Servicios Médicos Universitarios, Inc. can be obtained directly by contacting the Hospital s administrative offices. -11-

19 Notes To Financial Statements (co ntinued) 1. Reporting Entity and Summary of Significant Accounting Policies (continued) The following is a summary of the significant accounting policies followed by the University: Basis of Presentation The financial statements of the University of Puerto Rico have been prepared on the accrual basis of accounting following the accounting and financial reporting guidance recognized by the American Institute of Certified Public Accountants, Industry Audit Guide - Audits of Colleges and Universities, as amended. Such guidance is in accordance with generally accepted accounting principles. Depreciation is provided on equipment used on auxiliary enterprises. The statement of current funds revenues, expenditures, and other changes is a statement of financial activities of current funds related to the current reporting period. It does not purport to present either the results of operations nor the net income or loss for the period, as would a statement of income or a statement of revenues and expenses. Interest revenue on loans in the loan funds is recognized as revenue when collected, as the amounts involved are not significant. Basis of Presentation - Fund Accounting To ensure observance of limitations and restrictions placed on the use of the resources available to the University, its accounts are maintained in accordance with the principles of fund accounting. This is the procedure by which resources for various purposes are classified for accounting and reporting purposes into funds that are in accordance with activities or objectives specified. Separate accounts are maintained for each fund; however, in the accompanying financial statements, funds that have similar characteristics have been combined into fund groups. Accordingly, all financial transactions have been recorded and reported by fund group. Within each fund group, fund balances restricted by external sources are so indicated and are distinguished from unrestricted funds allocated for specific purposes by action of the University's Administration. Externally restricted funds may only be utilized in accordance with the purposes established by the source of such funds and are in contrast with unrestricted funds over which the University's Administration retains full control of their use in achieving any of its institutional purposes. Endowment funds are subject to restrictions requiring that the principal be invested in perpetuity and only the income be utilized. While quasi-endowment funds have been established by the University's Administration for the same purposes as endowment funds, any portion of quasi-endowment funds may be expended. All gains and losses arising from the sale, collection, or other disposition of investments and other noncash assets are accounted for in the fund which owned such assets. Ordinary income derived from investments, receivables, and the like, is accounted for in the fund owning such assets, except for income derived from investments of endowment and similar funds, which is accounted for in the fund to which it is restricted or, if unrestricted, as revenues in unrestricted current funds. -12-

20 Notes To Financial Statements (continued) 1. Reporting Entity and Summary of Significant Accounting Policies (continued) Basis of Presentation - Fund Accounting (continued) To the extent that the current funds are used to finance plant assets, the amounts so provided are accounted for as (1) expenditures, in the case of normal replacement of movable equipment and library books; (2) mandatory transfers, in the case of required provisions for debt amortization and interest; and (3) transfers of a nonmandatory nature in all other cases. All other unrestricted revenues are accounted for in the unrestricted current funds. Restricted gifts, grants, appropriations, endowment income, and other restricted resources are accounted for in the appropriate restricted funds. Restricted current funds are reported as revenues and expenditures when expended for current operating purposes. The responsibility of the University for the management, accounting and reporting for agency funds is only that of fiscal agent. Cash Equivalents The University considers all highly liquid debt instruments with maturities of three months or less when purchased to be cash equivalents. As of June 30, 2001 and 2000, cash equivalents of $96,065,690 and $114,888,658, respectively, consist of certificates of deposit and time deposits. As of June 30, 2001 and 2000, the Board of Trustees has designated cash equivalents and investments in excess of liabilities and open commitments for the future development of the University's activities, such as the capital improvement program, academic support, and research and development. Therefore, the funds are not available for other uses other than those for which they are designated. The Board of Trustees has the power to redesignate these funds as it may consider necessary. Investments Investments are reported at fair value in the balance sheet. The changes in the fair value of investments are reported in the statement of changes in fund balances and current fund revenues, expenditures and other charges. Donated investments are recorded at their fair value at the date of donation. Investments of the Deferred Compensation Plan are valued at fair value in order to measure the current liability attributable to plan participants. Investment in Plant Physical plant and equipment are stated at cost or fair value as of date of donation in the case of gifts. Interest costs for fixed asset construction are capitalized. Interest capitalized amounted to approximately $ 1,826,104 and $7,642,211 during 2001 and 2000, respectively. -13-

21 Notes To Financial Statements (continued) 1. Reporting Entity and Summary of Significant A ccounting Policies (continued) Investment in Plant (continued) Depreciation on physical plant and equipment is not recorded, except for equipment in auxiliary enterprises. Depreciation is computed on a straight line basis over the estimated useful lives of the related equipment. Inventories Inventories in the current funds are valued at the lower of first-in, first-out cost or market and consist primarily of books. Encumbrances Encumbrances represent outstanding purchase orders, contracts and other commitments for services not received. Encumbrances are not reported as reserves of fund balance in the current funds at year-end since they do not constitute expenditures or liabilities. Reserve for encumbrances of the current unrestricted fund balance amounted to $ 13,731,104 and $16,296,842 at June 30, 2001 and 2000, respectively. Reserve for encumbrances of the current restricted fund balance amounted to $ 16,665,769 and $14,134,272 at June 30, 2001 and 2000, respectively. Interfund Borrowings Interfund borrowings represent temporary advances between the various funds of the University. These borrowings are payable currently and without interest. Bond Premium/Discount and Deferred Issuance Costs Bond premium and/or discount and deferred issuance costs are presented in the net investment in plant. These are amortized using the effective interest method. Deferred Compensation Plan The University offers certain employees a non-qualified deferred compensation plan which was created pursuant to Certification No. 94 of the Council of Higher Education, dated February 13, The plan, managed by independent plan administrators, permits employees to defer a portion of their salary until future years. At the employee's election, such amounts may be invested in mutual funds, which represent varying levels of risk and return. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency. All amounts of compensation deferred under the plan, all property and rights purchased with those amounts, and all income attributable to these amounts, are (until paid or made available to the employee or other beneficiary) solely the property and rights of the University (without being restricted to the provisions of benefits under the plan), -14-

22 Notes To Financial Statements (continued) 1. Reporting Entity and Summary of Significant Accounting Policies (continued) Deferred Compensation Plan (continued) subject only to the claims of the University's general creditors. Participants' rights under the plan are equal to that of general creditors of the University in an amount equal to the fair market value of the deferred account for each participant. It is the opinion of the University's legal counsel that the University has no liability for the losses under the plan but does have the duty of care that would be required of an ordinary prudent investor. The University believes that it is unlikely that it will use the assets of the plan to satisfy the claims of general creditors in the future. Compensated Absences The vacation policy of the University generally provides for the accumulation of 2.5 days per month. Unpaid vacation time accumulated is fully vested to the employees from the first day of work. Employees accumulate sick leave generally at a rate of 1.5 days per month up to a maximum of 90 days. The University pays, annually, the excess of 90 days of accumulated sick leave to the employees. Upon retirement, an employee receives compensation for all accumulated unpaid sick leave at the then current rate, provided the employee has at least 10 years of service with the University. During the years ended June 30, 2001 and 2000, the cost of the excess of 90 days of the accumulated sick leave was $ 6,453,188 and $5,641,018, respectively. Reclassifications Certain reclassifications have been made to the 2000 financial statements to conform with the 2001 financial statements. 2. Cash All the operating cash of the University and its Retirement System (System) is pooled into one bank account. Cash balances by funds represent the cash that is allocated to each fund of the University. The University is authorized to deposit only in institutions approved by the Department of the Treasury of the Commonwealth of Puerto Rico (Treasury) and such deposits are maintained in separate bank accounts in the name of the University. Such authorized depositories, except for the Government Development Bank for Puerto Rico (GDB) and the Economic Development Bank for Puerto Rico (EDB), collateralize the uninsured deposits with securities that are pledged with the Department of the Treasury. No collateral is required to be maintained for deposits in the GDB and EDB, both public corporations of the Commonwealth of Puerto Rico. -15-

23 Notes To Financial Statements (continued) 2. Cash (continued) As of June 30, 2001 and 2000, the carrying value of cash and cash equivalents amounted to $79,680,464 and $104,132,995, respectively, and the cash deposited in the banks amounted to $102,706,737 and $121,219,288, respectively. The University's deposits are the following: June Insured by the United States and Puerto Rico insurance Corporations or collateralized by securities pledged with the Department of the Treasury (University s agent) $ 12,099,183 $ 57,951,779 Uncollateralized (mainly deposits in GDB and EDB) 90,607,554 63,267,509 $102,706,737 $121,219,

24 Notes To Financial Statements (continued) 3. Investments Investments of endowment and similar funds, restricted fund, loan fund and plant funds consist of the following: Carrying Amount June Fair Carrying Value Amount Fair Value Endowment and similar funds: Certificates of deposit $ 2,558,487 $ 2,558,487 $ 1,022,452 $ 1,022,452 Common stock 7,613,767 7,613,767 9,142,853 9,142,853 U.S. treasury bonds and 3,894,975 3,894,975 3,984,381 3,984,381 notes U.S. government agencies 2,182,719 2,182,719 1,812,652 1,812,652 Corporate bonds 5,121,988 5,121,988 3,885,125 3,885,125 Mortgage notes - - 3,000 3,000 Real estate held for sale 350, , , ,000 $ 21,721,936 $ 21,721,936 $20,200,463 $20,200,463 Restricted fund: Certificates of deposit $ 895,905 $ 895,905 $ 105,110 $ 105,110 U.S. government agencies 1,587,150 1,587,150 1,460,048 1,460,048 $ 2,483,055 $ 2,483,055 $ 1,565,158 $ 1,565,158 Loan fund: Certificates of deposit $ 868,136 $ 868,136 $ 856,388 $ 856,388 Plant funds: Retirement of indebtedness: U.S. treasury notes $ 41,541,570 $ 41,541,570 $36,730,448 $36,730,448 Unexpended: Certificate of deposits $ 97,128,360 $ 97,128, $138,669,930 $138,669,930 $36,730,448 $36,730,448 Investments in the Endowment and similar funds, Restricted fund, Loan fund and the Plant Funds-retirement of indebtedness and unexpended consisting of certificates of deposit, mortgage notes and real estate held for sale were held by the University; common stock, US treasury bonds and notes, US government agencies and corporate bonds were held in custody by a commercial bank in the University s name. The certificates of deposit are insured by the United States and Puerto Rico insurance corporations or collateralized by securities pledged with the Department of the Treasury. -17-

25 Notes To Financial Statements (continued) 3. Investments (continued) The investments of the loan fund consist of certificates of deposit held by the University, which are insured by the United States and Puerto Rico insurance corporations or collateralized by securities pledged with the Department of the Treasury. The fair value of these investments approximates their carrying value. 4. Accounts Receivable - Current Restricted Funds Accounts receivable of the current restricted fund at June 30, are as follows: Puerto Rico Department of Health $ 47,179,767 $ 52,819,582 Other 67,532,377 61,766, ,712, ,586,470 Less allowance for doubtful accounts 20,619,015 27,737,400 Accounts receivable, net $ 94,093,129 $ 86,849,070 During 2000, the legislature of Puerto Rico approved a resolution to pay $48,420,764 to the University on behalf of the Puerto Rico Department of Health, over the course of eight years. As of June 30, 2001 the University has received $2,000,000. The remaining balance is included as part of the $47,179, Due from Federal Government The University was notified by the U.S. Department of Education (the Department) during award year that $3,222,352 of Pell Grant Program funds had been deobligated. The Department's basis for the deobligation of the Pell Grant Program funds was that the University had not provided sufficient documentation to reconcile the University's disbursements to the Federal Pell cash authorization awards for award years through The University compiled documentation to substantiate $3,060,415 of Pell Grant Program disbursements in accordance with all applicable federal requirements in effect during the award periods aforementioned. A request was made to the Department to restore the University's authorization level in the amount of $3,060,415 and such amount was recorded as due from federal government in fiscal year During 1996, the University received a payment from the Department amounting to $1,721,135. The Department is in the process of reviewing the documentation submitted by the University for the amount not remitted. -18-

26 Notes To Financial Statements (continued) 5. Due from Federal Government (continued) Due from federal government includes the following: Restoration of award years to Pell Grant Program funds $ 1,339,280 $ 1,339,280 Unreimbursed expenditures related to federal grants 20,401,823 17,452,952 21,741,103 18,792,232 Less valuation allowance 1,339,280 1,339,280 $20,401,823 $17,452, Accounts Payable And Accrued Expenses Accounts payable and accrued expenses of the current funds and agency fund at June 30, are as follows: Current unrestricted fund: Accrued vacation and sick leave $ 77,774,145 $ 70,887,391 Accounts payable 25,515,398 29,252,169 Claims liability 13,464,925 13,355,128 Net pension obligation - 2,675,514 Total $116,754,468 $116,170,202 Current restricted fund: Accrued vacation and sick leave $ 18,459,122 $16,861,405 Accounts payable 10,939,362 7,618,629 Total $ 29,398,484 $ 24,480,034 Agency fund: Accounts payable $ 37,464 $ 11,

27 Notes To Financial Statements (continued) 7. Note Payable The following is a summary of the University's note payable at June 30, 2001 and 2000: Net Investment in Plan: Note payable to Government Development Bank for Puerto Rico (GDB) under two lines of credit agreement under which the University may borrow $83,700,000 and $2,070,000. The lines of credit are due on July 1, 2001 and bear a variable interest determined by GDB. The interest rate as of June 30, 2001 and 2000 was 4.68% and 4.81%, respectively. This note was repaid with the proceeds obtained from an issuance of bonds. $ - $74,929,040 A summary of changes in note payable follows: Balance as of Balance as of June 30, 2000 Proceeds Payments June 30, 2001 Note payable to GDB $74,929,040 $1,070,297 $75,999,337 $

28 Notes To Financial Statements (continued) 8. Bonds Payable - Plant Funds A. Bonds The University has issued revenue bonds designated as University System Revenue Bonds, the proceeds of which have been used mainly to finance new activities in connection with its educational facilities construction program and to cancel and refinance previous debts incurred. The following is the balance of bonds payable: Annual June 30 interest rate Due Series (%) date C - Serial $ $ 1,589,000 1,469, D - Serial 1,878,000 2,028, F - Term 16,050,000 16,875, M - Serial 33,305,000 36,630, M - Term 127,215, ,215, N - Serial 72,040,000 82,960, N - Capital Appreciation Serial 51,980,000 51,980, Bonds O - Serial 94,675, O - Term 101,905, ,517, ,277,000 Less unamortized bond discount (13,146,089) (9,756,853) Plus unaccreted premium 2,805,244 2,036,546 Less future appreciated principal (22,267,095) (23,815,508) $467,909,060 $287,741,185 Capital Appreciation Serial Bonds interest accrues semi-annually and is added to the principal. During the year ended June 30, 2001, the University issued University Revenue Bonds, Series O (Series O Bonds). The Series O Bonds proceeds were used to pay part of the cost of certain additional facilities and a portion of the capital improvement program (both as defined in the Trust Agreement dated as of June 1, 1971, as amended). -21-

29 Notes To Financial Statements (continued) 8. Bonds Payable - Plant Funds (continued) A summary of the net proceeds of the Series O Bonds and application of the proceeds follows: Series O Principal amount of Bonds $200,000,000 Plus: Accrued Interest 664,557 Bonds premium 1,124,353 Less: Original issue discount 2,492,812 Net proceeds $199,296,098 Application of net proceeds: GDB note repayment $ 75,999,337 Deposit to construction fund 119,917,283 Accrued interest 664,557 Insurance payment 730,000 Cost of issuance 1,984,921 Total $199,296,098 The Bonds maturing on June 1,2030 may be redeemed at the option of the University prior to maturity, upon not less than 30 days prior notice by mail, from any available monies, either in whole or in part, on any interest payment date not earlier than June 1, 2005, at the following prices expressed in percentages of the outstanding principal amount of such Bonds to be redeemed plus accrued interest to the redemption date: Period During Which Redeemed Redemption Price June 1, 2005 through May 31, % June 1, 2006 and thereafter 100 % The Series O Bonds maturing on June 1, 2011 through 2020 may be redeemed at the option of the University prior to maturity, upon not less that 30 days prior to notice by mail, from any available monies, either in whole or in part, on any interest payment date not earlier than June 1, 2010, at a redemption price equal to the outstanding principal amount of the Series O Bonds to be redeemed plus accrued interest to the redemption date, without premium. -22-

30 Notes To Financial Statements (continued) 8. Bonds Payable - Plant Funds (continued) B. Debt Service Requirement At June 30, 2001, bonds payable require payments of principal and interest as follows: Principal Interest Total 2002 $ 19,265,000 $ 23,919,013 $ 43,184, ,185,000 22,990,125 43,175, ,170,000 22,013,293 43,183, ,255,000 20,815,030 38,070, ,200,000 19,864,180 38,064,180 Thereafter 404,442, ,234, ,676,722 C. Pledged Revenues $500,517,000 $343,836,363 $844,353,363 The bonds are general obligations of the University and are collateralized by the pledge of, and a first charge on, all revenues derived or to be derived by the University, except for appropriations and contributions, as defined in the Trust Agreement governing the bonds issued. In the event that the pledged revenues are insufficient to pay the principal of, and the interest on, the bonds, the University agrees to provide any additional required monies from other funds available to the University for such purposes, including funds appropriated by the Commonwealth of Puerto Rico. The revenues pledged were as follows for the years ended June 30, 2001 and 2000: Tuition and other fees collected $57,353,106 $58,876,193 Student fees collected 4,840,752 5,038,866 Rental and other charges received for the right of use and occupancy of the facilities in the University system 1,215,439 1,253,420 Bookstore receipts (gross sales less cost of books and supplies sold) 1,005, ,877 Interest on investment of University funds, excluding funds invested pursuant to Article VI of the Trust Agreement 5,925,377 6,311,070 Funds paid to the University in respect to overhead allowance on federal research projects 9,841,068 10,017,756 Other income (including revenues from slot machines operations and racetrack pari - mutual bets) 2,602,592 3,335,423 $82,783,339 $85,336,605 Interest earned on investments in the sinking fund reserve account amounted to $3,006,704 and $2,358,234 for 2001 and 2000, respectively. -23-

31 Notes To Financial Statements (continued) 8. Bonds Payable - Plant Funds (continued) C. Pledged Revenues (continued) The University is required to maintain a sinking fund and construction fund as described in the following paragraphs. D. Plant Funds - Retirement of Indebtedness The funds for retirement of indebtedness consist of a sinking fund which includes three separate accounts designated Bond Service Account, Redemption Account and Reserve Account. The Trustee shall, upon the receipt of the pledged revenues, make deposits to the credit of the following accounts in the amounts specified and in the following order: Bond Service Account - such amount thereof as may be required to make the amount then to its credit equal to the interest then due, or to become due, within the next ensuing six (6) months on the bonds of each series then outstanding, and the amount of principal of the serial bonds of each series then due, or to become due, within the next ensuing twelve (12) months. Redemption Account - such amount, if any, after making the deposit to the Bond Service Account, as may be required to make the amount then to its credit equal to the amortization requirements, if any, for the fiscal year in which such deposit is made for the term bonds of each series then outstanding plus redemption premiums, if any. Reserve Account - such amount, if any, after making the deposit to the above accounts as may be required to make the amount then to its credit equal to the maximum principal and interest (less any federal debt service grant payments) requirements for any year thereafter, on account of all bonds then outstanding. Monies in the Bond Service Account and the Redemption Account shall, as nearly as may be practicable, be continuously invested and reinvested in direct obligations of, or obligations, the principal of and interest on which are unconditionally guaranteed by the United States Government. Monies in the Reserve Account may be invested in a broader range of investments including interest bearing bank accounts, federal agency obligations, repurchase agreements, commercial paper and other highly rated obligations. 9. Commitments And Contingent Liabilities A. Capital Program The University's capital construction program for educational facilities for the fiscal year ended June 30, 2001 and 2000 amounts to approximately $6,920,772 and $7,068,089, respectively. -24-