Bellas Artes 20038 - presupuesto.gobierno.pr€¦ · Corporación del Centro de Bellas Artes de...

CORPORACION DEL CENTRO DE BELLAS

ARTES DE PUERTO RICO

(A Component Unit of the Commonwealth of Puerto Rico)

FINANCIAL STATEMENTS WITH AUDITORS' REPORT

YEARS ENDED JUNE 30, 2003

AND 2002

CORPORACION DEL CENTRO DE BELLAS ARTES DE PUERTO RICO



AND 2002

CONTENTS

Page

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

11-21

INDEPENDENT AUDITORS' REPORT

Board of Directors

Corporación del Centro de Bellas Artes

de Puerto Rico

San Juan, Puerto Rico

We have audited the accompanying basic financial statements of Corporación del Centro de BellasArtes de Puerto Rico

(a component unit of the Commonwealth of Puerto Rico) as of and for the yearsended June 30, 2003

and 2002

as listed in the accompanying table of contents. These basic financialstatements are the responsibility of the Corporation's management. Our responsibility is to express anopinion on these basic financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the basic financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, as wellas evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the basic financial statements referred to above present fairly, in all material respects, thefinancial position of Corporación del Centro de Bellas Artes de Puerto Rico

(a component unit of theCommonwealth of Puerto Rico)

as of June 30, 2003

and 2002, and the results of its operations and cashflows for the years then ended in conformity with accounting principles generally accepted in the UnitedStates of America.

The Management's Discussion and Analysis included in pages 2 through 6, is not a required part of thebasic financial statements but is supplementary information required by the Governmental AccountingStandards Board. We have applied certain limited procedures, which consisted principally of inquiries tomanagement 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 1927306 was

affixed to the original of this

report.

1

MANAGEMENT'S DISCUSSION AND ANALYSIS

This section of Corporación del Centro de Bellas Artes' annual financial report presents our discussionand analysis of the corporation's financial performance during the fiscal years ended on June 30, 2003 and2002.

FINANCIAL HIGHLIGHTS

1) The corporation net assets increased $ 563,475 or 2.99% during the course of this year'soperations. This change was occasioned by the new norms of facilities agreement established inthe corporation.

2) During the year, the non-operating government grants increased in 108,569

or 4.10% incomparison with the previous year.

3) During the year, the corporation expenses increased in $373,975 or 8.07%. This increase wasmotivated by the implementation of the Plan of Reclassification and Remuneration of thecareer's employees. Although the salary increase of $100 monthly by government legislationand the Christmas Bonus increase in $150 by the government decision. Other factors, whichcontributed to the increase, was the payment liquidation of accumulated vacation and sick to theemployees 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 theprevious fiscal year.

OVERVIEW OF THE FINANCIAL STATEMENTS

Management's Discussion and Analysis introduces the Corporation's basic financial statements. The basicfinancial statements include: 1) Statement of net assets, 2) Statements of revenues, expenses and changein 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 mayserve as a useful indicator of whether the financial position of the Corporation as a whole isimproving or deteriorating.

2) Statements of revenues, expenses and changes in net assets. This statement reports how theCorporation's net assets changed during the current fiscal year. All current year revenues andexpenses are included regardless of when cash is received or paid.

3) Statement of cash flows.

This statement provides information about transactions resulting inthe flows of cash or equivalents.

4) Notes to financial statements. The accompanying notes to the financial statements provideinformation essential to a full understanding of the Corporation's financial statements.

2

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 and2002 respectively. (See Table I).

TABLE I


NET ASSETS

Total %

2003

2002

Change

Current assets

885,556

$

2,821,570

%( )68.61

Capital assets

17,994,364

18,145,584

%( )0.83

Other assets

3,211,851

408,181

%

686.87

Total assets

22,091,771

21,375,335

%

3.35

Current liabilities

2,478,990

2,196,656

%

12.85

Non-current liabilities

216,270

345,643

%( )37.43

Total liabilities

2,695,260

2,542,299

%

6.02

Net assets

Invested in capital assets, net of related debt

17,974,064

18,115,372

%( )0.78

Restricted

1,097,614

949,674

%

15.58

Unrestricted (deficit)

324,833

( )232,010

%( )240.01

Total net assets

$ 19,396,511

$ 18,833,036

% 2.99

Operating Revenues

- The corporation's total revenues (excluding non-operating items) increased by23.60% . (See table II). Most of the corporation's revenues come from rental of facilities, parking, sale oftickets and services to producers. Mostly the increase in revenues is due to the application of the newrental policies approved by Management.

3


FINANCIAL ANALYSIS OF THE CORPORATION (CONTINUED)

The total expenses increased by $373,975 or 8.07%. The most significant expenses variances areexplained as follows:

Professional and consulting services - During this fiscal year the Corporation obtained the services of anarchitecture firm to help in the impermeabilization of the roof. Also the services of a marketing firm wereacquired 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 marketinflation.

Bad debts expense - During this year, no increase in the allowance for bad debts was needed to cover forthe possible loss on doubtful accounts receivable.

The non-operating revenues increased by 7.92%, because the Corporation received more interest incomethan in prior year due to high interest rate in deposits because of the economy. Legislative grants weredeferred because capital projects will be completed in future years.

4



TABLE II


Changes in Net Assets

Total %

2003

2002

Change

Operating revenues:

Rental of facilities

$ 941,934

$

347,447

%

171.10

Food and beverage

207,906

181,902

%

14.30

Parking

449,542

407,806

%

10.23

Sale of tickets

490,931

364,836

%

34.56

Services to producers

124,672

284,911

%( )56.24

Assessments for special activities

33,630

173,293

%( )80.59

Other

46,181

96,366

%( )52.08

Total operating revenues

2,294,796

1,856,561

%

23.60

Operating expenses:

Salaries, payroll taxes and fringe benefits

2,643,469

2,426,211

%

8.95

Professional and consulting services

250,050

190,860

%

31.01

Water, electricity and telephone

557,111

513,270

%

8.54

Repairs and maintenance

218,309

231,636

%( )5.75

Food and beverage

73,687

72,234

%

2.01

Security

156,234

133,573

%

16.97

Insurance

271,432

245,825

%

10.42

Depreciation and amortization

680,223

648,555

%

4.88

Bad debts expense

-

22,623

%( )100.00

Advertising

59,254

52,034

%

13.88

Cultural contributions to producers

22,816

8,340

%

173.57

Other

74,577

88,026

%( )15.28

5,007,162

4,633,187

%

8.07

Operating loss

( )2,712,366

( )2,776,626

%( )2.31

Other non-operating revenues (expenses):

Interest income

142,340

48,831

%

191.50

Governmental grants

2,753,569

2,645,000

%

4.10

Interest expense

( )3,394

( )13,481

%( )74.82

Total other nonoperating revenues

2,892,515

2,680,350

% 7.92

Gain (Loss) before contributions

180,149

( )96,276

%( )287.12

Capital contributions

383,326

163,397

%

134.60

Changes in net assets

563,475

67,121

%

739.49

Total net assets, beginning as restated

18,833,036

18,765,915

%

0.36

Total net assets, ending

$ 19,396,511

$ 18,833,036

% 2.99

5



Capital assets

- The corporation had no significant change in capital assets during the current year, butas mentioned in non-operating revenues, the amount deferred refers to various projects which will beimplemented 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 airconditioning system and construction of rehearsal rooms. See note 4 to the basic financial statements foradditional 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 financialstatements 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 thosewith an interest in the government's finances. Questions concerning any of the information provided inthis report or requests for additional financial information should be addressed to the Office of theFinance Director, Corporación Centro de Bellas Artes, PO Box 41287 Minillas Station, San Juan, PuertoRico 00940-1287.

6



STATEMENTS OF NET ASSETS - JUNE 30, 2003

AND 2002

ASSETS

2003

2002

Current assets:

Cash and cash equivalents

$ 466,868

$

2,666,151

Accounts receivable

235,731

38,427

Other assets, principally prepaid insurance

182,957

116,992

Total current assets

885,556

2,821,570

Noncurrent assets:

Property and equipment

17,708,492

17,859,712

Art work

285,872

285,872

Certificates of deposit

3,211,851

408,181

Total noncurrent assets

21,206,215

18,553,765

22,091,771

21,375,335

LIABILITIES

Current liabilities:

Accounts payable:

Operational

177,120

163,507

Government entities

2,630

18,223

Compensated absences

109,000

61,000

Accrued expenses

53,563

50,543

Deposits from clients

485,378

174,533

Collections on behalf of producers

21,062

143,328

Deferred income

1,585,762

1,408,089

Current portion of capital lease obligations

11,104

9,912

Current portion of long-term debt

33,371

167,521

Total current liabilities

2,478,990

2,196,656

Noncurrent liabilities

Capital lease obligations

9,196

20,300

Long-term debt

-

33,371


207,074

291,972

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

1,097,614

949,674

Unrestricted (deficit)

324,833

( )232,010

$ 19,396,511

$ 18,833,036

See notes to financial statements.

7



STATEMENTS OF REVENUES, EXPENSES AND

CHANGES IN FUND NET ASSETS


AND 2002

2003

2002

Operating revenues:

Rental of facilities

$ 941,934

$

347,447

Food and beverage

207,906

181,902

Parking

449,542

407,806

Sale of tickets

490,931

364,836

Services to producers

124,672

284,911

Assessments for special activities

33,630

173,293

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

250,050

190,860

Water, electricity and telephone

557,111

513,270

Repairs and maintenance

218,309

231,636

Food and beverage

73,687

72,234

Security

156,234

133,573

Insurance

271,432

245,825

Depreciation and amortization

680,223

648,555

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

383,326

163,397

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


8



STATEMENTS OF CASH FLOWS


AND 2002

2003

2002

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



STATEMENTS OF CASH FLOWS (CONTINUED)


AND 2002

2003

2002

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

680,223

648,555

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

665,674

598,705

Net cash used in operating activities

$( )2,046,692

$( )2,177,921


10



NOTES TO FINANCIAL STATEMENTS


AND 2002

1.

ORGANIZATION:

The Corporación del Centro de Bellas Artes de Puerto Rico (the Corporation) was created by LawNo. 43 of May 12, 1980 of the Commonwealth of Puerto Rico to manage the Centro de BellasArtes. The Corporation is a public corporation and an instrumentality of the Commonwealth ofPuerto Rico. The Corporation commenced operations in April 1981, as part of the Arts and CulturalDevelopment Administration. On July 1st, 1985, the Corporation was transferred to the Instituto deCultura Puertorriqueña under Law No. 1 of July 31, 1985, which amended Law No. 43 of May 12,1980.

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 governmentalagency 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, withthe counsel and approval of the Senate of Puerto Rico. The Board has the power to make decisionsand is responsible for them.

Designation of management:

The Board of Directors appoints a General Manager. The General Manager selects the othermembers of management. The powers and functions of management reside within the legal limitsof 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 itsoperations. This legal capacity includes, but not limited, to the control of the assets, which includefacilities and properties, make short-term loans, and contract and develop programs.

11



NOTES TO FINANCIAL STATEMENTS (CONTINUED)


AND 2002

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 withaccounting 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 asrevenue as soon as all eligibility requirements imposed by the provider have been meet. Thelegislative grants and donations for permanent betterments or for any specific activity not used inthe fiscal year are credited to a deferred income account and income when used.

Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operatingrevenues and expenses generally result from providing services in connection with a proprietaryfund's principal ongoing operations. The principal operating revenues of the Corporation are rentalof 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 arereported 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 Entitiesthat Use Proprietary Fund Accounting. This Statement requires that proprietary activities apply allapplicable GASB pronouncements as well as Statements and Interpretations issued by the FinancialAccounting Standards Board (FASB), Accounting Principles Board (APB) Opinions, andAccounting Procedures issued on or before November, and ARBs issued on or before November30, 1989, a proprietary activity may also elect to apply all FASB Statements and Interpretationsissued after November 30, 1989, except those that conflict with or contradict GASBpronouncements. The Corporation has elected to apply FASB Statements and Interpretations issuedafter November 30, 1989.

Use of estimates in the preparation of financial statements:

The preparation of financial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reported amounts of assetsand liabilities and related disclosures at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period. Actual results could differ fromthose estimates.

12





AND 2002

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 theCommonwealth of Puerto Rico require that public funds deposited in commercial banks becollateralized when funds exceed the amount insured by the Federal Government. The securitiespledged by the banks as collateral for those deposits are under the custody of the Secretary of theTreasury 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 originalmaturities of less than three months. At June 30, 2003 $1,097,614

was restricted for the realizationof permanent work and betterments.

Capital assets:

Capital assets, which include land, building, betterments, and equipment donated to the Corporationby agencies of the Commonwealth of Puerto Rico are stated at estimated fair market value at thedate 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 materiallyextend assets lives are not capitalized. Major outlays for capital assets, renewals and betterments arecapitalized. Depreciation is computed on a straight-line basis over the following estimated usefullives:

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





AND 2002

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 whenit 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 of60 days, and sick leave benefits of 1.5 days per month, up to a maximum of 90 days. Accumulatedvacations and sick leave amounted to $316,074

at June 30, 2003.

Cultural contributions:

As part of the commitment of the Corporation in the development of the arts, the Corporation grantscultural contributions. During the years ended June 30, 2003

and 2002 the Corporation grantedcontributions to producers of $22,816

and $ 8,340

respectively.

3.

ACCOUNTS RECEIVABLE:

2003

2002

Trade

$ 212,857

$ 110,654

Governmental entities

100,498

5,397

313,355

116,051

Less allowance for doubtful accounts

( )77,624

( )77,624

$ 235,731

$ 38,427

14





AND 2002

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:


23,979,874

150,485

-

24,130,359

Construction in Process

-

50,498

-

50,498


4,107,508

328,020

-

4,435,528

Musical instruments

250,400

-

-

250,400

Recording equipment

213,621

-

-

213,621

Motor vehicles

78,043

-

-

78,043

Total capital assets, being depreciated

28,629,446

529,003

-

29,158,449

Less accumulated depreciation for:


9,333,735

500,321

-

9,834,056


3,504,319

167,382

-

3,671,701

Musical instruments

233,016

12,520

-

245,536

Recording equipment

213,621

-

-

213,621

Motor vehicles

78,043

-

-

78,043

Total accumulated depreciation

13,362,734

680,223

-

14,042,957

Total capital assets, net

$17,859,712

$( )151,220

$ -

$ 17,708,492

15





AND 2002

5.

CAPITAL LEASE:

The Corporation has entered into a lease agreement as lessee for financing the acquisition oftelephone 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 theinception date. Obligation under capital lease, due in monthly installments of approximately $1,071,including interest of 10.95% due until March 2005.

The asset acquired through capital lease is as follows:

2003

2002

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

2004

12,852

2005

9,639

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





AND 2002

6.

LONG-TERM DEBT:

2003

2002

Unsecured note payable to the Puerto Rico Electricityand Power Authority, due in 21 monthly installmentsof $10,000 and 39 monthly installments of $11,475,including interest at 8% annually

$ -

$

33,973

Payment plan with Treasury Department for publicinsurance, paid in a lump sum of $217,493 inSeptember, 2000 and 36 monthly installments of$11,129 thereafter, non-interest bearing

33,371

166,919

$ 33,371

$ 200,892

Future scheduled maturities of long-term debt are as follows:

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

166,919

-

133,548

33,371

33,371

Total

200,892

-

167,521

33,371

33,371

Capital leases

30,212

-

9,912

20,300

9,196


352,792

85,937

122,655

316,074

109,000

Long-term liabilities

$ 583,896

$ 85,937

$ 300,088

$ 369,745

$ 151,567

17





AND 2002

7.

PENSION PLAN:

The Corporation is a participant of the Retirement System of the Commonwealth of Puerto Ricoand its instrumentalities, a cost sharing multiple-employer defined benefit retirement system. Theplan covers substantially all governmental employees. This retirement system provides benefits forretirement, disability, death and an annuity to the employees of the Commonwealth of Puerto Ricothat are not covered by any other retirement system.

The retirement and related benefits provided by the system and the contributions required from theemployees are stated in Law No. 447 of May 15, 1951, as amended. Members' contributions are5.775% or 8.275% and the Corporation's contributions are 9.275% of the gross salary.

The participants who reach the age of 55 and who have completed at least 25 years of creditedservice or the participants who reached the age of 58 years (65 years for employees who areparticipants 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 ofcredited service up to 20 years, plus 2% of the average compensation multiplied by the number ofyears 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 yearsfor 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, 2000. Employees participating in the current system asof December 31, 1999, elected either to stay in the defined benefit plan or transfer to the newprogram. Persons joining the government on or after January 1, 2000, were only allowed to becomemembers of System 2000.

18





AND 2002

7.

PENSION PLAN (CONTINUED):

System 2000 is a hybrid defined contribution plan, also known as a cash balance plan. Under thisnew plan, there will be a pool of pension assets, which will be invested by the System, together withthose of the current defined benefit plan. Benefits at retirement age will not be guaranteed by theCommonwealth. The annuity will be based on a formula which assumes that each year theemployee's contribution (with a minimum of 8.275% of the employee's salary up to a maximum of10%) will be invested in an account which will either: (1) earn a fixed rate based on the two-yearConstant Maturity Treasury Note or, (2) earn a rate equal to 75% of there turn of the System'sinvestment 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 plansshowing their accrued balances. Disability pensions will not be granted under System 2000. Theemployers' contribution (9.275% of the employee's salary) will be used to fund the deficiency of thedefined benefit plan.

System 2000 will reduce the retirement age from 65 years to 60 for those employees who joined thecurrent plan on or after April 1, 1990.

The pension expense for the years ended June 30, 2003, 2002 and 2001 was $ 140,365 , $137,310and $125,514, respectively.

The amount of the total pension benefits obligation is based on a standardized measurementestablished by general accepted accounting principles that, with some exceptions, must be used by apublic employee retirement system. The standardized measurement is the actuarial present value ofcredited projected benefits. This pension valuation method reflects the present value of estimatedpension benefits that will be paid in future years as a result of employee services performed to dateand is adjusted for the effects of projected salary increases. The significant actuarial assumptionsused to determine the standardized measure of the pension benefits obligation are summarizedbelow:

Interest rate

8.5% a year

Salary increases

5.0% a year

Mortality

GAM'83 Mortality table set forward two years

Termination

Medium Turnover Table commensurate withanticipated experience

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AND 2002

7.

PENSION PLAN (CONTINUED):

Disability

65% of Third Railroad Retirement Table Rates

Retirement age

Graded scale of retirement ages commensuratewith anticipated experience

Proportion of Participants with Spouses

80% of participants assumed to be married,with wives assumed to be four years youngerthan husbands

Number of Employees Electing Higher

15% of retiring employees assumed to pay

Contributions

retroactive contributions at retirement

Cost-of-Living adjustment

3% every third year

The required and realized contribution by the employees and the employer for the years ended June

30, is as follows:

2003

2002

2001

Required and realized contribution by the

employees

$ 122,209

$ 118,500

$

103,544

% that represents the total of payroll covered

5.74%

7.75%

7.47%

Required and realized contribution by the employer

$ 139,888

$ 135,921

$

119,159

% that represents the total of payroll covered

6.57%

8.89%

8.59%

The financial statements and required supplementary information for the pension plan are availableat the administration office of the Employees' Retirement System of the Government of PuertoRico, P.O. Box 42003 Minillas Station, San Juan, Puerto Rico 00940.

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AND 2002

8.

LEGISLATIVE GRANTS:

The legislative grants represent the budgeted amounts approved by the Legislature of Puerto Ricofor 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

and2002:

2003

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

$ 2,645,000

9.

CONTINGENCIES:

The Corporation is currently subject to claims and suits arising in the ordinary course of itsbusiness. The claims and litigation in which the Corporation is currently involved are notreasonably 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

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