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82d Congress, 1st Session - House Document No. 34 REPORT ON AUDIT OF THE VIRGIN ISLANDS CORPORATION LETTER FROM THE COMPTROLLER GENERAL OF THE UNITED STATES TRANSMITTING REPORT ON THE AUDIT OF THE VIRGIN ISLANDS CORPORATION FOR THE FISCAL YEAR ENDED JUNE 30, 1950 JANUARY 4, 1951.—Referred to the Committee on Expenditures in the Executive Departments and ordered to be printed UNITED STATES GOVERNMENT PRINTING OFFICE 77127 WASHINGTON : 1951 LETTER OF TRANSMITTAL GENERAL ACCOUNTING OFFICE, COMPTROLLER GENERAL OF THE UNITED STATES, Washington 25, January 4, 1951. The honorable the SPEAKER OF THE HOUSE OF REPRESENTATIVES. DEAR Mr. SPEAKER: There is presented herein report on the audit Of VIRGIN ISLANDS CORPORATION for the fiscal year ended June 30, 1950. This audit was made by the Corporation Audits Division of the General Accounting Office, pursuant to and in accordance with the requirements of the Government Corporation Control Act (31 U. S. C. 841). Respectfully submitted. LINDSAY C. WARREN, Comptroller General of the United States. III CONTENTS Page SUMMARY 1 RECOMMENDATIONS TO THE CONGRESS 2 RECOMMENDATIONS TO THE MANAGEMENT 2 ORGANIZATION AND MANAGEMENT 2 GENERAL OPERATIONS DIVISION 4 Financial position 4 Income from operations 6 RURAL ELECTRIC DIVISION 7 Financial position 8 Income from operations 9 SCOPE OF AUDIT 10 OPINION 10 Exhibit FINANCIAL STATEMENTS Balance sheet, June 30, 1950 1 12 General Operations Division, transfers from the Department of the Interior and the predecessor corporation, June 30, 1950 2 14 General Operations Division, income statement, for the year ended June 30, 1950 3 15 Rural Electric Division, income and deficit statement, for the year ended June 30, 1950 4 16 Notes to financial statements 17 Schedule General Operations Division Cost of sugar produced, for the year ended June 30, 1950_ 1 18 Overhead expenses, for the year ended June 30, 1950_ _ __ 2 19 Summary of miscellaneous activities, for the year ended June 30, 1950 3 20 Land, structures, and equipment, June 30, 1950 4 21 V REPORT ON AUDIT OF THE VIRGIN ISLANDS CORPORATION FOR THE FISCAL YEAR ENDED JUNE 30, 1950 GENERAL ACCOUNTING OFFICE, CORPORATION AUDITS DIVISION, Washington 25, D. C. Hon. LINDSAY C. WARREN, Comptroller General of the United States. DEAR MR. WARREN: We submit herewith our report on the audit of the accounts and financial statements of VIRGIN ISLANDS CORPORATION for the fiscal year ended June 30, 1950. The audit was made pursuant to the requirements of the Government Corpora- tion Control Act (31 U. S. C. 841). SUMMARY Virgin Islands Corporation succeeded The Virgin Islands Company on July 1, 1949. The Corporation was directed to take over the assets, liabilities, and properties administered by the Company and was authorized to continue all general programs, except the manufacture of alcoholic beverages, as well as to engage in broa:d new activities, in order to promote the general welfare of the inhabitants of the Virgin Islands through economic development. See the Virgin Islands Corporation Act approved and effective June 30, 1949 (48 U. S. C. 1407). The Corporation reported a loss of $242,769 for the fiscal year 1950, exclusive of the rural electrification project operated by the Rural Electric Division. The loss reported by the predecessor corporatian for the fiscal year 1949, also exclusive of the rural electrification proj- ect, was $784,435. These amounts are not comparable, however, since the financial statements of the Corporation for the fiscal year 1950 are not consistent with those of the preceding year. The results of sugar operations, the principal activity of the Corporation, are reported on a crop-year basis in the financial statements, while in preceding years these operations were reported on the basis of actual sales and production which took place during the fiscal year. In addition, the new corporation is required by law to bear certain expenses which were not recorded in the predecessor corporation's accounts. These consist of the Government's share of the cost of the retirement system and compensation benefits applicable to the Corporation's employees, and interest on that portion of the Govern- ment's investment in the Corporation represented by advances from the revolving fund and transfers from the Department of the Interior and the predecessor corporation. Also, the new corporation records depreciation on the capitalized value of the properties transferred from the Department of the Interior. These expenses amounted to $127,164 for the year ended June 30, 1950. 1 2 AUDIT OF THE VIRGIN ISLANDS: CORPORATION After restating the 1949 sugar operations on a crop-year basis to make them comparable with the current year's sugar operations, the results show an operating loss (before general expenses and other charges) of $190,087 for that year compared with an operating profit of $81,424 for the fiscal year 1950. This marked improvement was due primarily to the increase in the sugarcane yield from 12.5 to 27.8 tons per acre, resulting in a decrease of $47 per ton in the cost of pro- duction of sugar. In addition, there was an increase of approximately $2 per ton in the gross revenue due to the increased market prices for sugar which prevailed at the end of the fiscal year 1950. Advances of $1,250,000 from the revolving fund in the United States Treasury were received in the fiscal year 1950. In addition a grant of $1,026,000 was appropriated by the Congress to reimburse the Corporation for its estimated operating loss for the year and to provide funds for the repayment of notes payable to the United States Treas- ury by the predecessor corporation in the amount of $750,000. RECOMMENDATIONS TO THE CONGRESS Substantially all of the recommendations for legislative action contained in prior audit reports were adopted in framing the charter for the Corporation; pending further experience we have no recom- mendations to submit. RECOMMENDATIONS TO THE MANAGEMENT Numerous recommendations for the improvement of accounting procedures and records and for the control of physical properties and supplies have been included in our previous audit reports. These recommendations are not repeated in this report because the Corpora- tion's management has either put them into effect or is currently con- sidering them. Additional recommendations have been made in- formally to the management as a result of our audit for the fiscal year 1950. ORGANIZATION AND MANAGEMENT Virgin Islands Corporation was created by the Virgin Islands Corporation Act; approved June 30, 1949, to promote the general welfare of the inhabitants of the Virgin Islands of the United States through the economic development of the islands. The Corporation succeeds The Virgin Islands Company, which originally had been incorporated as an instrumentality of the Department of the Interior by the Colonial Council of St. Thomas and St. John, April 9, 1934, and had been continued as a Federal corporation by the act of June 30, 1948 (62 Stat. 1170). The new corporation is prohibited from engaging in the manufacture of alcoholic beverages, but all other activities of The Virgin Islands Company may be continued. In addition, broad powers to engage in many new activities are provided. These include the making of loans to private enterprises on the islands, improving the transportation facilities between the islands, and encouraging the development of the tourist trade. The Corporation has succession to June 30, 1959, unless sooner dissolved by act of Congress. AUDIT OF THE: VIRGIN ISLANDS CORPORATION 3 The Virgin Islands Corporation Act transferred to the Corporation all the assets and liabilities of the predecessor corporation. In addi- tion, it transferred to the Corporation those Federal properties for- merly operated by The Virgin Islands Company under a lease agree- ment with the Department of the Interior, except that property conveyed to the Department by revocable permit from the Navy Department under an agreement dated January 1, 1948. It also transferred Bluebeard's Castle Hotel in St. Thomas to the new corporation. The law authorizes the establishment of a revolving fund in the United States Treasury, through congressional appropriations, for use by the Corporation in the performance of its powers, not to exceed $9,000,000. Advances are made to the Corporation from the fund when requested by the Corporation. Repayment into the revolving fund is required of any funds in excess of requirements for working capital and authorized plant replacement and expansion. Funds so repaid shall be applied first to outstanding advances from the revolving fund, and then to the 'Government's investment repre- sented by the transfers from the Department of the Interior and the predecessor corporation. The appropriation of additional funds in the form of grants to finance specific programs included in the budget as not predominantly of a revenue-producing character, and to reimburse the Corporation for its estimated operating losses, is also authorized by the provisions of the charter. Appropriations of funds to the revolving fund and in the form of grants are limited to a total of $2,750,000 for the fiscal years 1950 and 1951. The Corporation is required to pay interest into the Treasury on assets transferred and capitalized and on the advances from the revolving fund. The interest rate is determined annually in advance by the Secretary of the Treasury. The management of the Corporation is vested in a board of directors consisting of seven members, including the Secretary of the Interior, the Secretary of Agriculture, the Chairman of the Reconstruction Finance Corporation, the Governor of the Virgin Islands, and three businessmen who are appointed by the President of the United States for a term of six years, except that the terms of office of the appointed directors taking office on June 30, 1949, expire, as designated by the President at the time of appointment, one at the end of two years, one at the end of four years, and one at the end of six years. The directors receive no salaries for their services on the board. The members of the board of directors at June 30, 1950, were: Oscar L. Chapman Secretary of the Interior Charles F. Brannan Secretary of Agriculture Harley use Chairman of the RFC Morris F. De Castro Governor of the Virgin Islands Virgil M. Simmons Businessman (term expires June 30, 1951) Ward Canaday Businessman (term expires June 30, 1953) D. Victor Bornn Businessman (term expires June 30, 1955) At June 30, 1950, the officers of the Corporation and their annual salaries were: President Norman S. Olson Vice president Axel Schade Comptroller Norman Cissel 77127-51---2 $10, 330 7, 740 6, 486 4 AUDIT OF THE, VIRGIN ISLAND'S CORPORATION GENERAL OPERATIONS DIVISION FINANCIAL POSITION The financial position of the General Operations Division, which includes all the activities of the Corporation except the Rural Electric Division, is shown by the balance sheet presented as exhibit 1 in this report. The following summary compares the financial position of the Divi- sion at June 30, 1950, and June 30, 1949: June 30 Increase 1950 1949 (decrease) Current assets: Cash $82, 597 $57, 527 $25, 070 Receivables, net 475, 264 36, 928 438, 336 Anticipated income from unsold portion of crops 958, 744 247, 552 711, 192 Inventories 337, 032 420, 447 83, 415* Prepaid expenses 11, 437 8, 449 2, 988 Total current assets 1, 865, 074 770, 903 1, 094, 171 Less current liabilities: Notes payable to bank 214, 850 214, 850* Accounts payable and sundry accruals 156, 796 190, 450 33, 654* Provision for employees' annual leave_ 49, 915 46, 116 3, 799 Anticipated expenses on unsold portion of crops 349, 555 349, 555 Total current liabilities 556, 266 451, 416 104, 850 Working capital • 1, 308, 808 319, 487 989,321 Land, structures, and equipment, less ac- cumulated depreciation 1, 606, 041 216, 928 1,389, 113 Other assets 75, 390 75, 390 Net assets $2, 990, 239 $536, 415 $2, 453, 824 Represented by investment of U. S. Govern- ment: Interest-bearing investment: Advances from revolving fund $1, 250, 000 $1, 250, 000 Transfers from the Department of the Interior and the predecessor corporation 957, 008 957, 008 Notes payable to the Treasury $750, 000 750, 000* 2, 207, 008 750, 000 1, 457, 008 Non-interest-bearing investment: Capital stock 30 30* Grant 1,026, 000 1,026, 000 Net deficit 242, 769* 213, 615* 29, 154* 783, 231 213, 585* 996, 816 $2, 990, 239 $536, 415 $2, 453, 824 *Deduction AUDIT OF THE VIRGIN ISLANDS CORPORATION 5 The sources of funds provided to finance the General Operations Division activities during 1950 and their disposition are summarized: Funds provided by: Advances from revolving fund in U. S. Treasury: Operating capital $875, 000 Machinery and equipment 375,000 Total advances_ $1, 250, 000 Congressional appropriations in the form of a grant: Estimated operating loss 276,000 Repayment of notes payable to U. S. Treasury 750,000 Total grant 1, 026, 000 Total funds obtained from U. S. Treasury 2, 276. 000 Sales of livestock 9, 325 Total funds provided 2, 285, 325 Funds applied to: • Repayment of notes payable to U. S. Treasury 750,000 Additions to land, structures, and equipment 353, 430 Increase in noncurrent assets 75,390 Retirement of capital stock 30 Net loss for year, less depreciation of $125,615 117, 154 1, 296, 004 Balance, representing net funds applied to increase in work- ing capital $989, 321 The financial statements of the General Operations Division are not consistent with those of the preceding year because the results of the sugar operations are reported on the crop-year basis. In preceding years these operations were reported on the basis of actual sales and production which took place during the fiscal year. The crop-year basis of reporting operations is generally accepted in the sugar industry, both in the United States and in Puerto Rico. In reporting on this basis, all income, operating costs and expenses appli- cable to each year's sugar crop are considered earned or incurred in that fiscal year, whether or not any portion of the crop is processed or sold after the end of the fiscal year. The advantage gained by the use of this method is that the results of sugar operations reported in each fiscal year reflect all of the income and costs of that year's sugar crop, and are not affected by income or costs of any portion of the preceding year's crop. Thus operating results from sugar operations as stated in the financial statements for each fiscal year are placed on a com- parable basis. Anticipated income of $958,744 from the unsold portion of crops represents the sales value of the unprocessed and unsold 1950 sugar crop and its byproduct, molasses, at June 30, 1950. Of this amount $873,791 represents actual sales made subsequent to June 30, 1950. The balance of the unsold sugar, which cannot be sold in the United States until 1951 because of a quota restriction, is priced at June 30, 1950, market value. Anticipated expenses of $349,555 on the unsold portion of crops con- sist of (1) the actual cost of $214,871 of harvesting and processing the 1950 sugar crop after June 30, 1950, and (2) the estimated selling ex- penses of $134,684 applicable to sales of sugar and molasses after June 30, 1950, based on actual selling expenses incurred on completed sales during the year. Certain of the properties transferred pursuant to the Virgin Islands Corporation Act (see p. 3), including the central sugar mill and the abattoir, are not in operation and are of no value to the Corporation; these properties were transferred to the Corporation at the nominal amount of $1 each. Obsolete machinery, and equipment of no use to the Corporation were transferred at no value. All other properties, 6 AUDIT OPTHE. VIRGIN ISLANDS CORPORATION excluding the hotel, were transferred at cost less accumulated de- preciation as of June 30, 1947, as shown in schedule 1 of our audit report for the year ended June 30, 1947, adjusted for all changes from that date to June 30, 1949, the date of transfer. The value of Blue- beard's Castle Hotel was recorded in the accounts at $166,000, the amount approved by the Director of the Bureau of the Budget. Funds were provided by the advance of $375,000 from the revolving fund for additions to machinery and equipment. Additions to property of $353,430 were capitalized during the year. A listing of properties transferred at July 1, 1949, and net additions during the fiscal year 1950 are presented in schedule 4, page 21. INCOME FROM OPERATIONS No new activities were undertaken by the General Operations Division during the fiscal year 1950. It continued the growing of sugarcane and the operation of a sugar mill as its principal activity. The 1950 sugar crop operations resulted in an operating profit of $81,424, before general expenses and other charges. The 1949 crop operations, when reported on the same basis, resulted in an operating loss of $190,087. This marked improvement is due to a number of factors, the foremost of which are as follows: 1. Sugarcane grown and purchased increased from 46,162 tons in 1949 to 99,482 tons in 1950, an increase of 116 percent. Increased rainfall, the use of fertilizers, and more efficient crop management are the principal reasons for this increase. 2. The yield of sugar per ton of sugarcane increased from 202 pounds in 1949 to 217 pounds in 1950. The replacement of many obsolete pieces of machinery contributed a great deal to this increase. 3. The average market price of sugar, after deducting selling expenses, increased from $105.36 per ton in 1949 to $107.60 per ton in 1950. Pertinent data on sugar operations for the fiscal years 1950 and 1949 are summarized: Fiscal year 1950 1949 Sales, less selling expenses $1, 093, 324 $459, 144 Payments received under the Sugar Act of 1948 81, 835 32, 519 Total 1, 175, 159 491, 663 Operating costs and expenses 1, 093, 735 681, 750 Operating gain (loss*) (note) $81,424 $190, 087* Tons of sugar produced 10, 732 4, 579 Tons of sugarcane grown 66, 717 25. 873 Tons of sugarcane purchased 32, 76.5 20, 289 Total tons of sugarcane used in the production of sugar 99, 482 46, 162 Cost of sugar produced per ton $101. 91 $148. 89 Cost of sugarcane per ton: Grown 7.38 11.28 Purchased 7. 01 6. 10 Sugarcane yield—tons per acre 27. 8 12. 5 Sugar yield—pounds of sugar per ton of sugarcane 217 202 NOTE: Includes the results of molasses operations, the natural byproduct of sugar production. For comparison purposes, the 1949 sales and operating costs and expenses have been restated above in accordance with the crop-year basis and include the molasses operations; therefore they will not agree with the a mounts shown in our 1949 report. AUDIT OF THE VIRGIN ISLANDS CORPORATION 7 In compliance with the provision in the Corporation's charter pro- hibiting the manufacture of alcoholic beverages, no rum was produced in 1950. The distillery was leased to A. H. Riise Distillers Corpora- tion, and the entire stock of rum on hand at June 30, 1949, except for 620 cases of bottled rum, was sold during the year. The bulk of the rum was sold to the lessee of the distillery. The rum is to be paid for by installments, the final installment coming due on July 1, 1953. The installments of $75,390 due after June 30, 1951, are classified in the balance sheet as noncurrent assets. The administrative expenses for the fiscal year 1950 were satis- factorily classified by the Corporation for comparison with the detail of such expenses presented in the 1950 budget. These expenses amounted to $112,171, which is within the limitation of $121,480 set, for that year by the Congress. In compliance with the provisions of the Virgin Islands Corporation Act, the Corporation incurred several new expenses in the fiscal year 1950 which were not recorded in the predecessor corporation's accounts. These consist of the Government's share of the cost of the retirement, system and compensation benefits applicable to the Corporation's employees, and interest on that portion of the Government's invest- ment in the Corporation represented by advances from the revolving fund and transfers from the Department of the Interior and the predecessor corporation. In addition, the new corporation records depreciation on the capitalized value of the properties transferred from the Department of the Interior. These expenses amounted to $127,164 for the year ended June 30, 1950. New annual depreciation rates which we deem to be adequate, were established in the fiscal year 1950 for all items of property owned by th6 Corporation on July 1, 1949. These annual depreciation rates were determined by a consulting engineer, specializing in sugar mill and distillery operations, employed by the Corporation. The result- ing depreciation expense for the year amounted to $125,615, of which $84,574 was applicable to those properties transferred from the Department of the Interior. In the fiscal year 1950 the Corporation paid into the United States Treasury the Government's share of the cost of the civil service retirement and disability system and the Federal employees' com- pensation benefits applicable to its employees. These new expenses amounted to $14,066 for the fiscal year 1950. The Corporation also paid into the Treasury interest on the advances of $1,250,000 from the revolving fund and on the transfers of property amounting to $957,008, from the Department of the Interior and the predecessor corporation, as required by the Virgin Islands Corporation Act. The interest rate was fixed by the Secretary of the Treasury at 2 percent for the fiscal year 1950; this interest amounted to $28,525. RURAL ELECTRIC DIVISION Because of the special contractual relations between the Corporation and the Rural Electrification Administration (see note 8, p. 17), the financial statements of the, Rural Electric Division are appraised separately. AUDIT OF THE VIRGIN ISLANDS CORPORATION FINANCIAL POSITION The following summary compares the financial position of the Division at June 30, 1950, and June 30, 1949. June 30 Increase 1950 1949 a (decrease*) Current assets: Cash $8, 399 $20, 919 $12, 520* Receivables, net 28, 526 20,058 8, 468 Inventory of operating supplies 18, 444 18,063 381 Prepaid insurance 1, 225 1, 225 Total current assets 56, 594 59, 040 2, 446* Less current liabilities: Accounts payable and sundry accruals 34, 596 29, 894 4, 702 Provision for employees' annual leave 5, 825 5, 124 701 Total current liabilities 40, 421 35,018 5, 403 Working capital 16, 173 24, 022 7, 849* Land, structures, and equipment, less accu- mulated depreciation 277, 515 257, 747 19, 768 Net assets $293, 688 $281, 769 $11, 919 Represented by investment of U. S. Govern- ment: Notes payable to Rural Electrification Administration and accumulated in- terest $386, 820 $364, 624 $22, 196 Less deficit 93, 132 82, 855 10, 277 $293, 688 $281, 769 $11, 919 a Does not agree with 1949 report because of reclassification of $7,§91 of accounts receivable shown in land, structures, and equipment in 1949. The sources of funds provided to finance the Division's activities during 1950 and their disposition are summarized: Funds provided by: Additional loans from Rural Electrification Ad- ministration ($15,171, plus interest accrued dur- ing year of $7,025) $22, 196 Net income for year (before depreciation of $10,494) _ _ 217 Total funds provided 22, 413 Funds applied to: Additions to land, structures, and equipment 30,262 Balance, representing decrease in working capital $7, 849 As shown by the foregoing comparative summary of assets and liabilities, the working capital of the Division decreased from $24,022 at June 30, 1949, to $16,173 at June 30, 1950. Since property additions continue to be financed through further advances from the Rural Electrification Administration, no large amount of working capital appears to be required for this Division's activities. The land, structures, and equipment are stated on the balance .sheet at their cost of $334,343, less accumulated depreciation of $56,828. Depreciation was computed on the production plant and on the distribution system at rates of 3 and 3.48 percent, respectively, as prescribed by the Rural Electrification Administration. These rates, which were based on depreciation studies, appear to be rea- sonable. AUDIT OF THE VIRGIN ISLANDS CORPORATION 9 Gross additions of $30,262 to property accounts were recorded during the year, consisting of: • Electric generatinz unit and substation facilities (under construction at June 30, 1949) $6, 411 Distribution plant facilities and equipment 21,464 4, Transportation equipment 2,000 Miscellaneous 387 $30, 262 A survey of the existing facilities and future requirements of the Division was completed in September 1950. The increase in demand for electric power on St. Croix is expected to continue, and further additions to the capacity of the plant will be required. Under the terms of the wholesale power contract with the St. Croix Power Authority, the Authority will furnish and install at its own expense an additional generating unit in the Division's generating plant when- ever the excess capacity of the generating plant is no longer sufficient to meet the requirements of the Authority. This generating unit will be purchased and installed in the fiscal year 1951. Additional generat- ing and distribution equipment are needed to meet future require- ments of the Division, and the Rural Electrification Administration will be asked to advance the Division $350,000 for this purpose. The Rural Electric Division is financed by funds advanced by the Rural Electrification Administration, secured to the extent of a mortgage on all property owned or acquired by the Division and on the revenues derived from its operations. (See note 8, p. 17.) At June 30, 1950, the Rural Electrification Administration had advanced $351,671 on the principal amount of loan authorizations totaling $367,731. The remaining authorization of $16,060 represents un- completed construction work and approved projects not yet under- taken. Scheduled payments on the notes to and including the installment due September 5, 1945, were made by the predecessor corporation, but, by agreement; no further payments of principal or interest were required until September 5, 1950, although interest continued to accrue at 2 percent annually. Unpaid interest accumulated to June 30, 1950, amounted to $35,149 and is included in the $386,820 investment shown on the balance sheet at June 30, 1950. Major deficiencies found in the accounting records of the Division in the preceding year were corrected in the year ended June 30, 1950. INCOME FROM OPERATIONS The following summary compares the operating results of the Rural Electric Division for the fiscal years 1950 and 1949. 1950 1949 Electric operating revenue $77, 426 $48, 202 Operating expenses 62, 842 41. 210 14,584 6,992 Other expenses 24,861 9,852 Net loss $10, 2Z7 $2, 860 The increase of $7,417 in the net loss is due primarily to the decision.• by management to take out fire and windstorm insurance on the gen- erating and distribution plants and equipment. The additional in- 10 AUDIT OF THE VIRGIN ISLAND'S CORPORATION surance expense amounted to $6,116. In addition, the Division was required to bear, for the first .time, the Government's share of the cost of the civil service retirement and disability system applicable to its employees. This expense amounted to $1,293 for the year ended June 30, 190. SCOPE OF AUDIT We have examined the balance sheet of Virgin Islands Corporation as of June 30, 1950, and the related statements of income and deficit for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we congidered necessary in the circumstances and appropriate in view of the effectiveness of the system of internal control. OPINION During the examination we observed no program, expenditure, or other financial transaction or undertaking which, in our opinion, was carried on or made without authority of law. In our opinion, the accompanying balance sheet and related state- ments of income and deficit present fairly the financial position of the Corporation at June 30, 1950, and the results of its operations for the year then ended, in conformity with generally accepted accounting principles, and on a basis consistent with applicable Federal laws. The accompanying financial statements are not consistent with those of the preceding year because: 1. Sugar operation g in 1950 are reported on a crop-year basis whereas in the preceding year they were recorded on the bases of actual sales and production within the fiscal year. 2. The cost of maintaining and operating free housing and nursery schools for plantation employees, in prior years allocated to the cost of sugar operations, was included in "General expenses and other charges" in 1950. 3. In compliance with the provisions of the Virgin Islands Cor- poration Act, the Corporation incurred several new expenses in the fiscal year 1950 which were not recorded in the prede- cessor corporation's accounts. These consist of the Govern- ment's share of the cost of the retirement system and com- pensation benefits applicable to the Corporation's employees, and interest on that portion of the Government's investment in the Corporation represented by advances from the revolving fund and transfers from the Department of the Interior and the predecessor corporation. In addition, the new corporation records depreciation on the capitalized value of the properties transferred from the Department of the Interior. 4. Major deficiencies in the accounting records of Rural Electric Division, which adversely affected the financial statements for the fiscal year 1949, were corrected in fiscal year 1950. STEPHEN B. IVES, Director of Corporation Audits. FINANCIAL STATEMENTS 11 • • EXHIBIT 1 VIRGIN ISLANDS CORPORATION BALANCE SHEET-JUNE 30, 1950 ASSETS General Operations Division Rural Electric Division Combined LIABILITIES General Operations Division Rural Electric Division Combined CURRENT ASSETS: CURRENT LIABILITIES: Cash in U. S. Treasury and on hand $82, 597 $8, 399 $90, 996 Accounts payable and sundry accruals: Due other Government agencies $14, 839 $2, 245 $17, 084 Accounts receivable: Other 141,957 32,351 174,308 Government agencies (note 2) 84,082 356 84, 438 156, 796 34, 596 191,392 Other 391, 501 29, 567 421, 068 475, 583 29,923 505, 506 Provision for employees' annual leave 49, 915 5, 825 55, 740 Less estimated loss on collection 319 1, 397 1, 716 Anticipated expenses on unsold portion of 1950 475, 264 28, 526 503, 790 crop (note 3): Sugar 345,380 345,380 Anticipated income from unsold portion of 1950 crop (note 3): Molasses 4, 175 4, 175 349, 555 349, 555 Sugar 931, 340 931, 340 Molasses _ 27, 404 27, 404 556, 266 40, 421 596, 687 Total current liabilities 958, 744 958, 744 INVESTMENT OF THE UNITED STATES GOVERN- Inventories: MENT: Sugarcane under cultivation, 1951 crop Interest-bearing investment: (note 4) 180, 599 180, 599 Advances from revolving fund (note 7) _ 1, 250,000 1, 250, 000 Rum, at cost 1, 448 1, 448 Transfers from the Department of the In- Operating supplies (note 5) 154, 985 18, 444 173, 429 tenor and the predecessor corporation (exhibit 2 and note 7) 957, 008 957, 008 337, 032 18, 444 355, 476 Notes payable to Rural Electrification Ad- ministration, with accumulated interest 11, 437 1, 225 12, 662 Prepaid expenses of 2 percent (note 8) 386, 820 386, 820 Total current assets 1, 865, 074 56, 594 1,921, 668 2, 207, 008 386, 820 2, 593, 828 likIIDIT OF THE VIRGIN ISLANDS CORPORATION LAND, STRUCTURES, AND EQUIPMENT (note 6): Non-interest-bearing investment: Land 183,907 3,836 187, 743 Grant (note 9) 1, 026,000 1,026, 000 Buildings and land improvements 649,232 14,861 664, 093 Less deficit (exhibits 3 and 4) 242, 769 93,132 335, 901 Machinery and equipment 866,441 312,754 1,179, 195 783,231 93,132* 690, 099 Construction work in progress 32,076 2,892 34, 968 Total (schedule 4) 1,731,656 334,343 2,065, 909 Net investment of the United States Gov- Less accumulated depreciation 125,615 56,828 182, 443 ernment 2,990,239 293,688 3,283, 927 Net land, structures, and equipment 1,606,041 277,515 1,883, 556 OTHER ASSETS: Accounts receivable not due within one year (note 10) 75,390 75,390 $3,546,505 $334,109 $3,880, 614 $3, 546,505 $334,109 $3,880,614 *Deduction The notes on page 17 are an integral part of this statement. AUDIT OF THE. VIRGIN ISLANDS CORPORATION 14 AUDIT OF THE VIRGIN ISLANDS. CORPORATION EXHIBIT 2 VIRGIN ISLANDS CORPORATION GENERAL OPERATIONS DIVISION TRANSFERS FROM THE DEPARTMENT OF THE INTERIOR AND THE PREDECESSOR CORPORATION—JUNE 30, 1950 Properties transferred from the Department of the Interior: Federal properties operated under lease agreement with the Department of the Interior, except that property conveyed to the Department by re- vocable permit from the Navy Department $1,004, 623 Federal interest in Bluebeard's Castle Hotel 166,001) 1, 170, 62a Liabilities assumed less assets transferred from the predecessor corporation: Current liabilities $451, 416 Capital stock 30 Notes payable to U. S. Treasury 750, 000 1, 201,446 Current assets 770,903 Land, structures, and equipment (net) 216, 928 987,831 213,615 Transfers from the Department of the Interior and the predecessor corporation, June 30, 1950 (exhibit 1) $957, 008 The notes on page 17 are an integral part of this statement. AUDIT OF THE. VIRGIN ISLANDS CORPORATION VIRGIN ISLANDS CORPORATION GENERAL OPERATIONS DIVISION INCOME STATEMENT For the Year Ended June 30, 1950 15 EXHIBIT 3 Sugar operations, 1950 crop (note 1): Sales: Prior to Subsequent June 80, to June 30, 1950 1950 Total Sugar $345, 336 $925, 301 $1, 270, 637 Molasses 27, 404 27, 404 Payments received from the Production and Marketing Admin- istration of the Department of Agriculture under Sugar Act of 1948 52,611 29,224 81,835 397,947 981,929 1,379,876 Less selling expenses: Sugar 54, 944 142, 775 197, 719 Molasses_ 6, 998 6, 998 54,944 149,773 204,717 Income from 1950 crop 343,003 832, 156 1, 175, 159 Less cost of sugar produced (schedule 1) 308,373 785, 362 1, 093, 735 Operating profit on 1950 crop (before general expenses and other charges) 834, 630 $46, 794 81, 424 Add gain on sale of balance of 1949 crop 14, 118 Operating profit on sugar operations (before general expenses and other charges) 95, 542 'General expenses and other charges: Depreciation (note 6) 125, 615 Administrative expenses 112, 171 Interest on investment of U. S. Government (note 7) 28, 525 Other interest, property taxes, audit fees, and general expenses 119, 267 Net loss from miscellaneous activities (schedule 3) 10, 619 396, 197 Net operating loss 300, 655 Other income: Net gain on sale of rum inventories (note 10) 57, 886 Net loss for year (exhibit 1) 5242, 769 The notes on page 17 are an integral part of this statement. 16 EXHIBIT 4 AUDIT OF THE VIRGIN ISLANDS CORPORATION VIRGIN ISLANDS CORPORATION RURAL ELECTRIC DIVISION INCOME AND DEFICIT STATEMENT For the Year Ended June 30, 1950 Operating revenue Less operating expenses: $77, 42 Production $46,079 Distribution 2, 293 Maintenance 3,976 Depreciation 10,494 Total operating expenses 62,842 Net operating profit 14, 584 General expenses and other charges: General and administrative 16,037 Interest 7,025 Other income and expense (net) 1, 799 24, 861 Net loss for year 10, 277 Deficit, June 30, 1949 82, 855 Deficit, June 30, 1950 (exhibit 1) $93, 132' AUDIT OF THE. VIRGIN IStANDS CORPORATION 17 NOTES TO FINANCIAL STATEMENTS 1. The accompanying financial statements of the General Operations Division are not consistent with those of the preceding year because the results of the sugar operations are reported on a crop-year basis. In preceding years sugar operations were reported on the basis of actual sales and production within the fiscal year. 2. Accounts receivable due from other Government agencies include $81,835 representing the sugar benefit payment receivable from the Production and Marketing Administration of the Department of Agriculture under the Sugar Act of 1948. Of this amount, $29,224 is applicable to sugar produced from July I, 1950, to the end of the crop year. (See note 1.) 3. Under the crop-year basis of reporting, all income, operating costs, and expenses applicable to the year's crop are considered earned or incurred during the fiscal year. Anticipated income of $958,744 represents the estimated sales value of that part of the 1950 crop unsold at June 30, 1950, while anticipated expenses of $349,555 represent the estimated additional operating costs and selling expenses incurred after the end of the fiscal year. (See note 1.) 4. The amount of $180,599 represents the actual costs accumulated to June 30, 1950, of planting, cultivating, preparation of acreage, etc., for crops to be harvested in the fiscal year 1951. The Corporation follows the practice of charg- ing sugar operations, at the time the cane is ground, with all the costs accumulated on the crop harvested. 5. Supplies used in the production of sugar are reported at average cost. The inventory of these supplies at June 30, 1950, has been reduced by the cost of supplies required for the completion of the processing of the 1950 sugar crop. Electrical supplies used by the Rural Electric Division are carried at average cost. 6. The Virgin Islands Corporation Act (63 Stat. 350), approved June 30, 1949, transferred to the Corporation all the assets and liabilities of the predecessor corporation. In addition, it transferred the Federal properties operated by the Company under lease agreement with the Department of the Interior, and Blue- beard's Castle Hotel in St. Thomas. These properties, excluding the hotel, are carried at cost less accumulated depreciation as of June 30, 1947, shown in sched- ule 1 of the Comptroller General's report on the audit of The Virgin Islands Company for the fiscal year ended June 30, 1947, adjusted for all changes from that date to June 30, 1949, the date of transfer. The value of Bluebeard's Castle Hotel was recorded in the accounts at $166,000, the amount approved by the Director of the Bureau of the Budget. New depreciation rates were established for each item of property as of July 1, 1949. 7. The Virgin Islands Corporation Act authorizes the establishment of a revolving fund in the United States Treasury, not to exceed $9,000,000, through congressional appropriations. Advances are made to the Corporation from the fund for use in the exercise of its corporate powers and functions; $1,250,000 was appropriated in the fiscal year 1950. Transfers of $957,008 from the Department of the Interior and the predecessor corporation represent the property and other assets, less the liabilities assumed, transferred to the Corporation at June 30, 1949. The Corporation is required to pay interest on the advances and transfers at a rate determined annually in advance by the Secretary of the Treasury. The rate for the fiscal year 1950 was 2 percent. 8. The notes and interest payable to the Rural Electrification Administration are secured to the extent of a mortgage on the land, structures, equipment, and revenues of the Rural Electric Division. Payments of both principal and interest are to be made only from revenues derived from the operation of these properties. The first payment date on the notes and interest is September 5, 1950. 9. A grant of $1,026,000 was appropriated by the Congress during the fiscal year 1950 to reimburse the Corporation for its estimated operating loss for the year and to provide funds for the repayment of notes payable to the United States Treasury by the predecessor corporation in the amount of $750,000. 10. Virgin Islands Corporation is restricted by its new charter from producing rum and other alcoholic beverages. In compliance with this restriction, the distillery has been leased to a private operator, and the entire stock of rum, except for 600 cases of bottled rum carried in the inventory at June 30, 1950, was sold. The bulk of the rum was sold to the lessee of the distillery and is to be paid for by installments, the final installment coming due on July 1, 1953. Accounts receivable not due within one year of $75,390 represent the installments due after June 30, 1951. 18 SCHEDULE 1 AUDIT OF THE VIRGIN ISLANDS CORPORATION VIRGIN ISLANDS CORPORATION GENERAL OPERATIONS DIVISION COST OF SUGAR PRODUCED For the Year Ended June 30, 1950 Materials used: Sugarcane: Sugar- cane growing Sugar mill Total sugar operations ar Purchased (32,765 tons at $7.01) $229, 595 $229, 595 Grown (66,717 tons at $7.38) 492, 146 492, 146 Other materials $37, 659 60, 783 98, 442 Total materials 37,659 782, 524 820, 183 Direct labor 201, 857 146, 207 348,054 Overhead expenses (schedule 2) 68,801 178, 504 247,305 Total production costs 308,317 1, 107, 235 1, 415, 552 Add inventory, June 30, 1949 183, 829 183, 829 Total costs to be accounted for 492, 146 1, 107, 235 1, 599,381 Deduct: Sugarcane transferred to sugar mill, at cost 492, 146 492, 146 Shipping and handling losses 13, 500 13, 500 492,146 13,500 505,646 Cost of sugar produced (exhibit 3) $1, 093, 735 $1, 093, 735 AUDIT OF THE VIRGIN ISLANDS CORPORATION 19 SCHEDULE 2 VIRGIN ISLANDS CORPORATION • GENERAL OPERATIONS DIVISION OVERHEAD EXPENSES For the Year Ended June 30, 1950 Salaries and wages Maintenance department expenses allocated Sugar- cane growing Sugar mill Total u operations $32, 170 1,233 $69, 038 26,592 $101, 208 27,825 Supplies 7,560 25, 190 32, 750 Tractor expenses 44, 536 2,052 46, 588 Transportation expenses 7,207 26,992 34, 199 Storekeeping expenses 2,500 10,859 13,359 Livestock expenses (work animals) 9, 929 9, 929 Fuel oil and water 13, 100 13, 100 Supervision of purchased sugarcane growing 1,030 1,030 Miscellaneous 4,558 3,651 8,209 109, 693 178,504 288, 197 Less cost of cutting cane seeds 40, 892 40, 892 Total overhead (schedule 1) $68, 801 $178, 504 $247, 305 4. 20 SCHEDULE 3 AUDIT OF THE VIRGIN ISLANDS: CORPORATION VIRGIN ISLANDS CORPORATION GENERAL OPERATIONS DIVISION SUMMARY OF MISCELLANEOUS ACTIVITIES For the Year Ended June 30, 1950 Operation of the yacht "Flight," principally for freight service be- Income Costs and expenses Net income (loss*) tween St. Croix, St. Thomas, and San Juan $6, 547 $11, 092 $4, 545* Rentals: Tractors and other equipment 22, 712 15, 312 7, 400 Leases: Distillery 5, 089 2, 678 2, 411 Bluebeard's Castle Hotel 3, 000 3, 000 Poultry farm 270 1, 284 1, 014* Houses occupied by officers, supervisory personnel, and others 4,769 6,502 1,733* Sales: Livestock 15, 217 18, 905 3, 688* Vegetables (principally tomatoes) 13, 059 13, 059* Shopwork and material 11, 825 9, 316 2, 509 Miscellaneous 6, 667 8, 567 1, 900* $76,096 $86,715 $10, 619* (exhibit 3) AUDIT OF THE VIRGIN ISLANDS CORPORATION VIRGIN ISLANDS CORPORATION GENERAL OPERATIONS DIVISION LAND, STRUCTURES, AND EQUIPMENT—JUNE 30, 1950 21 SCHEDULE 4 Properties transferred from the Department of the Interior and the predecessor corporation, July 1, 1949: Bethlehem sugar mill $411,040 Central sugar mill 1 Distillery, rum warehouses, and bottling plant 111,725 Estate villages and structures 317,565 Transportation equipment 84,863 Water supply and sanitation equipment 45, 199 Administrative and maintenance equipment 43,666 Abattoir 1 Farm equipment 15,441 Livestock 14, 748 Land 177,302 Bluebeard's Castle Hotel 166,000 1, 387, 551 Net additions during the fiscal year 1950: Sugar mill equipment 139,235 Farm equipment, including tractors 133,062 Transportation equipment 38,967 Furniture and fixtures 6,294 Construction work in progress (principally on sugar mill equipment) 32,076 Total additions to machinery and equipment 349,634 Miscellaneous minor buildings, and land improvements 2,543 Increment in livestock 1,263 Total additions 363,430 Less sale of livestock 9,325 Net additions during fiscal year 1950 344, 105 Land, structures, and equipment, June 30, 1950 (exhibit 1) $1, 731, 656