Annual Report of a Foreign Private Issuer — Form 20-F
Filing Table of Contents
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1: 20-F Annual Report of a Foreign Private Issuer 176 848K
2: EX-1.1 Underwriting Agreement 5 22K
3: EX-8.1 Opinion re: Tax Matters 1 4K
4: EX-12.1 Statement re: Computation of Ratios 2± 9K
5: EX-12.2 Statement re: Computation of Ratios 2± 9K
6: EX-12.3 Statement re: Computation of Ratios 2± 9K
7: EX-13.1 Annual or Quarterly Report to Security Holders 1 7K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 20-F
|_| Registration Statement pursuant to Section 12(b) or (g)
of the Securities Exchange Act of 1934
OR
|X| Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
|_| Transition Report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File Number: 1-13406
Administradora de Fondos de Pensiones BBVA Provida S.A.
(Exact name of Registrant as specified in its charter)
Provida Pension Fund Administrator Republic of Chile
(Translation of Registrant's name into (Jurisdiction of incorporation or
English) organization)
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Avenida Pedro de Valdivia 100
Santiago, Chile
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, without nominal (par) New York Stock Exchange*
value American Depositary Shares New York Stock Exchange
each representing
fifteen shares of Common Stock,
without nominal (par) value
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* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
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Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
N/A
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Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
Common Stock, without nominal (par) value-- 331,316,623
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the Registrant has
elected to follow:
Item 17 Item 18 X
Table of Contents
Page
PRESENTATION OF INFORMATION
Item 1. Identity of Directors, Senior Management and Advisers 4
Item 2. Offer Statistics and Expected Timetable 4
Item 3. Key Information 4
Item 4. Information on Provida 10
Item 5. Operating and Financial Review and Prospects 59
Item 6. Directors, Senior Management and Employees 81
Item 7. Major Shareholders and Related Party Transactions 87
Item 8. Financial Information 90
Item 9. The Offer and Listing 92
Item 10. Additional Information 96
Item 11. Quantitative and Qualitative Disclosures About Market Risk 102
Item 12. Description of Securities Other Than Equity Securities 103
Item 13. Defaults, Dividend Arrearages and Delinquencies 103
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds 103
Item 15. Control and Procedures 103
Item 16. [Reserved] 104
Item 16A. Audit Committee Financial Expert 104
Item 16B. Code of Ethics 104
Item 16C. Principal Accountant Fees and Services 104
Item 17. Financial Statements 105
Item 18. Financial Statements 105
Item 19. Exhibits 105
2
PRESENTATION OF INFORMATION
In this annual report, references to "US$", "US dollars" and "dollars" are
to United States dollars and ThUS$ to thousands of US dollars, references to
"pesos" or "Ch$" are to Chilean pesos, references to "Ch$ million" or "MMCh$"
are to million Chilean pesos, and references to "UF" are to Unidades de Fomento.
The Unidad de Fomento ("UF") is a unit of account that is linked to, and is
adjusted daily to reflect changes in the Chilean consumer price index. At
December 31, 2003, one UF was equivalent to Ch$16,920.00. Percentages and
certain dollar and peso amounts contained herein have been rounded for ease of
presentation. Unless otherwise indicated, the exchange rate used to translate
peso amounts into dollars appearing throughout this annual report is the Dolar
Observado (the Observed Exchange Rate) reported by the Banco Central de Chile
(the "Central Bank") on December 31, 2003, which was Ch$593.80 = US$1.00. These
translations should not be construed as representations that the peso amounts
actually represent such dollar amounts or could be converted into dollars at the
rates indicated or at any other rate. Peso amounts presented herein in terms of
"constant" Chilean pesos are expressed in pesos as of December 31, 2003, by
adjusting year on year inflation.
The terms "AFP Provida", "Provida", "BBVA Provida", and "the Company",
unless the context otherwise indicates, refers to Administradora de Fondos de
Pensiones Provida S.A. References to "AFP" or "AFPs" refer to private pension
fund administrators in general.
The term "Authority" and "SAFP" means the Superintendency of Pension Fund
Administrators, the principal regulator of Chile's pension system.
The term "billion" means one thousand million (1,000,000,000).
The term "trillion" means one thousand billion (1,000,000,000,000)
In this annual report and related to BBVA Provida's business, the term
"affiliate" means a client that has made contributions at least one time in his
individual capitalization account, while "cotizante" or "contributor" means an
affiliate currently making pension contributions.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains statements that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear throughout this Annual
Report on Form 20-F and include statements regarding our intent, belief or
current expectations, our officers or our management with respect to (i) our
asset growth and financing plans, (ii) trends affecting our financial condition
and results of operations, (iii) the impact of competition and regulations, and
(iv) our exposure to various types of market risks, such as interest rate risk,
foreign exchange rate risk and market price risk. Forward-looking statements
include known and unknown risks and uncertainties and are indicated by words
such as "anticipate", "believe", "expect", "intend", "risk", "could", "may",
"will", "seeks", and similar words and phrases and the negatives and variations
thereof. Such forward-looking statements are not guarantees
3
of future performance and involve risks and uncertainties, and actual results
may differ materially from those described in such forward-looking statements in
this Annual Report on Form 20-F, including, without limitation, "Business
Overview", "Operating and Financial Review and Prospects" and "Quantitative and
Qualitative Disclosures About Market Risk".
Some factors that could cause actual results to differ materially from
those estimated by the forward-looking statements contained in this Annual
Report on Form 20-F include, but are not limited to: general economic conditions
in Chile and Latin America and the other countries in which we have significant
business activities or investments, including the United States; the monetary
and interest rate policies of the Central Bank; natural disasters, unanticipated
turbulence in interest rates, foreign exchange rates, equity prices or other
rates or prices; changes in Chilean and foreign laws, regulations and taxes;
changes in competition and pricing environments; natural disasters; the
inability to hedge certain risks economically; the adequacy of loss reserves;
technological changes; changes in consumer spending and saving habits; and our
success in managing the risks involved in the foregoing.
The forward-looking statements contained in this document speak only as of
the date of this report, and we do not undertake to update any forward-looking
statement to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
Selected Financial Data
The following table presents selected financial and operating information
for BBVA Provida as of the dates and for each of the period indicated. This
information should be read in conjunction with, and is qualified in its
entirety by reference to, the Audited Consolidated Financial Statements and the
Operating and Financial Review and Prospects included in Item 5 appearing
elsewhere in this annual report. The selected financial information as of and
for the periods ended December 31, 2003, 2002 and 2001 was audited by Deloitte
& Touche, Sociedad de Auditores y Consultores Ltda. whose report is included
herein. The selected financial information for the years 1999 and 2000 has been
restated to reflect the correction of the error related to the issue disclosed
in Note 40 to our financial statements.
The Audited Consolidated Financial Statements have been prepared in
accordance with Chilean GAAP, which differs in certain significant aspects to
U.S. GAAP. The Note 42
4
to the Audited Consolidated Financial Statements provides a description of the
main differences between Chilean GAAP and U.S. GAAP and a reconciliation of net
income and shareholders' equity as of and for the years ended December 31, 2001,
2002 and 2003, respectively, between Chilean GAAP and U.S. GAAP.
Pursuant to Chilean GAAP, the financial data in the following table for all
periods are restated in constant Chilean pesos as of December 31, 2003. See Note
1 to the Audited Consolidated Financial Statements.
[Enlarge/Download Table]
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As of and for the Twelve Months ended, December 31,
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1999(9) 2000(9) 2001(8) 2002(8) 2003 2003
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(In millions of Ch$ and thousands of US$)(1)(2)
Restated Restated Restated Restated
(8) unaudited
INCOME STATEMENT DATA Ch$ Ch$ Ch$ Ch$ Ch$ US$
Chilean GAAP:
Operating revenues 107,390 99,908 103,185 106,375 114,297 192,484
Operating cost and expenses (76,532) (68,088) (73,677) (70,595) (84,101) (141,631)
Income from operations 31,398 31,820 29,508 35,780 30,196 50,853
Non-operating expenses - net (9,660) (1,339) 11,098 1,916 9,942 16,743
Income taxes 370 750 (12,399) (3,501) (8,133) (13,697)
Extraordinary items 0 0 2,295 0 0 0
Net income 22,108 31,231 30,502 34,195 32,005 53,899
Earning per share and per ADS (3) (4) (6)
Income from operations per share (6) 116 96 89 108 91 0.15
Net income per share(6) 82 94 92 103 97 0.16
Dividends per share and per ADS (4) (5) (6) 44 30 58 75 77 0.13
Dividends per share and per ADS (in US$) (4) 0.07 0.05 0.10 0.13 0.13
(5) (6)
US GAAP:
Operating revenues 107,930 99,908 100,654 103,395 113,192 190,623
Operating cost and expenses (76,532) (68,088) (77,475) (71,825) (87,369) (147,135)
Income from operations 31,398 31,820 23,179 31,570 25,823 43,488
Non-operating expenses - net (11,266) (8,520) 35,437 4,261 11,082 18,663
Income taxes (3,042) (3,347) (15,821) (4,082) (8,791) (14,805)
Net income 17,090 19,953 42,795 31,749 28,114 47,346
Earning per share and per ADS (3) (4) 63 60 129 96 85 0.14
Weighted average number of shares 270,987 331,317 331,317 331,317 331,317
outstanding (thousands)
BALANCE SHEET DATA
Chilean GAAP:
Current assets 11,954 5,848 8,219 9,802 15,166 25,541
Mandatory Investments 64,830 69,042 75,703 80,188 92,253 155,360
Property, plant and equipment 25,427 25,563 24,853 23,880 25,817 43,479
Total assets 198,587 236,350 215,379 219,451 231,418 389,726
Total shareholders' equity 132,986 149,172 162,087 173,052 172,812 291,027
US GAAP:
Current assets 11,954 5,743 10,294 9,802 15,166 25,541
Mandatory Investment 64,830 69,042 75,703 80,188 92,253 155,360
Property, plant and equipment 25,427 25,563 24,853 23,880 25,817 43,478
Total assets 202,749 226,257 198,215 198,959 231,418 389,724
Total shareholders' equity 124,205 134,993 164,093 174,789 169,476 285,409
(1) Except per share and per ADS data.
(2) Amounts stated in US dollars as of December 31, 2003 or for the twelve
months ended December 31, 2002 have been translated at the observed
Exchange Rate of Ch$593.80 per US$1.00.
(3) Net income per share and per ADS data under Chilean GAAP have been
calculated on the basis of the weighted average number of shares
outstanding during the year. Earning per share and per ADS data under US
GAAP have been calculated on the basis of the weighted average number of
shares outstanding during the year.
(4) Calculated on the basis of one share per ADS.
5
(5) Dividends per share and per ADS in Chilean pesos represent actual dividends
paid restated to December 31, 2003. Dividends per share and per ADS in U.S.
dollars have been calculated based on the Chilean pesos paid and the
Observed Exchange Rate as of each date of payment.
(6) In 1999, the number of shares was modified by exchanging 15 new shares of
Provida's Capital Stock for each old share. The total number of outstanding
shares is 331,316,623.
(7) The Company's audit as of and for the year ended December 31, 2000 was
performed by other auditors who have ceased operations. The restatement
adjustment discussed in Note 40 to our financial statement has been
reflected in the appropriate amounts in this column. Net income under
Chilean GAAP and U.S. GAAP for this period was adjusted by Ch$1,345
million.
(8) On January 22, 2004, the Company received a written communication from the
Superintendency of Pension Funds Administrators requiring a restatement of
the Company's Chilean GAAP financial statements to more clearly match
expenses and revenue related to changes in casualty rate experience for
the disability and survival pension insurance premium. The effect on the
December 31, 2001 and 2002 Chilean GAAP financial statements is detailed
in Note 40 of our financial statements. This effect was reflected in the
U.S. GAAP December 31, 2001 and 2002 financial statements along with other
restatement adjustments as detailed in Note 42.
(9) The reStatement adjustment discussed in (7) above is included in the
appropriate line items in this column in the amount of Ch$866 million.
Exchange Rate Information
The following table sets forth, for the periods and dates indicated,
certain information concerning the exchange rate between the Chilean peso and
the US dollar. Such rates are provided only for the convenience of the reader
and are not necessarily the rates used by the Company in the preparation of the
Audited Consolidated Financial Statements included in this annual report. No
representation is made that the Chilean peso could have been, or could be,
converted into US dollars at the rates indicated below or at any other rate.
Chilean pesos per US$1.00
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Yearly amounts Average rate
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1999........................................ 508.78
2000........................................ 539.49
2001........................................ 634.94
2002........................................ 688.94
2003........................................ 691.54
NOMINAL RATE OF EXCHANGE
(Chilean pesos per Dollar)
Months Monthly Average High Low
December 2003 602.90 621.27 593.10
January 2004 573.64 596.78 559.21
February 2004 584.31 598.60 571.35
March 2004 603.91 623.21 588.04
April 2004 608.19 624.84 596.61
May 2004 635.76 644.42 622.25
Source: Central Bank.
Risk Factors
In addition to the information contained in this annual report, prospective
investors should carefully consider the risks described below and the other
information contained in this annual report. BBVA Provida's business, financial
condition or results of operations could be materially adversely affected by any
of these risks.
Risk Factors Relating to BBVA Provida's Business
BBVA Provida has limitations on significantly increasing its market position.
BBVA Provida has maintained a leading position in the private pension
system since its inception, which has currently led to market share over 40% in
terms of clients and 30% in terms of assets under management and associated
salary base. Given its market position and its relative size it is highly
probable that competitors will take steps towards attracting participants from
BBVA Provida persuading them to transfer their funds and make
6
contributions to other AFPs preventing BBVA Provida from significantly
increasing its market share. A decrease in BBVA Provida's client portfolio could
have a negative impact on its operating revenues.
BBVA Provida is limited in its ability to improve the performance of its Pension
Funds
Also associated with BBVA Provida's leading position described above, is
the fact that assets under management are very large with respect to the local
capital market, totaling US$15.7 billions as of December 2003. The latter
reduces BBVA Provida's flexibility to significantly modify its portfolio
structures, and in this way improve the return offered to affiliates.
Additionally, in situations of instability or uncertainty in the markets, BBVA
Provida's reactive capacity is likely to be limited.
In this context, BBVA Provida cannot ensure that it will be able to
maintain a sufficient rate of return on its Pension Funds to attract new
affiliations or decrease the number of affiliate transfers. Any decrease in BBVA
Provida's participants base could have a negative impact on its operating
revenues. Additionally, if BBVA Provida's pension fund returns do not achieve
the legal minimum return established by law, the Company could lose part of its
Mandatory Reserve and this portion must be refunded in a maximum term of 15 days
to continue with its business with the consequent reduction in the Company's
equity.
BBVA Provida operates in a highly competitive environment
In the 90's and before the merger and acquisitions process that reduced the
number of AFPs in Chile, competitiveness in the Industry was evidenced through
large sales forces and a high number of transfers among AFPs, with the obvious
impact on sales expenses. Such situation reached its peak in 1997, when
Authority implemented regulatory changes aimed at formalizing the transfer
process. As a result, the industry adopted a strategy focused on fee
competition, transferring savings in commercial expenses on to affiliates
through the gradual reduction of fees charged. Any reduction in fees could have
a negative impact on BBVA Provida's operating revenues.
BBVA Provida's returns in foreign companies investments could be affected by
changes in the regulatory environment, the exchange rates and the economic
situation of the countries where they are located.
BBVA Provida through its subsidiary Provida Internacional S.A. ("Provida
Internacional") maintains equity interests in private pension fund
administrators operating in Peru, Ecuador, Mexico, El Salvador and the Dominican
Republic. These Administrators are highly regulated which generates certain
stability. Nevertheless, BBVA Provida can not ensure that legal modifications in
those countries where these subsidiaries are located will not affect its
results. Further, given the high correlation between the results of the pension
business and the economic conditions in the countries where the company
operates. A change in the economic situation could affect BBVA Provida'results.
Likewise, devaluation of domestic currencies against the US dollar and the
evolution of the latter with respect to the Chilean currency could adversely
affect income recognized by BBVA Provida in such investments and therefore,
their respective return.
7
Risk Factors Relating to the Chilean Pension Fund Administration Industry
The economic situation in Chile significantly affects BBVA Provida's results
The main source of BBVA Provida's operating revenues (86% of the total
amount for the year ended on December 31, 2003) stems from the monthly fees
charged to its contributors for mandatory contributions made in their individual
capitalization account, which are compulsory for every salaried-worker as long
as there is a labor contract. As a consequence, the economic situation in Chile
basically related to growth activity indicators and employment conditions
significantly affect the Company's results.
In fact, macroeconomic conditions have repercussions on the financial
capacity of employers and/or entrepreneurs which might produce a drop in the
number of employee-contributors or a lack of capacity for creating new jobs as
well as increasing the taxable income perceived by workers. Therefore, both
variables -employee-contributors and average salaries- determine the salary base
of the contributors and affect the Company's results. An increase in the
unemployment rate affects BBVA Provida's results and depending on its magnitude
the impact could be significant.
Additionally, BBVA Provida's financial conditions and operational results
could also be adversely affected by changes in economic policies or others from
the Chilean Government or other political or economic developments in Chile or
those affecting Chile. Changes in evolution of the Chilean economy could
adversely affect BBVA Provida's ability to develop its business strategy
Pension Funds are global investors, which are affected by the economies of
neighboring countries as well as by worldwide economic development
Pension Funds such as such as those managed by AFP Provida are global
character investors and therefore, are affected by both the economy in
neighboring countries as well as worldwide economic factors. In recent years,
pension fund returns have been subject to volatility in international and local
financial markets. The worldwide economy could affect BBVA Provida's returns
obtained on mandatory investments and therefore its income.
Life and Disability Insurance is the main component of operating expenses so an
incremental rise in the casualty rate of client's portfolio has an important
effect on the Company's results
BBVA Provida by law is obligated to provide life and disability benefits to
its affiliates and has to insure this obligation financed by the fees received
from its contributors. BBVA has insurance coverage above a certain casualty rate
level that is negotiated periodically by a biding process. The Company pays all
casualties up to the maximum premium rate. Therefore the premium cost and the
fluctuation of the casualty rate affect BBVA Provida's results. Additionally,
the application of the new Annuity Law increases coverage for life and
disability beneficiaries, so BBVA Provida expects an increase in the casualty
costs. An upward trend in the casualty rate of its client portfolio may have a
negative impact on BBVA Provida's operating income.
8
Despite a recent trend towards moderate deregulation of its industry, BBVA
Provida continues to operate in a highly regulated market in which its
flexibility to manage its business is limited.
BBVA Provida's operations are regulated by the Pension Law and, to the
extent applicable the Corporation Law. The Pension Law defines the line of
business of pension fund administrators, so BBVA Provida is only permitted to
engage in the administration of its Pension Funds and the rendering of related
benefits. Further, it is authorized to establish local affiliated corporations
that may complement its line of business or invest in Pension Fund
Administrators or entities constituted in other countries whose lines of
business are related to pension matters.
Regarding Pension Fund investments, BBVA Provida must invest such assets in
accordance with the types of instruments and within the ranges of assets and
maximum percentages allocated per investment and fund types authorized by the
Pension Law.
In addition, the Pension Law requires each AFP to maintain a minimum
reserve fund equal to 1% of the pension fund' s value. Also, it must provide a
real return over investment for each of its pension funds based on a weighted
average of the real return by all pension funds in the AFP system in a 36-month
period. However, through the implementation of the Multiple Funds , the minimum
return requirement has been designated in accordance with different portfolio
composition, giving those with a higher component of variable income and
therefore higher volatility (Fund type A and B) a larger margin to achieve the
requirement. If an AFP fails to observe either the minimum reserve fund
requirement or the minimum real return requirement, it will eventually be
dissolved in accordance with the Pension Law. In fact, if a fund's annualized
real return for a certain period of time were, in a specific month lower than
the minimum return, the Administrator must complete the difference within a 5
day-period. To do so, the Company is allowed to apply funds from the mandatory
investments, and in that event, such amount must be refunded in 15 days. An
Administrator that does not reimburse the difference in return or refund the
mandatory investment of any of the administered funds will be dissolved by
operation of Law.
BBVA Provida's business and results of operations may be affected by changes in
laws, regulation or Chilean government's proposals
Government authorities and members of parliament are discussing the
modification of the private pension system, principally in two ways. The first
is to increase the pension coverage to include self-employed workers. This
could increase the casualty rate of BBVA Provida's client portfolio since these
potential clients have a different contribution profile. The second is
permitting the entrance of new participants, such as banks and insurance
companies, to the private pension system. This measure if adopted, would
increase, the number of BBVA Provida's competitors.
Considering the importance given by the Chilean Authority to pension
matters, future changes in laws or regulations in Chile may have a negative
effect on AFP Provida's financial results.
9
Item 4. Information on BBVA Provida
History and Development
Administradora de Fondos de Pensiones Provida S.A. is a corporation formed
under the laws of Chile. Its deed of incorporation was executed on March 3, 1981
and was registered in the Registry of Commerce in Santiago of Chile, on April 6,
1981, under the number 6,060 subsection 3,268. BBVA Provida's by-laws specify
that the Company shall have duration of one hundred years, beginning on the date
on which its existence was authorized. BBVA Provida's registered office is
located at Av. Pedro de Valdivia 100, Providencia, Santiago, Chile. Provida's
telephone number at that location is (56-2) 351-1200. BBVA Provida's internet
address is www.bbvaprovida.cl.
BBVA Provida is the largest and one of the oldest private pension fund
administrators operating in the Republic of Chile and has occupied a leading
position in the Chilean private pension industry since its inception. As of
December 31, 2003, BBVA Provida was the largest of the seven AFPs operating in
Chile in terms of the number of affiliates, contributors, assets under
management, affiliate's salary base and number of branch offices. See "Item 4.
Information on BBVA Provida - Principal Markets -". The Chilean private pension
system was created in May 1981, when Decree Law 3,500 of November 13, 1980 (the
"Pension Law") was implemented to replace the prior social security system. See
"Item 4. Information on BBVA Provida - The Chilean Private Pension System."
Provida was founded by the Cruzat Larrain Group that at the time of
Provida's founding was one of the most important conglomerates in Chile. In
1983, a commission controlled by the government (Comision Progresa) supervised
the liquidation of the Cruzat Larrain Group as a result of the government's
intervention due to that group's significant financial obligations. The Comision
Progresa took control of Provida until December 1985, when it sold all of
Provida's common stock through a combined private equity sale and public
offering. Subsequent to the above, INACSA S.A. ("INACSA"), a Chilean company,
finally acquired a significant equity interest in Provida through a series of
transactions. On August 29, 1997, INACSA changed its name to Corp Group
Pensiones Chile S.A. ("Corp Group Pensiones"). On July 1, 1999, Banco Bilbao
Vizcaya S.A. ("BBV"), a Spanish bank, acquired a 100% equity interest in Corp
Group Pensiones, thus acquiring an indirect 40.7% equity interest in Provida.
Upon the completion of the acquisition by BBV, Corp Group Pensiones changed its
name to BBV Pensiones Chile S.A. ("BBV Pensiones"). Adjustments in the
authorized capital of BBVA Provida, which occurred in July and August of 1999,
and again in March of 2000, increased BBV Pensiones's direct equity interest in
Provida by an additional approximate 9.3% (see "Item 7. Major Shareholders and
Related Party Transactions"). On May 11, 2000, BBV Pensiones changed its name to
BBVA Pensiones Chile S.A. ("BBVA Pensiones") to reflect the merger of BBV and
Argentaria S.A., another Spanish bank, into BBV Argentaria S.A. (the "BBVA
Group"). BBVA Pensiones currently owns 171,023,573 shares of BBVA Provida,
representing a 51.6% interest.
In 2001 the BBVA Group completed the consolidation process of its Pension
Fund Administrators in Latin America by unifying their corporate images,
resulting in a leading franchise in the region.
10
In order to reinforce its competitive position, Provida, like other major
AFPs, engaged in a merger process with smaller and less efficient AFPs in
attempt to increase market share and achieve economies of scale. On May 28,
1998, Provida purchased from Inversiones Interamericana S.A., 99.99% of the
shares of AFP Union S.A. ("AFP Union"), for a purchase price of UF 781,613.59
(approximately US$24 million). The Resolution No. E-146-98 authorized the
mergers of these two AFPs and their respective pension funds from June 1, 1998.
As of May 31, 1998, AFP Union had approximately 83,000 contributors and managed
a pension fund with assets totaling approximately US$1.2 billion. After the
merger, Provida absorbed approximately 60% of the sales agents and 4% of the
administrative personnel of AFP Union as part of the acquisition.
On March 18, 1998, Corp Group Pensiones acquired a stake of 89.1% in AFP
Proteccion S.A. ("AFP Proteccion"); subsequently, on January 1, 1999, Provida
acquired a 100% equity interest that Corp Group Pensiones and minority
shareholders had in AFP Proteccion for a purchase price of US$165 million. When
it merged with AFP Proteccion, approximately 170,000 contributors and a pension
fund totaling approximately US$2.8 billion to Provida's client portfolio were
incorporated.
Management considers the above mergers as successful due to Provida could
sustain the increase in its market shares reached through these acquisitions. In
figures, the latter is reflected by the increase in market share from 29% before
the mergers to 40% in terms of affiliates and from 20% to 32% in terms of assets
under management. At December 31, 2003, BBVA Provida continued leading the
pension fund industry, with total assets under management of US$15,748 million
and a client portfolio of 2.93 million affiliates, equivalent to market shares
of 31.69% and 42.00%, respectively.
With respect to Foreign Affiliated Companies investments, in March of 2001,
BBVA Provida sold its 14.45% interest in the Mexican company AFORE Profuturo
S.A. de C.V. ("AFORE Profuturo") for a total of US$61.7 million. The proceeds
from this sale allowed Provida to complete the consolidation of its strategic
position in Mexico, along with the BBVA Group after the purchase of a 7.5% stake
in AFORE Bancomer S.A. de C.V. ("AFORE Bancomer") in November of 2000 for a
total of US$66.3 million. The net proceeds of the US$61.7 million sale were used
to pay debts incurred from the acquisition of the AFORE Bancomer stake. Under
Chilean GAAP, the successive acquisition and sale of both companies constituted
a single financial operation, in this context, the net gain on sale of Profuturo
of ThUS$29,155 (discounted income taxes) was used to partly offset the goodwill
recognized from the acquisition of Bancomer.
Additionally, during September 2001, BBVA Provida became the owner of 100%
of AFP Genesis S.A. ("AFP Genesis"), leader in the Ecuadorian fund management
industry, through the purchase of 75% of the company that was owned by
Filanbanco. Since then, AFP Genesis' financial statements are consolidated with
BBVA Provida's ones.
During 2003 several adjustments in foreign subsidiaries investment
portfolio were carried out as a result of the joint strategy with the BBVA Group
to boost the pension franchise. As a result, in September 2003, Provida
Internacional sold its 20% equity interest in AFPC Porvenir in Colombia for
US$26.8 million. This decision was based on to the facts that the Colombian
market has matured in a context of changes in regulations, BBVA Provida did not
have management control of the company, and that BBVA Group has a controlling
position in another AFPC in Colombia (AFPC Crecer).
11
In conjunction with this transaction, BBVA Provida acquired 100% stake in
AFP Porvenir, the Dominican Republic from the Sarmiento Group and its minority
shareholders for US$15.4 million. It is important to point out that the
Dominican Republic has just created a pension fund system similar to Chile's, In
addition, management believes this transaction is financially justified on
expected results in the medium and long term strengthened by the synergies of a
planned merger of AFP Porvenir with BBVA Crecer, the AFP of the BBVA Group in
that country. Finally, since Provida controls 100% of the acquired society, AFP
Porvenir's results are consolidated with those of the Company.
During 2003 the Pension Industry was marked by the implementation of the
most important reforms to the business of Private Pension Funds Management since
its creation. These reforms are :
- The flexibilization of mechanisms for voluntary pension savings (APV) in
force since March 2002 that provide new savings incentives and allow other
financial institutions different from the AFPs to administer them. At the
close of 2002 about 277,000 people had contracted APV plans, whereas at
December 31, 2003 the number of administrated accounts had grown by 37% to
almost 382,000. In this context based on figures provided by the Authority,
AFPs continue to lead with a market share of 87% in assets under management
and 89% in number of accounts, followed by insurance companies with 6% and
8% market shares in assets and number of accounts, respectively. Regarding
market share within the AFP industry, Provida has 49% of the administered
accounts and 18% of the associated funds at December 2003.
- The Multiple Pension Funds law, partially in force since March, 2002 and in
full force since August 1, 2002, increased from 2 to 5 the number of
investment portfolios offered to affiliates in connection with pension
savings, allowing AFPs to widen the range of alternatives offered with
respect to voluntary pension savings. In this way, AFPs were able to offer
a better inducement of diversification to their clients and therefore to be
more competitiveness with the other players in this new business.
Additionally, and given that the start up of the multiple fund system
coincided with a recovery in the stock markets both in Chile and abroad, the
recovery benefited affiliates that opted to be in funds with a higher percentage
in variable income. For example, Type A fund, which have the highest
concentration of shares (up to 80% of the portfolio), earned in real terms a
26.9% return for 12 months close to the record of 29.7% obtained by pension
funds in 1991. Likewise, Type B fund, which have a maximum investment level in
shares of 60%, also had favorable return with a profitability of approximately
16.0% in real terms. Type C fund, which concentrate more than half of all
pension savings (56%), reached a 10.5% real profitability, whereas funds Type D
and E, having higher percentage in fixed income that represent 20% of savings,
experienced 8.9% and 3.3% in real terms respectively.
Moreover, this reform has resulted in a favorable cultural change evidenced
by the way affiliates learn and make decisions about their pension savings. In
fact, in the last 12 months nearly one million and a half of people have opted
for one of the five funds, representing more than 40% of the total number of
contributors in the Industry.
12
Regarding the area of new businesses on the local scene, since all AFPs
participated jointly by establishing a consortium in January 2002, they were
awarded the administration of Unemployment Insurance for a period of 10 years
after presenting the best bid, both technically and economically. BBVA Provida
participates in the newly created company "Administradora de Fondos de Cesantia
de Chile S.A." (AFC) with 37.8%. This new business has originated new sources of
revenues after being awarded the operational and technical support of said
company. In terms of market penetration, the affiliation process has been very
successful, where a 64% of salaried workers from private sector have been
incorporated and a 4.7% of the insurers, basically temporary workers or with
fixed term labor contracts, have received this benefit.
Strategy
In Chile, BBVA Provida has centered its strategy on consolidating its
leading position through a commercial plan directed to satisfy its client's
portfolio in the medium and long term. In doing so, the Company has focused its
efforts on long-term commercial action aimed at capturing and maintaining
profitable clients sustained by a sales structure intended to provide pension
advise to affiliates throughout their entire life. The latter is referred to
voluntary and mandatory savings, coverage benefits in terms of life and
disability and old and anticipated pensions. Complementing the aforesaid, is the
emphasis on BBVA Provida's efficiency through the application of a corporate
model and management style intended to maximize returns in the pension business.
Finally regarding new business opportunities, BBVA Provida will actively
participate to the extent these contribute to increase the Company's long term
returns.
With reference to international business, BBVA Provida together with BBVA
Group seeks to reinforce leadership reached in the pension franchise in Latin
America through the management of current investments' returns and the
participation in potential developments of private pension system in the Region.
Nevertheless, only BBVA Provida and BBVA Group will take into account the impact
that new investments will have in the Company's financial balance. Therefore,
BBVA Provida will act as advisor in those countries, which according to size
require important commitment of resources, and also where it can have a
management role.
Capital Expenditures and Divestitures
Capital expenditures for the last three years totaled Ch$14.7 billion
(approximately US$24.5 million) mainly related to the purchase of the additional
75% stake in AFP Genesis in Ecuador, the acquisition of 100% interest of AFP
Porvenir in the Dominican Republic and investments in properties and equipment.
Starting 1993, BBVA Provida has made investments in foreign affiliates
companies in Peru, Colombia, Ecuador, Mexico, El Salvador and the Dominican
Republic. The amounts that Provida invested in foreign affiliates in Fiscal
Years 2001 and 2002 ascended to Ch$1,107 million and Ch$0 million, respectively.
In 2003, investments in foreign subsidiaries amounted to Ch$9,136 million.
In September 2001, Provida became the sole shareholder of AFP Genesis,
leader in the Ecuadorian fund management industry, through the purchase of 75%
of the property
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previously owned by Filanbanco that involved an additional investment of US$1.6
million financed with internal funds.
In 2002, the investments made are basically fixed assets according to the
normal requirements of the business operation. .
In September 2003, BBVA Provida acquired a 100% total stake in AFP Porvenir
S.A. in the Dominican Republic for US$15.4 million from the Sarmiento Group.
This transaction was financed by the sale of Provida's 20.00% equity interest in
AFPC Porvenir S.A., Colombia for a sum of US$26.8 million, to the same Sarmiento
Group.
The table below sets forth information concerning expenditures and
divestitures for the twelve months periods ended December 31, 2001, 2002 and
2003, and the first quarter ended March 31, 2004.
[Enlarge/Download Table]
For the First
Quarter ended
For the Twelve Months ended December 31, March 31,
2001 2002 2003 2004
---------------- --------------- ----------------- --------------------
(In million of constant Ch$ as of December 31, 2003)
Capital Expenditures......... (3,986) (472) (10,266) (259)
Divestitures................. 33,622 441 16,795 286
There has been no indication of any public takeover offer by any third
party in respect of BBVA Provida's shares, nor has there been any indication by
BBVA Provida of any public takeover in respect of any other companies' shares,
in either the last or current fiscal year.
The Chilean Private Pension System
Historical Development
The Chilean private pension system was created in 1980 through the adoption
of the Pension Law, which was intended to eliminate many of the problems
associated with the former social security system. The private pension system
began with twelve AFPs, a number that increased to 21 in 1993. After a
consolidation process characterized by mergers, dissolution and bankruptcies,
the number of AFPs now stands at six, where five are listed on the Santiago
Stock Exchange, of which two, including BBVA Provida, are actively traded.
Under the social security system in place prior to the enactment of the
Pension Law, contributions from workers were used to fund current pension
payments, and there was a limited correlation between the amount contributed and
the amount received by each worker upon retirement. During the early years of
operation of the former social security system, the number of workers making
contributions was sufficient to support the pensions of retirees. In later
years, however, demographic changes, principally a decrease in birth rates and
an increase in life expectancy, had increased the ratio of pensioners to
contributing workers from 9 pensioners for every 100 workers in 1960 to 45
pensioners for every 100 workers by 1980. The higher ratio resulted in the need
for increased contributions from the State, which were funded through taxes, to
pay for required benefits.
14
In 1980, faced with an undercapitalized social security system, the Chilean
government enacted the Pension Law to reform the social security system. Instead
of making changes in the old "pay-as-you-go" system, which was similar in
function to the United States social security system, the Chilean government
elected to create an alternative system consisting of private, competitive and
Chilean AFPs, among which individuals could choose the location of pension
contribution in their respective individual capitalization accounts. Between
1993 and 2003, AFP assets under management grew at a compound annual rate of
15.6%, fueled basically by both, stock market returns and mandatory
contributions, reaching approximately US$49.7 billion at December 31, 2003,
which represents approximately 59% of Chilean GDP.
In 1984, the last year in which workers could elect to move to the new
private pension system, approximately 19%, mainly older workers near retirement,
elected to stay within the old social security system. Since then, new dependent
employees must contribute to the private pension system, therefore a higher
number of workers has been incorporated into the AFP system and, as of December
31, 2003, the number of affiliates to the Chilean private pension system reaches
7.0 million.
Workers who participated in the old social security system that decided to
transfer to the AFP system received an interest-earning recognition bond (Bono
de Reconocimiento) reflecting an estimate of the value of their contributions
into the old social security system. This bond, which is indexed to the CPI and
has a 4% real annual interest rate, is held by the Instituto de Normalizacion
Previsional (the state owned National Pension Administration, or the "INP",
which does not participate in Chile's private pension system) until the
affiliate retires, dies or is disabled. Upon early retirement, the recognition
bond may be traded in the secondary market to finance the pension capital in
accordance with the rights to which the affiliate is entitled.
Business Overview
Principal Activities
Collection for Individual Capitalization Accounts
In accordance with the Pensions Law, each dependent worker and affiliated
to BBVA Provida must contribute 10% of the portion of his taxable salary into
his individual capitalization account. Such contributions are deducted from the
affiliate's salary and are used to purchase shares of some of five types of
Funds that BBVA Provida manages. These Funds are entities, legally separated
from BBVA Provida as a Pension Fund Manager Company. The option to choose among
five alternatives of Funds was the result of legal changes made to Law Decree
3,500 implemented in August 2002. Until that date, it was just possible to
choose between two funds with certain restrictions according to affiliates' age.
BBVA Provida collects monthly mandatory contributions that are withheld
from the salaries of BBVA Provida's affiliates by their employers, and those
contributions from BBVA Provida's self-employed affiliates. Those monthly
contributions are credited into each affiliate's individual capitalization
account. In the case of dependent workers, each employer must provide to BBVA
Provida a monthly payroll listing all its employees who are affiliates of BBVA
Provida and identifying the payments being made on behalf of each employee for
pension contributions, both mandatory and voluntary ones. Self-employed
15
workers prepare and submit their own payrolls. Each payroll, together with
checks or cash for the aggregate amount, must be submitted to a BBVA Provida
branch office or a designated collection agent. Checks and cash are deposited in
banks and payrolls are destined to the operation center in Santiago for
processing. See "Item 4. Information on BBVA Provida--Business
Overview--Government Regulation--Mechanics of the System--Required
Contributions."
Voluntary Savings Accounts
BBVA Provida offers to its affiliates the option to establish a voluntary
savings account into which they may deposit additional funds to be invested in
the elected pension fund. The affiliate may make deposits into the account as
often as desired and is able to make withdrawals four times a year. BBVA Provida
maintains the account in the Pension Fund's register regardless of the balance.
Although permitted by law, neither BBVA Provida nor any other AFP currently
charges any fees related to withdrawals from voluntary savings accounts.
Voluntary Pension Savings
Legislation approved by the Congress intended to liberalize the Chilean
capital market modified the Pensions Law by introducing flexibility to
mechanisms for voluntary pension savings. The above implied making them more
accessible by establishing new saving incentives and permitting other authorized
financial institutions different from AFPs to administer them. Even though, BBVA
Provida already offered this service, since in March 2002 according to the law
requirements, the Company started to charge a fee for this concept.
Voluntary pension savings correspond to additional amount to mandatory
contributions that each worker may add to improve his future pension. The
maximum voluntary monthly contribution with tax benefits associated is UF50
(approximately US$1,400). If these funds are withdrawn for other use different
from pension, this amount will be charged a higher tax rate applicable to each
particular case.
AFPs are entitled to charge a fee over assets under management and for
collection of such funds for other institutions. Currently, BBVA Provida charges
an equivalent to a monthly fee for 0.49% in annual basis over total funds and
has established a fee of Ch$1,250 regarding fund-transfers collected for other
entities.
Service Fees
The most significant source of operating revenues for BBVA Provida is the
monthly fee charged to affiliates in connection with deposits into individual
capitalization accounts. Under the Pension Law, an AFP is permitted to charge a
fee for (i) mandatory contributions into a mandatory pension account to fund the
affiliate's old age pension, (ii) voluntary savings withdrawals, (iii) transfer
of account balances from another AFP, (iv) payments of programmed withdrawals
and (v) management and transfers of voluntary pension savings. All AFPs
currently charge fees in connection with (i), (iv) and (v) above. BBVA Provida
began charging a fee in connection with (iv) and (v) above in July 2000 and in
March 2002, respectively.
16
In accordance with the Pension Law, each AFP is allowed to set the fees it
charges to its affiliates or pensioners. Regarding fees for mandatory
contributions into the pension account, the Pension Law establishes that each
AFP must apply the same fee levels to each of its affiliates within the same
fund. Affiliates who are not entitled to receive life and disability benefits
are excluded, so they are charged a lower fee, reflecting lower cost to BBVA
Provida. The fees for programmed withdrawals pension payments must be the same
for each pensioner.
Although there is no legal limit on the fees that an AFP may charge,
competitive pressures have resulted in a difference fee-limited range charged by
the different AFPs.
Mandatory Contributions. Fee structure is one of the most competitive
aspects of the AFP industry. Under the Pension Law, each AFP may determine
whether to charge a fixed fee, a variable fee that is a percentage of the salary
used to calculate the mandatory pension contribution or a combination of both
types of fees. Variable fees are charged as a percentage of an affiliate's
monthly gross wages that is subject to the 10% of the salary base (up to UF60
per month). Five out of six AFPs, including BBVA Provida, charge a fixed fee in
combination with a variable fee, while the remaining AFP charges only a variable
fee.
The uniform fee requirement has limited the flexibility to reward longer
term or higher income contributor with lower fees than those applied to newer
and/or smaller accounts. Although changes to this rule have been proposed in
several opportunities, Provida cannot ensure that a change will be adopted which
would allow Provida to reward longer term or higher income contributors through
lower fees.
SAFP Circulars 998 and 999, released in November 1997 intended to
rationalize the commercial expenses stemming from transfers, and implied that
AFPs would have to reorient their strategies to fee competition by reducing the
variable tariff levels (partially offset by higher fixed fees). This trend
continued until 2001 as is shown in the following table:
[Enlarge/Download Table]
Monthly Fees for Mandatory Contributions
----------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed
% Ch$ % Ch$ % Ch$ % Ch$ % Ch$
------------------------------------------------------------------------------------------------------------------
Provida 2.36 390 2.25 390 2.25 390 2.25 390 2.25 390
Industry High 2.95 1,000 2.95 1,000 2.55 1,000 2.55 1,000 2.55 1,000
Industry Low 2.36 385 2.16 390 2.09 390 2.09 390 2.09 390
Industry Average 2.45 406 2.31 526 2.26 532 2.26 532 2.26 532
Source: SAFP.
During first quarter of 2004, no changes were observed in relation to
information at December 2003 shown in the previous table, while starting April
2004, one AFP increased its variable fee from 2.33 to 2.42 percent of the salary
base.
Because of BBVA Provida's size and cost of managing each affiliate's
account are significantly below than the industry average, management believes
that it can continue to effectively compete at a lower fee level than most of
its competitors. The following chart
17
presents certain comparative information regarding average monthly costs of
administering contributors' accounts for the years 1996 through 2003:
[Enlarge/Download Table]
Monthly Administrative Cost per Contributor
-------------------------------------------
For the Twelve Months ended December 31,
(In constant Ch$)
1996 1997 1998 1999 2000 2001 2002 2003
----------- --------- --------- --------- --------- --------- --------- --------
BBVA Provida 1,895 1,851 1,933 1,973 1,775 1,829 1,640 1,750
Second lowest cost AFP 2,423 2,322 2,338 2,432 2,431 2,400 2,056 2,303
Average of the five largest
AFPs 3,147 2,774 3,005 2,762 2,631 2,476 2,321 2,575
Source: Based on annual Uniform and Codified Statistic Form (FECU), for all
AFPs.
Variable fees are paid in addition to the amount contributed to the pension
account. Fixed fees are charged against the balance of each contributor in any
month for which contributions are made. For example, an affiliate with a monthly
salary of Ch$100,000 must contribute Ch$10,000. With the current Provida
variable fee rate of 2.25% of the salary base, the total monthly fee collected
by Provida on such an account would be a variable fee of Ch$2,250 plus a fixed
fee of Ch$390 deducted from the contributor's individual mandatory pension
account. Variable fees are paid directly by the employer or self-employed worker
at the same time as the pension contribution.
Programmed Withdrawals. Regarding fees for payments of programmed
withdrawals, five of the AFPs, including Provida, charge a variable fee that is
a percentage of the amount of pensions paid to the affiliates, whereas just one
AFP charges a fixed fee. Between 1999 and 2001, all AFPs in the industry
announced the establishment of fees for payments of programmed withdrawals with
such fees currently ranging from a low of 1.00% to a high of 1.25% of the
pension. Only one AFP charges a fixed monthly fee, which is set at Ch$1,495
(approximately US$2.5).
Voluntary Pension Savings. AFPs, like other authorized institutions, also
offer affiliates the option to establish a voluntary pension savings account in
which affiliates make previously determined monthly deposits in order to improve
their future pensions. According to the law, AFPs are allowed to charge a fee
over assets under management, and annual fees currently range between 0.47% and
0.51%. Since March 2002, the annual fee charged by BBVA Provida is 0.49%.
Additionally to the above, the regulation permitted to charge fees on fund
transfers collected for other institutions; BBVA Provida established a fee of
Ch$1,250 for each operation (approximately US$2.1).
The fees can be changed at any time upon three months' notice to
affiliates, the SAFP and the public. The following table sets forth the fee
rates charged by BBVA Provida for each of the last three years and the current
period:
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[Enlarge/Download Table]
As of December 31, March 31,
--------------------------------------
2001 2002 2003 2004
--------------------------------------------------
Fee charged on monthly contributions (for affiliates who
are entitled to receive life and disability insurance)(a):
Fixed fee Ch$390 Ch$390 Ch$390 Ch$390
Variable fee 2.25% 2.25% 2.25% 2.25%
Fee charged on payments of programmed withdrawals:
Fixed fee Ch$0 Ch$0 Ch$0 Ch$0
Variable fee 1.00% 1.00% 1.00% 1.00%
Fee charged for voluntary pension savings management:
Fixed fee Ch$0 Ch$0 Ch$0 Ch$0
Variable fee (annual basis over AUM) 0.00% 0.49% 0.49% 0.49%
Fee charged for voluntary pension savings transfers:
Fixed fee Ch$0 Ch$1,250 Ch$1,250 Ch$1,250
Variable fee 0.00% 0.00% 0.00% 0.00%
Ratios of fixed and variable fees to total fee income:
Fixed fee on monthly contributions 6.8% 6.6% 6.4% 6.2%
Variable fee on monthly contributions 92.4% 92.4% 92.5% 92.7%
Variable fee on payments of programmed withdrawals 0.8% 0.8% 0.8% 0.8%
Variable fee on voluntary pension savings N.A. (b) 0.2% 0.2% 0.3%
Fixed fee on voluntary pension savings transfers N.A. (b) 0.0% 0.0% 0.0%
--------------------------------------------------------------------------------------------------------------
(a) Affiliates who have reached retirement age or who are receiving a
disability benefit are not entitled to life and disability benefits and are
charged by lower fees. See "Item 4. Information on BBVA Provida--Business
Overview--Government Regulation--Fees and Commissions."
(b) Not Applicable.
The AFPs charge fees on active accounts into which contributions are made.
Accordingly, the number of contributors, as well as their average salaries, and
not the number of affiliates, determine the monthly fee revenues of each AFP. At
December 31, 2003, BBVA Provida had the largest market share of contributors
among all AFPs (41.5%) and, according to the Company 's estimates, also the
largest market share of monthly salary base (33.7%). A number of factors result
in each AFP having a larger number of affiliates than contributors. In March
2004, according to labor force information, approximately 8.1% of Chile's labor
force, and therefore a similar percentage of affiliates, was unemployed. In
addition, self-employed affiliates are not obligated to contribute every month,
regardless whether they receive a salary in a specific month. The number of
contributors is also influenced by the seasonal nature of many important
industries in Chile, such as fishing, agriculture and tourism.
Life and Disability Benefits
As required by the Pension Law, BBVA Provida has contracted insurance to
cover its obligation to provide life and disability benefits to affiliates. The
selection of the insurance company is determined through a competitive bidding
process open to all licensed Chilean life insurance companies and is designed to
provide the required coverage on the best terms available. Currently, BBVA
Provida's insurance contract is with BBVA Seguros de Vida S.A. and provides
coverage for 13 months, from August 1, 2003 to August 31, 2004.
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BBVA Provida is entitled to set the bid parameters for its competitive
bidding process. In its competitive bid request, BBVA Provida specifies a
maximum premium rate and a provisional premium rate. The maximum rate is the top
percentage that the Company would have to pay to the insurer for coverage,
regardless of the casualty rate experienced among BBVA Provida's contributors
were higher. The provisional rate is the monthly percentage of its contributor's
salary that BBVA Provida pays monthly to the insurer according to the current
contract. In this contract, its maximum rate is 1.10% of the maximum taxable
salary for contribution of each contributor and its provisional premium rate is
0.70%. In addition, the bid basis establishes a formula pursuant the insurance
company and BBVA Provida may share the casualty rates incurred. The above may
constitute a significant source of revenue to Provida if the casualty rates
experienced result in a premium cost below the provisional premium paid. The
insurance company also charges an additional fixed monthly premium to provide
such coverage. This monthly fixed premium is currently UF 2,150 (approximately
US$61,000).
Under BBVA Provida's current contract with BBVA Seguros S.A., at the end of
17 months following the beginning of the contract year, and every twelve months
thereafter for the 78 months following the beginning of the contract, the
casualty rate among contributors is calculated as a percentage of the
contributor's salary. The maximum rate is 1.10% and BBVA Provida has no
obligation to make additional premium payments above this. BBVA Provida pays the
provisional premium rate of 0.70% on monthly basis. The difference between the
maximum rate, the provisional rate and the cut rate set at 0.85%, allows the
contract to define a rebate structure based on the effective casualty rate. If
the effective loss is between 1.10% and 0.85%, BBVA Provida will have 100% of
the excess. If the casualty rate is equal or lower than 0.85%, BBVA Provida will
have 90% of the excess of the amount below 0.85%. For example, if the loss rate
is 0.90% and BBVA Provida pays a provisional rate of 0.70%, BBVA Provida will
pay the insurer an additional payment of 0.20% and the insurance company will
not receive any premium. However, if the loss rate is 0.75%, BBVA Provida will
pay to the insurance company an additional payment of 0.05%, in order to cover
the difference in the casualty rate. Additionally, the insurance company will
receive a premium equivalent to 10% of the difference between the effective
casualty rate and the cut rate, meaning 0.01%. Finally, if the loss rate is
0.65%, Provida will receive 0.05% as a rebate and the insurance company will
receive a premium equivalent to 10% of the difference between the effective
casualty rate and the cut rate, meaning 0.020%.
In the past, rebates system implied a significant source of revenues for
BBVA Provida, due to the casualty rate of the client portfolio being lower than
the provisional premium monthly paid to the insurance company. Although, since
the middle of year 1999, period when the country additionally evidenced
unemployment rates over 10% (implying a significant gap to the average observed
of 6.2% in 1998), the casualty rate started to increase to levels over the
provisional premium paid monthly. This situation has been maintained throughout
the industry until now as a result of: (i) local unemployment rate and awareness
by affiliates about benefits; both affecting the number of casualties and (ii)
downward trend evidenced by interest rates and pension funds returns that have
implied a rise in the economic value of casualties. In this context, BBVA
Provida has developed a strategy aimed at controlling the effects of a higher
casualty rate, which involves measures within the Company and with third parties
(Insurance Companies and Medical Commissions). BBVA Provida has also developed
an internal management model intended to determine and manage the effects of
casualties on client's portfolio. This includes tools to measure and
20
manage casualties and activities within the Company and with third parties aimed
at reducing the effects of casualty rates on results.
In order to measure the effect on results and considering that the rebates
and reimbursements are calculated on an annual basis for six years, reflecting
each year the cumulative impact of several prior contracts as well as the
current contract, the Company has perceived casualty rebates and made
settlements for unfavorable casualty. The refunds have their most significant
effect on operating revenues in the first quarter of the year, when the
insurance company makes pre-settlements. Regarding reimbursements to the
insurance company for unfavorable casualty and since recent contracts started
evidencing higher casualty rates over temporary premiums; Provida began to make
monthly provisions accounted as operating expenses. These provisions were based
on estimations of the casualty rate implicit in the settlements made to the
insurance company in the first quarter of the year, according to conservative
criteria of recognizing losses at the moment of having a reasonable base for
estimation.
In January 2004, the Superintendency of Pension Fund Administrators issued
instructions about provisions to be included in the year 2003 in connection with
higher casualty rates. According to the above, at the close of the period BBVA
Provida made provisions for 100% of the contract balances given by the insurance
company up to January 2004, corresponding the amount to be paid in March 2004,
regarding contracts prior to the current one.
The criteria applied until November 2003 as was informed to the Authority,
consisted in recording monthly for all contracts the accrued proportion stemming
from the unfavorable difference for implicit casualty rate in the
pre-settlements estimation, accounted in results as insurance cost and in a
provision account as liabilities. At the moment of knowing exactly the amount of
settlements or pre-settlements these provisions were used, adjusting that
month's difference for deficit or surplus of provisions. In this way, the effect
of reimbursement on results was accounted 12 months prior to the settlement,
affecting 9 out of 12 months of the previous period, and 3 out of 12 months of
the year in which the payment is made. Therefore, the last twelfth corresponded
to the month of pre-settlements and settlements payments to the insurance
company.
The application of the aforementioned instruction, implied a review of
constituted provisions, which led to an adjustment as an increase in provisions
for higher casualty rate, affecting both results of the year and of previous
periods, according to the analysis approved by the Authority. See Note 40 of
Consolidated Financial Statements.
Furthermore, with the coming into effect of the new August 2003-December
2004 contract, whose first pre-settlement will be made in March 2005, BBVA
Provida decided to strengthen its conservative criteria to acknowledge higher
casualty rates. The above meant the application of the accrued criteria of the
projected casualty rate of the contract in its period of coverage, to maintain
an adequate correlation between revenues and expenses recognized on monthly
basis. This criterion could not be applied previously since there was not enough
reasonable evidence that allowed for an adequate estimation. Therefore,
according to the Authority's request 100% of provisions for the payment that
will take place in March 2005 will be made in December 2004.
21
The following table sets forth the cost of casualties, the payments to the
insurance company and the provisions for unfavorable casualty rates of each
insurance contract at December 31, 2003:
[Enlarge/Download Table]
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Casualty Costs Payments made to Provisions for
incurred by the the Insurance Unfavorable
Insurance Company Company Casualty Rate
Insurance Company Coverage Period Ch$ million Ch$ million Ch$ million
------------------------------------------------------------------------------------------------------------------
ING Seguros de Vida S.A. Aug 1997-Jul 1999 44,319 44,290 29
ING Seguros de Vida S.A. Aug 1999-Jul 2001 66,500 63,853 2,647
ING Seguros de Vida S.A. Aug 2001-Jul 2003 71,265 57,502 13,763
BBVA Seguros de Vida S.A. Aug 2003-Dec 2004 13,682 11,528 2,707
------------------------------------------------------------------------------------------------------------------
In addition to the rebate and reimbursement system, BBVA Provida's current
insurance contract stipulates that BBVA Seguros de Vida S.A. must pay Provida a
monthly interest payment in the first and fourth quarters of each year. The
monthly interest payment is calculated by applying a market interest rate
previously defined in the contract, charged on the difference between (i) the
sum of the premiums paid to BBVA Seguros de Vida S.A. minus all paid casualties
that stemmed from Provida's client portfolio and (ii) rebates received or paid
by Provida during the contract period. The monthly interest payment compensates
BBVA Provida for the float that BBVA Seguros de Vida S.A. enjoys on the premium
amounts that are not used to cover casualties.
Investment Services
The general investment policy of the Pension Funds is determined by BBVA
Provida's Board members and is administered by a Credit Committee comprising all
Board members, the Chief Executive Officer and the Chief Investment Officer. The
Credit Committee approves eligible companies in which the Pension Funds may
invest and establishes investment limits in different types of securities within
legally prescribed limits. An Investment Committee composed by professionals of
the Investment Area is in charge of implementing the investment policy.
BBVA Provida's Investment Area has two management division -Variable Income
and Fixed Income- and two Departments -International Investments and Research-.
Both managers and heads of departments have full-time research analysts with
experience in areas of investing, economics, and securities. BBVA Provida has
also external advisory granted by domestic and international consultants who
provide advisory to the investment area on tendencies and developments affecting
the value of current and potential investments.
In Chile, all secondary market trading by AFPs must be executed in the
formal trading markets either through securities exchange or a competitive
bidding process. BBVA Provida's Investment Control Department, part of the
Accounting and Consolidation Division of the Company, validates investments each
day before completing them. Additionally, this department has the obligation of
disclosing to the SAFP a daily report with all investment activities.
22
Recent Developments
Introduction of the Multiple Funds. In February 2002, a legal modification
to the Law Decree 3.500 introduced the multiple funds' portfolios. Starting on
August 1, 2002, each AFP must hold four funds denominated Type B, Type C, Type D
and Type E, and optionally hold an additional fund named Type A. All AFPs
incorporated the five types of Funds and the first contributions to these funds
were made on September 27, 2002. The main difference among them is the portion
invested in variable income securities. The fund Type A has the highest
concentration in variable income while fund Type E does not have any variable
income component. Mandatory contributions, deposits by agreement, voluntary
contributions and voluntary pension savings may be maintained in different types
of funds. As established in the law 19,010 the indemnity account must remain in
the where the mandatory contributions are.
Men younger than 55 years old and women younger than 50 may elect for any
fund. Women and men older than 56 and 61 years old, respectively, are not able
to choose fund Type A neither for their mandatory contributions nor indemnity
account if it applies. Pensioners with programmed withdrawals and deferred life
annuity are not able to opt for funds Type A and B. According to the law, if at
the age of 56 and 61, women and men respectively who have their mandatory
contribution and/or their indemnity account do not make any choice regarding the
destination of their mandatory pension funds, these are gradually transferred to
fund Type B.
If the affiliate does not choose a fund at the moment of incorporation,
mandatory contributions are assigned and modified by law according the
affiliate's age:
- Men and women younger than 35 to fund Type B
- Men between 36 and 55 and women between 36 and 50 to fund Type C
- Men older than 56, women older than 51 and pensioners with programmed
withdrawals and deferred life annuity to fund Type D.
Regarding affliliates' transfers who have not defined any fund according to
the aforementioned, the procedure is the following:
- At reaching age condition 20% of funds are transferred to the corresponding
fund.
- After a year of reaching the age condition 40% of funds are invested in the
corresponding fund.
- After two years, 60%.
- After three years 80%.
- Finally, after four years, 100%
In spite of the above, the new mandatory contributions must be invested in
the corresponding fund in accordance with the affiliate's age. This allocation
is not applicable in the case of affiliates that have previously specified
another permitted fund type. The balance
23
of mandatory contributions, indemnity accounts, deposits by agreement and
voluntary savings can be invested in two types of funds at the same time.
As of March 31, 2004 distribution of funds administered by Provida is as
follows:
RELATIVE SIZE OF MULTIPLE FUNDS
Fund A 837 5%
Fund B 3,127 20%
Fund C 8,734 56%
Fund D 2,437 16%
Fund E 463 3%
Source: SAFP
Limits of Investment for each Type of Fund
The Pensions Law expressly prescribes classes and maximum limits of assets
in which pension funds can be invested. All securities (other than securities
issued by the Government, the Central Bank or certain government agencies and
certain qualified equity securities) must be specifically approved as eligible
for investment by the Rating Commission. In Chile, fund investments can be made
only in securities for which there is an established public trading market. The
Central Bank sets the precise limits on permitted investments for AFPs within
the range established by the law.
Regulations that control pension funds investments have been significantly
widened since the private pension system was created. This has arisen as a
response to prevent that the growth of total pension fund resources may exceed
investment alternatives since there is evidence that certain types of
investments have become more stable. In 1991, a new series of regulations came
into effect, allowing the AFPs to invest a percentage of their assets outside of
Chile in government or banks debt securities with "investment grade", or those
guaranteed by Government or bank with "investment grade".
On May 18, 1995, a new series of pension funds investment regulations came
into effect, modifying certain pension funds investment limits in equity
securities and variable and fixed yield debt instruments of foreign issuers. The
new investment regulations (i) allowed pension funds to enter into derivative
securities transactions whose sole purpose is to hedge portfolio exposures; (ii)
established the maximum investment limits on equity securities equal to 37% of
pension funds assets and (iii) broadened the foreign investments to bonds,
stocks, mutual funds and other investment funds by setting a maximum investment
limit of 12% on foreign issuers, that includes a sub-limit of 6% for equity
securities. The Pension Funds were also allowed to invest a small portion of
their assets in start-up projects depending on their risk classification.
24
On January 18, 1999, the maximum global limit to invest in international
assets increased up to 20% with a sub-limit of 10% for equity securities and
international mutual funds. The Central Bank that is in charge of establishing
precise limits within the boundaries defined by law, reduced the global limit to
16%.
The regulation also limits the investment level that a pension fund can
make in a specific company based on the net asset value of such pension fund,
the company's outstanding number of shares and certain additional criteria.
Limits related to a company's property percentage might have the impact of
restricting the larger AFPs' ability to own same proportion of administered
pension funds in equity than the smaller AFPs. In past years, while the Chilean
stock market was experiencing a strong growth, such regulations limited large
funds' possibility to take fully advantage of earnings recorded by certain
smaller-capitalization equity investments.
In fact until 1992, the Pensions Law provided that the maximum investment
value in equity securities of a "low ownership concentration" company (a company
whose by-laws prohibit shareholders to own over 20% of the company's equity)
owning by a pension fund was the lesser between (i) 7% of the net asset value of
the pension fund and (ii) 7% of the company's outstanding shares. In the case of
a "high ownership concentration" company, the limit was the lesser between (i)
1% of the net asset value of the pension fund and (ii) 1% of the company's
outstanding shares. Since Pension Funds are very large, as is BBVA Provida's,
equity investments were usually limited by the number of the issuer's
outstanding shares, while other smaller pension funds were able to invest a more
significant proportion of their total pension portfolio in an issuer. This
rule's impact on BBVA Provida was Pension Fund's lower return with respect to
the average recorded by the industry due to the high return obtained by equity
investments during that period.
In 1992, the Pensions Law was amended for, in the case of high ownership
concentration companies, the maximum value was the lesser between (i) 1% of the
net asset value of the pension fund and (ii) 3% of the company's outstanding
shares. This allowed larger pension funds to increase their investment level in
equity securities of such companies, while smaller pension funds remained
limited by the 1% of the net value of assets under management.
Effective in May 1995, the Pensions Law was amended to remove the low
ownership concentration and high ownership concentration company distinction as
the sole basis for limitations on pension funds' investments in equity
securities of companies.
Changes to these limits in 1992 and 1995, together with the option of
investing in international markets, have led restrictions imposed on domestic
equity holdings to become less relevant, significantly improving this situation.
Furthermore, this disadvantage has been largely removed since AFPs that are open
to increase equity stocks' interest in their portfolios, can easily acquire
stocks in international markets.
The law passed on February 28, 2002 modified investment limits directed to
introduce the multiple funds concept and establishes different parameters for
each type of fund. According to the above, new limits of Investments under the
multiple funds framework were established as it follows:
25
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A. Investment Limits by Instrument (as per the Fund Value)
INSTRUMENT MAXIMUM LIMITS BY TYPE OF FUND
TYPE A TYPE B TYPE C TYPE D TYPE E
1. Securities issued by the Central Bank of Chile;
securities issued by Chilean Treasury; mortgage
loans issued by Servicios Regionales y
Metropolitano de Vivienda y Urbanizacion;
recognition bonds issued by Government Pension
System (INP) or other Pension Institutions; other
securities issued or guaranteed by the Chilean 40% 40% 50% 70% 80%
Government.
2. Time deposits; bonds and other representative
securities of deposits issued by financial
institutions. 40% 40% 50% 70% 80%
3. Securities guaranteed by financial institutions. 40% 40% 50% 70% 80%
4. Mortgage loans issued by financial institutions. 40% 40% 50% 60% 70%
5. Bonds of public and private companies 30% 30% 40% 50% 60%
6. Bonds of public and private companies 30% 30% 10% 5% ---
convertible in shares.
7. Shares of publicly-traded corporations. 60% 50% 30% 15% ---
8. Shares of publicly real state corporations 60% 50% 30% 15% ---
9. Investment fund shares referred to the Law No
18,815, plus the amount of compromised
contributions through contracts of subscription
promises and payment of investment fund shares and 40% 30% 20% 10% ---
national mutual fund shares ruled by the 1,328
Decree Law of 1976.
10. Commercial notes issued by public and private
companies referred to promissory notes or other
investment and credit securities, expiring no 10% 10% 10% 20% 30%
longer than a year, counting from its inscription
in the Registro de Valores, without renewal.
11. Credit securities, commercial notes or
securities issued or guaranteed by foreign
Governments, central banks or international or
foreign bank institutions; investment securities
issued by Municipalities, regional and local
governments; shares, bonds and commercial notes
issued by foreign companies; bonds convertible in
shares issued by banking entities and foreing
companies; securitized credit bonds issued by
foreing companies, participation shares issued by
mutual funds and foreign investment funds; foreign
securities representative of share index; The sum of different investment funds of a same
short-term deposits; operations which have as an Administrator in foreing securities plus the amount of
unique objective to cover fluctuation-financial foreign investment through mutual fund shares and and
risks among foreign currencies or risks of interest local investment shares have a maximum limit of 30% of
rates of a same foreign currency, foreign value obtained from the sum of a same Administrator's
investments through investment shares issued by funds.
investment and mutual funds which is referred in
number 9 when these funds have more than 50% of
assets invested abroad.
11a. Bonds convertible in shares issued by banking Foreign Foreign 10% 5% ---
entities and foreing companies Global limit Global limit
11b. Current accounts foreing investment bank 0.20% 0.20% 0.20% 0.20% 0.20%
(movil average 30 last days)
11c. Structured notes issued by foreign companies 4% 3% 2% 2% ---
11d. Short-term deposit 2% 2% 2% 2% 2%
1/3 1/3 1/3 1/3 1/3
11e. Operation or agreements aimed at mutual
borrowing of financial instruments of foreign Foreign Foreign Foreign Foreign Foreign
issuers calculated as per instruments given in Investment Investment Investment Investment Investment
borrowing. Type A Type B Type C Type D Type E
12. Other public offer instruments whose issuers For each type of instrument indicated in this number,
are supervised by the Superintendency of securities maximum limits of investment for Types A, B, C, D y E, not
and insurance or the Superintendency of banks and being lower than 1 percent nor exceeding 5 percent of the
financial institutions, authorized by the Central respective fund value, corresponding to the Central Bank
Bank of Chile. of Chile to determinate them.
12a. Shares of investment funds of foreign capital 1% 1% 1% 1% ---
12b. Commercial notes of letter i) of 3.500 Law 1% 1% 1% 1% ---
Decree (not considered in number 10)
13. The sum of investments in foreign currency 40% 25% 20% 15% 10%
without exchangeable cover.
14. Operations or contracts aimed at borrowing or
mutual of financial instruments of local issuers
calculated as per financial instruments given in 15% 10% 5% 5% 5%
borrowing.
15. Time deposits; bonds and other representative
securities of deposits issued by financial
institutions and securities guaranteed by financial 40% 40% 50% 70% 80%
institutions.
16. Bonds of public and private companies and bonds
of public and private companies convertible in 30% 30% 40% 50% ---
shares.
17. Shares of publicly-traded corporations and 60% 50% 30% 15% ---
shares of publicly real state corporations
18. National mutual fund shares ruled by 1,328 5% 5% 5% 5% ---
Decree Law of 1976 which is referred to number 9.
19. Contributions of subscription promises and
payment of investment fund shares referred to 2% 2% 2% 2% ---
number 9.
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INSTRUMENT MAXIMUM LIMITS BY FUND TYPE
TYPE A TYPE B TYPE C TYPE D TYPE E
20. For each kind of financial risk coverage
usually made in formal secondary markets (limit
calculates as per shares of the coverage and Investment in shares for coverage
measured in net terms)
In Circular 1,216 of this Superintendency or those one
21. Operations of risk coverage made in local that replace or modify it, it is established a serie of
and/or external markets investment limits that Administrators must fulfill at
making risk coverage operations for pension funds.
B. Investment Limits in Specific Instruments and in Instrument Groups or Sectors (as per the Fund Value)
B.1. Maximum Limits of Investment by Specific Instruments and in Groups of Instruments and Sectors (in
accordance with the Fund Value)
INSTRUMENT MAXIMUM LIMITS BY FUND TYPE
TYPE A TYPE B TYPE C TYPE D TYPE E
I. CAPITAL INSTRUMENT
1. ACC with lower liquidity factor 10% 8% 5% 2% ---
2. ACC + CFI + CFM with no approval by the Rating 3% 3% 1% 1% ---
Commission (CCR).
3. EXT + other securities of public offer inspected
by S.V.S. or S.B.I.F. that require no approval of 1% 1% 1% 1% ---
CCR.
4. ACC + ACI + CFI + CFM referred to number 9,
letter A, plus the amount of comprsed contributions
through contracts of subscription promises and
payment of investment fund shares + representative 80% 60% 40% 20% ---
instruments of capital indicated in numbers 11 and
12, letter A.
II. DEBT INSTRUMENT
1. FIN + LHF + DEB + BCA + ECO + [ EXT + OAC ] if
they are from debts, classified in BBB category and
N-3 level of risk. 10% 10% 10% 5% 5%
III.DEBT AND CAPITAL INSTRUMENTS
1. DEB + BCA + Capital Instruments + Debt
Instruments classified in BBB category and N-3 of
risk. --- --- 45% 22% ---
2. DEB + BCA + ACC + ECO + OAC whose issuer has 10% 10% 10% 8% 5%
less than 3 years of operations.
3. Restricted securities: OAC + [ ACC ] with lower
liquidity factor + [ ACC + CFI + CFM + CME + CIE +
OAC ] that require no the approval of the CCR +
[ DEB + BCA + ACC + ECO + OAC ] whose issuer has less
than 3 years of operations + [ FIN + LHF + DEB + 20% 20% 20% 15% ---
BCA + ECO + EXT + OAC ] classified in BBB category
and N-3 of risk. The Central Bank of Chile will be
able to exclude from this limit each type of
instrument from number 12, letter A. (OAC).
B.2. Maximum Limits of Investment by Specific Instruments in Groups of Instruments and Sectors (as per the
Fund Value)
INSTRUMENT MAXIMUM LIMITS BY TYPE OF FUND
TYPE A TYPE B TYPE C TYPE D TYPE E
1. ACC + ACI + CFI + CFM referred in number 9,
letter A, plus the amount of compromised
contributions through contracts of subscription
promises and payment of investment fund shares +
capital representative instruments indicated in 40% 25% 15% 5% ---
number 11 and 12, letter A.
Capital Instruments:
o ACC: Shares of publicly-traded corporations.
o ACI: Shares of publicly real state corporations
o CFI: National Investment Funds Shares.
o CFM: National Mutual Funds Shares.
o CIE: Foreign Investment Fund Shares.
o CME: Foreign Mutual Fund Shares.
Debt Instruments:
o LHF: Mortgage loans issued by financial
institutions.
o ECO: Commercial Notes.
o DEB: Public and private companies Bonds.
o FIN: Time deposits, and other representative
securities of financial institutions deposits, and
securities guaranteed by financial institutions.
Others:
o BCA: Convertible share Bonds.
o OAC: Instruments of other types whose issuers are
supervised by the Superintendency of securities and
insurance and the superintendecy of banks and
financial institutions, authorized by the Central
Bank of Chile.
o EXT: Instruments of foreign issuers.
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C. Investment Limits by Issuer
INSTRUMENTS INDIVIDUAL FUNDS FUNDS
A + B + C + D + E
SECTORS % % % % %
FUND COMPANY SERIE COMPANY SERIE
I. FINANCIAL SECTOR
Deposit in current accounts and time deposits, and
debt securities issued by banks, financial
institutions or guaranteed by them and its
subsidiaries or guaranteed by them. 10% VF x fij MU1 x Pat. --- MU1 x Pat. ---
Shares (when correspond)+ deposit in current
accounts and time deposits + debt securities issued
by banks, financial institutions or guaranteed by 7% VF --- --- --- ---
them.
II. FOREIGN SECTOR
Shares 0,5 %
VF
Debt securities 5% x
VF x fij
Mutual and Investment Funds 1 % VF
Shares of free availability which are traded in 0,15%x 7% x AEE 7% x AEE
national markets VF
Investment Fund Shares of number 11, letter A, of a 0,15%x 35% x CF 35% x CF
same issuer not requiring approval of CCR VF
Mutual Fund Shares of number 11, letter A of a same 0,15%x 35% x CF in 35% x CF in
issuer not requiring approval of CCR VF circulation circulation
Structured Notes issued by foreign companies 1% VF
Short term deposits (overnight + time deposits) 0.5%
VF
Securities representatives of stock market index 1% VF
III. COMPANY SECTOR
A) Bonds and Commercial Notes
Debts securities leasing Companies 7% VF MU2 x Pat. MU2 x Pat. 35% serie
bonds + commercial notes x fij
Individual Companies 7% VF MU3 x Asset MU3 x Asset
Bonds + commercial notes issued or guaranteed by x fij value issuer value issuer 35% serie
individual companies 7% VF
x fij MU3 x > MU3 x
Headquarters and Subsidiaries Consolidated Consolidated
bonds + commercial notes issued or guaranteed net asset net asset
value issuer value issuer
Securitizer Company 7% VF 35% serie 35% serie
bonds + commercial notes issued or guaranteed x fij
Companies having less than 3 years of operation 3% VF 35% serie 35% serie
bonds + commercial notes issued or guaranteed x fij
B) Company Group
Shares, bonds and commercial notes issued or 15% x
guaranteed VF
C) Shares
5% x
Shares of publicly-traded corporations V Fx 20% new 7%xACC 20% new
FC x FL 7% x ACC issuance issuance
5% x
Shares of real state corporations VF x 20% x ACC 20% new 20% x ACC 20% new
FC issuance issuance
Shares not requiring approval of the CCR 0,15%x 7% x ACC 20% new 7% x ACC 20% new
VF issuance issuance
2,5% x
Shares of Financial and Bank Societies VF x 2,5% x ACC 20% new 2,5% x ACC 20% new
FC x FL issuance issuance
D) Investment Fund Shares and Mutual Funds
5% x
Investment Fund Shares + subscription promises. VF x 35% new 35% x CFI 35% new
FD 35% x CFI issuance issuance
35% x CFM
Mutual Fund Shares 1% x 5% x CFM in in
VF 3circulation circulation
Investment Fund Shares of number 9, letter A. not 0,15%x 35% x CFI 35% new 35% x CFI 35% new
requiring approval of CCR VF issued issuance issued issuance
35% x CFM
Mutual Fund Shares of number 9, letter A. not 0,15%x 5% x CFM in in
requiring approval of CCR VF 3circulation circulation
Contributions compromised through subscription and 0,5% x
payment promises VF
Investment fund shares of foreign capital 1% VF
E) Shares + Bonds + ECO
Individual Companies (Types A, B, C y D) 7% VF
IV. DERIVATIVE SECTOR
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INSTRUMENTS INDIVIDUAL FUNDS FUNDS
A + B + C + D + E
SECTORS % % % % %
FUND COMPANY SERIE COMPANY SERIE
Local forwards calculated as per asset and measured
in net terms 4% VF
Foreign forwards and foreign options OTC (not
listed in the Exchange) calculated as per the asset 3% VF
and measured in net terms
o ACC: The overall subscripted shares of a society
multiplied by its price.
o AEE: The overall subscripted shares of a foreign
society multiplied by its price.
o CFI: Subscripted fees from respective Investment
Funds.
o CFM: national mutual fund Shares in circulation
o fij: Weighted average risk factor, whose value
depends on instrument risk classification and
investments in them.
o FC: Concentration factor, may vary between 0.3
and 1.
o FD: Diversification factor, may vary between 0
and 1.
o FL: Liquidity factor, may vary 0.2 y 1,
determined by the Central Bank of Chile.
o MU1: Unique multiple for all the financial
institutions whose range may vary between 0.5 and
1.5. At present it is fixed at 1.0
o MU2: Unique multiple for companies whose line of
business is to make leasing operations, it varies
between 0.4 and 1. At present it is fixed at 0.7
o MU3: Unique multiple for Bonds and Commercial
Notes it varies between 0.08 and 0.12. At present
it is fixed at 0.12
o Pat: Issuer's equity.
o VF: Value of Pension Funds, meaning the closing
value of the instrument's portfolio, plus current
accounts' balance, Bank of national investment and
Bank of foreign investment
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D. Investment Limits in Issuers being Persons related to the Administrator
INSTRUMENTS INDIVIDUAL FUNDS FUNDS
NORMAL LIMIT RELATED LIMIT A + B + C + D + E
Shares of Publicly- traded corporations 5% x V Fx FC x FL 5% x V Fx FC x FL 5% x V Fx FC x FL
and high liquidity y high liquidity
7% x ACC 2% x ACC 2% x ACC
Shares of publicly real state corporations 5% x VF x FC 5% x V Fx FC and 5% x V Fx FC and
high liquidity high liquidity
20% x ACC 5% x ACC 5% x ACC
2,5% x V Fx FC x
Financial and Bank Shares 2,5% x VF x FC X FL 2,5% x V Fx FC x FL FL and high
and high liquidity liquidity
2,5% x ACC 0,5% x ACC 0,5% x ACC
Free Availability Shares 0,15%xVF 0% 0%
7% x ACC 0% 0%
Only AAA o AA
Previously categories or with
Debt Securities described level n-1 of risk 5% of the issuance
and limits and 20% of daily
previously described placement
3% x Asset value
issuer
3% x
Consolidated/countable
net asset value
issuer
Investment Fund Shares: AFP related to Investment 5% x VF x FD
Fund Administrator
35% x CF - 5% x CF
Mutual Fund Shares: AFP related to Mutual Fund 1% x VF -
Administrator
35% x CF - 5% x CF
Investment Fund Shares having securities from an
issuer that can be a person related to
Administrator - 10% of shares
Mutual Fund Shares having securities form an issuer - 10% of shares
that can be a person related to Administrator
Investment limits in instruments issued or 1% x VF -
guaranteed by each issuer related to AFP
Investment limit in direct or indirect way in
instruments issued or guaranteed by all societies 5% x VF -
related to AFP
o ACC: Number of subscripted shares multiplied by
its price
o VF: Value of Pension Funds
o FL: Liquidity Factor
o FC: Concentration Factor
o FD: Diversification Factor
29
E. Factors considered in Limits by Issuer in Shares and Investment Funds Shares
o Concentration Factor (FC)
It is calculated on the bases of the maximum concentration of the property
allowed in the corporation's by-laws and subject of this to XII Title -Law
Decree 3,500-.
PARTICIPATION OF MAJORITY SHAREHOLDER CONCENTRATION FACTOR
Subject to XII title <=32% 1
>32% to <50% 0.8
>=50% to<=65% 0.6
Not subject to XII title <=32% 0.6
>32% to <50% 0.5
>=50% to <=65% 0.4
>65% 0.3
o Liquidity Factor (FL)
It is calculated as per share's presence and amounts in Stock Exchange
(Liquidity Index). The following scale established by The Central Bank is as it
follows:
LIQUIDITY INDEX LIQUIDITY FACTOR
IL<=20% 0.3
20%< IL <=50% 0.5
50%< IL <=70% 0.7
70%< IL 1
o Diversification Factor (FD)
It is calculated as per investment fund total assets' proportion invested
directly and indirectly in instruments issued or guaranteed by a same issuer
where:
DIRECT AND INDIRECT INVESTMENT OF A SAME ISSUER DIVERSIFICATION FACTOR
Inv.<=20% of total fund asset 1.0
20%< Inv.<=25% of total fund asset 0.8
25%< Inv. <=1/3 of total fund asset 0.6
1/3< Inv.<=40% of total fund asset 0.2
Inv.>40% of total fund assets 0
Accounts Administration. A significant part of BBVA Provida's operational
activities are related to the payroll's processing submitted by employers and
the preparation of balance sheets for individual capitalization and voluntary
savings accounts. The payroll processing is labor-intensive since most of them
are still prepared and submitted on paper and must be manually entered into BBVA
Provida's computer files. Various computer programs, audit procedures and
backing files are maintained by BBVA Provida to assure that data is entered
accurately and the amounts are properly credited in accounts.
In October 2000, the PreviRed.com project was started, sponsored by the
Association of Pension Fund Administrators, aimed at developing and managing a
system to collect contributions electronically in Internet. All AFPs are
shareholders of PreviRed.com, and BBVA Provida holds a 37.8% stake in this
company. As of March 31, 2003, Provida's investment in PreviRed.com amounted to
Ch$528 million. PreviRed.com started operations in October 2001. The collection
volume recorded by this service ascends approximately to 13% of the total amount
collected by this Administrator.
Principal Markets
Chile
BBVA Provida is the largest and one of the oldest AFPs operating in Chile
and has occupied a leading position in the private pension industry since its
inception. As of December 31, 2003, BBVA Provida was the largest of the seven
AFPs operating in Chile in terms of the number of affiliates, contributors,
assets under management, salary base and number of branch offices. For the
twelve month-period ended December 31, 2003 ("Fiscal Year 2003") and the twelve
month-period ended December 31, 2002 ("Fiscal Year 2002"),
30
BBVA Provida held in operating revenues 32.7% and 32.8%, respectively; 33.0% and
35.5%, in operating income and 36.6% and 37.8% in net income of the entire
Chilean AFP system, according to information released by all AFPs (equity in
gain of related companies is considered as non-operating income, with the
exception of those consolidated). As of December 31, 2003, Pension Funds managed
by BBVA Provida reached to Ch$9.4 trillion (approximately US$15.7 billion)
including the Funds Type A, B, C, D and E representing 31.7% of the total value
of all funds in the Chilean AFP system according to data published by the
principal regulator of Chilean AFPs, the SAFP.
BBVA Provida's leading position is shown in the following table regarding
market shares in the most relevant variables:
[Enlarge/Download Table]
-------------------------- ------------- ------------ ----------------- ------------ ------------- -----------
Market Share 2003 Pension Affiliates Contributors Operating Operating Net Income
Funds Revenues Income
-------------------------- ------------- ------------ ----------------- ------------ ------------- -----------
Provida 31.7% 42.0% 41.5% 32.7% 33.0% 36.6%
Habitat 24.1% 23.7% 24.7% 23.8% 29.7% 29.3%
Cuprum 15.9% 6.5% 9.1% 15.4% 19.0% 16.3%
Santa Maria 12.6% 14.2% 13.0% 12.4% 7.4% 9.4%
Summa Bansander 11.4% 7.7% 7.7% 10.6% 12.4% 10.8%
Magister 1.7% 1.4% 1.3% 2.1% -2.8% -3.5%
Planvital 2.7% 4.5% 2.7% 2.9% 1.3% 1.1%
System 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Based on information provided by the authority and on annual Uniform and
Codified Statistic Form (FECU), for all AFPs.
The private pension system in Chile has matured and continues to be
extremely competitive. At present, there are six AFPs operating in a highly
regulated environment. By law, no company in Chile other than an AFP may provide
pension benefits of a similar nature, with only one exception related to
voluntary pension savings that has been opened to other authorized institutions
since March 2002. BBVA Provida is significantly larger in terms of branches,
affiliates and contributors than its closest competitors. All competitors have
certain relationships with trade associations, insurance companies, banks or
financial corporations that may provide unique competitive advantages.
Competition is especially focused on charged fees, commercial strategy and
returns earned by the pension funds. At the end of 1997, the intensity of the
commercial activity was evidenced by the fact that the number of sales agents in
the industry increased from 5,200 to 18,700, which represents a 260% increase
between the years 1992-1997. New regulations issued in November 1997 by the SAFP
formalized the affiliate-transfer process among AFPs; also reducing the number
of sales agents in the industry as evidenced by a fall of 48% from 1997 to 1998,
culminating with an average number of approximately 9,800 in 1998. During 1999,
an additional decline of 56% occurred in comparison to the previous year, with
the average number of salespeople falling to approximately 4,300. This trend
continued during the years 2000 and 2001, with the average number of salespeople
decreasing to 3,222 and 2,649, respectively, which represent decreases of 25%
and 18% respectively, regarding the previous year. This strategy related to
commercial expense rationalization was accompanied by fee reductions, converting
the latter into the main competitiveness variable. In 2002, the average number
of sales agents throughout the Industry was 2,679 implying an increase of 1%
compared to last period, while in 2003 the average number of sales agents
reached 2,604 representing a drop of 3% with respect to last year.
Competition also encouraged a process in which smaller and less efficient
AFPs were acquired by and merged into larger ones, as well as the association of
strategic partners with existing AFPs. Consequently, during 1995 and 1996,
Provida absorbed AFP El
31
Libertador S.A.; AFP Santa Maria S.A. absorbed AFP Banguardia S.A.; AFP Qualitas
S.A absorbed AFP Valora S.A. and AFP Previpan S.A.; AFP Planvital S.A. absorbed
AFP Corcordia S.A.; and AFP Magister S.A. absorbed AFP Futuro S.A. Additionally,
Citicorp Inc. became an important shareholder of AFP Habitat S.A. ("AFP
Habitat"), and Luksic group became the controller of AFP Qualitas.
During 1998 and 1999, the consolidation trend continued. Provida absorbed
AFP Union; Sun Life Inc. acquired 31.7% of AFP Cuprum S.A.; Corp Group Pensiones
acquired AFP Proteccion; and Inverlink Holdings acquired 84.6% of AFP Qualitas.
Inverlink Holdings, which already controlled AFP Magister, merged both pension
fund managers and retained the name AFP Magister. In addition, Santander Chile
Holding S.A. acquired 100% of AFP Summa S.A. which was merged with Santander AFP
to form AFP Summa Bansander S.A, and AFP Aporta S.A. and AFP Fomenta S.A. were
merged to form AFP Aporta Fomenta S.A.. On January 1, 1999, Provida acquired and
merged with AFP Proteccion. Subsequently, BBV acquired 40.7% of Provida and
Aetna Chile increased its participation in AFP Santa Maria from 76.0% to 96.6%.
In January, 2001, AFP Aporta Fomenta S.A. was acquired and absorbed by AFP
Magister, while at the end of the same year, the Banca della Suizzera Italiana,
a Swiss group, took control of AFP Planvital (99.98%). In June 20, 2001, the
merger of ING Life Insurance Company with Aetna Life Insurance Company was
allowed, implying the integration of AFP Santa Maria to ING Group, company that
was formerly controlled by Aetna Chile. Currently, ING S.A. owns 97.61% of AFP
Santa Maria's stake.
In March 2004, AFP Planvital S.A. merged with AFP Magister S.A. maintaining
the name of AFP Planvital S.A.
The mergers and acquisitions process previously described has resulted at
present in six AFPs operating in the market and competing in terms of size,
service and sales coverage. A new competitive factor arose from the Multiple
Funds' implementation due to its widening of the pension fund portfolio which
led affiliates to start requiring higher levels of information to make decisions
based on their age and risk profile. In this way, pension advisory services that
AFP started to provide became highly relevant. In fact, as of February 2004,
1,474,000 people had opted among the five funds offered, representing 43% of
total contributors of the industry. Additionally, as of February 2004, 352,000
affiliates had opted for funds with a higher concentration in variable income,
implying an increase of more than 100% as compared to February 2003. Of this
figure, 121,000 correspond to fund transfers and 231,000 to people that selected
funds for first time.
During the 18 months since the implementation of Multiple Funds all types
of Funds have recorded positive returns with an important return difference
between Fund Type A -with the highest concentration of shares- and Fund Type E
-totally concentrated in fixed income- which ascends to 29% in 12 month-period
(April 2003-March 2004). Those funds (Types A and B funds) with higher
percentages of variable income have generated the most positive returns and,
jointly represent 26% of the total.
32
At March 31, 2004 BBVA Provida obtained the following returns and its
respective rankings in real terms for each type of funds in twelve months:
Return Provida's position
----------------------------------------------------------
Type A 33.93% 3
Type B 19.39% 4
Type C 13.13% 3
Type D 9.93% 4
Type E 4.26% 5
Source: SAFP
Additionally, the Company continued its efforts to maintain its broad
customer base and to promote client loyalty by providing integral pension
advisory services. Supporting this effort is a continuous improvement in both
the technology and process involved in each distribution channel. The Company
also created Specialized Attention Centers for Voluntary Pension Savings and
participates in companies such as PreviRed.com and the Unemployment Funds
Administrator, with the support of the BBVA Group.
BBVA Provida also faces competition for voluntary savings contributions
from various financial institutions and intermediaries such as banks, insurance
companies and investment companies. Because BBVA Provida does not currently
charge a fee on voluntary savings account deposits, such competition has not
been a source of significant concern. As of December 31, 2003, the overall
number of voluntary savings accounts in the AFP industry ascended to 760,822
which represents a total amount of US$375 million, of which BBVA Provida had
326,177 accounts representing a market share of 42.9% and occupying first place
in the industry.
In 2001, the Chilean government recently passed a set of measures aimed at
liberalizing the capital market, one of them related to voluntary pension fund
savings that came into force in March 2002, giving new saving incentives and
allowing its administration by other institutions different from AFPs. In this
context, while competitors have the advantage of offering a larger variety of
products because AFP investments are limited by law (even though multiple funds
extended the limits), according to fees reported by the different participants,
AFPs stand out in terms of low costs. Additionally, by law AFPs had to establish
commissions, that has implied a new source of revenues. At December 31, 2003
BBVA Provida had the largest number of APV accounts in the AFP industry,
totaling 165,470 active accounts with a market share of 48.9%. At December 31,
2003 administered funds regarding APV accounts amounted to US$146 million, a
21.9% growth with respect to the year-end 2003.
International
Because of the success of the private pension system in Chile, a number of
other Latin American and European countries have adopted substantially similar
private pension systems. Currently, private pension systems are also in place in
Peru, Colombia, Argentina, Uruguay, Bolivia, Mexico, El Salvador, Costa Rica,
Panama, the Dominican Republic, Croatia and Poland. In addition, Ecuador,
Paraguay, Venezuela, Brazil and Guatemala are also considering the adoption of a
private and mandatory pension system.
33
The Pensions Law states that the "sole objective" of each AFP is limited to
the administration of pension funds and the provision of related benefits. The
Pension Law allows an AFP to invest, through a subsidiary created by the AFP for
such purposes, in foreign companies whose purpose is to grant social security
benefits in other countries.
In May 1995, Provida amended its by-laws to allow the creation of a
subsidiary, Provida Internacional, whose objective is to invest in companies in
countries other than Chile with the purpose of granting social security benefits
in those countries. Provida Internacional was constituted with Provida as holder
of 99.99% of common stock shares and Corp Group Pensiones Chile S.A. as holder
of the remaining shares. Subsequently, Corp Group Pensiones Chile S.A. changed
its name to BBVA Pensiones Chile S.A., maintaining the same equity interest
structure. Provida Internacional holds investments in AFPs operating in Peru,
Ecuador, Mexico, El Salvador and the Dominican Republic.
International Strategy. As of December 31, 2003 the BBVA Group, with the
BBVA Provida's participation, is the largest pension group in Latin America,
with almost 12 million affiliates and almost US$33 billion in assets under
management. BBVA Provida's international strategy has focused on investment
efficiency and new pension projects in Latin America together with the BBVA
Group. BBVA Provida's strategy is to act as a consultant to local AFPs in those
countries with large pension markets with the expectation of generating
consulting fees. In countries with smaller pension markets, BBVA Provida will
actively seek new investments in local AFPs.
Consistent with foregoing, during 2003 several adjustments in foreign
subsidiaries investment portfolio were carried out aimed at boosting the
pension franchise with the BBVA Group. In September 2003, Provida Internacional
sold its 20% equity interest in AFPC Porvenir in Colombia, considering the
Colombian market has matured in a context of changes in regulations and BBVA
Provida did not have management control of the company. The Company sold this
investment to AFPC Porvenir's controlling shareholder -the Sarmiento Group-,
for US$26,8 million on September 2003.
Together with the above transaction aforesaid, BBVA Provida acquired 100%
stake in AFP Porvenir, the Dominican Republic from the Sarmiento Group and
minority shareholders. Behind this is that the Dominican Republic has just
created a pension fund system similar to Chile's. BBVA Provida considered of
great attractiveness to have a management control in such AFP. Additionally,
such transaction sustains itself financially on the expected results in the
medium and long term that are reinforced by the benefits of the future merger of
AFP Porvenir with BBVA Crecer, the AFP of the BBVA Group in that country.
Peru-AFP Horizonte. In June 1993, Peru started a private pension system. In
November 1993, Provida made an initial US$2 million investment in exchange for a
20% equity share in AFP Horizonte, a company targeting high and middle-income
workers located mainly in the Lima region of Peru. In April 1994, Provida
invested an additional US$1 million in connection with an equity issue to
maintain its 20% stake. Due to the slow development of the private pension
market, in August, 1994 AFP Horizonte decided to
34
merge with AFP Megafondo S.A. in order to take advantage of scale economies and
consolidate its position as one of the leading AFPs in Peru. Under the terms of
the merger, Provida's equity stake in AFP Horizonte was reduced to 13.2%. In
1996, Provida, through Provida Internacional made an additional investment of
approximately US$1.1 million in AFP Horizonte in order to increase its
participation to 15.87%. BBVA Provida's total investment in AFP Horizonte at
December 31, 2003 amounted to US$4.1 million, being more than surpassed by
dividends paid by the Peruvian company to BBVA Provida. In the first half of
1998, AFP Horizonte distributed a dividend to its shareholders for the first
time since it started operations and in order to be able to pay these dividends,
AFP Horizonte had to absorb losses corresponding to previous periods. The
absorption of past period losses was accomplished through a reduction in the
amount of the paid-in capital of AFP Horizonte.
The Peruvian pension system originally was comprised of eight AFPs, but
only four are currently operating. Workers may still choose to participate in
the public system. As a result of the merger mentioned above, AFP Horizonte's
market share in terms of the number of affiliates in the system increased from
13% to 23%, and from 17% to 25% in terms of assets under management. At December
31, 2003, a total of 3,192,503 eligible workers had been incorporated into the
Peruvian private pension system, of which AFP Horizonte had 838,329 affiliates
and 365,024 contributors with a market share of 26% and 27% respectively,
occupying the first place in the industry. At that date, assets under management
in the Peruvian system were approximately US$6.3 billion, of which US$1.6
billion were managed by AFP Horizonte, representing a 25% of participation and
the third place in the market.
AFP Horizonte achieved strong financial returns in Fiscal Year 2003,
contributing Ch$1,944 million (US$3.27 million) to the net income of BBVA
Provida. This result basically stems from higher fee income given the increase
in the average number of contributors (5.5%).
During 1998, Holding Continental S.A., a company related to the Brescia
family and BBV, increased its interest in AFP Horizonte to 54%, thereby becoming
its controlling shareholder. Beginning in 2000 the BBVA Group, through the
acquisition of minority shareholdings, held a 100% equity interest in AFP
Horizonte, directly and through subsidiaries.
BBVA Provida does not currently anticipate making any additional investment
capital contributions to AFP Horizonte. No assurance can be given that
unforeseen circumstances may not arise which would make an additional capital
requirement or higher financing needs by AFP Horizonte.
Colombia-AFPC Porvenir. In April 1994, Colombia started a private pension
system. Provida purchased a 20% equity interest in AFPC Porvenir S.A. in 1994
for approximately US$4.7 million. In September 2003, BBVA Provida's total
investment in AFPC Porvenir amounted to US$10.3 million. The Company sold this
investment to AFPC Porvenir's controlling shareholder, the Sarmiento Group, for
US$26,8 million on September 2003.
The results obtained by AFPC Porvenir in Fiscal Year 2003 contributed
Ch$929 million (US$1.6 million) to the net income of BBVA Provida, that
corresponds to the profits generated until August 2003, previous to the sale of
said entity. This sale generated for BBVA Provida income after taxes of US$8,873
thousands at the year-end exchange
35
($593.80 per US$) resulting in a gain of Ch$5,269 million. Additionally, this
transaction generated income for price level restatement originated by
differences in the exchange rate when the reserves associated to that investment
were released. The latter implied acknowledging an earning of US$181 thousands
(equivalent to Ch$107 million), therefore this transaction's net result ascended
to US$9,054 thousands, that is, Ch$5,376 million.
Ecuador. AFP Genesis Although a mandatory private pension system has not
been implemented yet in Ecuador, the Ecuadorian government has authorized the
creation of AFPs, which receive regular voluntary contributions from their
affiliates. Until 1995, Filanbanco S.A., one of the largest banks in Ecuador,
operated and owned all of the outstanding common stock of AFP Genesis. In August
1994, Provida entered into a software and technology supply contract with AFP
Genesis and also signed a letter of intent by which Provida agreed to purchase
approximately 25% of the outstanding shares of common stock of AFP Genesis from
Filanbanco. In December 1995, Provida Internacional, as Provida's successor in
interest under the above-mentioned contract and letter of intent, purchased 25%
of the outstanding shares of common stock of AFP Genesis from Filanbanco, paying
approximately US$0.7 million.
In 1996, Provida Internacional made an additional investment of
approximately US$0.5 million, in order to maintain its 25% interest in AFP
Genesis. In that time, Filanbanco, like other local banking institutions, was
suffering from financial difficulties that ultimately required the intervention
and assistance of the government at the end of 1998. ING Barings was engaged by
the Ecuadorian government to find a strategic partner for Filanbanco. Finally,
in September 2001, Provida Internacional acquired 75% de AFP Genesis, completing
100% of the shareholding in the Ecuadorian company. Since then, Provida's
financial statements are consolidated with those of AFP Genesis, implying a net
result of Ch$360 million as of December 2003 (US$ 0.61 million).
At December 31, 2003, Genesis had 227,826 affiliates; 109,105 contributors
and assets under management over US$15 million representing a market share of
83% in terms of contributors and 73% in terms of assets under management.
Mexico. In March 1996, Mexico promulgated a pension reform law that allowed
the implementation of privately managed pension funds. The affiliation process
began in February 1997 and private Mexican pension funds administrators
("AFOREs") started receiving collections in September 1997. In 1996, Provida
entered into an agreement with Grupo Nacional Provincial S.A. de C.V. ("GNP") of
Mexico, one of the largest insurance groups in Mexico offering life, health,
casualty and property insurance products, and BBV to create AFORE Profuturo. The
initial shareholders of AFORE Profuturo were GNP (51%), BBV (25%) and Provida
Internacional (24%) that also provided instruction and technology for pension
fund administration. On May 29, 1998, Profuturo's shareholders approved the
acquisition of AFORE Previnter S.A. de C.V., which was financed by the issuance
of new capital. Through this acquisition, AFORE Profuturo became the third
largest pension fund administrator in Mexico. Provida Internacional decided not
to increase its exposure in the Mexican market, and consequently its
participation was diluted from 24% to 14.45%.
Afterward, a merger between Grupo Financiero Bancomer S.A. de C.V. and
Grupo Financiero BBV Probursa S.A. de C.V. was authorized in the first half of
2000, creating one of the largest banks in Latin America and, upon the
incorporation of AFORE Bancomer into the BBVA Group, and the largest pension
fund administrator in Mexico at that time.
36
Provida, as a member of the BBVA Group, was invited to participate in this new
project. On November 30, 2000 Provida Internacional acquired a 7.5% equity
interest in AFORE Bancomer in a substantial transaction involving the payment of
US$66.3 million. In March 2001, in the second part of the process, Provida
Internacional sold its 14.45% holding in AFORE Profuturo, receiving US$61.7
million before taxes from the sale. The net proceeds were used to prepay the
transitory debt originating from the acquisition of Provida Internacional's
stake in AFORE Bancomer, whereas earnings of Ch$19,051 million (net of taxes)
were destined to accelerate the amortization of part of the goodwill resulting
from the purchase of AFORE Bancomer. The successive acquisition and sale of both
companies constituted a single financial operation.
For BBVA Provida, Mexico offers significant opportunities because it is the
most important market where a private pension system similar to the Chilean
system has been adopted, reaching more than 31 million affiliates at December
2003. AFORE Bancomer had 4,328,805 affiliates equivalent to a market share of
14%, 2,046,506 contributors with a market share of 16%, and assets under
management near to US$7.4 billion, representing a market share of 21% at
December 31, 2003. This situates AFORE Bancomer in the second place in the
industry in Mexico, a very competitive environment with the 12 AFORES operating
in the Mexican system.
The AFORE Bancomer' results obtained in Fiscal Year 2003 contributed
Ch$4,278 million (US$7.2 million) to BBVA Provida's net income. AFORE Bancomer
is BBVA Provida's main investment and generates the highest earnings equivalent
to 53.9% of the total earnings of foreign affiliates during this period.
El Salvador. In early 1998, Provida Internacional signed an agreement with
Dresdner Bank A.G. and local sponsors Corporacion Universal S.A. and Credomatic
S.A. to create AFP Porvenir S.A. ("Porvenir (El Salvador)"). Porvenir (El
Salvador) began its operations in April 1998 with a capitalization of
approximately US$6.3 million, of which 35% was contributed by Provida
Internacional. In the last quarter of 1999, Provida made an additional
investment of US$2.6 million aimed at increasing its stake to 50% in Porvenir
(El Salvador) by the acquisition of 15% interest previously in hands of Deutsche
Group company.
On March 28, 2000, the merger of Porvenir (El Salvador), AFP Prevision S.A.
and AFP Maxima S.A. was approved. The merger process was completed in September
2000, forming a new entity, AFP Crecer S.A., in which Provida participates with
a 19% stake. Porvenir (El Salvador) added about 181,000 affiliates and US$80
million in assets under management to AFP Crecer. At December 31, 2003, AFP
Crecer had 600,551 affiliates with a market share of 56%; 279,846 contributors
representing a market share of 56% and assets under management for US$738
million, with a market share of 48%. The results obtained by AFP Crecer in
Fiscal Year 2003 contributed Ch$790 million (US$1.3 million) to BBVA Provida's
net income.
The Dominican Republic - AFP Porvenir. On February 1, 2003 a pension
private system was implemented in the Dominican Republic, and the affiliation
began. In September 2003, Provida Internacional purchased 99.99% of AFP Porvenir
S.A. ("Porvenir (The Dominican Republic)") with an investment of US$15.4
million. Since then, Provida Internacional invested an additional US$1.3 million
to meet the capital needs of Porvenir (The Dominican Republic), bringing the
total investment to US$16.7 million
37
Since then, Porvenir in the Dominican Republic is consolidated in BBVA
Provida's financial statements with a net loss effect for Ch$316 million (US$
0.5 million) at December 2003 due to this affiliate having just started
operations.
At December 31, 2003, Porvenir (The Dominican Republic) had 117,363
affiliates and 81,154 contributors representing market shares of 14% and 15%
respectively, and assets under management for US$4.3 million, with a market
share of 13%.
It should be pointed out that such transaction is financially justified on
expected results in the medium and long term reinforced by the synergies of a
planned merger of AFP Porvenir with BBVA Crecer, the AFP of the BBVA Group in
that country. This merger process is due to start in June 2004 and it is
expected to be completed within five months.
On May 27, 2004, BBVA Provida, through its subsidiary Provida Internacional
S.A. sold to Grupo Progreso S.A. and Progreso Compania de Seguros S.A., a 30%
interest in AFP Porvenir -The Dominican Republic- for US$5.4 million. After this
transaction, Provida Internacional S.A. maintains a 69.9999% ownership interest
in AFP. Porvenir (The Dominican Republic).
The table below describes the total equity in gain of BBVA Provida's
related companies, both foreign and local, for the last three financial years.
[Enlarge/Download Table]
For the Twelve Months Ended December 31,
(in millions of constant Ch$)
2001 2002 2003 2003
MMCh$ MMCh$ MMCh$ MMUS$
Net Income BBVA Provida 33,663 34,347 32,005 54
- Net Income excluding gains of affiliated companies (*) 23,055 24,538 25,001 42
- Equity in gain of foreign affiliated companies (*) 10,772 10,410 7,942 13
- Equity in gain (loss) of local affiliated companies (164) (601) (938) (2)
Equity in Gain of Affiliated Companies/Net Income 31.5% 28.6% 21.9% 21.9%
(*) Gains on affiliated companies do not include entities consolidated with BBVA
Provida (AFP Genesis in Ecuador and AFP Porvenir in the Dominican Repulic)
Marketing and Sales
General
As is the case with all AFPs, BBVA Provida's activities are limited to
offering only those products and services permitted under the Pensions Law. See
"Item 4. Information on BBVA Provida--Business Overview--Government
Regulation--Mandatory Benefits." As a result, BBVA Provida seeks to maximize its
income by attracting and retaining affiliates as well as by offering the
possibility to make voluntary pension contributions and to receive payments
under a defined pension withdrawal program.
BBVA Provida obtains its affiliates fundamentally through its sales force,
which targets potential clients who may be interested in changing their pension
savings administration as well as new workers who enter in the labor market for
first time and need to be mandatory
38
affiliated to the AFP System if they are dependent workers. The same sales force
also performs tasks aimed at retaining the affiliate's portfolio, foreseeing
client transfers which might be induced by competitors' sales agents. BBVA
Provida also captures affiliates through its wide network of pension service
centers without sales agents' intervention.
As the largest AFP in the Chilean private pension system, BBVA Provida
seeks to capitalize its brand name recognition to attract new affiliates and
retain existing affiliates. Management believes that an important part of BBVA
Provida's public image is associated with a "three block" corporate value
concept: Experience, Capability and Trust, maintaining closeness with and
disposition to service its clients through out the country. Additionally,
reinforcing the above, BBVA Provida's prestige stems from its consolidated
leading position over time, as well as the culmination of the integration
process in the BBVA Group, a conglomerate leader in the Latin American private
pension fund system, which led to through a corporate image change starting
March 2001. Moreover, BBVA Provida believes that its marketing efforts,
including direct marketing and other promotional activities, permit the Company
to reinforce its strong presence in the market and to support the objective of
attracting new affiliates and retaining the current portfolio through its sales
force and its pension service centers.
BBVA Provida also mails periodic information, develops promotional
activities to highlight the technological capabilities and the quality of its
services rendered as well as provides additional services by making its
facilities available for community use.
In March 2002, the law that allowed the flexibilization of mechanisms for
voluntary pension savings came into force, providing new saving incentives and
permitting other financial institutions different from AFPs to administrate this
service, also generating a new source of revenues for the Company. Competition
has been present through a wide range of pension saving plans offered by
participating institutions, presenting significant differences in administration
costs among them. In this context, AFPs have highlighted for their low
administration cost, where BBVA Provida charges an annual fee of 0.49% over
assets under management. Regarding commercial strategy facing greater
competitiveness in this new business segment, at the beginning BBVA Provida
focused its efforts on capturing clients interested in making voluntary pension
contributions, which implied to open new accounts for pension saving plans. This
commercial strategy was developed by a sales force specially trained in this new
product, having additional advertising support in written media and supportive
elements for different distribution channels. Today commercial emphasis is
centered in affiliates transfers having voluntary pension savings, accordingly
commercial campaigns are directed to entities that offer these savings plans in
order to attract their clients to BBVA Provida. The opening of specialized
centers in voluntary pension savings, permits the Company to provide
personalized assistance to preferential clients, rendering integral advisory
services by highly trained professionals.
The Multiple Funds Law, partially in force since March of 2002 and in full
force from August 1, 2002, has allowed affiliates to have five investment
alternatives to manage their pension savings, according to their risk and age
preferences. Additionally, it has given AFPs higher competitiveness among other
participants regarding voluntary pension savings by broadening the number of
funds offered, giving affiliates more attractiveness in terms of
diversification. Management considers that this Multiple Funds Law, also
represents an opportunity to take steps towards obtaining its clients' loyalty
by delivering an integral
39
advisory service that allows clients to plan and optimize their decision of
saving in light of their future pension.
As regards distribution channels, it is worth noticing that BBVA Provida's
sales force and service centers are distributed in seven geographical zones
throughout Chile: North zone, North-center zone, Central zone, West
Metropolitan, South Metropolitan, Mid-South and South.
Branch Offices. BBVA Provida has maintained a leading position in a
framework of high technology offering the most extensive nationwide branch
network in Chile with 101 interconnected offices at April 2004.
Starting in 2003, the Company redefined pension service centers profiles in
order to segment and optimize client service timings, starting the "shared
networks" project together with BBVA Chile S.A.("BBVA Banco"). The four types of
offices correspond to the following:
- Pension Service Centers: maintain the original branch concept whose main
purpose is to provide advisory services for pensions and benefits,
collection process, pension payments, issuance of certificates and AFC
services.
- Shared offices: correspond to offices where the BBVA Provida's agency and
the BBVA Banco's branch office are in the same location, but separated by
panels. These offices are directed to supply integral service for the
BBVA's clients both in terms of pension matters as well as financial
issues. The BBVA Provida's agency office furnishes pension and benefit
advisory services and seeks to capture clients to offer voluntary pension
savings plans. This office unlike the previous aforementioned one neither
collects money nor pays pensions.
- BBVA Express: in this kind of office, BBVA Provida's agency and BBVA
Banco's branch office are also located together in clearly defined spaces.
The main service characteristics of these offices are fast transactions
such as the issuance of certificates, AFC (Unemployment Funds
Administrator) formalities and general payments.
- Specialized Centers for APV (Voluntary Pension Savings): office created to
supply first level advisory services for all clients who require more
in-depth advise. The aim of these centers is to provide a more personalized
service encouraging its client's loyalty These offices are located in
Santiago, while outside the city this task is provided by each service
center's chief. Furthermore, these offices are located in corners at BBVA
Banco's branch offices, aimed at boosting the BBVA Group's brand image
through pension and banking business. We expect that in 2004 this new
concept will be extended to all regions of the country, through the
currently branch network.
Offices are distributed throughout the country in 53 Pension Service
Centers, 22 Shared Offices, 21 BBVA Express and 5 Specialized Centers for APV.
Approximately 17.8% of the branches are located in the north region, 17.8% in
the central-north region, 11.9% central zone, 16.8% in east metropolitan of
Santiago, 10.0% in west metropolitan, 9.9% in south center and 15.8% in the
south region. The offices have a uniform style
40
nationwide and vary in size according to the needs of the zone where they are
located and the previously defined profile. Adding to the above, BBVA Provida in
order to increase its leading position and reinforce its quality service made an
important technological investment during the period, oriented to modernize its
offices network and thus improving its relations and services to its customers.
Also, the Company has broadened services offered in its web page
(www.bbvaprovida.cl). Additionally and supporting the "clear process" of
offices, self- consulting devices called "Provimaticos" were installed in the
main cities of the country, allowing affiliates to obtain in a faster way their
certificates and account balance.
Services. With respect to associated technology to customer services, BBVA
Provida has made important renewals and has reoriented resources according to
legislative changes aimed at increasing affiliates satisfaction and optimizing
the Company's brand position. The above includes the following issues:
- Gold Service. This is a service aimed at delivering special attention to an
exclusive client portfolio assigned to specialized and personalized account
executives having communication tools such as e-mail and telephone.
- Internet Service. This service provides several options that enhance BBVA
Provida's client support. The service involves the use of passwords and
personal identification numbers (PINs), delivers online information about
individual capitalization accounts and updates personal information. It
also provides information to employers about their workers, the interest
and inflation adjustments over unpaid contributions and access to different
areas within BBVA Provida. Additionally, BBVA Provida released a new web
site with "Virtual Agency" characteristics. This initiative counts on a
larger number of on line services, highlighting change of funds; pension
estimations; personal account information; tax, contributions and
affiliation certificates, balance sheets and APV and pension appliances.
The above permitted to fulfill the SAFP requirements issued by 12111
Circular, implementing for such purposes a password provided by
PreviRed.com for all AFP system.
- CD Gold. This CD includes software for both retirement calculation and
employers programs. The retirement calculation software facilitates
calculations of pension plan estimates at different stages in accordance
with the legal retirement age (65 for men and 60 for women) or anticipated
retirement, under different profitability and cost assumptions. The second
program facilitates calculations of pension plan estimates and provides the
contribution payroll. On the other hand and as a result of legal
amendments, during 2002 the pension estimate software was updated to
calculate the date and the amount of the future pension. Besides, it allows
calculating the impact that the voluntary pension savings would have in the
amount of pension as well as tax rebates associated to this alternative
The last update to this software includes the Multiple Funds. This broadens
the range of possibilities offered to make pension projections not only by the
number of funds where the affiliate has its accounts, but also by percentage
distribution that the affiliate might choose (for the same account the affiliate
can distribute this percentages in two different funds).
41
- Telephone service. This service has undergone important modifications,
since it is provided by a third party Atento Chile in order to take
advantage of its experience and its modern technology.
Services provided by Atento Chile includes the telephone switchboard that
provides general information and transfers phone calls to BBVA Provida's
personnel. It also provides Provifono, a phone automated service of
personal pension consulting for both affiliates and employers that answers
questions regarding Pension's Law and the old system. This service also
offers the alternative of acceding to specialized executives in pension
matters, by identifying the user profile, peak days and hours of service,
idle resources, re-orientation of operators' functions, etc. This
information is used by BBVA Provida to evaluate and establish action plans
aimed at improving the quality service supplied to customers.
New services in the Industry. Provida participates in PreviRed.com, a
company created with the aim of providing electronic collections services for
employers through the Internet, including among others pension and health
contributions. PreviRed.com began operations in August 2001, and is oriented to
improve efficiency by simplifying the payment and registration processes. In its
first period of operations, PreviRed.com incorporated important clients such as
health insurance companies (Isapres) and the government pension system
(Instituto de Normalizacion Previsional, "INP"). Since then, PreviRed.com has
focused on establishing strategic agreements with entities in charge of managing
great volume of transactions, gradually increasing its market penetration.
New Corporate Image. On March 19, 2001, BBVA Provida modified its corporate
image by replacing its traditional logo with the BBVA Group's one as the
successful culmination of Provida's integration into the BBVA Financial Group
that currently holds a leading position in the industry of pension funds private
administrators in Latin America. Provida materialized this change after
conducting several studies, concluding that the association of BBVA Group with
Provida implied a higher international profile and a stronger image, among other
benefits, generating positive expectations for future investments.
Sales Force
BBVA Provida has generally maintained a sales force that enable it to
sustain its dominant market share. In a competitive context, after the mergers
and acquisitions of small AFPs into larger ones, in 1997 Provida reached a
maximum of 3,142 sales agents. Therefore and considering the high level of the
industry sales force with its subsequent impact on commercial expenses stemming
from a large number of transfers, not all them fulfilling the requirements,
Circulars 998 and 999 from the SAFP were implemented. This implied establishing
strict procedures regarding the transfers of affiliates among AFPs as well as
concerning sales force hiring. As a consequence of the reduction in transfers
due to the above, Provida's sales force diminished 51.1% in comparison to its
1997 level, falling to 1,536 sales agents at the end of 1998, while in 1999 a
further 31.6% reduction resulted in a year-end sales force of 1,050 sales
agents. Additionally, following this trend and according to a strategy focused
on fee competition instead of commercial efforts, in the year 2000 the sales
force decreased 14.5% to 898 sales agents regarding 1999 and diminished 25.9% to
665 in the year 2001 compared to the year 2000, while in 2002 sales agents were
reduced to
42
652 (2%) compared to 2001. Finally, in 2003, the sales force diminished 4.1%
compared to the previous year, reaching to 625 sales agents.
At December 31, 1997, Provida's sales force constituted 18.4% of the total
sales force in the AFP industry, whereas at December 31, 1998, 1999, 2000, 2001,
2002 and 2003, BBVA Provida's sales force constituted 24.2%, 29.6%, 30.0%,
25.7%, 23.5% and 24.6% of the sales force in the AFP industry, respectively.
The following chart compares the relative sizes of the sales force of BBVA
Provida against its competitors as of December 31, 2002, 2003 and March 31,
2004:
[Enlarge/Download Table]
Total AFP Sales Force (percentage) As of December As of As of March
31, 2002 December 31, 31, 2004
2003
BBVA Provida 23.50% 24.61% 25.860%
AFP Summa Bansander 16.65% 16.93% 18.25%
AFP Habitat 11.64% 12.05% 14.25%
AFP Santa Maria 17.55% 14.84% 18.52%
AFP Cuprum 13.41% 14.02% 12.36%
Other AFPs 17.25% 17.55% 10.56%
-----------------------------------------------------------------------------------------------
Total AFP Sales force (number of sales agents) 2,775 2,540 2,208
Source: Based on annual Uniform and Codified Statistic Form (FECU), for
all AFPs
Unlike some of its competitors, Provida has not focused its marketing
efforts on any specific industry or region. Each sales agent is assigned to
cover certain businesses within a specific geographic coverage area. Sales
personnel have a visiting program aimed at covering different businesses,
companies and institutions in order to present Provida to new workers to achieve
their incorporation, as well as to encourage affiliates to transfer from other
AFPs. During regularly scheduled visiting programs, salespersons emphasize BBVA
Provida's size, longevity, industry prominence and reputation for quality of
customer service in attracting affiliates, reinforcing the concepts of
experience, capability and trust.
Sales agents receive a base salary and commissions. Generally, the base
salary is approximately equal to the legal minimum wage. Sales agents earn
commissions at a rate based on the age, gender, and salary and affiliates'
permanence that they attract to Provida. In order to include the last commission
concept, in September 1999, Provida changed its labor contract with its sales
force to reduce the commission rate it pays as well as to link such commissions
to the affiliates' permanence. In Chile, a sale agent is an AFP's exclusive
employee and he is registered with the SAFP. The sales agents' behavior is also
monitored by this Superintency, being subject to penalties for violating
behavior standards as established by the SAFP. The Pensions Law does not allow
independent sales agents to market AFP's products.
BBVA Provida's sales personnel meet regularly with supervisors to analyze
the strategy and coverage of potential customer opportunities. Since the
implementation of SAFP Circulars 998 and 999, BBVA Provida's sales force
turnover has decreased which has led the Company to modify its commercial
strategy to control the turnover rate of its sales force by boosting its human
resources and other operating and administrative areas. BBVA Provida developed
intensive training and preparation programs with the main objective of deepen
further in the Pensions Law, as well as new sales techniques and arguments
centered on delivering excellent service to its clients. Advertising in various
domestic and national
43
media is used to supplement the efforts of the sales force. Advertising must
conform to SAFP standards, and copies of advertisements must be sent to the
SAFP.
In relation to affiliate transfers among AFPs, these evidenced an upward
trend until 1997 as a consequence of a regulation that facilitated transfers. At
the end of 1997, new regulations were introduced (SAFP Circulars 998 and 999),
establishing new requirements for the process of moving towards other AFP, which
resulted in a lower number of transfers. In figures, this was evidenced during
Fiscal Years 1999, 2000 and 2001 where approximately 489,000; 254,500 and
225,000 overall contributors were transferred from AFPs, resulting in reductions
of 30%, 48% and 12% respectively. Reductions in affiliates' transfers among AFPs
in these years resulted in a significant decrease in both the number of sales
agents in the industry as well as sales expenses.
Opposite to the tendency followed in previous years, during Fiscal Year
2002 and 2003, the number of transfers increased by 7% and 4%, respectively with
respect to the previous year, reaching approximately 240,000 and 249,000
affiliates, respectively and 7% of total average of contributors in both cases.
This evolution was the result of the law enacted that introduced new products to
the Pension Fund industry, the Voluntary Pension Savings (APV) and the Multiple
Funds. Both, publicity carried out by all AFPs as well as government's support
to those new products implied a strong encouragement for workers to be actively
involved in their pension fund management. The latter created an adequate
environment for sales force not only to provide the required general information
on these new products but also to promote their own AFP's advantages, which
resulted in transferring many of these affiliates. Additionally in 2003,
commercial activity in transfers was also affected by the imminent dissolution
of an AFP with lower market share called Magister. BBVA Provida could take
advantage efficiently of this situation since it records an annual net result of
10,291 transfers, of which 3,394 (33%) stemed from Magister.
BBVA Provida's sales and marketing expenditures in the Fiscal Year 2001
was Ch$10.0 billion (including costs associated with the commercial name
change), for the Fiscal Year 2002 they reached Ch$8.1 billion and for the Fiscal
Year 2002 they reached Ch$9.7 billion. BBVA Provida has continued to pursue a
policy aimed at rationalizing the number of transfers and sales expenditures.
In figures, sales and marketing expenditures as a percentage of fee income
decreased from 10.8%, 8.6%, 9.7% in Fiscal Years 2001, 2002 and 2003
respectively.
BBVA Provida's market share in terms of contributors reached an average of
40.93%, 41.69% and 41.37% in 2001, 2002 and 2003, respectively. Regarding
affiliates transfers, the Company increased the number of subscribed transfers
by 17% in comparison to 2002, while in terms of volume of salary base
transferred among AFPs, it obtained a total amount of approximately Ch$7,000
million as compared to none during 2002. BBVA Provida has maintained the focus
on capture of new affiliations; a strategy that allows it to continue
optimizing the possibilities of future growth of its recurrent business,
catching 89,669 new affiliations in 2003, representing 45% of market share
based on SFAP information. Finally, there was an increase in productivity by
the Company's sales force given a 5.7% reduction in sales personnel compared to
2002.
44
Government Regulation
All AFPs are subject to extensive and continuous regulatory reviews. The
principal authorities regulating AFPs in Chile are the SAFP, the Central Bank,
the Superintendencia de Valores y Seguros "Superintendency of Securities and
Insurance" (the "SVS") and the Rating Commission. The AFPs are primarily subject
to the Pensions Law and to the Corporation Law. The principal regulator is the
SAFP; however, AFPs are also regulated by the Central Bank, which by law is
required to set the limit on permitted investment for AFPs within the range
established by the Pensions Law. In addition, AFPs that are listed on a stock
exchange are regulated by the SVS, which controls the securities and insurance
industries. Finally, the Rating Commission determines whether securities qualify
as acceptable for pension funds investment.
The SAFP
General. The SAFP, an independent governmental agency under the supervision
of the Ministry of Labor and Social Security, is in charge of supervising and
controlling the AFPs. The SAFP authorizes the creation of the new AFPs, mergers
of the existing ones and has broad powers to interpret and enforce legal and
regulatory requirements. Furthermore, in cases of non-compliance, the SAFP has
the ability to impose sanctions, such as censures and fines and in extreme
cases, it may order the liquidation of an AFP. In addition, any amendment of an
AFP's by-laws such as capital increase is subject to the SAFP's approval.
Frequently during the year, SAFP officers inspect the AFPs' facilities and
examine their records. The AFPs are required to submit their quarterly financial
statements to the SAFP and provide periodically detailed information on their
operations. The annual report of an AFP that includes financial statements for
the Fiscal Year and its independent auditors' opinion must be submitted to the
SAFP for review before March 1 of the following year.
Limitations on Types of Activities. According to the Pension Law, the
corporate purpose of an AFP is unique and exclusive: to administrate pension
funds and to provide related benefits. The above includes to collect mandatory
and voluntary contributions made by affiliates to the pension funds, to credit
these contributions to each individual capitalization account and to invest
those contributions in securities according to the rules established by the
Pensions Law.
Legal amendments introduced to the Pensions Law in March 1994 allowed the
AFPs, upon prior formal approval by the SAFP to set up affiliated companies in
Chile that may: (i) provide services related to the AFP's business to companies
operating abroad and (ii) invest in foreign companies managing pension funds or
in foreign companies whose business is related to pension matters abroad.
Additionally, The AFPs were authorized to constitute a subsidiary intended to
invest in companies that act as depositaries of securities. Following this
authorization, all AFPs participated in the constitution of Inversiones DCV
S.A., where BBVA Provida has a 23.14% stake.
The Unemployment Insurance Law enacted on May 2001 authorized the AFPs to
participate in the tender on the Unemployment Insurance administration and, if
applicable, to set up an affiliated company that administrates the Unemployment
Funds. This society is also subject to supervision by SAFP'. The Unemployment
Insurance Management tender bases were published in November 2001 and all AFPs
participated as a consortium that was
45
finally awarded the insurance management for 10 years presenting the best offer
in terms of technical and economic issues. BBVA Provida participates in the new
Company "Unemployment Funds Administrator of Chile S.A." constituted in March
2002, with 37.8% stake and was awarded the operational and technical support of
this company.
Insurance. Each AFP is obligated by the Pension Law to provide life and
disability benefits to each affiliate. The SAFP establishes regulations in
connection to the AFPs' insurance contracts. See "Item 4. Information on BBVA
Provida--Business Overview--Government Regulation--Mandatory Benefits--Life and
Disability Benefits."
Reserves. The Pensions Law establishes that each AFP must maintain a
reserve fund ("Mandatory Investments") equal to 1% of the pension funds under
management. As per the Pension Law, if an AFP records more than two breaches of
this rule within a six-month period it will result in the AFP's liquidation. The
mandatory investment is calculated in accordance with instructions issued by the
SAFP over the pension fund value two days before the calculation. Since March
1995, the Pensions Law stipulated that the AFPs must invest this mandatory
investment in shares of the pension funds managed by the AFP. See "Item 4.
Information on BBVA Provida--Business Overview--Government
Regulations--Reserves."
Dissolution and Liquidation of the AFPs. Any AFP that fails to cover the
difference between the legal minimum real return of pension funds and the real
return obtained, or that does not replenish the mandatory investments funds
within the established time limits, it will be dissolved under the Pension Law.
Once the AFP is dissolved or declared bankrupt its affiliates have ninety
days to transfer themselves to another AFP. If an affiliate does not do so, a
receiver appointed by the SAFP must transfer the affiliate's individual account
balances to another AFP in line with certain rules.
If an AFP must be dissolved for any reason, the liquidation of that AFP
will be carried out by the SAFP. For those purposes, the SAFP is vested with all
necessary legal powers to liquidate the assets of such AFP.
In accordance with the Pensions Law, the Chilean Government guarantees the
contributions made to an AFP. If an AFP is liquidated and the remaining funds
are not enough to cover the minimum return required, the Government will pay the
difference.
Fund Investment Controls. The Pensions Law limits the investment options of
a pension fund. The sole objective to invest with the pension funds' sources is
to obtain an adequate return and maintain their security. Any instrument, other
than securities issued by the Chilean Government, the Central Bank and Chilean
Government agencies, and within certain margins equity securities instruments
qualified to be purchased for a pension fund, must be previously approved by the
Rating Commission.
The Central Bank is responsible of establishing maximum investment limits
by type of securities and by issuer within certain defined ranges. The Central
Bank cannot establish minimum investment limits. See "Item 4. Information on
Provida--Business Overview--Government Regulations--Pension Fund Investments."
46
Conflicts of Interest. Directors, officers and all employees involved in
the investment process must file a report to the SAFP disclosing their
investments in eligible securities and cannot use information related to the
pension fund investments for their own or a third party's benefit. By law, the
AFP or the people mentioned above must indemnify the pension fund for any damage
caused to it by the misuse of confidential information.
Funds Return Requirements. The Pensions Law establishes that each AFP must
ensure that each month the real return of each managed pension fund Types C, D
and E for the immediately preceding thirty-six months will not be lower than the
minimum between (a) the annual real weighted average return of all pension
funds, less 2% and (b) 50% of the annual real weighted average return of each
pension funds respectively. For pension funds Types A and B, the law requires
that each AFP must ensure each month that the real return on investment of each
pension fund for the immediately preceding thirty-six months will not be lower
than the lesser between (a) the annual real weighted average return of each
pension funds, less 4% and (b) 50% of the annual real weighted average return of
each pension funds respectively. Returns on investments are calculated based on
the performance of the system's pension funds in the preceding thirty-six months
according to a weighted formula established by law. This requirement has been in
force since November 1, 1999, date since when the performance period was
incremented by one month every month until reaching thirty-six months by October
2002, as where previously the performance period was twelve months . In February
2002, Law 19,795 on Multiple Funds introduced another amendment to the funds
return requirements by establishing differences of return requirements according
to the investment portfolio profile. The former funds (Types C and E) and
additionally Type D fund maintained the same requirements, while for Type A an B
funds the request was more flexible given their higher concentration in variable
income.
The Central Bank
The Central Bank is an autonomous legal entity created by the Chilean
Constitution. It is subject to the Central Bank Act and, to the extent
applicable and not inconsistent, also to the laws and regulations applicable to
the private sector. It is governed and administered by a Board of Directors
composed of five members appointed by the President of the Republic and
requiring a "special majority" vote of the Chilean Senate to be elected. For a
further description of the Central Bank's regulation of Provida. See "Item 4.
Information on Provida--Business Overview--Pension Fund Investments" and "Item
10. Additional Information--Exchange Controls".
The SVS
The SVS is an independent governmental agency that supervises, regulates
and controls the Chilean capital markets. As an open corporation listed on the
Chilean stock exchanges, BBVA Provida is subject to the supervision, regulation
and control of the SVS.
The Rating Commission
The Rating Commission comprises the Superintendents of pensions, securities
and banks as well as AFP industry representatives. Its main objective is to
determine whether securities qualify as acceptable for pension funds investment.
47
Mechanics of the System
General. The AFPs are required by law to be single purpose companies. The
services they provide include collection of affiliate contributions, the
management of individual capitalization accounts, the investment of affiliate
contributions into one of the Pension Funds managed by the AFP, the allowance of
life and disability benefits for affiliates and the rendering of specified
defined pension and retirement benefits. AFPs are required to enter into
insurance contracts with licensed Chilean insurance companies in order that
these companies insure the obligation of the AFP to provide life and disability
benefits.
In order to commence operations, an AFP must have a minimum capital equal
to UF5,000 (approximately US$142,000), which increases based on the number of
affiliates up to UF20,000 (approximately US$567,000) for AFPs with over 10,000
affiliates.
Required Affiliation. Affiliation process in the pension fund system is
mandatory for all dependent workers and voluntary for self-employed individuals.
Members of the armed forces, foreign workers who can demonstrate that they are
part of another social security system and approximately 429,000 workers who
elected to remain in the old system are not required to participate in the
private system. Each AFP also administers a separate private unemployment
account in the fund for household workers, such as housekeepers. Additionally,
according to the Unemployment Insurance Management law passed in May 2001 and
its tender bases were published in November 2001, all AFPs participated as a
consortium that finally was awarded the insurance management for 10 years,
presenting the best offer in terms of technical and economic issues. BBVA
Provida participates in the new company "Administradora de Fondos de Cesantia de
Chile S.A." constituted in March 2002, with a stake of 37.8% and was awarded the
operational and technical support of said company.
AFPs compete actively for the affiliation of workers in Chile, who may
choose to be affiliated with only one AFP to administrate its pension funds at a
time. Although affiliation process in the system is obligatory for employees, is
also individual (as opposed to collective or through an employer), giving the
individual full discretion both in selecting an AFP initially, as well as in
transferring from one AFP to another with the respective option of choosing the
funds type to deposit their pension savings. At present, transfers between
different AFPs are free of cost to affiliates, and the only restriction is a
limit of one transfer every six months. No AFP may reject a properly documented
request by a worker to transfer to another AFP.
Required Contributions. Employers are required to retain and transfer 10%
of each employee's gross pre-tax monthly salary to the AFP selected by the
employee. The maximum amount of salary subject to the 10% mandatory contribution
is UF60 per month (approximately US$1,700). The AFP uses these sources to buy
shares in one of the five pension funds managed and has been chosen by the
affiliate. Those funds are credited to a special individual account opened and
maintained by the AFP (the "individual capitalization account"). These
contributions are tax deductible, although affiliates pay income tax on their
pensions at the time of withdrawal.
48
Affiliates can also make additional voluntary contributions into their
individual capitalization accounts, which are invested in shares of the funds
that the affiliate has elected for that kind of contributions. The monthly
non-taxable overall limit on mandatory and additional voluntary contributions is
up to UF60 or up to the current affiliate's salary if it is lower. In this
aspect it has to be mentioned that the measures approved in order to liberalize
the Chilean capital market, among others, allowed the flexibilization of
mechanisms for voluntary pension savings. The above implied tax benefits for
this kind of savings, the alternative to be able to withdraw the funds before
the retirement and opening up the participation in this business to other
entities besides AFPs.
Monthly contributions deducted from wages are made directly by a worker's
employer, who is required to file a payroll with each AFP that has accounts for
employees of such employer within 10 days of the beginning of the following
month. The payroll identifies each worker for whom a contribution is being made
and the amount of it. The employer provides a check or cash to the AFP in the
aggregate amount of contributions made for the affiliated employees.
Self-employed workers who elect to contribute an AFP file their own payroll with
their AFP together with a check or cash for the contribution amount and related
fees.
Mandatory contributions are only required for a month in which an affiliate
has actually earned wages. Affiliates who have made a contribution in a current
month are called contributors. Self-employed individuals who voluntarily become
affiliates are not obligated to make monthly pension contributions regardless of
whether they have perceived income for that month. The decision regarding the
timing and amount of a self-employed affiliate's contributions is at the
discretion of the affiliate, but such contributions are subject to the same UF60
maximum monthly limit described above.
The value of the shares in each fund is determined and published daily,
based on the current prices for the fund's investments calculated in accordance
with regulations established by the SAFP. The objective of these regulations is
to generally revalue the investments daily to reflect their current market
value.
Since August 2002, the alternatives increased from two existing at that
time to five funds currently in force, allowing affiliates to choose among them
according to their age, preferences and risk aversion degree. The new five funds
denominated Funds A, B, C, D and E, differ mainly in the proportion of variable
income equity that they are allowed to hold. The main characteristics of each
fund are as following:
Variable Income Investment Limit
Type of Fund -------------------------------------
Maximum % Minimum %
--------------------------------------------------------
A 80% 40%
B 60% 25%
C 40% 15%
D 20% 5%
E Not allowed Not allowed
In the event that an affiliate dies or is permanent disabled prior to
retirement, an AFP must contribute an amount (known as "contribution") in his
individual capitalization account. This contribution that, together with funds
accrued in his account, plus the amount paid pursuant to any recognition bond
that the AFP holds for such affiliate, will be sufficient
49
to provide the present value of all pensions to which the affiliate or his legal
beneficiaries is/are entitled. In order to guarantee that there are enough funds
for an AFP to make this contribution as required by the Pension law, each AFP is
obligated to contract insurance to cover this obligation. In doing so, AFPs must
pay insurance premiums to a licensed life insurance company in Chile that
effectively insures the fulfillment of the 100% of the responsibility. Under the
Pension Law, the AFP remains liable if the insurance company becomes insolvent
and cannot pay the contribution. The selection of the insurance company is
determined by a competitive bidding process open to all licensed Chilean life
insurance companies and is designed to provide the required coverage in the best
terms.
Mandatory Benefits
Under current law, all AFPs must provide each of their affiliates specific
benefits as per instructions established by the Pension Law and complementary
regulations. The Chilean law specifies certain minimum benefits for all workers;
however, the greater fund amount contributed to an individual capitalization
account, the greater monthly benefit will be for the affiliate or beneficiaries
upon retirement, death or disability.
Under current law, each AFP must supply to each of its affiliates with the
following:
- An old age pension;
- Life and disability benefits granted to the affiliate or his beneficiaries,
specific benefits in the event of the affiliate's death or disability prior
to retirement;
- A voluntary savings account that allows affiliates to make additional
contributions to one of the Pension Funds managed by their AFP; and
- The alternative of voluntary pension savings that allows affiliates to make
additional contributions to one of the Pension Funds managed by their AFP
to improve their future pensions.
AFPs are not required to provide compensation benefits to workers in the
event of suffering occupational accidents. Under the workers' compensation law,
these compensation benefits are paid by mutual insurance societies legally
created for these purposes, which are principally financed by the employer's
contributions.
Old-Age Pension Benefits. Under the Pensions Law, each AFP must provide
specific old age pension benefits to its affiliates who meet legal requirements
for retirement. Affiliates may retire and receive an old age pension by reaching
the age determined by law (60 for women and 65 for men), or before that time, if
the affiliate has fully financed a pension equal or superior than 50% of the
monthly average taxable salary for the last ten years, reaching at least a
monthly amount equal to 110% of the legal minimum pension. By the implementation
of the new Annuity Law, which will be effective on August 19, 2004, these
percentages will increase gradually (in a target period of six years) to 70% and
150% respectively. This is aimed at increasing received pension levels and to
stop the trend of receiving pensions before the legal age.
The Chilean government guarantees a minimum level of old-age pensions for
all AFP's affiliates who have contributed at least during 20 years (including
any year
50
contributed under the old system) having reached the age stipulated by the law.
In the event that an affiliate's contributions into his individual
capitalization account together with the amount paid pursuant to any recognition
bond do not meet these minimum levels, the AFP pays the pension from the
affiliate's individual capitalization account until the account is depleted.
At retirement, the affiliate chooses among three options for receiving his
pension benefits: an immediate life annuity, a deferred life annuity, or a
programmed withdrawal plan. In the first case, the affiliate selects an
insurance company, which shall pay the affiliate a monthly fixed rent (i.e., an
annuity) for the rest of his life in exchange for transferring the total amount
in his individual capitalization account. For the affiliates that elect this
alternative, the insurance company must offer a pension equal or superior to the
minimum pension effective at retirement. In the second case, the affiliate
contracts a life annuity plan with the insurance company to start receiving
benefits in a specific date in the future. Thus, the excess of funds is kept in
the individual capitalization account for a temporary pension that covers the
period from the individual selects this option until the annuity payment begins.
In the third case, the affiliate keeps his funds accrued in his individual
capitalization account in the AFP and receives a monthly pension in accordance
with a pre-established formula that considers the historical pension fund return
and the rates offered by the insurance companies, as well as life expectancies.
The amount of the affiliate's monthly pension under the programmed withdrawal
plan is recalculated every twelve months based on surplus amount in the
individual capitalization account of the affiliate and the variables described
above. In the event that such amounts fall below the minimum pension level, the
Government's guaranty starts operating if it applies. If the affiliate chooses a
programmed withdrawal plan, it is possible to switch him to life annuity plan.
However, if an affiliate elects to transfer savings from his individual
capitalization account to an insurance company to receive life annuity benefits,
the affiliate may no longer return to the programmed withdrawal plan.
All pension obligations that an AFP must pay through programmed withdrawals
from the individual capitalization account are expressed in shares of pension
funds managed by the AFPs. Insurance annuity amounts are expressed in UF and are
thus indexed to reflect the impact of inflation. The AFP has no financial
obligations in the time with respect to the insurance company's annuity. In the
case of bankruptcy of companies that are providing insurance annuities, the
Chilean government guarantees 100% of this obligation up to the amount of the
legal minimum pension and 75% of the maximum contribution (corresponding to UF60
or approximately US$1,700, meaning a maximum of UF 45 or approximately
US$1,275). See "Item 4. Information on Provida--Business Overview--Government
Regulation --Government Guarantees".
In addition to old-age pensions, the affiliates who have financed with
their individual capitalization accounts an adequate amount to generate a
pension superior than 70% of their monthly average taxable salary during the
last ten years and exceeding 120% the legal minimum pension; are entitled to
withdraw and freely use all surpluses after the corresponding tax rate was
applied. By the implementation of the new Annuity Law in full force at August
19, 2004, this last percentage is going to rise from 120% to 150% in a target
period of six years. The idea behind this is that this kind of savings are
directed to finance pensions, reason why they were accrued.
51
Life and Disability Benefits. Each AFP is required to provide specific life
and disability coverage to each affiliate who has contributed into his
individual capitalization account in the month the casualty took place or for a
period of six months from the last previous twelve months to such date. Under
the law, the AFP must enter into a contract with a Chilean licensed insurance
company that insures the obligation of the AFP to provide such benefits to the
extent that these benefits may not be covered by the funds in the affiliate's
individual capitalization account. As per life benefits granted to affiliates,
the legal beneficiaries of an affiliate who dies prior to reach retirement age
are entitled to elect to receive either programmed withdrawals from the
affiliate's individual capitalization account, to contract an annuity, or a
combination of both. The monthly payment amount a beneficiary is entitled to it
is calculated on the basis of the affiliate's average taxable salary over the
prior ten years. Designated legal beneficiaries include the affiliate's wife or
disabled husband, unmarried mother of the affiliate's child, affiliates'
children and dependent parents of the affiliate.
Disability benefits are granted to those workers who have not reached legal
retirement age and have been qualified by a government medical commission
("Medical Commission") designated by the SAFP to have diminished their working
capacity by at least 50%. Disability benefits are designed to provide the
disabled affiliate and after his death to beneficiaries legally-appointed an
amount necessary to receive programmed withdrawals from his individual
capitalization account or take a life annuity or a combination of both that will
provide to said workers or beneficiaries monthly specific disability benefits.
Under the Pensions Law, an affiliate prior to retirement is entitled to
disability pensions as a result of a partial disability (loss between half and
two-thirds of working capacity) or a total disability (loss of more than
two-thirds of working capacity).
In the case of partial disability for those affiliates who were
contributing the amount of pension is equal to 50% of the affiliate's average
taxable salary for the last ten years or for the period while he was working
adjusted by inflation of that period. Also, for unemployed affiliates to be
covered the casualty must have occurred within the twelve months after labor
termination registering six months of contributions in the previous year to the
year in which services were rendered. For these cases, the amount of pension is
equal to 35% of the affiliate's average taxable salary for the last ten years or
for the period while the affiliate was working adjusted by inflation.
In the case of total disability for those affiliates who were contributing
the amount of pension is equal to 70% of the affiliate's average taxable salary
for the last ten years or for the period the affiliate was working adjusted by
inflation of such period. Also, for unemployed affiliates to be covered the
casualty must have occurred within the twelve months after stop working,
recording six months of contributions in the previous year to the year in which
services were rendered. The amount of pension is equal to 50% of the affiliate's
average taxable salary for the last ten years or for the period while the
affiliate was working adjusted by inflation.
With the implementation of the Annuity Law in force since August 19, 2004,
the amount of pension to be received by unemployed affiliates has been modified
going from a 35% to 50% of the average taxable salary for partial disability. In
the case of total disability the amounts will go from 50% to 70% of the average
taxable salary. These modifications are going to be in force at the same date
that the law is enacted.
52
By law, Medical Commissions make a preliminary determination of partial or
total disability (interim disability). Three years later, a determination is
made by the Medical Commission as to whether to classify the disability as a
partial or total permanent disability (definitive disability). In abeyance the
final determination, the insurer selected by the AFP pays an interim pension
benefit to the affiliate.
In the case that funds are used to contract an annuity for the life and
disability benefits, either the affiliate or his beneficiaries, as the case,
select a Chilean licensed insurance company to provide the annuity benefit. The
AFP makes payment of the total amount directly to such designated insurer for
the benefit of the recipients and such insurer is thereafter obligated to make
all future annuity payments, while the AFP has no further obligation to the
affiliate or his beneficiaries once funds have been transferred.
Voluntary Savings Accounts. AFPs also offer to affiliates the option to
establish a voluntary savings account in which an affiliate may make deposits as
often as desired. Withdrawals from the account may be made by an affiliate as
their needs, up to four times a year, with no prior notice required to effect a
withdrawal. The amounts deposited in a voluntary savings account are invested in
shares of the same elected fund for monthly mandatory contributions administered
by the AFP and accumulate value based on the overall performance of the fund.
Unlike the monthly mandatory contributions into the individual capitalization
account, contributions into voluntary savings accounts are not tax-deductible.
Revenues obtained by such funds are not tax-deductible until withdrawn.
Voluntary Pension Savings. AFPs also offer affiliates the option to
maintain a voluntary pension savings account in which affiliates make monthly
deposits previously determined in order to improve their future pensions. Like
the monthly mandatory contributions into the individual capitalization account,
contributions into voluntary pension savings accounts are tax-deductible.
Affiliates can make withdrawals from the account, assuming a higher tax cost
compared to their effective annual tax rate as defined by a formula. The amounts
deposited in a voluntary pension savings account are invested in shares of any
fund managed by the AFP, independent of the ones where the affiliates make their
mandatory contributions and accumulate value based on the overall performance of
the elected funds. Additionally, this service is open to other authorized
institutions different from AFPs and the Company has the obligation of
transferring funds to them if an affiliate so requests, being able to charge a
fixed fee for the procedure.
Fees and Commissions
Under the Pension Law, an AFP is permitted to charge a fee for (i)
mandatory contributions into the affiliate's individual capitalization account
to fund his/her old age pension; (ii) voluntary savings withdrawals; (iii)
transfer of account balances from another AFP; (iv) payments of programmed
withdrawals and (v) management and transfers of voluntary pension savings. All
AFPs currently charge fees in connection with (i), (iv) and (v) described above.
BBVA Provida began charging a fee in connection with (iv) and (v) above
mentioned in July 2000 and in March 2002, respectively. See "Item 4. Information
on BBVA Provida--Business Overview--Principal Activities--Service Fees."
53
Pension Fund Investments
Under the Pensions Law, each pension fund is a separate legal entity from
the AFP, immune to the AFP's financial situation. In the event of the AFP's
bankruptcy, the SAFP assumes control of the fund, having affiliates 90 days to
transfer funds in their individual capitalization accounts to another AFP. At
the end of that period, the fund custodian appointed by the SAFP transfers all
remaining accounts to another fund that the custodian designates.
The following table sets forth the permitted investments for pension funds
Type A, B, C, D and E, the limits for such investments and the current
investments composition's breakdown for all pension funds managed by the
industry and BBVA Provida's pension funds as of December 31, 2003:
[Enlarge/Download Table]
BBVA Provida's
Pension Fund A as
Industry as of of December 31,
Instrument December 31, 2003 2003
---------------------------------------------------------------------------------------------
Government bonds....................................... 6.78% 1.82%
Mortgage bonds......................................... 1.16 0.00
Time deposits (CDs) and other financial institution
obligations............................................ 11.77 15.46
Private & corporate bonds.............................. 1.07 0.97
Company stocks......................................... 27.57 24.61
Low ownership concentration companies.................. 8.87 7.92
Real estate companies.................................. 0.00 0.00
High ownership concentration companies................. 18.70 16.69
Investment fund shares................................. 2.23 1.86
Real estate............................................ 0.58 0.66
Venture capital........................................ 0.33 0.41
Publicly traded securities............................. 1.32 0.79
Commercial paper....................................... 0.00 0.00
Foreign investments.................................... 51.34 51.20
BBVA Provida's
Pension Fund B as
Industry as of of December 31,
Instrument December 31, 2003 2003
---------------------------------------------------------------------------------------------
Government bonds....................................... 17.25% 14.27%
Mortgage bonds......................................... 6.18 4.76
Time deposits (CDs) and other financial institution
obligations............................................ 18.58 23.06
Private & corporate bonds.............................. 4.67 3.96
Company stocks......................................... 19.68 20.59
Low ownership concentration companies.................. 6.48 5.72
Real estate companies.................................. 0.00 0.00
High ownership concentration companies................. 13.20 14.87
Investment fund shares................................. 2.93 2.44
Real estate............................................ 0.98 1.19
Venture capital........................................ 0.35 0.29
Publicly traded securities............................. 1.60 0.96
Commercial paper....................................... 0.00 0.00
Foreign investments.................................... 30.71 30.92
54
[Enlarge/Download Table]
BBVA Provida's
Pension Fund C as
Industry as of of December 31,
Instrument December 31, 2003 2003
---------------------------------------------------------------------------------------------
Government bonds....................................... 23.72% 19.02%
Mortgage bonds......................................... 9.30 6.97
Time deposits (CDs) and other financial institution
obligations............................................ 16.56 21.63
Private & corporate bonds.............................. 8.58 8.56
Company stocks......................................... 14.22 14.41
Low ownership concentration companies.................. 4.61 3.73
Real estate companies.................................. 0.00 0.00
High ownership concentration companies................. 9.61 10.68
Investment fund shares................................. 3.05 3.14
Real estate............................................ 1.36 1.50
Venture capital........................................ 0.43 0.34
Publicly traded securities............................. 1.26 1.30
Commercial paper....................................... 0.00 0.00
Foreign investments.................................... 24.57 26.27
BBVA Provida's
Pension Fund D as
Industry as of of December 31,
Instrument December 31, 2003 2003
---------------------------------------------------------------------------------------------
Government bonds....................................... 36.69% 34.54%
Mortgage bonds......................................... 11.31 9.71
Time deposits (CDs) and other financial institution
obligations............................................ 15.63 23.46
Private & corporate bonds.............................. 8.78 6.77
Company stocks......................................... 9.72 9.73
Low ownership concentration companies.................. 3.19 2.45
Real estate companies.................................. 0.00 0.00
High ownership concentration companies................. 6.53 7.28
Investment fund shares................................. 1.56 2.80
Real estate............................................ 0.67 1.49
Venture capital........................................ 0.13 0.33
Publicly traded securities............................. 0.76 0.98
Commercial paper....................................... 0.00 0.00
Foreign investments.................................... 16.18 13.00
BBVA Provida's
Pension Fund E as
Industry as of of December 31,
Instrument December 31, 2003 2003
---------------------------------------------------------------------------------------------
Government bonds....................................... 47.25% 41.11%
Mortgage bonds......................................... 15.70 14.17
Time deposits (CDs) and other financial institution
obligations............................................ 13.43 29.23
Private & corporate bonds.............................. 13.28 8.84
Company stocks......................................... 0.00 0.00
Low ownership concentration companies.................. 0.00 0.00
Real estate companies.................................. 0.00 0.00
High ownership concentration companies................. 0.00 0.00
Investment fund shares................................. 0.0 0.0
Real estate............................................ 0.0 0.0
Venture capital........................................ 0.0 0.0
Publicly traded securities............................. 0.0 0.0
Commercial paper....................................... 0.0 0.0
Foreign investments.................................... 10.12 6.49
Source: SAFP
55
Reserves
The Pensions Law establishes that each AFP must maintain a reserve
denominated Mandatory Investment equal to 1% of the value of each pension funds
under management. The mandatory investment is calculated in accordance with
instructions issued by the SAFP, and corresponds to the value of each pension
fund two days prior calculation. Since June 1995, the Pensions Law has required
AFPs to invest this mandatory investment in shares of the respective pension
fund managed by the AFP. This legislation is aimed at eliminating potential
conflicts of interest that could arise between investment decisions relating to
a security portfolio held as AFP's reserves and those relating to the portfolio
where pension funds are invested.
The mandatory investment's purpose is to provide a guarantee in the event
that the performance of a specific pension fund drops below the required minimum
level of return. Currently, for pension funds Type C, D, E this level is the
lesser between (a) the annual real weighted average return for the last 36
months of the same type of all pension funds in the system less 2% and (b) 50%
of the average annual real return for the last 36 months of the same type of all
pension funds in the system. The minimum return for A and B Pension Funds is the
lesser between (a) the annual real weighted average return for the last 36
months of the same type of all pension punds in the system less 4% and (b) 50%
of the average annual real return for the last 36 months of the same type of all
pension funds in the system.
The annual real average return is calculated by the SAFP according to a
weighted formula established by law. If, for a certain month, the pension fund's
annual real return on investment falls below the minimum return, the difference
is compensated first from the pension fund's own reserve for fluctuation on
investment returns. If this procedure is not sufficient, then the remaining
difference is covered by the AFP's mandatory investment.
A pension fund's reserve for fluctuation on returns is a reserve that is
created if there are excess of returns on fund investments over specific levels.
Excess returns on investment arise when, for C, D, E pension funds, this level
is the higher of (a) the annual real weighted average return for the last 36
months of the same type of pension funds in the system plus 2% and (b) 50% over
the average annual real return for the last 36 months of the same type of
Pension Funds in the system. The level for A and B pension funds is the higher
between (a) the annual real weighted average return for the last 36 months of
the same type of pension funds in the system plus 4% and (b) 50% over the
average annual real return for the last 36 months of the same type of pension
funds in the system. Since the beginning of the operation of the pension system,
only one AFP has generated sufficient excess returns to constitute a fluctuation
reserve.
In the event that the pension funds managed by an AFP fail to fulfill the
required minimum level of investment return, the AFP is required to cover the
difference within five days of such determination by the SAFP. If reserves are
used to fund any deficit in the required return, the AFP must replenish the
reserves within fifteen days thereafter. If a deficit is not covered or if
reserves are not replenished, the AFP will be liquidated by the SAFP.
56
Collection
In the case that an employer fails to make the correct payment or fails to
pay contributions, BBVA Provida is obligated to take diligent legal steps to
collect such amounts. In such cases, BBVA Provida must file a lawsuit within six
months of non-payment and actively pursue the lawsuit until payment is received
or a court makes a final determination with respect to such payments. BBVA
Provida has approximately 35 employees who manage the legal process and initiate
collection efforts. Additionally, BBVA Provida hires lawyers throughout the
country to provide legal services when a lawsuit must be initiated. As long as
it acts diligently, BBVA Provida is not under any obligation to make a refund of
the contributions that an employer has failed to provide. It should be pointed
out that BBVA Provida has never been held liable for failing to diligently
pursue delinquent employers.
Record-keeping
BBVA Provida must maintain complete records of the accounts of each of its
affiliates. Provida is required to provide an account statement to each
contributor every four months and once a year to every non-contributing
affiliate. These statements comprise information regarding mandatory
contributions, voluntary savings contributions and voluntary pension savings
managed by the AFP. It also has the amount and current value of shares in the
elected Pension Fund and, if it is applicable, the amount of the recognition
bond properly updated. In addition, the affiliate must receive information about
the insurance cost and the whole pension service cost, separated by income
brackets, as a way to evaluate his situation. Also, each affiliate can obtain
daily information on his/her account balances at BBVA Provida branch offices,
through BBVA Provida's Internet service or through the telephone service center.
Government Guarantees
The Chilean government guarantees old age, life and disability pensions for
affiliates who have made contributions for a certain number of years, regardless
of the level of contributions actually made into the affiliate's individual
capitalization account. Since 1988, when an affiliate transfers his funds to
contract a life annuity, the AFP is not liable in the event that the insurer
fails to make the required payments. The Chilean Government, however, is liable
in 100% of this obligation up to the legal minimum pension amount and for 75% of
the pensions over the minimum pension up to UF45 (approximately US$1,275).
New Legal Developments
Flexibilization of Mechanisms for Voluntary Pension Savings. According to
Law 19,786 published on November 7 2001, in force since March 2002, the Pensions
Law was amended with respect to the voluntary pension savings. The main changes
included voluntary pension funds' flexibilization by allowing other participants
different from AFPs, such as banks, insurance companies and mutual funds to
offer this savings alternative. Furthermore, the modification included tax
deductions for this savings alternative up to the established maximum if the
funds are destined to increase future pensions. If the affiliate makes
withdrawals, these will be charged a higher tax rate than his current one.
Finally, the law permits all the institutions offering this service to charge a
fee over funds under management, which was not allowed before its
implementation.
57
Multiple Pensions Funds. As per Law 19,795 published on February 28, 2002,
partially in force since March 2002 and in full force since August 2002, the
Pensions Law was modified with respect to pension funds alternatives by
increasing the number from two to five. The differences among funds are
basically related to the variable income portion in their portfolios and each
affiliate may choose among them with only one age legal restriction refereed to
affiliates near retirement and pensioners. If affiliates do not make any fund
specification, the law assigns a fund according to his age profile. Finally, the
law fully specifies investment limits for the different types of instruments to
the five fund types, including foreign investment.
Organizational Structure
Provida was integrated into the BBVA Group in July 1999. At December 31,
2003 the BBVA Group has 1.2 million shareholders and a presence in 35 countries,
with more than 86,000 employees worldwide that serve over 35 million of clients
trough a network of 7,000 branches. Within the pension fund area, the BBVA Group
is a leader in Latin America, managing assets in an amount of US$33 billion and
providing services to approximately 12 million people. In Chile, the BBVA Group,
through BBVA Provida, manages assets in an amount of US$15.7 billion in a highly
competitive market in which BBVA Provida is the leader.
The following chart sets forth the significant related companies comprising
BBVA Provida's corporate structure.
Banco Bilbao Vizcaya
Argentaria S.A.
|
| 100% (Direct and indirect)
|
BBVA Pensiones Chile - - - - -
S.A. |
| |
| 51.6% |
AFP Provida S.A. | 0.01%
| |
| 99.99% |
Provida Internacional S.A. - - -
|
- - - - - - - - - - - - - - - - -|- - - - - - - - - - - - - - - -
| 7.50% | 100% | 100% | 19% | 15.87%
| | | | |
AFORE AFP AFP AFP AFP
Bancomer Porvenir S.A Genesis Crecer S.A. Horizonte
S.A. de C.V. (the Dominican S.A. (El Salvador) S.A.
(Mexico) Republic) (Ecuador) (Peru)
58
Property, Plant and Equipment
Since 1981, BBVA Provida's strategy has included the development of a
nationwide branch network, which currently includes 93 branch offices located
throughout the country (See "Item 4. Information on Provida--Business
Overview--Principal Activities--Marketing and Sales"). Since 1989, BBVA Provida
has opted to company-owned real estate rather than leased space for its branches
by increasing the number of owned branches from 5 to 41. In order to market its
corporate image to the public, each newly built or remodeled branch is uniformly
decorated. In March 2001, Provida completed its integration into the BBVA
Financial Group with a complete change of Company image, thus making the BBVA
Provida brand consistent with most of BBVA's other Latin American interests.
This process involved the design of a new branch employee uniform and color
scheme, which was implemented throughout the entire branch network.
The principal property that BBVA Provida owns is its 18-story headquarters
building, known as the BBVA Tower, located in the east commercial neighborhood
of Santiago. Completed in 1994, the BBVA Tower houses all staff units of BBVA
Provida, where as Operation Area operates at downtown Santiago. Since 2003, it
became the BBVA Group's corporate building in Chile, renting spaces to BBVA
Chile S.A.("BBVA Banco") personnel.
Item 5. Operating and Financial Review and Prospects
Critical Accounting Policies
Financial Reporting Release No. 60, released by the Securities and Exchange
Commission, encourages all companies to include a discussion of critical
accounting policies or methods used in the preparation of the financial
statements. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, which would potentially
result in materially different results under different assumptions and
conditions. We believe that our critical accounting policies in the preparation
of our Chilean GAAP financial statements are limited to those described below.
It should be noted that in many cases, Chilean GAAP specifically dictates the
accounting treatment of a particular transaction, with no need for management's
judgement in their application. Additionally, significant differences can exist
between Chilean GAAP and U.S. GAAP, as explained in the section U.S. GAAP
Reconciliation above. There are also areas in which management's judgement in
selecting available alternatives would not produce materially different results.
For a summary of significant accounting policies and methods used in the
preparation of the financial statements, see Note 1 to our consolidated
financial statements.
Revenue Recognition
The Company recognizes revenues when all the activities relating to the
administration of the Pension Fund have been completed. See "Item 4. Information
on Provida--Business Overview--Principal Activities--Service Fees".
59
Valuation of Mandatory Investments
In accordance to the Pension Law each AFP must maintain a reserve fund
("encaje") equal to 1% of the value of the pension fund. These investments are
stated at fair values, with unrealized gains and losses included in earnings.
Accounting of Life and Disability Insurance Cost:
D.L. 3,500 dated 1980, establishes that the Disability and Survival Pension
will be funded with the balance in the member's individual capitalization
account and Guarantee by the State, when applicable.
Otherwise, partial and total disability pensions corresponding to those
determined by the Medical Commission in their preliminary review, granted in
accordance with the first ruling of D.L. 3,500 ("the First Ruling"), shall be
funded by the Administrator that manages affiliates's pension fund and the State
Guarantee, when applicable.
The balance in the individual capitalization account includes the
accumulated capital by the affiliates, including the contributions as outlined
in article 53, and when applicable bonus recognition stipulated by the law. The
Administrator must make by law an additional contribution and may transfer the
funds from the voluntary savings accounts subordinated to the affiliate's
decision.
The additional contributions made by the Administrator should equal the
shortfall between the capital needed to the Disability and Survival Pension fund
and the accumulated capital of the affiliates including their bonus recognition
on the date of loss. The Administrator shall be solely responsible for paying
partial and total pensions originating from the first ruling and to pay
additional contributions for those affiliates that can qualify for a Disability
or Survival Pension as required by the Law.
As required by the Pension Law, Provida has purchased insurance to cover
its obligation to provide life and disability benefits to affiliates. The
selection of the insurance company is determined through a competitive bidding
process open to all licensed Chilean life insurance companies and is designed to
provide the required coverage on the best terms available. Currently, Provida's
insurance contract is with BBVA Compania de Seguros de Vida S.A. and provides
coverage for seventeen months, from August 1, 2003 through December 31, 2004.
BBVA Provida has discretion to set the bid parameters for its competitive
bidding process. In its competitive bid request, Provida specifies a maximum
premium rate and a provisional premium rate. The maximum rate is the top
percentage that Provida would have to pay to the insurer for coverage,
regardless of casualty rates experienced among Provida's contributors were
higher. The provisional rate is the monthly percentage of the salary of
contributors that Provida pays monthly to the insurer according to the current
contract. Under Provida's current contract, its maximum rate is 1.10% of the
maximum salary eligible for contribution of each contributor and its provisional
premium rate is 0.70%. In addition, the competitive bid request provides for a
formula pursuant to which the insurer and Provida may share in casualty rates
incurred. This casualty sharing may constitute a significant source of revenue
to Provida if the casualty rates suffered result in a premium cost below the
provisional premium paid. Insurers also charge an additional fixed monthly
premium to
60
provide such coverage. This fixed monthly premium is currently UF 2,150
(approximately US$61,000).
In the past, rebates system implied a significant source of revenues for
Provida, while the casualty rate of the client portfolio was lower than the
provisional premium paid monthly to the insurance company. Although, since the
middle of year 1999, period when the country additionally evidenced unemployment
rates over 10% (implying a significant gap to the average observed of 6.2% in
1998), the casualty rate started to increase to levels over the provisional
premium paid monthly. This situation has been maintained at the industry level
until now, as a result of: (i) local unemployment rate and awareness by
affiliates about benefits, both affecting the number of casualties and (ii)
downward trend evidenced by interest rates and pension funds returns that have
implied a rise in the economic value of the casualties.
In consideration that the rebates and reimbursements are calculated on an
annual basis for six years and each year can reflect the cumulative impact of
several prior contracts as well as the current contract, the Company has
received casualty refunds and made payments for unfavorable casualty rate. The
rebates have the most significant effect on operating revenues in the first
quarter of the year, when the insurance company makes partial settlements.
Regarding reimbursements to the insurance company for unfavorable casualty rate
and since recent contracts started evidencing casualty rates higher than
temporary premiums; Provida began to make monthly provisions accounted as
operating expenses. These provisions were related to casualty rate projections
implicit in the yearly first quarter payment to the insurance company, according
to the conservative criteria of recognizing losses when having a reasonable base
for estimating.
Besides, 2003 was marked by changes in the criteria of accounting
provisions related to casualty rate. In January 2004, the Superintendency of
Pension Fund Administrators issued instructions about provisions to be included
in the year 2003 in connection with higher casualty rates. Consequently, at the
close of the period BBVA Provida made provisions for 100% of the contract
balances given by the insurance company up to January 2004, that corresponds to
the amount to be paid in March 2004, regarding contracts prior to the current
one.
Likewise, criteria applied until November 2003 as was informed to the
Authority, consisted in recording monthly all contracts from the accrued
proportion obtained from the unfavorable difference for implicit casualties in
the estimation for payment of pre-settlements, recorded in results as insurance
cost and in a provision account as a liabilities. At the moment of knowing
exactly the amount of settlements or pre-settlements these provisions were used,
adjusting that month the difference for deficit or surplus of provisions. The
effect of reimbursement on results was accounted 12 month prior to make the
settlement, affecting 9 out of 12 months of the previous period, and 3 out of 12
months of the year in which the payment is made. Therefore, the last twelfth
corresponded to the month of pre-settlements and settlements payments to the
insurance company.
The application of the aforesaid instruction, implied a review on
constituted provisions, which led to an adjustment as an increment in provisions
for unfavorable casualty rate, affecting both results of the year and of
previous periods, according to the analysis carried out and contrasted with the
respective approval by the Authority. See Note 40 of Consolidated Financial
Statements.
61
Furthermore, with the coming into effect of the new August 2003-December
2004 contract, whose first pre-settlement will be made in March 2005, BBVA
Provida decided to strengthen its conservative criteria of acknowledging the
unfavorable casualty rates. The latter implied the application of the accrued
criteria of the projected casualty rate of the contract in its period of
coverage, in order to maintain an adequate correlation between revenues and
expenses recognized on monthly basis, that would imply having 100% of provisions
in December 2004 for the payment that will take place in March 2005 as required
by the Authority.
Fair value of Financial Derivative Instruments
The Company's financial derivative instruments are primarily short duration
foreign currency forward exchange contracts to purchase U.S. dollars or UF and
sell UF or U.S. dollar. The Company records these financial derivative contracts
at fair value. Generally, fair values under Chilean GAAP are calculated using
the closing spot exchange rate at the period end, because the spot rates are the
accepted local standard to calculate fair value.
Impairment of Investments in Related Companies, Long-lived assets, Identifiable
Intangible Assets and Goodwill
We assess the impairment of our investments in related companies,
long-lived assets, identifiable intangible assets and goodwill whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Important factors which could trigger an impairment review include
the following:
- Significant under performance relative to expected historical or
projected future operating results;
- Significant changes in the manner of use of the acquired assets or the
strategy for our overall business;
- Significant negative industry or economic trends.
When we determine that the carrying value of investments in related
companies, long- lived assets, identifiable intangibles and goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we evaluate the future cash flows to determine if we need to take an
impairment charge. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the assets, we
recognize an impairment loss. The measurement of the impairment loss is based on
the fair value of the investment which we generally determine using a discounted
cash flow approach and recent comparable transactions in the market.
Initial Adoption of Accounting Policies
For periods beginning after January 1, 2000, Provida has adopted Technical
Bulletin No. 60 and subsequent complementary technical bulletins issued by
the Chilean Association of Accountants established the accounting for deferred
taxes originating from temporary differences, tax loss carry forwards and other
events creating differences between financial reporting and income tax assets
and liabilities.
62
In addition, on December 28, 2001 the Superintendency of Pension Fund
Administrators issued Ordinary Letter No. 17,817, with retroactive effect
to January 1, 2001, requiring Provida to recognize deferred taxes originating
from income on mandatory investments on a discounted basis. As of November 30,
2001, deferred taxes associated with the income on such mandatory investment are
recognized at the present value of the obligation. The application of this
change in accounting principle resulted in an increase to income of MMCh$ 2,295
in 2001 that was included under the caption "Extraordinary Items" in the
Company's consolidated statement of income. In 2002 and 2003, there was no
effect due to this issue.
Users unfamiliar with Chilean GAAP may not be accustomed to certain
accounting policies applied in our financial statements.
Price-level restatement
Chilean GAAP requires that the financial statements be restated to reflect
the full effects of loss in the purchasing power of the Chilean peso on the
financial position and results of operations of reporting entities. The method
prescribes that the historical cost of all non-monetary accounts be restated for
general price-level changes between the date of origin of each item and the
year-end. The consolidated financial statements have been price-level restated
in order to reflect the effects of the changes in the purchasing power of the
Chilean currency during each year. All non-monetary assets and liabilities and
all equity accounts have been restated to reflect the changes in the CPI from
the date they were acquired or incurred to year-end. The purchasing power gain
or loss included in net income reflects the effects of Chilean inflation on the
monetary assets and liabilities held by the Company. For comparative purposes,
the historical December 31, 2001 and 2002 consolidated financial statements and
their accompanying notes have been presented in constant Chilean pesos as of
December 31, 2003. This updating does not change the prior years' statements or
information in any way except to update the amounts to constant pesos of similar
purchasing power.
The price-level adjusted consolidated financial statements do not purport
to represent appraised values, replacement cost, or any other current value of
assets at which transactions would take place currently and are only intended to
restate all non-monetary consolidated financial statement components in terms of
local currency of a single purchasing power and to include in the net result for
each year the gain or loss in purchasing power arising from the holding of
monetary assets and liabilities exposed to the effects of inflation.
Currency translation of foreign investments
In October 1998, the Chilean Institute of Accountants (Colegio de
Contadores de Chile) issued Technical Bulletin No. 64, Accounting for Permanent
Foreign Investments replacing Technical Bulletin No. 51, which was effective as
from January 1, 1996. As required by Chilean GAAP, Technical Bulletin No.64 has
been applied prospectively from January 1, 1998. Such Bulletin differs from the
foreign currency translation procedures to which an investor is accustomed under
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation" issued by the Financial Accounting Standards Board. Technical
Bulletin No.64 changes the method used to restate the foreign investments, by
first translating foreign currency amounts in respect of foreign subsidiaries
and investees to US$ at historical rates of exchange and then translating the
U.S. dollar amounts to Chilean
63
pesos at the period-end rate of exchange. In effect, the foreign investments are
adopting the U.S. dollar as their functional currency, because the local
currency is not considered to be a stable currency.
The application of Technical Bulletin No. 64 results in the comprehensive
separation of the effects of inflation in Chile (for financial accounting
purposes) from the changes in foreign currency translation, with respect to our
non-Chilean investments. Under Chilean GAAP, the amount of the net foreign
investment as of the opening balance sheet date is price-level restated for the
effects of inflation in Chile, increasing net income due to price-level
restatement. Changes in the opening balance sheet balance of the net foreign
investment due to movements in the Chilean peso to U.S. dollar exchange rates
are recorded net of the effects of price-level restatement mentioned above in
shareholders' equity under the caption "cumulative translation adjustments." As
a result, during periods when the Chilean peso depreciates in excess of
inflation in Chile, compared to the U.S. dollar, shareholders' equity would
increase. Conversely, during periods in which the Chilean peso appreciates in
excess of inflation in Chile, as compared to the U.S. dollar, shareholders'
equity would decrease.
The application of Chilean foreign currency translation standard Technical
Bulletin No.64 with respect to the translation of our non-Chilean operations is
part of the comprehensive basis of preparing of price-level adjusted financial
statements required by Chilean GAAP. The inclusion of inflation and translation
effects in the financial statements is considered appropriate under the
inflationary conditions that have historically affected the Chilean economy and,
accordingly, have not been eliminated. The U.S. Securities Exchange Commission
has confirmed that they do not object to the view that the adjustment made in
respect of investments in unstable countries are part of a comprehensive basis
of adjusting for inflation. Accordingly, differences between Technical Bulletin
No. 64 and SFAS No.52 do not need to be eliminated in the reconciliation to US
GAAP.
Net Investment Hedge under Technical Bulletin No. 64
Technical Bulletin No.64 allows us to designate certain US$-denominated
debt as a hedge against our net foreign investments being measured in US$. The
unrealized exchange differences resulting from the translation to Chilean pesos
of the foreign investee's financial statements and the related hedges are not
included in determining net income for the period; rather, such differences are
recorded in cumulative translation adjustment, a reserve account as part of
shareholders' equity. For the year ending December 31, 2003, the effect of
unrealized exchange differences for net investments resulted in an unrecorded
loss of Ch$1,601 million.
Introduction
The following discussion should be read in conjunction with the Audited
Consolidated Financial Statements of Provida and its subsidiary, and the Notes
thereto included elsewhere in this annual report. See Item 19.
The Audited Consolidated Financial Statements have been prepared in
accordance with Chilean GAAP, which differs in certain significant respects from
U.S. GAAP. Note 42 to the Audited Consolidated Financial Statements provides a
description of the principal differences between Chilean and U.S. GAAP as they
relate to Provida and a reconciliation of
64
net income for Fiscal Years, 2001, 2002 and 2003 assets and liabilities as of
December 31, 2001, 2002 and 2003 to U.S. GAAP. In addition, in accordance with
Chilean GAAP, all financial information regarding Provida contained in this
report, unless otherwise indicated, has been restated in constant Chilean pesos
as of December 31, 2003 to recognize the effects of changes in the general
purchasing power of the Chilean currency. See Note 1 to the Audited Consolidated
Financial Statements.
BBVA Provida is the largest AFP in Chile, providing pension fund and
various related services. These services are limited to those permitted for AFPs
under the Pension Law and its revenues is largely dependent on the amount and
level of fees charged to its affiliates. See Item 4. As a consequence, Provida's
operating results are dependent on the general level of economic activity in
Chile and, in particular, on the number of workers who affiliate with Provida
and make monthly contributions as well as the amount of their salaries subject
to contributions. Even though the Chilean economy has evidenced a moderate
increase during recent years basically due to the international environment,
Provida has been able to maintain the upward trend of its results. Additionally,
Provida believes that growth in the number of workers in Chile and their
aggregate salaries will continue to increase in the future, although not
necessarily at the same rate as in the past. Because of its large market share,
the broad geographic coverage of its branch network and its sales activities,
and the diversity of its affiliates, Provida believes that its revenues are not
dependent on any one sector of the economic activity.
The principal sources of operating revenues for Provida are the variable
and fixed fees it charges to its contributors for monthly mandatory
contributions. Therefore, the operating revenues of Provida can be materially
impacted by any combination of significant changes in fee rates, in the number
of contributors or in their gross wages. From April, 1993 until March, 1998,
Provida charged a variable fee of 2.85% over each contributor's salary and a
fixed fee of nominal Ch$195 per month discounted from the contributor's
accounts. From April 1998 until March 1999, Provida charged a variable fee of
2.62%, maintaining its fixed fee of Ch$195 per month. Continuing with the
downward trend in variable fee rates, from April, 1999 until November, 1999,
Provida charged a variable fee of 2.36% and a fixed fee of Ch$390 per month and,
since December, 1999, Provida has charged a variable fee of 2.25%, holding its
fixed fee of Ch$390 per month.
With more pensioners now benefiting from programmed withdrawals, on July 1,
2000, Provida started charging a 1.0% fee over pensions paid out to absorb the
costs of this service. Whereas all companies in the industry had been charging
fees for this service, Provida was the last in applying this type of fee.
According to the modifications of the Pension Law related to voluntary
pension savings, Provida started charging a monthly fee for this new service
equivalent to 0.49% on an annual basis on the funds under management.
Additionally, the law permitted fees to be charged on fund transfers to other
institutions, and Provida established a fee of Ch$1,250 for each operation of
this type.
Although sales efforts are relevant factors in competition, Provida
believes that fees have became the most important factor.
Another significant source of revenues is the gain on mandatory investments
held in the mandatory investments. "See Item 4. Information on Provida--Business
Overview--
65
Government Regulation--Reserves". These earnings reflect general market
performance (i.e., the stock and bond markets and interest rates, both domestic
and international). The income generated from the mandatory investments belongs
to the AFP but does not necessarily result in increased cash flow because as the
pension fund grows so do the reserve requirements imposed on the mandatory
investments. After June 30, 1995, AFPs must invest their reserves in shares of
the pension funds they manage. Until 1994 these investments were maintained in
debt and equity securities that had been classified as investment grade for
pension funds.
In the past, an additional source of revenues for AFPs including Provida,
were rebates received from life and disability insurance contracts. "See Item 4
Information on Provida--Business Overview--Life and Disability.", while the
casualty rate of the client portfolio was lower than the provisional premium
paid monthly to the insurance company. Rebates had the most significant effect
on operating revenues in the first quarter of the year, which is when the
insurance companies make partial settlements on the most recent contracts, in
the event that the casualty rate is lower than the provisional rate paid by the
AFP. Given that the rebates are calculated on an annual basis for six years,
each year can reflect the cumulative impact of several prior contracts as well
as the current contract. In addition to the rebate system, Provida's insurance
contracts stipulate that the insurance companies must pay Provida a monthly
interest payment in the first and fourth quarters of each year. These payments
are recognized on monthly basis according to accrual criteria. These revenues
are accounted as other operating income in the case of older contracts than the
current one, and are deducted from the insurance cost in the case of the current
contract. The monthly interest payments are calculated by applying an interest
rate, previously specified in each contract, multiplied by the difference
between (i) the sum of the premiums paid to insurance companies plus all losses
stemmed from Provida's client portfolio and (ii) rebates received or paid by
Provida during the contract period. The monthly interest payment compensates
Provida for the float that insurance companies enjoy on the premium amounts that
are not used to cover casualties.
The most significant components of Provida's operating expenses are
personnel remuneration, of both administrative and sales staff, administrative
expenses and the cost of life and disability insurance. Provida believes that it
is the most cost efficient provider of services in the AFP industry, presenting
the lowest administrative cost per contributor since its creation. However,
Provida, like the other AFPs in the industry, was subject in the past to
increasing sales cost pressures as a result of the high level of competition
reflected in aggressive commercial campaigns to reach leading market share. This
increasing trend stopped at the end of 1997, after a new regulation environment
reinforced by the change in AFPs competitive strategies. In fact, regulations
introduced by SAFP (Circulars 998 and 999) in November 1997 effectively reduced
the number of salespeople and the number of transfers in the industry, which is
reflected by the sales expense comparisons between the last four fiscal years
and the preceding period. In the current context, the AFP competitive strategy
is more focused on fee competition that on commercial efforts. Even though new
products are being allowed, mainly multiple funds and voluntary pension savings,
management believes that commercial efforts are going to be only one of the
competitive issues in future periods, and not the only one.
The life and disability insurance cost has become a very important
component of Provida's operating expenses during the recent years due to
increase in the client portfolio casualty rate, as demonstrated in 2001, 2002
and 2003 figures, due to (i) local
66
unemployment rate and awareness by affiliates about benefits, both affecting the
number of casualties and (ii) downward trend evidenced by interest rates and
pension funds returns that have implied a rise in the economic value of the
casualties. In this aspect, it has to be stressed that Provida established a
strategy to reduce the impact of casualty rate on its results. This strategy
consists of maintaining higher control of the number of cases included in the
insurance company's technical reserve and the careful analysis of cases
presented to the Medical Commission.
The main sources of Provida's non-operating income (expenses) are: the
results on financial investments, its equity in the earnings or losses of its
investments in foreign pension fund managers, goodwill amortization due to
investments in foreign pension fund managers and local acquisitions, interest
expenses and the effect of inflation and foreign exchange exposure as measured
by the price-level restatement.
The gain or loss on financial investments, excluding those held as
mandatory reserves, reflects the impact of actual trading gains or losses, the
daily revaluation of the carrying values of such securities to reflect market
prices, dividends and interest received and the effect of forward contracts
entered into in order to hedge foreign exchange exposure. This kind of
investments does not represent a commensurate impact on Provida's cash flow.
Even when forward contracts entered into in order to hedge foreign exchange
exposure were relevant in Fiscal Year 1999, the Company decided not to enter
into them related to US denominated loans, since its foreign debt was
transferred to UF denominated local debt in March 2000 (See "Note 35 of the
Consolidated Financial Statements"). However, Provida has entered into forward
contracts mainly to cover the impact of investments in related companies.
In 1997, an accounting standard was adopted in Chile that require a company
making an investment in a foreign affiliate to reduce its net worth by the
amount of such investment related to start up costs, and then to record the
amount on the company's balance sheet under "investments in related companies".
This amount is thereafter reduced (increased) by the net income (loss) generated
by that foreign affiliate until the account is reduced to zero. The income
statement, thus, only registers current net income obtained from foreign
affiliates without the impact of the amortization of their start-up costs.
As a consequence of the process of mergers and acquisitions of smaller
Chilean AFPs, the participation in the capital increase of Provida's current
investments and the acquisition of stakes in companies that have begun
operations, Provida's financial statements include goodwill. This originates
in the excess of cost over the book value of assets acquired that may be
amortized over the estimated period of return on the corresponding investments
with a maximum of twenty years.
Inflation produces losses, due to the net liability exposure of the
Company. See "Impact of Inflation and Price Level Restatement."
67
The following table sets forth the composition of Provida's operating
revenues and expenses for the periods indicated:
[Enlarge/Download Table]
For the Twelve Months Ended December 31,
------------------------------------------
2001 2002 2003
------------------------------------------
REVENUES:
Fee income......................................... 90.2% 90.1% 87.8%
Gain on mandatory investments...................... 6.2% 4.6% 8.6%
Other operating revenues........................... 1.1% 2.5% 1.0%
Rebates on life and disability insurance........... 2.5% 2.8% 2.7%
------------------------------------------
TOTAL OPERATING REVENUES 100.0% 100.0% 100.0%
For the Twelve Months Ended December 31,
------------------------------------------
2001 2002 2003
------------------------------------------
EXPENSES:
Administrative personnel remuneration.............. 25.3% 23.3% 19.0%
Sales personnel remuneration....................... 12.3% 11.0% 10.7%
Directors' remuneration............................ 0.3% 0.2% 0.1%
Marketing expense.................................. 1.4% 1.0% 0.8%
Data processing expense............................ 1.0% 1.1% 0.9%
Administrative expense............................. 9.9% 11.1% 11.4%
Depreciation....................................... 2.1% 2.4% 1.9%
Other operating expenses........................... 1.8% 2.2% 2.1%
Life and disability insurance...................... 46.0% 47.8% 53.2%
------------------------------------------
TOTAL OPERATING EXPENSES 100.0% 100.0% 100.0%
The following table sets forth-certain additional monthly average
information relating to the operations of Provida for the periods indicated:
[Enlarge/Download Table]
----------------------------------------
Monthly Averages
----------------------------------------
2001 2002 2003
----------------------------------------
Number of cotizantes (1).......................... 1,353,242 1,441,684 1,413,179
Administrative employees..........................
1,219 1,130 1,064
Sales personnel...................................
739 673 634
----------------
(1) Source: SAFP
OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 2003 AND 2002
Operating Revenues
Operating Revenues rose by 7.4% from Ch$106,375 million for Fiscal Year
2002 to Ch$114,297 million for Fiscal Year 2003, due to an increase of Ch$4,394
million (4.6%) in fee income and Ch$4,899 million (99.8%) in gains on mandatory
investments.
This 4.6% increase in fee income from Ch$95,852 million for Fiscal Year
2002 to Ch$100,246 million for Fiscal Year 2003, primarily due to higher
collection levels during the period (a 3.6% growth in real terms). Likewise,
fees regarding APV administration and programmed withdrawals implied higher
revenues than in previous year of Ch$29 million
68
(14.9%) and Ch$39 million (4.9%) respectively. In addition, there was an
increase in commissions for mandatory contributions of Ch$4,326 million (a 4.6%
increase over 2002) due to fewer affiliate transfers and increased new
affiliations, as well as a lower unemployment rate (an average of 8.5% in 2003
versus 9.0% in 2002). As far as number of clients is concerned, BBVA Provida has
maintained its leading position with market shares over 40% during all the
period, in which the average number of contributors reached to 1,413,179.
Gains on Mandatory Investments increased by 99.8% from Ch$4,907 million in
Fiscal Year 2002 to Ch$9,806 in Fiscal Year 2003. This is due principally to the
implementation of the multiple funds, the recovery of the stock market both in
Chile and abroad and to positive return shown by the long term fixed income
portfolio; partly offset by the effect of the appreciation of the Chilean peso
respect to US dollar in the period. In Chile the market indicators reflected the
increase (IPSA +48.5%, IGPA +46.2%) as well as foreign markets (Dow Jones
+25.3%, Nasdaq +50.0%, MSCI US Value +31.0%, MSCI Europe ex UK +39.6%, Nikkei
+37.7%, AC Far East ex Japan +40.8%). Consequently, average weighted nominal
return of funds reached 12.27% in 2003, comparing favorably to 6.51% recorded in
2002.
Other Operating Revenues in Fiscal Year 2003 decreased by 24.4% or Ch$1,371
million compared to Fiscal Year 2002, due to minor rebates stemming from
previous L&D Insurance contracts for a sum of Ch$1,874 million, partially offset
by the increase recorded in revenues for services rendered to AFC (Unemployment
Fund Administrator) for Ch$518 million.
Operating Expenses
Total Operating Expenses increased 19.1% from Ch$70,595 million for Fiscal
Year 2002 to Ch$84,101 million for Fiscal year 2003, including expenses of
Ch$426 million stemming from consolidation of AFP Genesis, Ecuador and AFP
Porvenir of the Dominican Republic.With respect to its Chilean operations, the
Company recorded higher expenses Ch$13,080 due to higher casualty rate
provisions throughout the industry, and to the application of even more
conservative criteria established by the Authority in early 2004.
Administrative Personnel Remuneration for Fiscal Year 2003 reached
Ch$15,958 million, decreasing 2.9% or Ch$477 million with respect to Fiscal Year
2002, which after excluding the effect of consolidating foreign subsidiaries
(higher expenses for Ch$158 million), would have shown a decrease of Ch$635
million (4.0%). However, savings in remuneration were partially offset by higher
expenses for severance payments regarding staff reductions and the recording of
higher seniority benefits, due to change of criteria that consist on accrued
proportion of service years and not only when seniority stage was reached. The
average number of administrative personnel fell from 1,130 in 2002 to 1,064 in
2003, representing a drop of 5.9%. By comparing figures at the close of 2002 and
2003, reduction of workers reached 7.2% from 1,119 in December 2002 to 1,038 in
December 2003.
Sales Personnel Remuneration increased 15.5% from Ch$7,792 million for
Fiscal Year 2002 to Ch$8,999 million for Fiscal Year 2003 mainly due to higher
local fees and benefits granted to sales staff for transfers (18.8% higher than
the previous year). The above is the result of a more aggressive commercial
strategy arising from the Multiple Funds implementation and its consequent
effect over competitiveness in APV plans. In terms of net
69
salary transfers among AFPs, production levels achieved by BBVA Provida
sale-force resulted in nearly no transfers in 2002 to positive net transfers
close to Ch$7,000 million in salaries, in spite of commercial staff reductions.
The average number of sales agents fell a 5.7% from 673 in Fiscal Year 2002 to
634 in fiscal year 2003. By comparing figures at the end of each period for 2002
and 2003, sales force diminished 4.1% from 652 to 625 sales agents,
respectively.
Life and disability (L&D) insurance cost increased from Ch$33,730 million
in Fiscal Year 2002 to Ch$44,700 million in Fiscal Year 2003, representing an
increase of Ch$10,970 million or 32.5% over the previous year. Behind the higher
cost of L&D Insurance are, on one hand, the upward trend in the casualty rate of
client's portfolio, evidencing a higher frequency of the benefit's applications
by affiliates as well as lower interest rates that resulted in higher economic
value of said casualties.
As discussed under Critical Accounting Policies above, during 2003 there
was a change in criteria used to establish accounting provisions in connection
with the casualty rate due to instructions from the Superintendency of Pension
Fund Administrator. Therefore, at the close of the period the Company made
provisions for 100% of the Insurance Company's balance up to January 2004.
Likewise, the criterion applied until November 2003 as was informed to the
Authority, consisted in monthly recording for all contracts, of the accrued
proportion obtained from the unfavorable difference for the implicit casualty
rate in the estimation of pre-settlement payments, recorded in results as
insurance cost and as a provision account in liabilities. At the moment of
knowing exactly the amount of settlements or pre-settlements, these provisions
were used, adjusting in that month the difference for deficit or surplus of
provisions. The effect of reimbursement on results was accounted 12 month prior
to make the settlement, affecting 9 out of 12 months of the previous period, and
3 out of 12 months of the year in which the payment is made. Therefore, the last
twelfth corresponded to the month of pre-settlements and settlements payments to
the insurance company.
The application of the aforementioned instruction implied a review of
constituted provisions, which led to an adjustment of Ch$6,724 million as an
increase in provisions for a higher casualty rate, affecting both results of
the year and of previous periods for Ch$5,614 million net of taxes, according
to the analysis approved by the Authority. See Note 40 of Consolidated
Financial Statements.
Furthermore, as the new August 2003-December 2004 contract came into effect
whose first pre-settlement will take place in March 2005, the Company decided to
strengthen its conservative criterion used to account for the casualty rate. The
latter, through the application of the accrued criterion with respect to the
projected casualty rate in the contract during its 17-month coverage period, in
order to maintain an adequate correlation between revenues and expenses
recognized monthly. This criterion that could not be applied previously since
there were not reasonable evidence that allowed an adequate forecast capacity of
the casualty rate, would imply that 100% provisions will be completed in
December 2004 for the payment that will take place in March 2005 as required by
the Authority. Consequently, over the total client salary base expected for the
contract, it has been monthly accounted (at a rate of 1/17) an additional
provision over the temporary premium associated to a higher casualty rate
estimated for the contract. The latter is subject to periodic review according
to the monthly balances given by the insurance company,
70
adjusted by for increases from the initial projections. Since at the end of
2003, the new contract was in effect for five months, the impact of provisions
recognized with respect to the August 2003/December 2004 contract reached an
amount of Ch$2,707 million.
The remaining operating expenses increased by 14.3% or Ch$1,806 million
from Ch$12,638 million for Fiscal Year 2002 to Ch$14,444 million for Fiscal Year
2003. This increase is due to (i) higher administration expenses (Ch$1,705
million) associated with launching the Multiple Funds that correspond
fundamentally to communications for clients (mailing services) as requested by
the Authority and expenses related to funds administration, (ii) costs
associated to the externalization of collection process to improve service
quality at agencies aimed at maintaining portfolios' fidelity and at the same
time reducing associated expenses and (iii) expenses related to technological
and operating support services to the AFC, which has hiring temporary workers.
Operating Income
Consequently and in spite of the favorable evolution of both fee income and
gains on mandatory investments, higher operating expenses resulted in a decrease
in the operating income of Ch$5,584 million or 15.6% from Ch$35,780 million for
Fiscal Year 2002 to Ch$30,196 million to Fiscal Year 2003.
Non-operating income (expenses) net
Non-operating income (expenses) net registered a significant increase from
an income of Ch$1,916 million in Fiscal Year 2002 to an income of Ch$9,942
million in Fiscal Year 2003, representing a favorable variation of Ch$8,182
million. This increase was principally due to income obtained from the sale of
AFPC Porvenir in Colombia recognized as non-operating revenues Ch$8,026 million
(not considering associated taxes).
Furthermore, the price level restatement results evolved favorably from a
loss of Ch$1,928 million in Fiscal Year 2002 to a gain of Ch$214 million to
Fiscal Year 2003, representing a positive deviation of Ch$2,142 million. Of such
deviation, Ch$1,009 million stems from the fact that inflation applied over the
Company's non-monetary net liability exposure was 1.0% as compared to 3.0%
applied in 2002 which also affected the lower growth showed by UF and therefore,
in a lower negative result in price level restatement associated with debt
denominated in that currency. The remaining difference is related to profits
obtained by exchange rate according to the distribution of dividends by
subsidiaries and the release of patrimony reserves associated with the sale of
the 20% AFPC Porvenir (Colombia) stake.
The results of Affiliated Companies diminished from Ch$9,809 million in
Fiscal Year 2002 to Ch$7,004 million in Fiscal Year 2003. This Ch$2,805 million
decrease (28.6%) regarding foreign affiliates is explained by the appreciation
of the Chilean peso with respect to dollar (17.4% in 12 months) in recording
gains obtained by these subsidiaries. Another factor contributing to the above,
is the negative evolution recorded by AFORE Bancomer, Mexico basically generated
by the depreciation of the local currency with respect o dollar (10.0%), and the
sale of AFPC Porvenir Colombia which ended a recurrent average net contribution
of US$196,000 per month. Regarding local affiliates, two affiliates -AFC and
PreviRed.com- together recorded a higher loss of Ch$328 million.
71
Income Taxes
Income taxes increased from Ch$3,501 million in Fiscal Year 2002 to
Ch$8,133 million to Fiscal Year 2003, a higher tax expense of Ch$4,632 million
(132.3%). This is due to the tax associated with the sale of the stake in AFPC
Porvenir in Colombia in September, for an amount of Ch$3,794 million and to an
increase in the. tax rate from 16.0% in 2002 to 16.5% in 2003.
Extraordinary items
There were no extraordinary item in Fiscal Year 2002 nor in Fiscal Year
2003 record balance in the Extraordinary Item account.
Effect of accounting change
In Fiscal Year 2003 there were no accounting changes that affect the
comparison of financial statements with respect to Fiscal Year 2002.
Net Income
Net Income decreased from Ch$34,195 million for Fiscal Year 2002 to
Ch$32,005 million for Fiscal Year 2003, representing a real decrease of 6.4% or
Ch$2,190 million.
OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Operating revenues
Operating revenues increased 3.1% from Ch$103,185 million for Fiscal Year
2001 to Ch$106,375 million for Fiscal Year 2002, due to increases of 3.0%
(Ch$2,772 million) in fee income and 53.4% (Ch$1,956 million) in other operating
revenues.
The 3.0% increase in fee income, from Ch$93,080 million for Fiscal Year
2001 to Ch$95,852 million for Fiscal Year 2002, is explained by higher
collections recorded during the period due to an increase in the average number
of contributors, from 1,353,242 for Fiscal Year 2001 to 1,441,684 for Fiscal
Year 2002. The above is the result of the successful commercial strategy of BBVA
Provida on attracting new affiliations, and as it has been occurring throughout
the industry during the year, an improvement in contribution density. In figures
the average ratio contributors to affiliates for BBVA Provida increased from
52.3% in 2001 to 54.1% in 2002. Additionally, regarding to unemployment level,
the average rate in 2002 was 9.0%, compared favorably to the figure registered
last year that reached 9.2%.
The increment of 53,4% in other operating revenues from Ch$3,660 in the
fiscal year 2001 to Ch$5,616 in the fiscal year 2002, is mainly explained by (i)
higher rebates and financial revenues stemming from previous L&D Insurance
Contracts for Ch$448 million, (ii) revenues stemmed from AFC annual fee
(Administradora de Fondos de Cesantia) in connection of rendering of
technological support given by BBVA Provida for Ch$218
72
million and (iii) higher revenues for Ch$1,372 million generated by 100% of AFP
Genesis, Ecuador consolidation.
Gains on Mandatory Investments in Fiscal Year 2002 decrease 23.9% or $1,538
million regarding fiscal year 2001 as a consequence of a drop in domestic
equities as well as international markets which partially overshadowed the
positive contribution of the local fixed income stemming from Central Bank's
easing up on monetary policy reflected in successive interest rate reductions
during the period. As a result, the pension funds return amounted to 6.51% in
nominal terms in 2002 which compares unfavorably respect to the 9.46% obtained
in 2001.
Operating expenses
Total operating expenses decreased 4.2%, from Ch$73,677 million for Fiscal
Year 2001 to Ch$70,595 million for Fiscal Year 2002. This result is mainly due
to important savings achieved in both administrative and sales force
remunerations and additionally lower marketing expenses sustained by no
recurrence of the extraordinary effects during 2001 (advertising campaign and
change of corporate image), partially offset by the increase in the life and
disability insurance cost and higher administrative expenses.
Administrative personnel remuneration, for Fiscal Year 2002 amounted to
Ch$16,435 million, representing a decrease of 12.0% or Ch$2,238 with respect to
Fiscal Year 2001. This favorable result is mainly due to the implementation at
the end of 2001, of special retirement and pre-retirement plans, resulting in a
lower average staff number compared 2001 and implying lower expenses related to
wages and other benefits for administrative personnel as well as minor severance
payments caused by structural staff adjustments. In figures, the average number
of administrative staff dropped from 1,219 employees in 2001 to 1,130 in 2002
representing a drop of 7.3%. Comparing the year-end figures of years 2001 and
2002, the reduction in employees was 6.8% from 1,201 to 1,119.
Remuneration of sales personnel decreased by 14.1%, from Ch$9,069 million
for Fiscal Year 2001 to Ch$7,792 million for Fiscal Year 2002. This result
mainly originated by adjustments in the sales force during 2001, based on less
commercial activity expectations, situation that was evidenced in 2002.
Therefore, and considering that during the year there were no significant
adjustments in sales staff, savings in severance payments were recorded as well
as capitalization of savings stemmed from lower sales personnel (wages and
personnel benefits) and less commercial activity which generated minor
commercial incentives. The average number of sales agents decreased 8.9% from
739 in Fiscal Year 2001 to 673 in Fiscal Year 2002,. Comparing the year-end
figures of 2001 and 2002, the sales force decreased a 2.0% from 665 to 652
employees.
Life and disability insurance cost decreased slightly from Ch$33,880
million for Fiscal Year 2001 to Ch$33,730 million for Fiscal Year 2002,
representing a drop of Ch$150 million or 0.4% over the previous year. This
result stemmed from the growth registered in the client salary base and its
subsequent higher provisional premium payments, as well as, higher provisions
originated by the increment in casualty rate in client's portfolio throughout
the industry. The latter has been affected by the local unemployment rate and
awareness by affiliates about benefits that affects the number of benefit
appliances, as well as the lower trend evidenced by interest rates and the
return of pension funds that increased the economic value of casualties.
Considering the above, BBVA Provida continues its strategy intended to
73
control the effects of a higher casualty rate; which involves measures within
the Company and with third parties (Insurance Company and Medical Commission).
The remaining operating expenses increased by 4.8%, or Ch$583 million, from
Ch$12,055 million for Fiscal Year 2001 to Ch$12,638 million for Fiscal Year
2002. The principal component of Ch$600 million arose from higher administration
expenses negatively affected by new business start up in 2002 basically related
to the campaign made through Association of AFP in order to promote voluntary
pension savings start up, as well as outsourcing for the rendering of technical
and operational support to AFC and higher payments on account of a license
referred to BBVA Provida International due to the increase in its taxable
capital. Another factor affecting this item is disability qualification expenses
for Ch$226 millions aimed at controlling the impact of casualties in the
insurance cost and administrative expenses partially offset by lower
commercialization expenses of Ch$326 million during this period, due to the
corporate change image that took place in 2001.
Operating income
Consequently, due to favorable evolution of both operating revenues and
operating expenses, the operating income increased by Ch$6,272 million, or
21.3%, from Ch$29,508 million for Fiscal Year 2001 to Ch$35,780 million for
Fiscal Year 2002.
Non-operating income (expenses) net
Non-operating income (expenses) net decreased from a gain of Ch$11,098
million for Fiscal Year 2001 to a gain of Ch$1,916 million for Fiscal Year 2002,
representing an unfavorable variation of Ch$9,182 million. However, the
non-operating income as of December 2001 includes the sale of AFORE Profuturo,
which had zero effect on the results including the respective income tax,
therefore, once the financial impacts of the transactions are isolated, the
adjusted deviation non-operating income is reduced to Ch$777 million. This
result is explained by lower earnings obtained in affiliated companies basically
originated by exchange effects and losses for start up process of local
companies and higher losses in price level restatement due to in 2001 it was
recorded a positive and extraordinary effect of Provida Internacional
dollarization in 2001.
Regarding to the transactions in Mexico, it should be reminded that the
sale of AFORE Profuturo generated the following effects: a gain of Ch$26,443
million recorded as other non-operating income, a release of shareholders equity
reserves due to foreign exchange effect related to this investment amounted to
Ch$1,822 million recorded as a gain in price level restatement and the
corresponding transaction taxes of Ch$8,405. Therefore, the net proceed of the
transaction was Ch$19,860 million fully destined to amortize a significant
portion of goodwill generated by AFORE Bancomer acquisition.
The result in Affiliated Companies decreased from Ch$10,608 million in
Fiscal Year 2001 to Ch$9,809 million in Fiscal Year 2002. This Ch$799 million
(7.5%) decrease is originated partially by local affiliated companies
(PreviRed.com and AFC) still record losses, registering a negative variation of
Ch$437 million. Regarding affiliated companies abroad, they recorded lower
results for Ch$362 mainly originated by lower earnings recorded by AFPC
Porvenir, Colombia of Ch$1,025 million stemming from depreciation of the local
currency respect to US dollar in the year. On the other hand, the sale of the
stake in AFORE Profuturo, Mexico in March 2001 since its benefits are not being
accounted for
74
from that date on, implied lower income for BBVA Provida of Ch$550 million.
Although, it has to be stressed that the higher benefits stemmed from AFORE
Bancomer, Mexico of Ch$1,148 million, more than compensate that lower income,
generating a net earning of Ch$598 million from the investment in this country.
Additionally, in September 2001, Provida Internacional completed its 100% stake
of AFP Genesis consolidating its results, and its net income is not considered
in this item.
The price-level restatement results evolved unfavorably, from a gain of
Ch$2,384 million in Fiscal Year 2001 to a loss of Ch$1,787 million in Fiscal
Year 2002, representing a negative deviation of Ch$4,171 million. The latter due
to year 2001 considers the extraordinary effect of Provida Internacional
dollarization and the sale AFORE Profuturo, therefore isolating that effect the
deviation is reduced to Ch$116 million originated by the increase in BBVA
Provida's net passive exposure.
Regarding to the exchange difference registered during the year, the loss
decreased from Ch$917 million in 2001 to Ch$141 million en 2002, basically as a
cause that in 2001 an extraordinary loss was registered stemming from the hedge
passive conversion regarding to AFORE Profuturo investment, while in 2002 the
loss is related to forward contracts valorization.
Income taxes
Income taxes decreased from Ch$12,399 million in the fiscal year 2001
(which includes Ch$8,405 million associated with 20% tax retention in December
2001 in connection to AFORE Profuturo sale) to Ch$3,501 million in fiscal year
2002, showing a lower expense of Ch$8,898 million (71.8%). Adjusting 2001 due to
tax generated by Profuturo sale, lower expenses for Ch$493 million is registered
in 2002, which is backed up in tax credits stemming from dividends in affiliated
companies abroad and the favorable effect of the tax base review made in the
period.
Extraordinary items
By request of the AFPs, the Superintendency of AFPs modified the regulation
of deferred tax accounting of gains on mandatory investments in December 2001.
The modifications allows the gains to be recognized at their present value,
considering that it is doubtful that an AFP would sell its shares and
consequently recognize the earnings. Therefore, this modification meant a
retroactive recognition of Ch$2,295 million accumulated since January 2001 that
was accounted for as an extraordinary item, generating a lower gain in respect
to that amount in 2002 compared to 2001.
Effect of accounting change
During the period, there were no changes in accounting policies regarding
the previous year that might affect the interpretation of these consolidated
financial statements.
Net income
Net income increased from Ch$30,502 million for Fiscal Year 2001 to
Ch$34,195 million for Fiscal Year 2002. The real growth of 12.1%, or Ch$3,693
million, mainly backed up in good results obtained in fee income and other
operating revenues, as well as lower
75
administrative and sale personnel remuneration and marketing and financial
expenses; more than offsetting the market evolution negative impact on gains in
mandatory investments, as well as the client portfolio casualty rate that
generated a higher cost in life and disability insurance.
Impact of Inflation and Price-Level Restatement
BBVA Provida is required under Chilean GAAP to restate non-monetary assets
and liabilities, profits and loss accounts in order to reflect the effect of
changes in the purchasing power of the Chilean peso. During inflationary
periods, monetary assets and liabilities generate losses or gains, respectively,
in purchasing power. Non-monetary assets and liabilities are restated so as to
correct the effect of inflation and remain constant in real terms for both
periods. See Notes 1 and 31 of the Audited Consolidated Financial Statements.
Non-monetary assets and liabilities are generally restated using the CPI.
Monetary assets and liabilities are typically not adjusted because their value
is eroded by inflation.
For practical reasons, the price-level restatement of trading securities is
not accounted separately from the gain or loss on such securities because it has
just been included. Accordingly, the net loss from changes in purchasing power
of the currency does not include the gain that would have been separately
recognized if price-level restatement on trading securities had been accounted
separately prior to restating trading securities to fair values.
In terms of inflation impact in BBVA Provida's results, it produces losses
as a consequence of the Company's net liability exposure.
Otherwise, after BBVA Provida incurred US dollar-denominated long-term debt
to finance the acquisition of AFP Union and Proteccion, other variables, such as
movements in the foreign exchange rate, become relevant in terms of the
definition of the price-level restatement account. In terms of existing assets,
a natural hedge evolved from the foreign affiliate investments that for
accounting purposes are denominated in dollars. Nevertheless, subsequent to the
capital increase at the end of Fiscal Year 1999, BBVA Provida's borrowings were
re-negotiated and the new obligations were re-denominated in UF.
Additionally, in the Fiscal Year 2001 an extraordinary gain was perceived
due to Provida International's change in its functional currency from the
Chilean peso to US dollar starting on January 1st, considering that most of its
operations are controlled in that currency.
The following table sets forth the calculation of the net effect resulting
from the changes in the purchasing power of the Chilean peso:
76
[Enlarge/Download Table]
--------------------------------------
As of, and for the Twelve Months
ended, December 31,
--------------------------------------
(in million of constant Ch$)
2001 2002 2003
--------------------------------------
Shareholders' equity.............................................. 4,226 4,309 1,919
Current assets.................................................... (248) (1)
Other assets...................................................... (4,968) (2,927) (1,189)
Premises and equipment............................................ (936) (903) (300)
Liabilities....................................................... (972) 601 288
Accumulated depreciation.......................................... 171 176 57
Profit and loss accounts.......................................... 404 689 3
Net loss from changes in the purchasing power of the currency..... (2,323) 1,944 788
======= ===== ===
Liquidity and Capital Resources
BBVA Provida's working capital requirements have historically been funded
with internally-generated cash flows and short-term sources such as available
lines of credit, considering that BBVA Provida's cash flow from operations,
mainly from fees paid by its affiliates, is significant and sufficient to cover
the core business needs. As a consequence, BBVA Provida has historically paid a
significant portion of its income as dividends, even though they are limited
according to the long-term investment decisions. See Item 8. "Financial
Information -- Dividends Policy". Management believes that the Company's cash
flow generated by operations, cash balances, and available lines of credit will
enable it to finance its working capital.
BBVA Provida's long-term investments have been financed by long-term
sources, basically bank debt, capital increases and retained earnings.
Until Fiscal Year 2000, Provida incurred significant capital expenditures
related to merger and acquisitions process and foreign affiliates investments,
while starting Fiscal Years 2001 this trend has diminished. Since then,
investments have benn mainly related mainly related to the purchase of the
additional 75% stake in AFP Genesis in Ecuador, the acquisition of 100% interest
of AFP Porvenir in the Dominican Republic and investments in properties and
equipment. "See Item 4. -Information on BBVA Provida- Capital Expenditures and
Divestitures".
BBVA Provida also has had to build additional reserves as its assets under
management have increased, translating into higher mandatory investments. "See
Item 4. Information on BBVA Provida." As of December 31, 2003, the amount of
such reserves had increased 42.4% in the last four years due to mandatory
contributions of affiliates and the pension funds' returns. BBVA Provida expects
these reserves to increase in the future as a result of further increases in
funds invested by affiliates in the Pension Funds and their respective returns.
During 2002, BBVA Provida made paid-in capital contributions in two of its
local subsidiaries, financed with internally generated funds. These capital
contributions were (i) the incorporation of the unemployment insurance
management company in which BBVA Provida has a 37.8% interest and (ii)
PreviRed.com based on the company's needs and in
77
order to maintain BBVA Provida's 37.8% interest. Additionally and because these
companies are in their start-up process, during 2003 and the first quarter of
2004, BBVA Provida made new capital contributions. Management expects that
additional investment will be necessary in the short term, which are expected to
be financed by internal resources.
In the case of foreign affiliates, the main source of financing was
shareholders' equity. In fact, the recent acquisition of the AFP Porvenir (the
Dominican Republic) was financed by proceeds from the sale of AFPC Porvenir
(Colombia). Regarding future projects abroad, BBVA Provida together with BBVA
Group will participate as a shareholder in those investments that do not alter
the Company's financial status. Consequently, BBVA Provida will act as a
consultant to local AFPs in those countries with large pension markets, where
it will expect to generate consulting fees. In countries with smaller pension
markets, BBVA Provida will actively seek new investments in local AFPs.
The following table represents our contractual obligations and commercial
commitments as of December 31, 2003:
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-------------------------------------------------------------------------------------------
Less than After
(in million of constant Ch$) Total 1 year 1-3 years 4-5 years 5 years
-------------------------------------------------------------------------------------------
Contractual Obligations
Operating leases ........ 1,524,897 112,318 973,400 16,398 422,782
Unconditional purchase
obligation............. 13,963 2,327 4,654 4,654 2,327
Other long term
obligation ............ 268,201 44,700 89,400 89,400 44,700
-------------------------------------------------------------------------------------------
Total contractual cash
obligations ........... 1,807,061 159,345 1,067,455 110,452 469,809
===========================================================================================
Commercial Commitments
Syndicated loan - Local
banks ................. 5,076 3,384 1,692
BBVA Pensiones Chile S.A. 3,045 3,045
Banks overdrafts ........ 95,449 15,908 31,816 31,816 15,908
Lease contracts ......... 822 68 135 135 484
-------------------------------------------------------------------------------------------
Total commercial commitments 104,392 22,404 33,643 31,951 16,393
===========================================================================================
The Company's operating leases are basically related to branch offices,
none of them representing a material amount.
Unconditional purchase obligations are related to permanent service
contracts. Since most of them are connected with the Company's level of
activity, it is expected that the minimum commitment for this concept would be
the same as for 2003. See Note 32 of Consolidated Financial Statements.
BBVA Provida's most material contractual obligation (registered under
"Other long term obligation") stems from the life and disability insurance
policy signed with the BBVA Seguros de Vida S.A. Since premiums are related to
fee levels charged to contributors and the casualty rate of the Company's client
portfolio, it has been presumed that these premiums are going to remain at least
at 2003 levels. See Note 8 of Consolidated Financial Statements.
BBVA Provida's BBVA commercial commitments are basically connected with
long term obligations aimed at financing mergers and acquisitions of other AFPS
during years 1998 and 1999. See Notes 16 and 17 of Consolidated Financial
Statements.
Although the long-term debt has covenants, whose non-fulfillment could
accelerate the integral payment of the obligations, management believes that the
transactions, which originated them, are going to permit the full payment of the
debt and the fulfillment of the
78
related requirements. The covenants related to the long-term obligations
according to the figures at December 31,2003 are as follows:
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DATA INFORMATION FOR CONVENANTS
1.- Consolidated Financial Debt Ch$ Million US$ Million
Current Liabilities
Bank and financial institutions borrowings 19,312 32.52
(+) Public borrowings - -
(+) Due to related companies 3,066 5.16
(+) Accounts payable and sundry creditors - -
Long-term Liabilities
Bank and financial institutions borrowings 1,692 2.85
(+) Public borrowings - -
(+) Due to related companies - -
(+) Accounts payable and sundry creditors 71 0.12
Total Consolidated Financial Debt 24,141 40.66
2.- Net Shareholder's Equity Ch$ Million US$ Million
Total Shareholder's Equity 172,812 291.03
(-) Net Income (32,005) (53.90)
(+) Provisional Dividends 7,928 13.35
Net Shareholder's Equity 148,735 250.48
3.- EBITDA Ch$ Million US$ Million
Income before taxes 40,139 67.6
(-) Depreciation 1,574 2.65
(-) Amortization of goodwill 4,993 8.41
(-) Interest expenses 1,359 2.29
EBITDA 48,066 80.95
COVENANTS Ratio Limit
1.- Consolidated Financial Debt / Net Shareholder's Equity 0.16 < 1.75
2.- Consolidated Financial Debt / EBITDA 0.50 < 3.75
3.- EBITDA / Interest expenses 35.36 > 2.75
4.- Net Shareholder's Equity (US$ Million) 250 > 150
In operating terms, BBVA Provida's cash flow obtains its main source of
revenues from fees charged to its contributors, which are destined to pay
(i) remuneration of adminstrative and sales personnel, (ii) administrative
expenses in relation to its line of business as an administrator of pension
funds, and (iii) premiums to provide life and disability benefits. The Company
operationally generates cash flows surplus. In financial terms, this surplus is
used to pay dividends in accordance with the policy established during recent
years at 80% of the Company's net income. Also, resources have been destined to
pay long-term debts that were used in mergers and acquisitions at the end of
1998 and 1999.
79
Regarding investments, the main recurrent requirement is the mandatory
investment constitution equivalent to 1% of the administered funds which
experienced an annual growth by both mandatory contributions made by
contributors of the Company's portfolio and new participants who affiliate or
transfer to AFP Provida. In addition to the above, are investments in local and
foreign affiliates carried out in recent years which have been financed by the
Company's own sources.
Off-balance Sheet Arrangements
Finally, it should be mentioned that there are no off-balance sheet
arrangements that could have a material in BBVA Provida's results.
U.S. GAAP Reconciliation
The adjustments made under U.S. GAAP for deferred taxes in order to conform
to the Statement of Financial Accounting Standards Number 109 "Accounting for
Income Taxes" lowered net income for Fiscal Years 2001, 2002 and 2003 by
Ch$1,127 million (3.7%), Ch$581 million (1.7%) and Ch$658 million (2.1%),
respectively.
In addition, the adjustments made under U.S. GAAP for the amortization of
acquisition costs of initial affiliates of investees did not have any effect in
Provida's net income in Fiscal Years 2001, 2002 and 2003.
The conversion adjustments of foreign affiliates lowered net income for
Fiscal Years 2001, 2002 and 2003 by Ch$2,790 million (9.1%), Ch$2,855 million
(8.3%) and Ch$2,734 million (8.5%), respectively.
Consequently, Provida's net income under Chilean GAAP was Ch$30,502 million
for Fiscal Year 2001, Ch$34,195 million for Fiscal Year 2002 and Ch$32,005
million for Fiscal Year 2003 as compared to net income under U.S. GAAP of
Ch$45,090 million for Fiscal Year 2001, Ch$31,749 million for Fiscal Year 2002
and Ch$28,114 million for Fiscal Year 2003. Net income under U.S. GAAP 47.8%
higher than under Chilean GAAP in 2001, 7.2% lower than under Chilean GAAP 2002
and 12.2% lower than under Chilean GAAP 2003, respectively.
The principal differences between Chilean GAAP and U.S. GAAP as they relate
to the Company are the reversal of income in Investment in related Companies,
elimination of result of subsidiaries during the development stage, the reversal
of amortization of goodwill for the sale of Afore Bancomer, the recognition of
gains in sale of Afore Profuturo, the inclusion of derivatives effects, the
recording of a liability to reflect minimum dividend payments required by law
and the recording of deferred taxes. For a more detailed explanation of these
differences between Chilean GAAP and U.S. GAAP, see Note 42 for the Consolidated
Financial Statements. The difference between Chilean GAAP and U.S. GAAP arising
from deferred taxes and amortization of acquisition costs of initial affiliates
of investees, also affected Provida's net equity at of the end of each fiscal
year. Other differences that affected equity were a decrease in equity under
U.S. GAAP, in order to recognize a liability for the minimum dividend Provida
must distribute every year, and an increase in equity under U.S. GAAP due to the
reversal of a deficit for the inception period.
Net equity under Chilean GAAP as of December 31, 2001, 2002 and 2003 was
Ch$162,087 million, Ch$173,052 million and Ch$172,182 million, respectively, as
compared to net equity under U.S. GAAP as of December 31, 2001, 2002 and 2003
of Ch$164,093 million, Ch$174,789 million and Ch$169,476 million, respectively
(or 1.2% higher, 1.0% higher and 1.9% lower, under U.S. GAAP than under Chilean
GAAP).
80
In determining U.S. GAAP amounts, Provida has implemented Statements of
Financial Accounting Standards applicable to its operation and described in Note
42 for the Consolidated Financial Statements. The inclusion of price-level
adjustments in the accompanying financial statements is considered appropriate
under the prolonged inflationary conditions affecting the Chilean economy even
though the cumulative inflation rate for the last three years does not exceed
100%. Accordingly, the effect of price-level changes is not eliminated in the
reconciliation to U.S. GAAP.
Pursuant to Chilean GAAP, the Company's financial statements recognize the
effects of the application of Chilean foreign currency translation standard
Technical Bulletin No. 64 with respect to the translation of our non-Chilean
operations is part of the comprehensive basis of preparing of price-level
adjusted financial statements required by Chilean GAAP. The inclusion of
inflation and translation effects in the financial statements is considered
appropriate under the inflationary conditions that have historically affected
the Chilean economy and, accordingly, have not been eliminated. An accommodation
has been made by U.S. Securities Exchange Commission permitting Chilean
registrants to not include or the effect of any differences between Technical
Bulletin No. 64 and SFAS No. 52 in respect of investments in unstable countries
in the reconciliation to US GAAP.
Item 6. Directors, Senior Management and Employees
BBVA Provida's current Directors and Executive Officers are as follows:
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Current Position Term of
Directors * Position Held Since Expiration
-------------------------------------------------------------------------------------------------------------
Antonio Martinez-Jorquera Lloveras Chairman of the Board of 2002 2004
Directors
Miguel Angel Poduje Sapiain Vice-Chairman 1999 2004
Julio Gilsanz Arrola Director 2002 2004
Jesus Maria de las Fuentes Arrambarri Director 1999 2004
Fernando Leniz Cerda Director 1997 2004
Jose Maria Ayala Vargas Director 2003 2004
Alberto Pulido Cruz Director 1999 2004
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Current
Position Held Term of
Executive Officers (*) Position Since Expiration
-------------------------------------------------------------------------------------------------------------
Gustavo Alcalde Lemarie (**) Chief Executive Officer 1996 N/A
Juan Carlos Reyes Madriaza(**) Chief Operation Officer 1998 N/A
Joaquin Cortez Huerta (**) Chief Investment Officer 1996 N/A
Carlo Ljubetic Rich (**) Chief Commercial Officer 2000 N/A
Gonzalo Pizarro Sironvalle (**) Human Resources Manager 2003 N/A
Maria Paz Yanez Macias Planning & Control Division Manager 2002 N/A
Gabriel Galaz Gonzalez Accounting & Consolidation Division Manager 2002 N/A
Arnaldo Eyzaguirre Miranda Auditor 2003 N/A
Andres Veszpremy Schilling(**) General Counsel 2002 N/A
----------------
(* ) None of the above mentioned Directors and Executive Officers individually
owns one percent or more shares of the Company.
(**) Members of Management Committee of the Company.
81
Directors
Antonio Martinez Jorquera is the Chairman of the Board and has been a
Director of BBVA Provida since 2002. He received a degree in law and economics
from the University of Deusto in San Sebastian, Spain.
Miguel Angel Poduje is the Vice-Chairman of the Board and has been a
Director of BBVA Provida since 1999. He received his law degree from the
Catholic University of Chile. Mr. Poduje is also a Director of Provida
International S.A. and of Consorcio Periodistico de Chile S.A. ("COPESA").
Additionally, he is the President of the Directorship of Andres Bello University
and law professor of such university.
Julio Gilsanz has been a Director of BBVA Provida since 2002. He received a
law and economics degree from the Deusto University, San Sebastian in Spain.
Jesus Maria de las Fuentes has been a Director of BBVA Provida since 1999.
He received an industrial engineering degree from the High Engineer Academy of
Bilbao in Spain. He has served BBV in Mexico and as Director of Instituciones
Bancarias Internacionales del Area America Centro-Sur ("International Banking
Institutions, Central and South America Area").
Fernando Leniz has been a Director of BBVA Provida since 1997. He obtained
a civil engineering degree from the University of Chile. He is a Director of
several companies such as Banmedica, Compania Sudamericana de Vapores, Sintex
and Cintra. He is a former Minister of the Economy.
Jose Maria Ayala has been a Director of BBVA Provida since 2003. He
obtained his law degree from the University of Barcelona, Spain.
Alberto Pulido has been a Director of BBVA Provida since 1999. He received
a law degree from the Catholic University of Chile. He is a partner at Philippi,
Yrarrazaval, Pulido & Brunner law firm. Mr. Pulido is director of Scotiabank
Sudamericano and Axa Seguros.
The Extraordinary Shareholders Meeting held on April 30, 2002 approved an
amendment of article 7th of BBVA Provida's Bylaws, in order to decrease the
number of Board of Directors members from ten to eight. In the Extraordinary
Shareholders Meeting held on April 30, 2004, another amendment of BBVA Provida's
Bylaws was approved, decreasing the number of Board of Directors members from
eight to seven.
Executive Officers
Gustavo Alcalde has been Chief Executive Officer since 1996. He received
his commercial engineering degree from the University of Chile.
Juan Carlos Reyes has been Chief Operation Officer since 1998. From 1994 to
1998 he served as Production Manager in AFP Provida. He received a mathematics
civil engineering degree from the University of Chile.
82
Joaquin Cortez has been Chief Investment Officer since 1996. He received a
commercial engineering degree from the Catholic University of Chile and a Master
of Arts in economics from the University of Chicago.
Carlo Ljubetic has been Chief Commercial Officer since year 2000. He
received an industrial engineering degree from University Santiago of Chile.
Gonzalo Pizarro has been Human Resources Manager since 2003. He received an
industrial engineering degree from the Catholic University of Chile.
Arnaldo Eyzaguirre has been the auditor in charge of the Audit Division
since 2003. He received commercial engineering degree from the Metropolitan
Technological University of Chile and his Public Accountant-Auditor degree from
the Central University of Chile.
Maria Paz Yanez has been Planning & Control Division Manager since 2002.
She received a commercial engineering degree from the Catholic University of
Chile.
Gabriel Galaz has been Accounting & Consolidation Division Manager since
2002. He is a university graduate in mathematics and physics from the University
of Santiago of Chile.
Andres Vezspremy has been General Counsel since 2002. He received a law
degree from University of Chile and a Master of Laws in International Legal
Studies from the Washington College of Law in the United States of America.
Compensation of Directors and Officers
In 2003, the total compensation paid to each director of BBVA Provida was
as follows:
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(in Thousands of Constant $Ch as of December 31, 2003)
--------------------------------------------------------
Per Diem Fees * Total
--------------------------------------------------------
Directors
Miguel Angel Poduje Sapiain 31,091 0 31,091
Fernando Leniz Cerda 15,918 2,173 18,091
Maximo Pacheco Matte (**) 15,546 0 15,546
Alberto Pulido Cruz 15,918 2,654 18,572
Total 78,473 4,828 83,301
(*) Fees received by participation in the Directors Committee.
(**) At January 27,2004, in the Borad Meeting was informed that mister Maximo
Pacheco Matte has presented the resignation to his director position for
professional reasons.
The aggregate amount of compensation paid by BBVA Provida to all Directors
in Fiscal Year 2003 was Ch$83 million, including the fees of Ch$5 million
received by the directors members of the Directors Committee. The aggregate
compensation of BBVA Provida's executive staff during Fiscal Year 2003,
including 24 managers (area and division) and 33 department chiefs, was Ch$2,562
million in addition to bonus for results for Ch$833 million, totaling Ch$3,395
million.
83
Severance payments made during 2003 to all executives who left the Company,
including those who opted for retirement plan offered to all employees at the
end of 2002, reached Ch$142 million. The plan aforesaid was on an extraordinary
and voluntary basis and in line with the Company's administration emphasis on
the administrative structure efficiency.
The plan of variable incentives known as "Direction Oriented to Results"
(DOR) has been in force which was implemented, first for managers during the
year 2000 and extended to department chiefs in 2001. This evaluation system is
focused on the employees' reaching previously defined objectives during the
period. DOR is composed mainly of three aspects: achievements of goals
established in numerical terms (figures); achievements of goals not established
in numerical terms, but related to tasks and responsibilities and finally,
discretionary evaluation aimed at reinforcing aspects in terms of efforts and
external environmental factors which can affect worker's performance.
Board Practices
BBVA is administered by its Board of Directors which in conformity with the
current Company's by-laws, comprises seven members who are elected in the annual
ordinary shareholders' meeting for a two-years term. Cumulative voting is
permitted for the election of Directors.
The current Directors will hold their positions until the ordinary
shareholders' meeting to be celebrated in the first four months of 2006. The
Board of Directors meets once a month.
There are not Service Contracts of Directors with the Company or with any
of its subsidiaries to provide benefits upon termination of employment.
Directors Committee
With respect to the Law No. 19,705 passed in December 2001 which regulates
public share offers and establishes regulations on interest conflicts; and
Circular 1,526 of February 2001, issued by the SVS, the concept "Directors
Committee" was created. At the Board of Directors' meeting held on May 29, 2001
BBVA Provida elected the members for its first committee to start on that date.
This committee assumed functions developed by the old Audit Committee. Currently
in the Board of Directors' meeting held on May 18, 2004, and since the Board's
renewal occurred in the Ordinary Shareholder's Meeting carried out on April 30,
2004 the Board of Directors was renewed. The new members comprised the
following: Mr. Fernando Leniz as President, Mr.Alberto Pulido and Mr. Jesus
Maria de las Fuentes. The current members will hold their positions until the
Board of Directors' renewal.
The Directors Committee analyze reports of internal and external auditors,
as the case may be, the balance sheet and other financial statements submitted
by the Company's administrators or disbursing officers to the shareholders; and
renders an opinion on them prior to be presented to the shareholders for
approval. The Directory Committee also proposes external auditors and private
risk rating agencies, if is pertinent to the Board of Directors, proposal that
is submitted in the respective shareholders' meeting. In the event of
disagreement with the Directors Committee, the Board of Directors may propose
its own
84
suggestion and both may be submitted for consideration at the shareholders'
meeting. Finally, the Directory Committee analyzes the information related to
transactions with related parties, making a report on such transactions that is
submitted to the Board of Directors for consideration at the moment of making
decisions on said transactions.
Employees
The following chart sets forth BBVA Provida's organizational structure and
related numbers of employees for major operating areas as of March 31, 2004:
85
Total number of employees as of March 31, 2004: 1,619
BOARD OF DIRECTORS
Chairman
7 members
DIRECTORS COMMITTEE |
Chairman - - - - -|
3 members |
GENERAL
MANAGER
(4)
DIVISION | DIVISION
LEGAL ADVISORY - - - - -|- - - - - PLANNING & CONTROL
(4) | (7)
|
DIVISION | DIVISION
CONTROLLER - - - - -|- - - - - HUMAN RESOURCES
(9) | (24)
|
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
| | | |
DIVISION AREA AREA INVESTMENTS AREA OPERATIONS
ACCOUNT & CONSOLIDATION MARKETING (20) (352)
(59) (1,140)
The daily operations of BBVA Provida are supervised by the general manager,
who is the Chief Executive Officer. The General Counsel, Auditor, Human
Resources, Planning & Control and Accounting & Consolidation Managers and three
Area Managers of BBVa Provida report directly to the General Manager. The Area
Managers or Officers are: (i) the Chief Commercial Officer, (ii) the Chief
Investment Officer, and (iii) the Chief Operation Officer. The Chief Executive
Officer, the three Area Officers, the Human Resources Manager and the General
Counsel are members of the Management Committee. Although each of these persons
manages a distinct area or division of BBVA Provida, they coordinate many of
their day-to-day activities. BBVA Provida's executive officers are appointed by
the Board of Directors and hold office at its discretion. BBVA Provida believes
it has one of the most experienced senior management teams in the AFP industry.
As of December 31, 2003 BBVA Provida had 1,663 employees: 625 employees,
were members of the sales force representing 38% of its total staff. As of
December 31, 2002, BBVA Provida had 1,771 employees, of which 652 employees were
members of the sales force, representing 37% of its total staff. As of December
31, 2001, BBVA Provida had 1,866 employees, of which 665 were members of the
sales force, representing 36% of its total staff.
Labor Unions. BBVA Provida has good relations with its employees and its
labor unions, and has never experienced a strike or walk out.
BBVA Provida's workers are represented by two labor unions. El Sindicato
No. 1 de Trabajadores de AFP Provida S.A. ("Sindicato No. 1"). El Sindicato
No. 1 was established in 1986 and is the oldest one. At December 31, 2003 its
membership constituted 41.57% of labor force, of which 573 were sales agents
and the rest corresponded to administrative staff.
86
The second labor union, El Sindicato No. 2 of AFP Provida's workers
("Sindicato No. 2) was established in 1997 and represents only
administrative employees. At December 31, 2003 its members represent 32.67% of
the Company's employees.
Both Labor Unions, Sindicato No.1 and Sindicato No.2, presented its
collective bargaining agreement on October 1, 2002, which is effective from that
date onwards and expires on January 31, 2005 and on December 31, 2004
respectively, therefore at the end of 2004 or before, we should have a new
bargaining. It should be pointed out that bargaining agreement's terms are
applied to both union workers and non-union workers.
Item 7. Major Shareholders and Transactions with Related Parties
The Administradora de Fondos de Pensiones Provida S.A. is a publicly traded
Corporation with an equity divided into 331,316,623 common stocks of only
series, nominative cases and without nominal value; instrument that grants such
right of vote to each one of the shareholders. Since July 1, 1999, BBVA Provida
is controlled by its principal shareholder BBVA Pensiones Chile S.A., with a
participation of 51.619% in the capital stock, which is indirectly wholly owned
by Banco Bilbao Vizcaya Argentaria.S.A. The balance of the subscribed and paid
shares is distributed among small local and foreign investors including
Directors and Executive Officers of BBVA Provida with an individual
participation lower than 1%.
At December 31, 2003, shares were distributed as it follows:
Number of Common
Shares of Percentage
Name of Shareholder Stock Owned Ownership
--------------------------------------------------------------------------------
BBVA Pensiones Chile S.A.(1)............. 171,023,573 51.619%
The Bank of New York (2)................. 79,401,165 23.965%
Directors y Executive Officers .......... 148,213 0.045%
----------------
(1) Corporation constituted in Chile whose major shareholder is Banco Bilbao
Vizcaya Argentaria - Spain.
(2) Depositary Bank of A.D.S acting Banco de Chile as a custodian.
The shares registered on behalf of Directors and Executives are the
following:
Number of Shares
of Common
Name of Shareholder Position Stock Owned
--------------------------------------------------------------------------------
Miguel Angel Poduje Sapiain................ Director 5,250
Juan Carlos Reyes M. and spouse ........... Officer 87,499
Carlo Ljubetic Rich........................ Officer 28,589
Mario Picero Castro........................ Manager 1,905
Gabriel Galaz Gonzalez..................... Manager 9,000
Roberto Vaccaro Yob........................ Manager 5,000
Julio Cesar Gonzalez Opazo................. Manager 9,000
Pablo Aichele Germani...................... Manager 1,970
87
Related Party Transactions
Article 89 of the Chilean Corporation Law requires that a Chilean company's
transactions with related parties be on a market basis or in similar terms to
those usually prevailing in the market. Directors and executive officers
breaching Article 89 are liable for losses resulting from such breach.
Furthermore, the Chilean Corporate Law - Article 44-provides that any
transaction, in which a Director has a personal interest or is acting on behalf
of a third party, may be approved only when the Board of Directors has been
informed of this fact, and such transaction has similar terms to those
prevailing in the corresponding market. Resolutions approving such transactions
must be disclosed to the Company's shareholders in the next Shareholders'
meeting. Breaching 44 Article may result in administrative or criminal penalties
and public liability to the Company, shareholders or third parties that may have
losses as a result of such breach. In certain circumstances, BBVA Provida has
entered into transactions with related parties or with entities that have
relationship with certain of its Directors All of these transactions have been
made in compliance with the requirements of Articles 44 and 89 of Corporate Law.
During the last three years, BBVA Provida has entered into transactions
with companies under common ownership, including BBVA Pensiones Chile S.A., BBVA
Chile S.A., BBVA Corredores de Bolsa S.A., BBVA Compania de Seguros de Vida
S.A., Sociedad Administradora de Fondos de Cesantia de Chile S.A. y Servicios de
Administracion Previsional S.A.
The acquisition of AFP Proteccion paid through Provida's assumption of BBVA
Pensiones Chile S.A. pre-existing debt (previously Corp Group Pensiones),
resulted in financial expenses for BBVA Provida for Ch$1,072 million in Fiscal
Year 2001; Ch$501 million in Fiscal Year 2002, Ch$158 million in Fiscal Year
2003 and Ch$36 million in the first quarter of Fiscal Year 2004. Additionally,
BBVA Provida received Ch$35 million during Fiscal Year 2001; Ch$58 million
during Fiscal Year 2002, Ch$78 million during Fiscal Year 2003 and Ch$30 million
in the first quarter of Fiscal Year 2004 on account of lease to BBVA Pensiones
Chile S.A., which is BBVA Provida's main shareholder.
In year 2003, BBVA Provida subscribed lease contracts with BBVA Chile S.A.
("BBVA Banco"), receiving Ch$516 million and paying Ch$162 million for this
concept. During first quarter of Fiscal Year 2004, BBVA Provida received Ch$230
million and payed Ch$72 million. The BBVA Group is the main shareholder either
BBVA Provida or BBVA, Chile S.A.
Additionally, BBVA Provida received financial services from BBVA Banco's
subsidiary, BBVA Corredores de Bolsa S.A. In Fiscal Years 2001, 2002 and 2003,
BBVA Corredores de Bolsa S.A. rendered services to Provida at a cost of Ch$61
million, Ch$56 million and Ch$48 million, respectively. In the first quarter of
Fiscal Year 2004, this cost was Ch$14 million.
BBVA Compania de Seguros de Vida S.A. was awarded the bidding of BBVA
Provida's life and disability insurance for a coverage period of 17 months
(August 2003-Decembre 2004). This contract has implied a total cost of Ch$14,412
million in 2003, of which Ch$177 million correspond to fixed premium, Ch$11,528
million to provisory premium and the remaining Ch$2,707 million to higher
casualty provision. In the first quarter of Fiscal Year 2004, this cost was
Ch$9,898 million of which Ch$109 million correspond to fixed premium, Ch$6,964
million to provisory premium and the remaining
88
Ch$2,825 million to higher casualty provision. The BBVA Group is the main
shareholder either BBVA Provida or BBVA Compania de Seguros de Vida S.A.
In March 2002, BBVA Provida assumed a mercantile current account agreement
with PreviRed.com, a company in which Provida has a 38.2% equity interest. As
per this Agreement Provida loaned to PreviRed.com UF12,852 (approximately
US$364,000), with a monthly interest to be established on the basis of the
average of the last 5 days of the corresponding month of the TIP (Average
Interest Rate), as informed by the Central Bank for non-index loans with
maturity between 30 and 89 days. In Fiscal Year 2003, this loan has generated
revenues for Ch$12 million to BBVA Provida and Ch$3 million in the first
quarter of Fiscal Year 2004. Such contract expired on December 31, 2003 and was
renewed until March 31, 2005. Additionally, in Fiscal Years 2001, 2002 and
2003, PreviRed.com rendered electronic collection services to BBVA Provida at a
cost of Ch$0.3 million, Ch$4 million and Ch$18 million, respectively, while in
the first quarter of Fiscal Year 2004, this cost ascends to Ch$1 million.
In April 2002, Provida granted a joint and indivisible guarantee for
UF226,800 (approximately US$6.4 million) on the account of Sociedad
Administradora de Fondos de Cesantia de Chile S.A. ("AFC"), a company in which
BBVA Provida has a 38.5% equity interest intended to this entity obtains secure
bank bonds to guarantee obligations while the Mandatory Unemployment Insurance
is implemented. Additionally, BBVA Provida was awarded the technical service
contract to AFC for an amount of US$3,850,000, for 10 years, providing
technological support. In October of the same year having returned bank bonds
previously mentioned, reason why the said guarantee was annulled, BBVA Provida
granted a joint and indivisible guarantee for UF151,200 (approximately US$4.3
million) in favor of the AFC aimed at obtaining bank bonds guarantees to ensure
loyal fulfillment of the contract. In Fiscal Years 2002 and 2003 BBVA Provida
perceived revenues from the rendered services aforementioned of Ch$218 million
and Ch$491 million, respectively and Ch$64 million in the first quarter of
Fiscal Year 2004. Additionally, in Fiscal Year 2003, BBVA received revenues for
Ch$246 million due to computer system sale and in the first quarter of Fiscal
Year 2004, the Company perceived revenues for Ch$0.5 million stemming from
technological support transfers.
During year 2003, the Board of Directors approved the following operations
with related parties, all of them are adjusted to similar conditions of equity
to those ones usually prevailing in the market:
- Several Property Rental Contracts to BBVA Banco for a total amount
between UF 51,480 and UF 62,667 (approximately between US$1.5 and
US$1.8 million) plus UF 236.
- Several Property Rental Contracts from BBVA Banco for a total amount
between UF 16,610 and UF 18,622 (approximately between US$470 and
US$528 thousands) plus UF 94.
- Collection Contract of pension contributions with BBVA Banco for a
total amount of UF 0.022 per contribution payroll.
- Pension Payment Contract with BBVA Banco for an amount of UF 0.0264
for cash or check pension payments.
- Property Rental Contract to BBVA Pensiones Chile S.A. for an annual
amount of UF 7,176 (approximately US$200,000).
89
- Capital increase in "Servicios de Administracion Previsional S.A."
(PreviRed.com) for an amount of Ch$491 million.
- Capital increase in "Sociedad Administradora de Fondos de Cesantia de
Chile S.A." (AFC) for an amount of UF 56,700 (approximately US$1.6
million).
- Property Rental Contract to BBVA Banco for an annual amount of UF
7,176 (approximately US$200,000).
- Amendment of Service Contract with PreviRed.com. The yearly amount to
be paid to this entity is UF 2,778 plus Ch$32.5 per each password
issuance.
- Celebration of a test agreement with BBVA Banco of services related to
payments and collection of mandatory, voluntary and delay
contributions, in several branch offices for a monthly amount of
Ch$2.5 million. The agreement expires on March 31, 2004.
During the first months of 2004, the Board of Directors approved the
following operations with related parties, all of them are adjusted to similar
conditions of equity to those ones usually prevailing in the market:
- Capital increase in "Servicios de Administracion Previsional S.A."
(PreviRed.com) for an amount of Ch$429 million.
- Contract of mercantile current account with "Servicios de
Administracion Previsional S.A.", PreviRed.com for UF 25, 448
(approximately US$720 thousands).
- Renewal of the mercantile current account contract until March 31,
2005 with "Servicios de Administracion Previsional S.A.", PreviRed.com
for UF 12,852 (approximately US$364 thousand).
- Extension of the test agreement period with BBVA Banco until June 30,
2004 through which BBVA provides services for different payments and
receives mandatory and voluntary contributions or deposits for Ch$625
thousands for each office in which the service is granted.
- Real state lease to BBVA Banco for an approximate annual rent of six
thousand and nine hundred and two UF UF6,902 (approximately US$195
thousand) .Real state leases from BBVA, Chile for an approximate
annual rent of six thousand and nine hundred sixty one UF 6,961
(approximately US$197 thousand).
- Amendment of lease contract subscribed with BBVA, Chile, including an
increase in the lease annual rent for one thousand one hundred and
forty six UF approximately UF1,146 (approximately US$32 thousand).
- Capital Increase in "Sociedad Administradora de Fondos de Cesantia de
Chile S.A." (AFC), in UF 49,259 (approximately US$1.4 million).
Item 8. Financial Information
Audited Consolidated Financial Statements
See "Item 18. Financial Statements" for notes of audited and consolidated
financial statements and other financial information filed with this annual
report. BBVA Provida's Fiscal Year ends on December 31 of each year.
Legal Proceedings
BBVA Provida is subject to certain claims and is party to certain legal
proceedings inherent to the normal course of its business. BBVA Provida does not
believe that any
90
liabilities related to such claims and proceedings, in the aggregate, are likely
to have a materially adverse effect on its consolidated financial statements or
in its operation's results.
On April 28, 1993, the Company's Labor Union filed a suit before the courts
to collect alleged differences in legal bonuses, alleging differences during
1990 and 1991 between legal gratuities and the Company's profit bonuses. The
Supreme Court established that it be the difference between the profit bonuses
paid by the Company and the 30% of net income minus 10% of paid-in capital. In
the opinion of the Company's labor legal advisors, considering the amount paid
to workers by BBVA Provida there should not be any material difference. BBVA
Provida appealed before the Court of Appeals which is still pending.
In April 1995, a new claim was filed for the same reasons regarding
years1992 and 1993. The appealing sentence included the same arguments of the
aforementioned suit. In March and April of 1997, similar suits were submitted
with respect to years 1994 and 1995. Thereafter, in 1998, 1999, 2000 and 2003,
six new suits were presented similar to the previous ones. In connection to 1998
and 1999 suits, they were rejected and the rest of the remaining lawsuits are
still pending. According to the Company's legal advisors opinion, these lawsuits
should not have material unfavorable effect on BBVA Provida's shareholders'
equity or financial results.
For the year ended December 31, 2003 there were 55 labor lawsuits presented
by the Company's former employees, which are filed in various courts throughout
the country. These labor lawsuits seek damages of Ch$557 million. However,
according to the opinion of BBVA Provida's legal advisors, none of these
lawsuits would have a material impact on the Company's financial results.
The Chilean Tax Authority (Servicio de Impuestos Internos, "SII") notified
all Pension Fund Administrators (BBVA Provida included) that refunds to foreign
technicians under their pension funds are subject to withholding for income tax.
Regarding BBVA Provida, the SII determined that it should have withheld an
approximate amount of Ch$200 million. In BBVA Provida's opinion such pension
funds refunds are not subject to income tax withholding and, in any case, BBVA
Provida does not have the obligation to retain any tax for that concept.
Dividend Policy
At the ordinary shareholders' meeting in April 1999, a dividend policy was
adopted that established the annual dividends payments equal to the legal
minimum (30%) and not exceeding 80% of BBVA Provida's annual net income, in
light of AFP Union's and Proteccion's acquisitions.
One year later, at the ordinary shareholders' meeting in April 2000, a new
dividend policy was adopted, calling for the payment of annual dividends
equivalent to 50% of Provida's annual net income, in light of the partial
prepayment of the debt it assumed to acquire the AFP Union and Proteccion with
the proceeds of the capital increase made at the end of Fiscal Year 1999. At the
ordinary shareholders' meeting in April 2001, the Board informed its intention
of paying annual dividends for the twelve months ended December 31, 2001
("Fiscal Year 2001") of not more than 70% of Provida's annual net income that
91
was ratified in the shareholders' meeting in April 2001. In such meeting, the
Board informed its intention of paying annual dividends for the twelve months
ended December 31, 2002 ("Fiscal Year 2002") of not more than 80% of Provida's
annual net income that was ratified in the shareholders' meeting in April 2003.
In this shareholder's meeting, the Board of Directors informed its intention
of paying annual dividends for the twelve months ended on December 31, 2003
("Fiscal Year 2003") not exceeding 80% of BBVA Provida's net income, proposal
that was ratified during the shareholders' meeting that took place on April 30,
2004. Finally, in such meeting, the Board of Directors informed its intention of
paying annual dividends for 2004 period at levels of 90% of BBVA Provida's net
income.
Dividends per share of each respective period
(in Ch$ as of December 31, 2003)
1999 2000 2001 2002 2003
--------------------------------------------
Total dividend (1)...... 22.63 48.93 70.89 82.94 77.28
Dividend ratio (2)...... 33% 50% 70% 80% 80%
----------------------------
(1) The historical dividends per share were adjusted by the effective
increase in the number of issued shares of Common Stock through the
exchange of 15 new shares of Common Stock for each old one on August
25, 1999.
(2) Annual dividends for the corresponding annual net income.
Item 9. The Offer and Listing
General
The Chilean stock markets are sophisticated and developed, reflecting the
particular economic history and development of Chile. The Chilean government's
policy of privatizing state-owned companies, implemented during the 1980s, led
to an expansion of private share ownership, resulting in an increase in the
importance of stock markets in Chile that are regulated by the SVS. Certain
elements of Chile's stock markets, including pension fund investors, are highly
regulated with respect to investment and remuneration criteria, even though
Chile's stock markets are generally less regulated than U.S. stock markets with
respect to disclosure requirements and information usage.
History and Description
The Santiago Stock Exchange was established in 1893 and is a private
company whose equity consists of 48 shares with 48 shareholders. As of December
31, 2003, 251 companies had shares listed on the Santiago Stock Exchange. The
Santiago Stock Exchange is Chile's principal exchange and accounts for
approximately 86.7% of all equity traded in Chile. Approximately 12.8% of equity
trading are conducted on the Chilean Electronic Stock Exchange, an electronic
trading market that was created by banks and brokerage houses non-member of the
Stock Exchange. The remaining 0.5% of equity is traded on the Valparaiso Stock
Exchange.
Equities, investment funds shares, fixed-income securities, short-term and
money market securities, gold and US dollars are traded on the Santiago Stock
Exchange. In 1991, the Santiago Stock Exchange initiated a future market with
two instruments: US dollar futures and Selective Shares Price Index (the "IPSA")
futures and, in 1994, a stock options
92
market. Equities are traded through an electronic system called Telepregon that
operates continuously from 9:30 to 16:30. The Electronic Stock Exchange of Chile
operates continuously from 9:30 to 16:30 on each business day.
There are two share price indexes for the Santiago Stock Exchange: the
General Share Price Index (the "IGPA") and the Selective Share Price Index
("IPSA"). The IGPA is calculated using the prices of more than 180 issues and is
broken into five main sectors: banks and finance, farming and forest products,
mining, industrial, and miscellaneous. The IPSA is a major company index,
currently including the Exchange's 40 most traded stocks. Shares included in the
IPSA are weighted according to the share's value traded and represent more than
60% of the entire market capitalization. Currently BBVA Provida's common stocks
are included in the IGPA and the IPSA.
The table below summarizes recent value and performance indicators for the
Santiago Stock Exchange:
[Enlarge/Download Table]
Market Annual Trading IGPA IPSA
As of: Capitalization (1) Volume (1)(2) Index (3) Index (3)
----------------------------------------------------------------------------------------------------------
(US$ billion) (US$ million)
December 31, 1999.............. 68.2 6,601.2 105.41 124.94
December 31, 2000.............. 60.4 5,777.9 99.30 120.44
December 31, 2001.............. 56.0 4,110.7 110.08 131.40
December 31, 2002.............. 48.1 3,399.1 102.37 111.06
December 31, 2003.............. 53.7 7,544.2 149.62 164.90
----------------------------------------------------------------------------------------------------------
Source: Santiago Stock Exchange.
(1) US dollar equivalents for the year-end stock market capitalization and
trading volume figures are translated at the Observed Exchange Rate for the
last day of such period.
(2) Reflects annual trading volume.
(3) Index base = 100 on December 31, 1996.
Volatility
The IPSA has increased at an annualized real rate of +3.85% (with a
standard deviation of 27.3%) for the period between December 31, 1997 until
December 31, 2003. During 2003, the IPSA grew by +46.9% in real terms. As the
table below shows, swings in market performance are often dramatic and reflect
the high level of volatility characteristic of the Santiago Stock Exchange:
Real Annual % Change in
Year IGPA Index IPSA Index
-----------------------------------------------------------
1999..................... 40.5 39.8
2000..................... (9.9) (7.8)
2001..................... 8.0 6.3
2002..................... (9.6) (17.8)
2003..................... 44.6 46.9
-----------------------------------------------------------
----------------
Source: Santiago Stock Exchange.
Liquidity
As of December 31, 2002 and 2003, the aggregate market value of equity
securities listed on the Santiago Stock Exchange reached to US$48.1 billion and
US$53.7 billion,
93
respectively. The ten companies with largest equity on the Santiago Stock
Exchange represented approximately 51% and 48% of the IPSA index market
capitalization, in 2002 and 2003 respectively. The average monthly trading
volumes for the years ended December 31, 2002 and 2003 were US$283 million and
US$628 million, respectively.
Foreign Ownership
Foreign investment in Chile is governed by Decree Law No. 600 and by the
Central Bank Act. See "Item 10. Additional Information--Exchange Controls."
Until May 2000, it was not possible to remit capital outside Chile less than one
year from the date of investment if it was governed either by Decree Law No. 600
or by the Central Bank Act, although earnings could be remitted at any time. The
Central Bank during its meeting held on May 11, 2000, decided to finish this
restriction on capital outflows. Capital and earnings, however, must be remitted
through the Formal Exchange Market.
Notwithstanding the above, an investment in Chilean shares by foreigners
through an ADS program is regulated by the Central Bank Act and by Chapter XXVI,
which does not require a withholding period before remitting capital or earnings
abroad. Even though Chapter XXVI was repealed on April 2001, it is still
applicable for foreign investment contracts executed before that date. See Item
10.
Foreign capital investment funds ("FCIF") are ruled by Law No. 18,657 and
are permitted to receive preferential tax treatment. FCIFs are required to
obtain a favorable report issued by the SVS, in the case capital may not be
remitted earlier than five years after the investment is made, although earnings
may be remitted at any time. An FCIF may hold a maximum of 5% of shares of a
specific company, although this might be increased if the company issues new
shares. Furthermore, no more than 10% of an FCIF's assets may be invested in a
specific company's stock, and no more than 25% of the current outstanding shares
of any listed company may be owned by FCIFs, taken together.
Market Information
Since November 16, 1994, BBVA Provida's American Depositary Shares (the
"ADSs") have been listed on the New York Stock Exchange under the symbol "PVD".
Until August 25, 1999, each ADS represented one Common Stock, while after the
increase in BBVA Provida's paid-in capital it became to represent fifteen shares
of Common Stock. Until February 7, 1996, the ADSs were guarded by The Chase
Manhattan Bank N.A. as depositary (the "Depositary"). Since that date, BBVA
Provida's ADSs have been guarded by the Bank of New York as the successor
depositary (the "Successor Depositary"). In addition to approximately 24.69% of
the common stock held by the Depositary, at December 31, 2003 approximately
48.68% of BBVA Provida's outstanding capital stock were held by shareholders
other than the principal shareholder.
The common stocks are currently traded on the Santiago Stock Exchange,
Valparaiso Stock Exchange and the Chilean Electronic Stock Exchange (BEC). In
Fiscal Year 2003, the Santiago Stock Exchange accounted for approximately 86.70%
of the trading volume of the shares of common stocks in Chile, while the
Valparaiso Stock Exchange accounted for 0.49% and the Chilean Electronic Stock
Exchange accounted for 12.81%. BBVA Provida estimates that during 2003, its
common stocks were traded on approximately 94% of the trading days on the
Santiago Stock Exchange y BEC 59.6%.
94
The table below shows, for the periods indicated, the quarterly high and
low closing prices in pesos of common stock listed on the Santiago Stock
Exchange, the quarterly high and low trading prices expressed in dollars per ADS
on the New York Stock Exchange (each ADS represents fifteen shares). See
"Presentation of Information" for the exchange rates applicable during the
periods set forth below.
Santiago Stock Exchange NYSE
Ch$ per share (1) US$ per ADS(2)
----------------- --------------
--------------------------------------------------------------------------------
Period High Low High Low
--------------------------------------------------------------------------------
1999
1st Quarter............. 613.33 400.00 18.75 12.38
2nd Quarter............. 800.00 613.33 23.19 19.19
3rd Quarter............. 833.33 690.00 24.44 20.06
4th Quarter............. 770.00 620.00 21.50 16.94
2000
1st Quarter............. 771.00 670.00 21.56 19.50
2nd Quarter ............ 736.10 690.00 21.75 19.50
3rd Quarter ............ 815.00 735.00 21.50 19.88
4th Quarter ............ 810.00 770.00 21.25 20.02
2001
1st Quarter............. 965.00 780.00 24.45 20.40
2nd Quarter ............ 1,005.00 920.00 24.45 22.64
3rd Quarter ............ 1,220.00 1,000.00 27.16 22.70
4th Quarter ............ 1,170.00 1,050.00 27.50 23.34
2002
1st Quarter............. 1,175.00 1,005.00 26.61 22.76
2nd Quarter ............ 1,130.00 1,015.00 25.10 22.54
3rd Quarter ............ 1,110.00 980.00 22.84 20.16
4th Quarter ............ 1,115.00 1,035.00 23.80 22.09
2003
1st Quarter............. 1,130.00 1,090.00 23.09 21.62
2nd Quarter ............ 1,190.00 1,085.00 25.00 22.30
3rd Quarter ............ 1,150.00 1,090.00 25.07 23.67
4th Quarter ............ 1,120.00 1,033.00 28.21 24.88
2004
1st Quarter............. 1,185.00 1,050.00 29.48 26.80
January................. 1,100.00 1,050.00 28.49 26.84
February ............... 1,130.00 1,050.00 28.94 26.80
March .................. 1,185.00 1,030.00 29.48 28.05
April................... 1,201.00 1,159.00 29.95 27.75
May..................... 1,235.00 1,150.00 28.10 26.76
Source: Santiago Stock Exchange-Official Quotations Bulletin.
(1) Pesos per share reflect the nominal closing price at the trade date. The
historical closing prices were adjusted by the effective increase in the
number of issued shares of common stock through the exchange of 15 new
shares of common stock for each old one on August 25, 1999.
(2) Each ADS represents 15 shares.
On May 31, 2004, the closing sales price for Provida's common stock shares
in the Santiago Stock Exchange was Ch$1,150.0 per share of Common Stock or
US$27.28 per ADS, considering that each ADS represented fifteen shares of the
Common Stock, converted at the Observed Exchange Rate of Ch$632.32 = US$1.00 in
the same date.
95
On May 30, 2004 the closing sales price for the ADSs on the New York Stock
Exchange was $26.82 per ADS.
On March 31, 2004, the closing sales price for Provida's common stock
shares in the Santiago Stock Exchange was Ch$1,174.3 per share of Common Stock
or US$28.26 per ADS, considering that each ADS represented fifteen shares of the
Common Stock, converted at the Observed Exchange Rate of Ch$623.21 = US$1.00 in
the same date.
On March 31, 2004 the closing sales price for the ADSs on the New York
Stock Exchange was $28.50 per ADS.
It is not possible for Provida to determine the proportion of ADSs
beneficially owned by U.S. persons.
Item 10. Additional Information
Memorandum and Articles of Association
Organization and Register
Provida is a Corporation organized under the Chilean laws. The Company's
deed of incorporation was executed on March 3, 1981 and was inscribed in the
Registry of Commerce of Santiago on April 6, 1981, on number 6,060, section
2,913. The Company's by-laws were amended and restated at the shareholders'
meeting held on April 23, 2000; furthermore, on April 27, 2001 they were amended
again. Specifications of the amended and restated by-laws have been filed as an
exhibit to this annual report.
Purpose
The Company's amended and restated by-laws ("Social by-laws") -Article 4-
establishes its corporate purpose as it follows: "The Company exclusive purpose
is (i) to manage the Pension Funds established by law (ii) to provide and
administer the benefits established in the Decree Law 3,500 from 1980 and its
amendments and those specifically authorized by other present or future legal
dispositions; (iii) to constitute and/or participate, complementing its line of
business in affiliate corporations pursuant to Article 23 and 23 bis of said
Decree Law 3,500 (iv) to carry out activities authorized by law constituting
and/or participating in affiliated companies or united corporations authorized
by law and/or by the Superintendency of Pension Fund Administrator as agreed to,
and (v) constitute and/or participate in corporations constituted as securities
custody companies referred to in Law 18,876".
Board of Directors
BBVA Provida's Management is vested in its Board of Directors. According
to the Company's by laws, the Board of Directors comprises seven members, who
may be reelected. They hold their positions for two years, after this time new
elections are held. The Board of Directors holds ordinary meetings once a
month. The quorum to hold meetings is full attendance of its members and all
resolutions require unanimous approval.
96
(a) There are no provisions in the Company's by-laws relating to the power
of directors or officers to vote on a proposal in which there is o
might be a conflict of interest. However under the Chilean law, the
Board of Directors must decide previously whether a transaction
fulfills to equity conditions similar to those currently effective in
the market and if it is deemed impossible to determine those
conditions, the Board may approve or reject the transaction or appoint
two arbiters requesting to issue a report on that transaction. In the
last case, Directors with interest shall be excluded from all the
Board's decisions related to such transaction.
(b) The aggregate compensation of the Board of directors is fixed at the
ordinary shareholders' meeting.
(c) There are no provisions in the Company's by-laws relating to borrowing
powers of the directors.
(d) There are no provisions in the Company's by-laws setting forth age
limits or retirement requirements for directors and officers.
(e) As per the Company's by-laws, Directors do not need to be Company's
shareholders to be appointed.
Shares
The Company's share capital is divided into 331,316,623 ordinary shares of
the same series. Each ordinary share entitles the holder thereof to one vote and
to share in any distributions in proportion to the number of shares that they
own. The Ordinary shares' holders have the right to subscribe for new shares
that maybe issued by the Company from time to time in proportion to the shares
they hold at the time of the increase.
(a) There are no provisions in the by-laws setting forth a time limit for
dividend entitlements to lapse. All shares are entitled to the same
dividend payments. However, in accordance with the rule currently in
force, if five years pass by since a dividend was available for a
shareholder and it has not been charged it, the dividend will go to
the Chilean Fire Department.
(b) There are no provisions in the by-laws concerning staggered intervals
for the reelection of directors or permitting or requiring cumulative
voting.
(c) All shares have the right to participate in the Company's net income.
According to its by-laws, the Company is required to distribute
annually a cash dividend to all shareholders in proportion to the
shares of at least thirty-percent of each Fiscal Year's net income.
(d) In case of liquidation that would be carried out by the SAFP, managed
pension funds would also be liquidated. Pursuant to the law, all
shares have the same right to be distributed with any surplus in case
of the Company's liquidation after having settled all pending debts.
(e) There are no redemption provisions in the by-laws.
97
(f) There are no sinking fund provisions in the by-laws.
(g) All Company's shares are issued and fully paid. Consequently,
shareholders are not subject to further capital requirements.
(h) There are no provisions in the Company's by-laws discriminating
against any existing or prospective holder of such securities as a
result of such shareholder owning a substantial number of shares.
In order to modify the shareholders' rights, by-laws must be amended to
reflect such modification. By-laws can be amended only through a resolution
passed at the extraordinary shareholders' meeting.
According to by-laws, shareholders' meetings can be ordinary or
extraordinary. The ordinary shareholders' meeting must take place within four
months to the close of each Fiscal Year. Any other general shareholders' meeting
is an extraordinary meeting. Generally, the Board of Directors calls the
shareholders' meeting; however, it can be appointed by the SAFP, other
institutions authorized by law or by shareholders representing at least 10% of
the issued and fully paid shares. Notification of the meeting must be published
in a newspaper of general circulation, in the domicile of the Company three
times during three different days.
The by-laws do not describe any limitation on the rights to own
Company'shares.
There are no provisions in the by-laws governing the ownership threshold
above which shareholder ownership must be disclosed. Nevertheless, in accordance
with the law if a controller shareholder had 66.66% of the capital stock of the
society, he would be forced to make a public offering ("OPA") for the rest of
shareholders, within a period and form established by law.
There are no provisions in the by-laws imposing more stringent conditions
than those required by law to change the capital of the Company.
For a complete description of the Company's by-laws see Exhibit 2.
Material Contracts
BBVA Provida has not entered into any material contracts other than in the
ordinary course of business.
Exchange Controls
The Central Bank is responsible for, among other issues, monetary policy
and exchange controls in Chile. Appropriate registration of a foreign investment
in Chile grants the investor access to the Formal Exchange Market. Foreign
investments can be registered with the Foreign Investment Committee under Decree
Law No. 600 or can be registered with the Central Bank under the Central Bank
Act. The latter is an organic constitutional law requiring a "special majority"
vote of the Chilean Congress to be modified.
98
It was entered into a Foreign Investment Contract (the "Contract") among
the Central Bank, BBVA Provida and the Depositary pursuant the Central Bank Act
-Article 47- and Chapter XXVI -Compendium of Foreign Exchange Regulations- of
the Central Bank ("Chapter XXVI"), which addressed the issuance of ADSs by a
Chilean company. On April 16, 2001, the Central Bank approved a series of
amendments to the Compendium of Foreign Exchange Regulations, thereby
establishing an entirely new regime. The new Compendium represents the
culmination of a deregulation process, which has resulted in the elimination of
many of the exchange restrictions established in the former Compendium. Chapter
XXVI has been repealed. Notwithstanding the aforementioned, the applicable law
that governs the Contract is that in force at the execution of the Contract.
Therefore for the purpose of the Contract, Chapter XXVI is still applicable.
Absent the Foreign Investment Contract, under applicable Chilean exchange
controls regulation, investors might not be granted access to the Formal
Exchange Market for the purpose of converting from pesos to dollars and
repatriating from Chile the amounts received with respect to deposited shares or
shares withdrawn from deposit on surrender of ADSs (including amounts received
as cash dividends and proceeds from the sale in Chile of the underlying shares
and any rights arising therefrom). The following is a summary of certain
provisions contained in the Foreign Investment Contract. This summary does not
purport to be complete and is qualified in its entirety by reference to Chapter
XXVI, before the amendments established by the Central Bank on April 16, 2001,
and the Foreign Investment Contract.
Under Chapter XXVI and the Foreign Investment Contract, the Central Bank
agreed to grant to the Depositary, on behalf of ADS holders, and to any investor
not residing or domiciled in Chile who withdraws shares upon delivery of ADSs
(such shares being referred to herein as "Withdrawn Shares"), access to the
Formal Exchange Market to convert pesos to dollars (and remit such dollars
outside of Chile) in respect of shares represented by ADSs or Withdrawn Shares.
This includes amounts received as (a) cash dividends, (b) proceeds from the sale
in Chile of Withdrawn Shares subject to receipt by the Central Bank of a
certificate from the holder of the Withdrawn Shares (or from an institution
authorized by the Central Bank) that such holder's residence and domicile are
outside Chile and a certificate from a Chilean stock exchange (or from a
brokerage or securities firm established in Chile) that such Withdrawn Shares
were sold on a Chilean stock exchange, (c) proceeds from the sale in Chile of
rights to subscribe for additional shares, (d) proceeds from the liquidation,
merger or consolidation of a company and (e) other distributions, including
without limitation those resulting from any re-capitalization, as a result of
holding shares represented by ADSs or Withdrawn Shares. Transferees of Withdrawn
Shares were not entitled to any of the foregoing rights under Chapter XXVI
unless the Withdrawn Shares were re-deposited with the Depositary. Under certain
circumstances, investors receiving Withdrawn Shares in exchange for ADSs had the
right to re-deposit such shares.
Chapter XXVI provided access to the Formal Exchange Market in relation to
dividend payments qualified upon a company's certification to the Central Bank
that such dividend payment has been made and any applicable tax has been
withheld. The Chapter XXVI also provided access to the Formal Exchange Market in
relation to the sale of withdrawn shares or its distributions thereon. This is
conditional upon receipt by the Central Bank of certification from the
Depositary that such shares were withdrawn in exchange for ADSs and receipt of a
waiver benefit of the Foreign Investment Contract until such withdrawn shares
were re-deposited.
99
Chapter XXVI and the Foreign Investments Contract provided that a person
who brought foreign currency into Chile to purchase shares with the benefit of
the Foreign Investments Contract must convert it into pesos on the same date and
had 5 days within which to invest in shares in order to receive the benefits of
the Foreign Investments Contract. If such person decided during that period not
to acquire shares, the person could access the Formal Exchange Market to
reacquire dollars, provided that the applicable request was presented to the
Central Bank within 7 days of the initial conversion into pesos. Shares acquired
as described above could be deposited for ADSs and receive the benefits of the
Foreign Investment Contract, subject to receipt by the Central Bank of a
certificate from the Depositary that such deposit was effected and that the
related ADSs were issued and receipt by the Custodian of a declaration from the
person making such deposit waiving the benefits of the Foreign Investment
Contract with respect to the deposited shares. Both previously mentioned periods
were modified by the Central Bank on September 20, 1995. Formerly, the period
was 60 days for converting into pesos and 90 days from the initial conversion
for informing the Central Bank that the person did not acquire shares of Common
Stock and reacquired Dollars.
On July 3, 1995 the Central Bank modified regulations applicable to persons
entering foreign currency into Chile aimed at acquiring Chilean pesos to
purchase securities. Under these regulations such persons should (i) establish a
non-interest bearing deposit with the Central Bank for a one-year term in an
amount equal to 30% of foreign currency entered into Chile or (ii) pay an
overcharge to the Central Bank at the moment foreign currency were converted
into pesos for an amount equal to interest applied to such deposit at a rate of
12-months LIBOR plus 4% for one year. The Central Bank regulations did not apply
to persons bringing foreign currency into Chile for the purpose of purchasing
securities from the issuer thereof as part of a capital increase (primary
offering) by the issuer. Effective September 17, 1998, this 30% withholding
requirement was reduced to 0%. Finally, the Central Bank decided to eliminate
this regulation.
Access to the Formal Exchange Market under any of the circumstances
described above was not automatic. Pursuant to Chapter XXVI, such access
required the approval of the Central Bank based on a request presented through a
banking institution established in Chile. The Foreign Investment Contract
determines whether the Central Bank had not acted on such request within seven
banking days, the request could be deemed approved.
Under current Chilean law, the Foreign Investment Contract cannot be
unilaterally modified by the Central Bank. However, no assurance can be given
that additional Chilean restrictions applicable to ADS' holders on underlying
shares' disposal or the repatriation of the proceeds from such disposition could
not be imposed in the future, nor there can be any assessment of the duration or
impact of such restrictions if they were imposed.
Taxation
Chilean Tax Consideration
In accordance with D.L. 824, 1974 on Tax Income, updated in April, 2002,
Foreign Investors domiciled and abroad resident are affected by an additional
tax with a rate 35% calculated on the net dividend, which is withheld and paid
by the disbursement officer on behalf of the investor. This tax is paid off in
April of the following year to which the
100
dividend payment has been recorded, considering that taxes paid by the society
respect to gains obtained during the previous fiscal year (first category Tax),
constitute a credit in favor of the investor. If the withheld tax for each
dividend were higher than the tax in the definitive liquidation, disbursement
officer should ask for the corresponding repayment of the surplus to the
Internal Revenue Service to generate the payment for The Bank of New York and
later distribution to the holders of ADS subscribed to the date of payment of
each dividend.
The first category tax effective from April 2002 has the progressive and
transitory character, according to the following:
Fiscal Year 2002 Rate 16.0%
Fiscal Year 2003 Rate 16.5%
Fiscal Year 2004 Rate 17.0%
Capital Gains. Gains from the sale or exchange of ADSs (or ADRs evidencing
ADSs) outside of Chile are not subject to Chilean taxation. The deposit and
withdrawal of shares in exchange for ADSs will not be subject to any Chilean
taxes.
Gain recognized on a sale or exchange of shares (as distinguished from
sales or exchanges of ADSs representing such shares) will be subject to both the
First Category Tax and the Withholding Tax (the former being creditable against
the latter) if: (i) the foreign holder has held the shares for less than one
year since exchanging ADSs for the shares, (ii) the foreign holder acquired and
disposed of the shares in the ordinary course of its business or as a regular
trader of shares or (iii) the foreign holder transfers shares of Common Stock to
a related person, as defined in the Chilean Tax Law. In all other cases, gain on
the disposition of shares will be subject only to the First Category Tax.
The tax basis of shares received in exchange for ADSs is the acquisition
value of the shares. The valuation procedure set forth in the Deposit Agreement,
which values shares that are being exchanged at the highest price they were
trade on the Santiago Stock Exchange on the date of the exchange. Consequently,
the conversion of ADSs into shares and the immediate sale of such shares for the
value established under the Deposit Agreement do not generate a gain subject to
taxation in Chile.
The exercise of preemptive rights relating to the shares is not subject to
Chilean taxation. Any gain on the sale or assignment of preemptive rights
relating to the shares are subject to both the First Category Tax and the
Withholding Tax (the former being creditable against the latter).
Other Chilean Taxes. No Chilean inheritance, gift or succession taxes apply
to the transfer or disposition of ADSs by a foreign holder, but such taxes
generally do apply to the transfer at death or by gift of shares by a foreign
holder. No Chilean stamp, issue, registration or similar taxes or duties apply
to foreign holders of ADSs or shares.
101
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Rate Risk
BBVA Provida has been exposed to foreign exchange rate risks associated
with underlying assets, liabilities and anticipated transactions. In these
cases, Provida manages these risks using derivative financial instruments. These
contracts are entered into with major high credit quality financial
institutions, in accordance with procedures and within limits approved by senior
management. Provida's policy is to use derivatives only for hedging its foreign
exchange rate exposures.
In the past, Provida was exposed to foreign exchange rate risk mainly
related to its foreign currency denominated borrowings. In order to take
advantage of opportunities to reduce the cost of borrowings, Provida took out a
US dollar-denominated long-term loan to finance the acquisitions of AFP Union
and Proteccion in 1998 and at the beginning of 1999, respectively. At the end of
1999, Provida increased its capital base in order to pre-pay part of the debt,
converting the remaining debt into UF in order to reduce Provida's exposure to
foreign exchange rate risk.
At December 31, 2003, Provida did not have commitments to repay debt in
currencies other than UF or Chilean pesos.
Otherwise, as a product of its investment in Provida Internacional, Provida
is exposed to minor foreign exchange rate risk associated with the subsidiaries
of that company. Consequently, a risk factor is depreciation of domestic
currencies respect to U.S. dollar and the evolution of the latter with respect
to the Chilean currency, and its effect in foreign affiliates income and their
respective return. Notwithstanding, this risk could be covered by taking forward
contracts, if Provida considers it necessary.
Interest Rate Risk
BBVA Provida is exposed to an interest rate risk due to the long-term debt
taken to finance the acquisitions of two AFPs in previous years. These long-term
obligations have an interest rate determined by the TAB rate (active banking
rate) for 90-day indexed operations plus 0.75% per year. These debt obligations
expose us to variability in interest payments due to changes in the TAB rate. If
interest rates increase, interest expense increases. Conversely, if interest
rates decrease, interest expense also decreases.
Management believes that the interest rate exposure is moderate considering
that the long-term obligations assumed in order to finance the acquisitions are
being paid for by the cash flows generated by both transactions and the maturity
of the remaining debt is in the first quarter of 2005. Adding the above, it
should be highlighted that Provida maintains a moderate leverage of 0.16.
Liquidity Risk
BBVA Provida's liquidity requirements have historically been funded with
internally-generated cash flows considering that the Company's cash flow from
operations, mainly from fees paid by its affiliates, is significant and
sufficient to cover the core business needs. Reflecting the above, Provida has
historically paid a significant portion of its income
102
as dividends, even though they are limited according to the long-term investment
decisions. Additionally, Provida counts on other short-term sources such as
available lines of credit.
Credit Risk
BBVA Provida's main investment is the Mandatory Investment constituted by
law and is equivalent to one percent (1%) of the Pension Funds under management,
which should be maintained invested in shares of each kind of them.
The Pensions Law expressly prescribes the assets classes and maximum assets
limits in which funds can be invested. All securities (other than securities
issued by the government, the Central Bank or certain government agencies, and
certain qualified equity securities) must be specifically approved as eligible
for investment by the Rating Commission. In Chile, fund investments can be made
only in securities for which there is an established public trading market. The
Central Bank sets the precise limits on permitted investments for AFPs within
the range established by the law.
Additionally, Provida counts on an Investment Committee composed of
specialized professionals of the Investment Area responsible for the
implementation of the investment policy. The general investment policy for the
Pension Funds is determined by Provida's Board members and is administered by a
Credit Committee composed of all Board members, the Chief Executive Officer and
the Chief Investment Officer. The Credit Committee approves eligible companies
in which the Pension Fund may invest and establishes limits for investments of
different types of securities within legally prescribed limits.
Item 12. Description of Securities Other Than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
To BBVA Provida's knowledge, there has been no material default in the
payment of principal or interest or any other material default not cured within
30 days relating to indebtedness of Provida or any of its subsidiaries.
Item 14. Material Modifications to the Rights of Security Holders and Use
of Proceeds
None.
Item 15. Control and Procedures
As of December 31, 2003, BBVA Provida, under the supervision and with the
participation of the BBVA Provida's management, including the Chief Executive
Officer, our Planning and Control Officer and our Account and Consolidation
Officer, performed an evaluation of the effectiveness of BBVA Provida's
disclosure controls and procedures. BBVA Provida's management necessarily
applied its judgment in assessing the costs and
103
benefits of such controls and procedures, which by their nature can provide only
reasonable assurance regarding management's control objectives. Based on this
evaluation, BBVA Provida's Chief Executive Officer our Planning and Control
Officer and our Account and Consolidation Officer concluded that BBVA Provida's
disclosure controls and procedures are effective at the reasonable assurance
level for gathering, analyzing and disclosing the information BBVA Provida is
required to disclose in the reports it files under the Securities Exchange Act
of 1934 within the time periods specified in the SEC's rules and forms.
There has been no change in BBVA Provida's control over financial reporting
that occurred during the period covered by this annual report that has
materially affected, or is reasonably likely to materially affect, BBVA
Provida's internal control over financial reporting.
Item 16.
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Mr. Fernando Leniz qualifies as
an "audit committee financial expert" within the meaning of item 16A of Form
20-F under the Exchange Act".
Item 16B. Code of Ethics
The registrant has adopted a code of ethics that applies to BBVA Provida's
principal executive officer, principal financial officer, principal accounting
officer or controller, and to all persons performing functions of any kind as
employees of BBVA Provida. Such document is called "Codigo de Conducta del
Grupo BBVA" ("BBVA Group Code of Conduct"), and it applies to all officers and
employees of all subsidiaries of the BBVA Group all over the world. A copy of
the code will be provided to any person without charge upon request made in
writing to: Corporate Secretary and General Counsel, Administradora de Fondos
de Pensiones BBVA Provida S.A., Avenida Pedro de Valdivia 100, Santiago, Chile.
Item 16C. Principal Accountant Fees and Services.
Our principal auditors were chosen by the Shareholders in an Ordinary
Shareholders Meeting on a proposal by the Directors Committee and the Board. The
firm chosen was Deloitte & Touche, Sociedad de Auditores y Consultores Ltda.
The Board of the Directors has determined that Mr. Fernando Leniz, member of the
Comite de Directores (Audit Committee) is a financial expert.
Audit and Non-AuditFees
The following table sets forth the fees billed to us by our independent
auditors, Deloitte & Touche, Sociedad de Auditores y Consultores Ltda., during
the fiscal years ended December 31, 2002 and 2003.
104
Year ended
December 31,
----------------
Ch$ million of 2003 2002 2003
---- ----
Audit fees.................................. 47.7 75.8
Tax fees.................................... 1.3 16.9
Total fees..................... 49.0 92.7
Source: Internal Information
PART III
Item 17. Financial Statements
BBVA Provida's Audited Consolidated Financial Statements have been prepared
in accordance with Item 18 thereof.
Item 18. Financial Statements
Reference is made to Item 19 (a) for a list of all Audit Financial
Statements filed with this form 20-F.
Item 19. Exhibits
(a) Index to Financial Statements
Page
Report of Independent Auditors in connection with the
Consolidated Financial Statements as of and for the year ended
December 31, 2003 F-1
Reports of Independent Auditors in connection with the
Consolidated Financial Statements as of and for the years
ended December 31, 2001 and 2002 F-2
Consolidated Balance Sheets as of December 31, 2002 and 2003 F-3
Consolidated Statements of Income for the years ended December
31, 2001, 2002 and 2003 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2002 and 2003 F-6
Notes to the Consolidated Financial Statements F-8
(b) Exhibit Index
Exhibit Number Description
-------------- --------------------------------------------------------------
1.1 Amended Bylaws of A.F.P. Provida S.A. (English translation)
8.1 List of Subsidiaries
12.1 Form 302 Certification of the Chief Executive Officer
12.2 Form 302 Certification of the Planning and Control Manager
12.3 Form 302 Certification of the Accounting and Consolidation
Manger
13.1 Form 906 Certification
105
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report on Form 20-F to be
signed on its behalf by the undersigned, thereunto duly authorized.
Administradora de Fondos de Pensiones Provida S.A.
By: /s/ Gustavo Alcalde L.
---------------------------------------------
Name: Gustavo Alcalde L.
Title: Chief Executive Officer
Dated: June 30, 2004
Deloitte
Deloitte & Touche
Sociedad de Auditores y Consultores Ltda.
RUT: 80.276.200-3
Av. Providencia 1760
Pisos 6, 7, 8 y 9
Providencia, Santiago
Chile
Fono: (56-2) 270 3000
Fax: (56-2) 374 9177
e-mail: deloittechile@deloitte.com
www.deloitte.cl
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Administradora de Fondos de Pensiones Provida S.A.
We have audited the consolidated balance sheets of Administradora de Fondos de
Pensiones Provida S.A. and subsidiaries (the "Company") as of December 31, 2002
and 2003, and the related consolidated statements of income and of cash flows
for each of the three years in the period ended December 31, 2003 all expressed
in millions of constant Chilean pesos. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Company's 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Administradora de Fondos de
Pensiones Provida S.A. and its subsidiaries as of December 31, 2002 and 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in Chile.
As discussed in Note 40 to the consolidated financial statements, the
consolidated balance sheet as of December 31, 2002 and the related consolidated
statements of income and cash flows for each of the two years in the period
ended December 31, 2002 included herein have been restated.
Accounting principles generally accepted in Chile vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effects of such differences is
presented in Note 42 to the consolidated financial statements.
As discussed in Note 42 to the consolidated financial statements, the
information relating to the nature and effect of the differences between Chile
GAAP and US GAAP has been restated for the years ended December 31, 2001 and
2002.
Our audit also comprehended the translation of constant Chilean Peso amounts
into U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2. o. Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
/s/ Deloitte & Touche Sociedad de Auditores y Consultores Limitada
Santiago, Chile
January 27, 2004, except for Notes 40, 42 and 43
as to which the date is June 25, 2004
Una firma miembro de
Deloitte Touche Tohmatsu
F-1
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2002 AND 2003
(Restated for general price-level changes)
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------------------------------------------------------------
2002 2003 2003
(As restated (Note 2.p)
- see Note 40)
MCh$ MCh$ ThUS$
--------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash 796 960 1,617
Time deposits (Note 4) 686 306 515
Marketable securities (Note 5) 118 90 152
Receivables from Pension Fund 428 162 273
Receivables from Insurance Companies (Note 8) 627 1,362 2,294
Receivables from the State (Note 8) 32 204 344
Receivables and notes due from related companies (Note 9) 949 835 1,405
Fees receivable (Note 7) 3,034 6,097 10,268
Miscellaneous Receivables, net (Note 10) 1,384 2,304 3,880
Accounts receivable 57 111 187
Inventories 44 39 66
Recoverable Taxes, net (Note 23) - 1,632 2,748
Prepaid expenses (Note 11) 398 134 226
Deferred Income Taxes (Note 23) 1,248 778 1,310
Other Current Assets (Note 12) 1 152 256
--------------------------------------------------------------------------------------------------------------------
Total Current Assets 9,802 16,165 25,541
--------------------------------------------------------------------------------------------------------------------
Mandatory Investment
Mandatory Investment - Fund type A 848 3,564 6,002
Mandatory Investment - Fund type B 9,087 17,846 30,054
Mandatory Investment - Fund type C 59,073 52,868 89,033
Mandatory Investment - Fund type D 8,075 14,885 25,067
Mandatory Investment - Fund type E 3,105 3,090 5,204
--------------------------------------------------------------------------------------------------------------------
Total Mandatory Investment (Note 6) 80,188 92,253 155,360
--------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, net
Land 4,745 4,746 7,993
Buildings and Infrastructure 17,204 17,217 28,995
Equipment, furniture and fixtures 2,591 2,720 4,581
Other Fixed Assets 7,025 9,300 15,662
(Less) Accumulated Depreciation (7,685) (8,166) (13,752)
--------------------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment, net (Note 13) 23,880 25,817 43,479
--------------------------------------------------------------------------------------------------------------------
Other Assets
Investment in related companies (Note 14) 22,532 14,425 24,293
Goodwill, net (Note 14) 82,021 82,107 138,274
Receivable and notes due from related companies (Note 9) - 374 630
Other Assets (Note 15) 1,028 1,276 2,149
--------------------------------------------------------------------------------------------------------------------
Total Other Assets 105,581 98,182 165,346
--------------------------------------------------------------------------------------------------------------------
Total Assets 219,451 231,418 389,726
--------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
--------------------------------------------------------------------------------------------------------------------
F-2
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2002 AND 2003
(Restated for general price-level changes)
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------------------------------------------------------
2002 2003 2003
(As restated - (Note 2.p)
see Note 40)
-----------------------------------------------------------------------------------------------------------------------
MCh$ MCh$ ThUS$
-----------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Obligations with banks and financial institutions (Note 16) 8,815 19,313 32,524
Dividends payable 174 268 451
Accounts payable 1,789 1,822 3,069
Miscellaneous creditors - 182 307
Notes and accounts due to related companies (Note 17) 5,944 3,066 5,163
Accounts payable to National Health Fund (Note 18) 158 508 856
Pensions payable 65 90 152
Collections to be cleared (Note 8) 73 52 88
Accounts payable to insurance companies (Note 8) 784 952 1,603
Accrued expenses (Note 20) 12,894 20,665 34,801
Withholdings (Note 19) 1,397 1,846 3,109
Withholdings from pensioners (Note 18) 1,020 1,185 1,996
Income tax (Note 23) 1,678 - -
Other current liabilities (Note 21) 91 175 295
-----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 34,882 50,124 84,414
-----------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Obligations with banks and financial institutions (Note 16) 5,074 1,692 2,850
Notes payable - 72 121
Notes and accounts due to related companies (Note 17) 3,043 - -
Long - term provisions (Note 20) - 2,707 4,559
Long-term deferred taxes (Note 23) 2,376 3,101 5,222
Other long-term liabilities (Note 22) 1,024 910 1,533
-----------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities (Note 24) 11,517 8,482 14,285
-----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 35)
-----------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Paid-in Capital 84,438 84,438 142,199
Additional Paid-in Capital 121 121 204
Other reserves 4,967 (1,601) (2,696)
Retained earnings 83,526 89,854 151,320
-----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity (Note 25) 173,052 172,812 291,027
-----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity 219,451 231,418 389,726
-----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
-----------------------------------------------------------------------------------------------------------------------
F-3
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Restated for general price-level changes)
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
2001 2002 2003 2003
(As restated (As restated (Note 2.p)
- see Note - see Note
40) 40)
---------------------------------------------------------------------------------------------------------------------------
MCh$ MCh$ MCh$ ThUS$
---------------------------------------------------------------------------------------------------------------------------
Operating Revenues:
Fee income (Note 7) 93,080 95,852 100,246 168,821
Gain on mandatory investments (Note 6) 6,445 4,907 9,806 16,514
Other operating revenues (Note 26) 3,660 5,616 4,245 7,149
---------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 103,185 106,375 114,297 192,484
---------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Administrative personnel payroll expenses (18,673) (16,435) (15,958) (26,874)
Sales personnel payroll expenses (9,069) (7,792) (8,999) (15,155)
Directors' fees (Note 28) (190) (118) (83) (140)
Selling and marketing expenses (1,030) (704) (717) (1,207)
Data processing expenses (723) (744) (763) (1,285)
Administrative expenses (7,269) (7,869) (9,574) (16,123)
Depreciation (1,550) (1,684) (1,575) (2,652)
Life and disability insurance premium expenses
(Note 8) (restated) (33,880) (33,730) (44,700) (75,278)
Other operating expenses (Note 30) (1,293) (1,519) (1,732) (2,917)
---------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (73,677) (70,595) (84,101) (141,631)
---------------------------------------------------------------------------------------------------------------------------
Net Operating Income 29,508 35,780 30,196 50,853
---------------------------------------------------------------------------------------------------------------------------
Non-Operating Income (Expenses):
Gain (loss) on financial investments 107 176 55 93
Equity participation income of related companies (Note 14) 10,608 9,809 7,004 11,795
Amortization of goodwill (24,945) (4,979) (4,993) (8,409)
Other non-operating income (Note 27) 27,102 650 9,572 16,120
Interest expenses (Note 29) (3,008) (1,512) (1,360) (2,290)
Other non-operating expenses (Note 30) (233) (300) (550) (926)
Price-level restatement, net (Note 31) 2,384 (1,787) (778) (1,310)
Foreign exchange gain (loss) (917) (141) 992 1,670
---------------------------------------------------------------------------------------------------------------------------
Net Non-Operating Income (Expenses) 11,098 1,916 9,942 16,743
---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 40,606 37,696 40,138 67,596
---------------------------------------------------------------------------------------------------------------------------
Extraordinary items 2,295 - - -
---------------------------------------------------------------------------------------------------------------------------
Income Taxes (Note 23) (12,399) (3,501) (8,133) (13,697)
---------------------------------------------------------------------------------------------------------------------------
Net Income 30,502 34,195 32,005 53,899
---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
---------------------------------------------------------------------------------------------------------------------------
F-4
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated for general price-level changes)
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
2001 2002 2003 2003
(As restated (As restated (Note 2.p)
See Note 40) See Note 40)
-------------------------------------------------------------------------------------------------------------------------
MCh$ MCh$ MCh$ ThUS$
-------------------------------------------------------------------------------------------------------------------------
Cash Flow from Operating Activities:
Fee income 90,912 93,688 97,182 163,661
Gain on investments 110 650 1,392 2,344
Revenue from dividends and others 5,850 - - -
Other operating revenues 1,440 6,090 6,090 10,256
-------------------------------------------------------------------------------------------------------------------------
Total operating revenues 98,312 100,428 104,664 176,261
-------------------------------------------------------------------------------------------------------------------------
Payroll expenses (25,862) (22,518) (27,152) (45,726)
Selling and marketing (500) (343) (9) (15)
Data processing expenses (879) (437) (20) (34)
Administrative expenses (7,857) (17,322) (9,498) (15,995)
Life and disability insurance expenses (25,213) (31,142) (33,713) (56,775)
Other operating expenses (1,538) (503) (275) (463)
-------------------------------------------------------------------------------------------------------------------------
Total operating expenses (61,849) (72,265) (70,667) (119,008)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 36,463 28,163 33,997 57,253
-------------------------------------------------------------------------------------------------------------------------
Cash Flow from Financing Activities:
Dividends paid (18,767) (24,870) (23,509) (39,591)
Bank borrowings 145,487 75,047 132,161 222,568
Repayment of bank borrowings (181,614) (76,805) (156,422) (263,425)
Repayment of accounts due to related companies (5,784) (6,361) (8,231) (13,862)
Dividend Income (17) 8,522 12,427 20,928
Other - - (114) (192)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (60,695) (24,467) (43,688) (73,574)
-------------------------------------------------------------------------------------------------------------------------
Cash Flow from Investing Activities:
Sale of marketable securities 175 191 86 145
Sale of mandatory investments 2,051 1,583 13,004 21,900
Sale of investments in related companies 33,831 30 16,245 27,358
Collection of accounts receivable from related companies - 1,092 - -
Collection of other accounts receivable from related companies - - 10,818 18,218
Other proceeds from investments 1,454 167 251 423
Additions to premises and equipment (2,642) (472) (1,131) (1,905)
Purchase of marketable securities - (1,534) - -
Purchase of mandatory investments (3,634) (2,762) (16,136) (27,174)
Investments in related companies (1,344) - (9,135) (15,385)
Loans to related companies (3,958) (1,994) (1,282) (2,159)
Other (2,118) 423 (2,617) (4,407)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 23,815 (3,275) 10,103 17,014
-------------------------------------------------------------------------------------------------------------------------
Total net positive (negative) cash flow for the period (417) 421 412 693
-------------------------------------------------------------------------------------------------------------------------
Effect of inflation on cash and cash equivalents (11) 49 (106) (178)
-------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (428) 470 306 515
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,440 1,042 960 1,617
-------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at end of period 1,012 1,512 1,266 2,132
-------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
-------------------------------------------------------------------------------------------------------------------------
F-5
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
RECONCILIATION BETWEEN THE NET CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES AND NET INCOME FOR THE YEAR
(Restated for general price-level changes)
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
---------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2003
(As restated (As restated (Note 2.p)
Note 40) Note 40)
---------------------------------------------------------------------------------------------------------------------------
MCh$ MCh$ MCh$ ThUS$
---------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO NET
INCOME FOR THE YEAR
Net Income for the year 30,502 34,195 32,005 53,899
---------------------------------------------------------------------------------------------------------------------------
Add (deduct) charges (credits) to Income which do not represent cash
flows 25,790 (5,573) (3,929) (6,617)
---------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization for the period 26,495 6,663 6,568 11,061
Gain on mandatory investments (6,445) (4,907) (9,806) (16,514)
Accrued fee income (2,168) (2,164) (3,064) (5,160)
Life and disability insurance expenses 5,839 2,587 9,608 16,180
Loss from disposal of property, plant and equipment 67 (5) (17) (29)
Income from sale of investments - (107) - -
Equity participation income of related companies (10,608) (9,809) (7,004) (11,795)
Price-level restatement, net (2,384) 1,787 778 1,310
Foreign exchange (loss) gain 917 141 (992) (1,670)
Other operating funds 14,077 241 - -
---------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in Current Assets (2,277) 27 (1,049) (1,767)
---------------------------------------------------------------------------------------------------------------------------
Accounts receivable from pension funds, insurance companies and State (633) (5) (662) (1,115)
Fees receivables (1,823) (204) - -
Inventories - (1) 6 10
Other current assets 179 237 (393) (662)
---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Current Liabilities (17,552) (486) 6,970 11,738
---------------------------------------------------------------------------------------------------------------------------
Notes payable, accounts payable and miscellaneous creditors (21,861) (477) 880 1,482
Collections to be cleared, accrued reimbursement collections by
employers and
participants for payments in excess (5) (5) (21) (35)
Accounts payable to National Health Fund, Pension Funds insurance
companies and other AFPs 3,110 115 6,133 10,328
Income tax - - (46) (77)
Pensions payable 28 19 24 40
Other accounts payable related to non operating results 1,176 (138) - -
---------------------------------------------------------------------------------------------------------------------------
Net Cash provided by Operating Activities 36,463 28,163 33,997 57,253
---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
---------------------------------------------------------------------------------------------------------------------------
(Concluded)
F-6
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 1. THE COMPANY
Administradora de Fondos de Pensiones Provida S.A. is a publicly traded company
incorporated on March 3, 1981. It is subject to the supervision of the
Superintendency of Securities and Insurance (SVS) and the Superintendency of
Pension Funds Administrators (SAFP).
The sole object of Provida is to administer Fondos de Pensiones Provida for
Pension Funds Types A, B, C, D and E, defined contribution pension funds and to
administer the provision of related benefits, in accordance with D.L. 3,500 and
modifications. Accordingly, Provida is regulated by the SAFP. As of 1994, in
accordance with Laws 19,301 and 18,876, Provida is allowed to create
subsidiaries and to invest in companies that act as depositories of securities.
The main difference among the five types of funds is the portion invested in
variable income securities. The Type A fund is the most concentrated in variable
income, while Type E fund does not have any variable income component.
The Company's controlling shareholders is BBVA Pensiones Chile S.A. which is
controlled by the BBVA Group.
NOTE 2. Summary of Significant Accounting Policies
a. Basis of Presentation - The accompanying financial statements have been
prepared in accordance with regulations issued by the SAFP, SVS and accounting
principles generally accepted in Chile, ("Chilean GAAP"). The consolidated
financial statements include certain reclassifications and additional
disclosures in order to conform more closely to the form and content of the
financial statements required by the United States Securities and Exchange
Commission.
The preparation of financial statements in conformity with Chilean GAAP,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities as of the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
b. Basis of Consolidation - The consolidated financial statements include the
accounts of Administradora de Fondos de Pensiones Provida S.A. ("Provida" or the
"Administrator") and the following subsidiaries:
-------------------------------------- ------------- ------------ ------------
Subsidiary 2001 2002 2003
% % %
-------------------------------------- ------------- ------------ ------------
Provida Internacional S.A. 99.99986 99.99986 99.99986
-------------------------------------- ------------- ------------ ------------
AFP Genesis S.A. de Ecuador 99.999994 99.999994 99.999994
-------------------------------------- ------------- ------------ ------------
AFP Porvenir de Republica Dominicana 99.99984
-------------------------------------- ------------- ------------ ------------
All significant transactions and balances between the companies have been
eliminated in consolidation.
As of January 1, 2001, the subsidiary Provida Internacional S.A. maintains its
accounting records in US dollars in accordance with Chilean GAAP. For
consolidation purposes, these financial statements in dollars have been
converted into Chilean pesos using the exchange rate as of the balance sheet
date.
F-7
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
c. Price-Level Restatement (Monetary Correction) - The consolidated financial
statements are prepared on the basis of general price-level accounting in order
to reflect the effect of changes in the purchasing power of the Chilean peso
during each year. At the end of each reporting period, the consolidated
financial statements are stated in terms of the general purchasing power of the
Chilean peso using changes in the Chilean Indice de Precios al Consumidor
(Consumer Price Index, or "IPC") as follows:
o Nonmonetary assets, liabilities, and shareholders' equity accounts are
restated in terms of year-end purchasing power.
o Monetary items are not restated as such items are, by their nature, stated
in terms of current purchasing power in the financial statements.
o The price-level restatement credit or charge in the income statement
represents the monetary gain or loss in purchasing power from holding
assets and liabilities exposed to the effects of inflation.
o All the accompanying consolidated financial statements have been restated
in constant Chilean pesos of general purchasing power on December 31, 2003
("constant pesos") applied under the "prior month rule" as described below,
to reflect changes in the IPC from the financial statement dates to
December 31, 2003. This updating does not change the prior years'
statements or information in any way except to update the amounts to
constant pesos of similar purchasing power.
The general price-level restatements are calculated using the official consumer
price index of the Chilean Instituto Nacional de Estadisticas (National
Statistics Institute, or "INE") and are based on the prior month rule, in which
the inflation adjustments are based on the consumer price index at the close of
the month preceding the close of the respective period or transaction. The IPC
index is considered by the business community, the accounting profession and the
Chilean government to be the index which most closely complies with the
technical requirement to reflect the variation in the general level of prices in
the country and, consequently, is widely used for financial reporting purposes
in Chile.
The values of the Chilean IPC used for price-level restatement purposes are as
follows:
December 31,
Year Index * Change in index
2001 110.10 3.1%
2002 113.36 3.0%
2003 114.44 1.0%
------------------
* Index as of November 30 of each year, under prior month rule described
above.
The price-level restated consolidated financial statements do not purport to
represent appraised values, replacement cost, or any other current value of
assets at which transactions would take place currently and are only intended to
restate all nonmonetary financial statement components in terms of local
currency of a single purchasing power and to include in the net result for each
year the gain or loss in purchasing power arising from the holding of monetary
assets and liabilities exposed to the effects of inflation.
d. Foreign Currency Translation - Balances in foreign currency have been
translated at the year-end exchange rate. Indexed balances have been adjusted
according to the readjustment index of the balance or as agreed to for this
purpose.
During 2001, after receiving authorization by the Chilean Tax Authority
(Servicio de Impuestos Internos, SII), Provida Internacional changed its
functional currency from the Chilean peso to US dollar starting on January 1st,
considering that most of its operations are controlled in that currency.
F-8
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Assets and liabilities (in foreign currency) and UF (an inflation index-linked
unit of account) and the investments in foreign related companies have been
translated into Chilean pesos at the following year-end exchange rates:
Currency 31-Dec-01 31-Dec-02 31-Dec-03
$ $ $
United States Dollar 654.79 718.61 593.80
UF (Unidad de Fomento) 16,262.66 16,744.12 16,920.00
e. Financial Investments:
Time deposits: are stated at cost plus accrued interest and UF or US dollar
indexation adjustments, as applicable.
Marketable securities: The company, as part of its trading activities maintains
marketable securities, which mainly consist of commercial paper, mutual fund
units, and corporate bonds which are recorded at the lower of cost or market.
Mandatory Investments: Provida must achieve a minimum return on the Pension
Funds' assets, as required by D.L. 3,500, or compensate for any shortfall. To
ensure the maintenance of each funds' value, Provida is required to maintain a
1% investment in the amount of the corresponding pension fund under Chilean law.
In addition to this amount, the Company may maintain up to a 0.02% investment in
the Pension Funds' assets, which is presented as other current assets. Should
the minimum return by fund not be maintained, the Company is required to use the
proceeds from its mandatory investments to reimburse the pension fund for the
shortfall. Should the shortfall exceed such proceeds, the Company would be
required to purchase additional units in the Pension Fund to maintain its 1%
participation.
f. Property, plant and equipment - These have been valued at price-level
restated cost. Depreciation has been determined using the straight-line method
over the estimated useful lives of the assets.
Capital lease assets are recorded at present value, which is calculated using
the contracted monthly installments plus the purchase option at the interest
rate implicit in the respective contract. The related obligations are included
in "Other current liabilities and Other long-term liabilities" in the
Consolidated Balance Sheets, net of deferred interest costs. Assets obtained
under financial contracts are not the legal property of the Company until it
decides to exercise the related purchase option. Therefore, the Company cannot
freely dispose of them.
Capital lease assets are depreciated using the straight-line method over the
estimated useful lives of the assets.
g. Investments in Related Companies - Investments in related companies are
included in other assets using the equity method, when there is significant
influence over such company. This valuation method recognizes in income the
Company's equity participation in the net income or loss of each investee on an
accrual basis, after eliminating intercompany transactions. Changes in
shareholders' equity that do not affect the income of the related companies are
recorded as direct charge to retained earnings, other reserves or accumulated
deficit in development stage, where applicable. Under Chilean GAAP, significant
influence is presumed to exist when the investment represents more than 10% and
less than or equal to 50% of the investee's outstanding shares.
h. Goodwill - Goodwill results from differences between the carrying value of
assets and liabilities acquired and the acquisition cost at the purchase date.
Amortization is determined using the straight-line method over 20 years.
F-9
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
i. Income tax and deferred taxes - Provida recognizes its income tax obligations
in accordance with the tax laws of the respective countries in which it
operates. Deferred taxes arising from those items which are treated differently
for tax and book purposes have been recorded as established in Boletin Tecnico
No. 60 (Technical Bulletin No. 60, or "BT60") of the Chilean Institute of
Accountants, as amended.
j. Employee Vacations -The cost of employee vacations as established in Boletin
Tecnico No. 47, is recorded on a monthly accrual basis.
k. Staff severance indemnities and profit-sharing agreement - Indemnities agreed
upon in the respective collective bargaining agreements are valued at the
current value of the obligation calculated at today's salary rates. The Company
has also recorded a liability for profit-sharing in accordance with the related
contract with certain employees.
l. Revenue Recognition - Fee income from the Pension Fund is recognized when all
the activities relating to the administration of the Pension Fund have been
completed. In accordance with instructions issued by the SAFP, fee income is not
recognized for the Pension Funds' individual account administration until the
contributions have been deposited.
m. Disability and survival pension system - In 2003, the Company received an
Oficio from the SAFP requiring a change in its accounting for life and
disability insurance premium expense to more closely match the expense with the
period associated with the casualties contributing to the increase/decrease in
the expense calculated as explained in Note 8. These effects were recorded for
Chilean GAAP purposes as explained in Note 40.
n. Software applications - Software acquired in the form of software packages
which are recorded in Other property, plant and equipment have been valued at
price-level restated cost. This software is being amortized using the
straight-line method over the estimated useful lives of the software. The useful
life is 4 years. No internally developed software has been capitalized in the
last ten years.
o. Forward foreign exchange contracts - The Company maintains forward contracts
to cover the risks of fluctuation in foreign exchange which are considered
speculative contracts or hedge contracts. These derivative instruments are
stated at market value in accordance with Boletin Tecnico No. 57 (Technical
Bulletin) of the Chilean Institute of Accountants. Depending on whether the
contracts are speculative or hedge contracts and the type of transaction the
latter may cover, their treatment differs.
p. Convenience translation to US dollars - Provida maintains its accounting
records and prepares its consolidated financial statements in Chilean pesos. The
US dollar amounts disclosed in the accompanying financial statements are
presented solely for the convenience of the reader using the observed exchange
rate for December 31, 2003 of Ch$593.8 per US$1. This translation should not be
taken to mean that the Chilean peso amounts actually represent, have been, or
could be, converted into U.S. dollars at such a rate or at any other rate.
q. Cash and cash equivalents - The Company and its subsidiaries have considered
cash and cash equivalents to be all cash, time deposits and investments defined
under Technical Bulletin 50.
Cash flows from operating activities include all cash flows from operations,
including fees from clients, payments to suppliers and personnel remuneration.
In addition to the above, cash flows related to taxes, interest paid, financial
income and in general all cash flows not otherwise defined as financing or
investing activities are considered to be operating in nature. This concept is
broader than the operating income used in the consolidated statement of income.
r. Reclassification - Certain amounts in the prior years' financial statements
have been reclassified to conform to the current year's method of presentation.
F-10
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 3. CHANGES IN ACCOUNTING POLICIES
During 2003 there were no changes in accounting policies from the prior year
that might have a significant impact on the interpretation of these consolidated
financial statements.
NOTE 4. TIME DEPOSITS
Investments in time deposits have been made with Banco BICE (interest rate
0.25%) in the year 2003 and Banco Corpbanca in the year 2002. The checking
account in dollars is deposited with Brown Brothers Harriman Co. The amounts are
detailed below:
2002 2003
MCh$ MCh$
Time deposits 686 279
Overnight deposits (US$ checking account) - 27
-------------------------------------------------------------------------------
Total 686 306
-------------------------------------------------------------------------------
The time deposits have original maturity dates of less than 90 days.
NOTE 5. MARKETABLE SECURITIES
----------------------------------------------------------------------------
As of December 31,
-----------------------
2002 2003
MCh$ MCh$
Marketable securities:
Bonds issued by corporations 2 -
Bonds issued by Chilean Government agencies 95 67
Notes issued by financial institutions 21 23
----------------------------------------------------------------------------
Total 118 90
----------------------------------------------------------------------------
NOTE 6. MANDATORY INVESTMENT
In order to guarantee the capacity of the Administrator to cover the Pension
Funds minimum return which is established by formula under the law, as
stipulated in Article 37 of D.L.3,500, and in conformity with Article 40 of the
same legal regulation, the Administrator must maintain an asset known as
Mandatory Investment equivalent to one percent (1%) of each Pension Fund. See
Note 2 (e).
----------------------------------------------------------------------------
As of December 31,
-------------------------------
2002 2003
MCh$ MCh$
Pension Funds - Type A 848 3,564
Pension Funds - Type B 9,087 17,846
Pension Funds - Type C 59,073 52,868
Pension Funds - Type D 8,075 14,885
Pension Funds - Type E 3,105 3,090
------------------------------------------------------------------------
Total 80,188 92,253
------------------------------------------------------------------------
F-11
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
As of December 31, 2002, the Mandatory Reserve is MCh$80,188. This amount
consists of Type A, B, C, D and E Pension Fund Mandatory Reserves of MCh$848,
MCh$9,087, MCh$59,073, MCh$8,075 and MCh$3,105, respectively. These amounts are
equivalent to Pension Fund Shares of 80,471.47, 881,371.81, 5,241,020.12,
792,315.72 and 227,761.05 respectively, based on the value of the shares as of
December 31, 2002.
As of December 31, 2003, the Mandatory Reserve is MCh$92,253. This amount
consists of Types A, B, C, D and E Pension Fund Mandatory Reserves of MCh$3,564,
MCh$17,846, MCh$52,868, MCh$14,885 and MCh$3,090, respectively. These amounts
are equivalent to Pension Fund Shares of 266,178.38, 1,491,445.86, 4,242,358.09,
1.346,439.47 and 219,397.07 respectively, based on the value of the Shares as of
December 31, 2003.
The Mandatory Reserve investment in Pension Funds generated net income of
MCh$6,445, MCh$4,907 and MCh$9,806 during the years ended December 31, 2001,
2002 and 2003, respectively, from recognizing the variation in the value of the
Shares for book purposes. These amounts are shown in the Consolidated Statements
of Income as "Gain on mandatory investments."
The return of each fund which Provida administered during the most recent three
years, is detailed below:
-----------------------------------------------------------------------------
As of December 31,
2001 2002 2003
% % %
(1) (1)
-----------------------------------------------------------------------------
Pension Funds - Type A 27.09
Pension Funds - Type B 16.06
Pension Funds - Type C 6.4 3.00 10.56
Pension Funds - Type D 8.47
Pension Funds - Type E 7.7 8.30 3.3
-----------------------------------------------------------------------------
(1) In 2001 Fund Types A, B and D did not exist, in 2002 the percentages of
Funds Types A, B and D were less than 1%.
NOTE 7. Fee Income
In conformity with D.L.3,500 dated 1980, the Administrator receives compensation
based on commissions paid by participants.
These commissions are designed to finance the Administrator and such amounts are
designated for the administration of the Pension funds, the cost of the record
keeping of individual accounts, of the old age pension systems, of disability
and survival pensions and, benefits which are guaranteed by the State. These
amounts also provide funds for the insurance premiums which cover differences in
the necessary capital to finance disability and survival pensions and the sum of
the accumulated capital of each participant plus the fund recognition bonuses,
if applicable, and administration costs of the other services which are
established by law.
In accordance with current regulations, commissions on monthly contributions are
recognized at the time that the contributions are received in the participants'
personal accounts.
F-12
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
From April 1999 to December 2003, the fixed fees that legally are earned on a
participants' account, were Ch$ 390 per account per month. From December 2000 to
2003 the variable fee was 2.25% of the participants' salary. Those participants
who do not qualify for life and disability insurance are subject to a variable
fee of 1.4% of salary for the years ended December 31, 2001, 2002 and 2003. All
funds have the same fees.
For the years ended December 31, 2001, 2002 and 2003, fee income related to Type
A, B, C, D and E funds was as follows:
-----------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
-----------------------------------------------------------------------------
Fixed fees 6,307 6,310 6,461
Variable fees 86,001 88,749 92,953
Other Fees 772 793 832
-----------------------------------------------------------------------------
Total 93,080 95,852 100,246
-----------------------------------------------------------------------------
As of December 31, 2002 and 2003, the accrued fee from pension funds was
MCh$3,034 and MCh$6,097 respectively, which is included in "Fees receivables".
NOTE 8. Disability and Survival Pension System
a. Financing of Disability and Survival Pensions:
D.L. 3,500 dated 1980, establishes that the Disability and Survival Pension will
be funded by the balance in the member's individual capitalization account and
is guaranteed by the state, when applicable.
In addition, in accordance with the law, partial and total disability pensions
corresponding to those determined by the Medical Commission in their preliminary
review, granted in accordance with the first ruling of D.L. 3,500 ("the First
Ruling"), shall be funded by the Administrator that manages participant's
pension funds and the State Guarantee, when applicable.
The balance in the individual participants' account therefore includes the
accumulated capital in this account, including the contributions as outlined in
article 53, and, when applicable, bonus recognition stipulated by the law. The
Administrator must make by law an additional contribution (as described below)
and may transfer the funds from the voluntary savings of the affiliates.
The additional contributions, if necessary, made by the Administrator should
equal the shortfall between the amount needed to fund the Disability and
Survival Pension and the accumulated capital of the participant including their
bonus recognition at any given date. The Administrator shall be solely
responsible for administering the payment for partial and total pensions under
the law and for paying any additional contribution for those participants who
qualify for a Disability or Survival Pension as required by the Law.
b. Insurance Contract:
In conformity with D.L. 3,500, Provida has purchased insurance from BBVA Seguros
S.A. which covers the pensions of participants declared disabled through the
first ruling and the initial and additional contributions specified in a) above.
This agreement does not exempt Provida from the responsibility and obligation of
administering the payment of pensions originated by the first ruling,
administering contributions to the member's individual account, or making
additional contributions, when applicable.
F-13
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The insurance policy related to disability and survival runs from August 1, 2003
to December 31, 2004. Premiums are expressed as a percentage of the contributing
participants' taxable remuneration; are variable, and are adjusted on the basis
of the effective casualty rate. This adjustment is calculated when the effective
casualty rate is less than the maximum contract rate, by comparing all monthly
payments to a maximum of 1.10% of taxable remuneration, less corresponding
bonuses for lower casualties. All values are expressed in UF. Provida's
participation in the surplus will be 100% if the casualty rate is equal to or
lower than 1.10% and greater than 0.85% (the cut rate) of the participants'
taxable remuneration; if the casualty rate is equal to or less than 0.85%,
Provida will also have the right to an additional participation in 90% of the
surplus for the amount that is below 0.85%.
The final settlement of this contract will occur on December 31, 2008, but is
extendable for up to 2 years by common agreement, with pre-settlements on March
31 of each year beginning in 2005. In addition, in December of each year an
accrual estimate for the premium payment is made based on a one - month lag in
the factors required to calculate the premium. Should the difference result in a
receivable balance, it is recognized as income. In addition, the contract
specifies monthly payments to be calculated with a provisional rate of 0.70%,
applied over the total remuneration and monthly taxable income contributed in
the preceding month and a fixed monthly premium of UF 2,150.
Payment of provisional premiums are due on the 20th of each month.
In accordance with current legislation, the insurance company was chosen through
public tender, and the results were published in the newspaper "La Tercera" on
July 1, 2 and 3, 2003.
The previous insurance policy, which was from August 1, 2001 to July 31, 2003,
with ING Seguros de Vida S.A. (formerly Aetna Chile Seguros de Vida S.A.)
established that premiums are expressed as a percentage of the contributing
participants' taxable remuneration; are variable, and are adjusted on the basis
of the effective casualty rate. This adjustment is calculated when the effective
casualty rate is less than the maximum contract rate, by comparing all monthly
payments to a maximum of 0.95% of taxable remuneration, less corresponding
bonuses for lower casualties. All values are expressed in UF. Provida's
participation in the surplus will be 100% if the casualty rate is equal to or
lower than 0.95% and greater than 0.80% (the cut rate) of the participants'
taxable remuneration; if the casualty rates are equal to or less than 0.80%,
Provida will also have the right to an additional participation of 90% of the
surplus for the amount that is below 0.80%. In addition, the contract specifies
monthly payments calculated with a provisional rate of 0.70%, applied over the
total remuneration and monthly taxable income contributed in the preceding month
and a fixed monthly premium of UF 2,200. Additionally, it establishes previous
advances in the collection month equivalent to 70% of provisional settlements.
The final settlement of this contract will take place on January 31, 2008, but
is extendable for up to 2 years by common agreement, with pre-settlements on
March 31 of each year which began in 2003. In addition, in December of each
year, the premium for this contract is also calculated on a one - month lag
based on the accounting policy described in Note 40.
Between August 1, 1999 and July 31, 2001, another contract was in place with ING
Seguros de Vida S.A., under the same conditions as the current agreement, except
the fixed premium was UF 3,920 monthly. In this agreement, the bonus for a
casualty rate lower than the premium rate was 90% of the excess, if the range of
casualty rate was equal to or less than 0.85%.
F-14
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The final settlements of the previous agreement will take place on March 31,
2006, but is extendable for up to 2 years by common agreement. Preliminary
settlements take place on March 31 of each year which began in 2001. In
addition, the premium for this contract is also estimated on a one - month lag
based on the accounting policy described in Note 40.
Between August 1, 1997 and July 31, 1999, another contract was in place with ING
Seguros de Vida S.A., but with different conditions including a fixed premium
that was UF 2,150 monthly, the maximum rate of 0.80% of taxable remuneration and
the cut rate of 0.63%. The bonus for favorable casualty rates was 100% if
casualty rate was in the range of 0.80% to 0.63% of taxable remuneration. If the
casualty rate was equal to or less than 0.63% there was a participation in 90%
of surpluses produced.
The final settlements of this contract will take place on March 31, 2004, but
are extendable for up to 2 years by common agreement. Preliminary settlements
take place on March 31 of each year beginning in 1999. In addition, the premium
for this contract is also calculated on a one - month lag based on the
accounting policy described in Note 40.
Between August 1, 1995 and July 31, 1997, there was a contract with ING Seguros
de Vida S.A. under the same conditions as the previous agreements, except that
the fixed premium was UF 410 per month.
The final settlement of this contract was realized on March 31, 2003, by
agreement between the parties.
Provida sends to the insurance company a list of participants for whom payment
has been recorded and those dependent affiliates whose delay in payment is known
or is subject to confirmation due to incomplete information.
See Note 40 for a description of the Company's accounting for the insurance
premium expense described above.
c. Effect on results:
Insurance premium expenses for the years ended December 31, 2001, 2002 and 2003,
were MCh$33,880, MCh$33,730 and MCh$44,700, respectively, and are recorded as
"Life and disability insurance premium expenses" in the Consolidated Statements
of Income. For the years ended December 31, 2001, 2002 and 2003, adjustments and
provisions for a casualty rate higher than the premium rate were MCh$8,087,
MCh$6,719 and MCh$16,288, respectively, while net financial income was
MCh$1,183, MCh$403 and MCh$420, for the years ended December 31, 2001, 2002 and
2003, respectively.
F-15
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
In "Other Operating Revenues", includes settlements for a casualty rate lower
than the premium rate and monthly financial revenues amounting to MCh$2,531,
MCh$2,980 and MCh$1,105 in 2001, 2002 and 2003, respectively, for contract
settlements from previous years, as shown below:
[Enlarge/Download Table]
2002 2003
(As restated -
see Note 40)
----------------------------------------------------------------------------------------------------------
Items ThCh$ ThCh$
----------------------------------------------------------------------------------------------------------
Annual expenses for Disability and Survival insurance premiums 27,419 28,832
Unfavorable adjustments for casualty rate 6,719 16,288
Net financial income for current contract (403) (420)
----------------------------------------------------------------------------------------------------------
Net expenses for the year 33,730 44,700
----------------------------------------------------------------------------------------------------------
Positive adjustments by insurance companies (2,980) (1,105)
----------------------------------------------------------------------------------------------------------
Total expenses for the year 30,441 43,595
----------------------------------------------------------------------------------------------------------
See Note 40 for a description of accounting for insurance premium expense.
d. Liabilities arising from additional contributions:
d.1) Collections to be cleared
Until 1987, the Company had collected additional contributions designated to
finance the Disability and Survival Pension System fund, which were liabilities
of MCh$73 and MCh$52 as of December 31, 2002 and 2003 respectively. This
liability increased in June 1998 and January 1999 as a result of the merger with
AFP Union and AFP Proteccion, respectively. These liabilities are recorded under
the caption "Collections to be cleared" in the Consolidated Balance Sheets and
consist of the following:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
-----------------------------------------------------------------------------------------------------------------------
1. Pending additional contributions
Contributions of workers not identified in the participants' master file or transferred to
other Administrators, of deceased affiliates, or for which only the summary sheet has been
received identifying the employer, or positive differences resulting from subtracting the
balance from the contribution summary. 70 52
2. Additional contributions to be cleared
Additional contributions and health Insurance contributions of independent participants paid
for which the support sheet has not been received 3 -
-----------------------------------------------------------------------------------------------------------------------
Totals 73 52
-----------------------------------------------------------------------------------------------------------------------
F-16
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The balance of pending contributions will be reconciled internally or by
transferring them to other pension fund administrators, as since January 1,
1988, these contributions are paid directly into the Pension Fund.
Comparative analysis of pending additional contributions:
------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
------------------------------------------------------------------------------
Pending additional contributions
Beginning balance 71 69
Pending for the year - 16
Cleared pending items:
o For Provida - (33)
o Sent to other Administrators (1) -
------------------------------------------------------------------------------
Totals 70 52
------------------------------------------------------------------------------
d.2) Accounts Payable to Insurance Companies
This account represents obligations of the Administrator for disability and
survival insurance premiums with BBVA Seguros de Vida S.A., ING Seguros de Vida
S.A. and Compania de Seguros de Vida Consorcio Nacional de Seguros S.A. The
liability, as explained in paragraph b), is for the difference between the final
adjustment of the monthly premium and advances paid, which were MCh$784 and
MCh$952 as of December 31, 2002 and 2003, respectively. These liabilities are
due on the 20th of the following month.
e. Advances on Disability and Survival Pension Premium:
e. 1) Receivable from Insurance Companies
--------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
--------------------------------------------------------------------------
Life Insurance Companies (*):
Balance at end of previous year 715 620
Covered by insurance companies 41,451 33,624
Insurance companies reimbursements (41,539) (32,882)
--------------------------------------------------------------------------
Total 627 1,362
--------------------------------------------------------------------------
(*) Includes contracts with BBVA Seguros de Vida S.A., Consorcio Nacional,
Euroamerica, Inter Rentas, ISE Las Americas and ING by merger with AFP
Union contracts with Vida Corp, AXA and La Prevision, by merger with AFP
Proteccion and contracts with Chilena Consolidada by merger with AFP El
Libertador.
F-17
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
e. 2) Receivable from the State
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
---------------------------------------------------------------------------------------------------------------
o Balance as of previous year 29 31
o Pensions financed with state guarantee according to art. 73 of D.L. 3,500 12,950 15,013
o Payments financed by the Administrator 1,400 1,552
o Reimbursement of state guarantee (12,958) (14,844)
o Reimbursement of payments financed by the Administrator (1,389) (1,548)
---------------------------------------------------------------------------------------------------------------
Total 32 204
---------------------------------------------------------------------------------------------------------------
f. Accrual for higher casualty rate arising from disability and survival
insurance (long-term and short-term)
Net provisions for unfavorable claims and net financial income for lower than
anticipated casualty rates is included for MCh$19,146 and MCh$9,623 at December
31, 2003 and 2002, respectively:
Breakdown of the provision for short term:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------
Costs for claims Provision (MCh$)
incurred by the
insurance Company
Provision
Payments made to the recorded at
Insurance Company the date of
(MCh$) the Total
information provision
Period covered by to the provided by at the
the contract Amount reported at the Insurance current
Insurance Company name (MMAA-MMAA) Date (MCh$) date 12.31.2003 Company year-end
--------------------------------------------------------------------------------------------------------------------
ING Seguros de Vida S.A. 08-1997 to 07-1999 31-01-2004 44,319 44,290 44,290 29 29
ING Seguros de Vida S.A. 08-1999 to 07-2001 31-01-2004 66,500 63,853 63,853 2,647 2,647
ING Seguros de Vida S.A. 08-2001 to 07-2003 31-01-2004 71,265 57,501 57,501 13,763 13,763
--------------------------------------------------------------------------------------------------------------------
16,439
--------------------------------------------------------------------------------------------------------------------
Breakdown of the provision for long-term:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------
Costs for claims Provision (MCh$)
incurred by the
insurance Company
Provision Total
recorded at the provision at
date of the the current
information year-based on
Period covered by Payments made to provided by the experience
the contract Amount the Insurance Company Insurance updated
(MMAA-MMAA) Date (MCh$) (MCh$) Company information
to the
reported at
Insurance Company name date 12.31.2003
--------------------------------------------------------------------------------------------------------------------
BBVA Seguros S.A. 08-2003 to 12-2004 31-12-2003 13,682 11,528 11,528 2,154 2,707
-------------------------------------------------------------------------------------------------------------------
2,707
-------------------------------------------------------------------------------------------------------------------
F-18
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 9. RECEIVABLES AND NOTES DUE FROM RELATED COMPANIES
Receivables and notes due from related companies were as follows:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------
Short-term Long-term
2002 2003 2002 2003
MCh$ MCh$ MCh$ MCh$
---------------------------------------------------------------------------------------------------------
AFPC Porvenir de Colombia 641 - - -
Servicios de Adm. Previsional S.A. 223 235 - -
BBVA Pensiones Chile S.A. 85 428 - -
BBVA Seguros S.A. - 20 - -
Soc. Adm. De Fondos de Cesantia Chile S.A. - 54 - 374
BBVA Chile S.A. (ex-Banco Bhif) - 98 - -
---------------------------------------------------------------------------------------------------------
Total 949 835 - 374
---------------------------------------------------------------------------------------------------------
NOTE 10. MISCELLANEOUS RECEIVABLES, NET
Miscellaneous receivables consists of the following:
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
-------------------------------------------------------------------------------------------------------------------
Advances to employees 756 990
Medical leave advances 36 52
Advances to suppliers 77 152
Short term housing loans 22 24
Pending operations debtors, net 40 240
Recoverable management expenses AFP Genesis 324 324
Recoverable management expenses AFP Porvenir Republica Dominicana - 90
Insurance receivable - 134
Overhead receivable - 150
Welfare fund current account 6 -
-------------------------------------------------------------------------------------------------------------------
Others 123 148
-------------------------------------------------------------------------------------------------------------------
Total 1,384 2,304
-------------------------------------------------------------------------------------------------------------------
F-19
NOTE 11. PREPAID EXPENSES
[Enlarge/Download Table]
Prepaid expenses consists of the following:
-------------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
-------------------------------------------------------------------------------------------------------------------
Advertising 23 24
Quarterly AFP association installment: medical commissions 84 -
AFP association social installment 93 -
Quarterly AFP association installment: medical observer system 31 -
Insurance 126 38
Others 41 72
-------------------------------------------------------------------------------------------------------------------
Total 398 134
-------------------------------------------------------------------------------------------------------------------
NOTE 12. OTHER CURRENT ASSETS
[Enlarge/Download Table]
Other current assets consists of mandatory investments in excess of the required 1%:
-----------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
-----------------------------------------------------------------------------------------------------------------
Amounts maintained for Type A Fund - -
Amounts maintained for Type B Fund - -
Amounts maintained for Type C Fund - -
Amounts maintained for Type D Fund - -
Amounts maintained for Type E Fund 1 -
-----------------------------------------------------------------------------------------------------------------
Total mandatory investments 1 -
-----------------------------------------------------------------------------------------------------------------
Other current AFP Provenir Republica Dominicana - 152
-----------------------------------------------------------------------------------------------------------------
Total 1 152
-----------------------------------------------------------------------------------------------------------------
NOTE 13. PROPERTY, PLANT AND EQUIPMENT, NET
[Enlarge/Download Table]
Property, plant and equipment consists of the following:
------------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
------------------------------------------------------------------------------------------------------------------
Land 4,745 4,746
Buildings and Infrastructure 17,204 17,217
Equipment, furniture and fixtures 2,591 2,720
Other fixed assets (1) 7,025 9,300
Accumulated depreciation (7,685) (8,166)
------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 23,880 25,817
------------------------------------------------------------------------------------------------------------------
(1) Capital leased assets consist of the following:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------------
Maturity MCh$
-------------------------------------------------------------------
Interest rate 2008 and
annual 2004 2005 2006 2007 thereafter
----------------------------------------------------------------------------------------------------------------------
Rancagua office 8.70% 3 4 4 4 40
Huerfanos office 8.97% 11 12 13 14 293
Quilicura office 8.01% 18 20 22 25 27
----------------------------------------------------------------------------------------------------------------------
Total 32 36 39 43 360
----------------------------------------------------------------------------------------------------------------------
F-20
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 14. INVESTMENTS IN RELATED COMPANIES
a. Investments in related companies consists of the following:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------
As of and for the years ended December 31,
---------------------------------------------------------------------------
Participation Carrying value Equity in gain (loss)
2001 2002 2003 2002 2003 2001 2002 2003
-----------------------------------------------------------------------------------------------------------------------------
% % % MCh$ MCh$ MCh$ MCh$ MCh$
Afore Profuturo (Mexico) (1) (2) 14.45 - - - - 550 - -
AFPC Porvenir (Colombia) (1) (6) 20.00 20.00 - 7,803 - 2,573 1,549 929
Afore Bancomer (Mexico) (1) (3) 7.50 7.50 7,431 6,857 4,858 6,006 4.278
7.50
AFP Horizonte (Peru) (1) 15.87 15.87 15.87 3,134 2,939 1,704 2,055 1.944
AFP Crecer (El Salvador) (1) (4) 19.00 19.00 19.00 3,339 3,522 1,086 800 790
Servicios de Adm. Previsional S.A. (Chile) (5) 37.80 37.80 38.22 164 232 (238) (404) (421)
Inversiones DCV S.A. (Chile) 23.14 23.14 23.14 277 262 75 58 50
Soc. Adm. De Fondos de Cesantia de Chile S.A. - 37.80 38.46 384 613 - (255) (566)
-----------------------------------------------------------------------------------------------------------------------------
Total 22,532 14,425 10,608 9,809 7,004
-----------------------------------------------------------------------------------------------------------------------------
(1) These investments are measured in US$.
(2) Provida International's investment in Afore Profuturo (Mexico) was sold to
Grupo Nacional Provincial Pensiones S.A. de C.V. (Mexico) effective March
2001, for ThUS$ 61,698. The effect in income of this transaction was
applied to the amortization of part of the goodwill generated in the
purchase of Afore Bancomer and was part of the purchase of a 7.5%
participation in Afore Bancomer, since Provida, according to Mexican
legislation, cannot have share participation in two Afores.
(3) Provida purchased a 7.5% share in Afore Bancomer effective November 30,
2000, for ThUS$66,264. This purchase was made as part of Banco Bilbao
Vizcaya Argentaria's agreement to purchase a total of 49% of Afore
Bancomer.
(4) On March 30, 2000, AFP Porvenir, in which Provida Internacional had a 45%
ownership, merged with AFP Maxima and AFP Prevision in El Salvador,
creating the AFP Crecer and diluting Provida International's ownership.
(5) In October 2000, Servicios de Adm. Previsional S.A. (PreviRed.com) was
formed together with all the other Chilean AFPs. PreviRed.com began
operations in October 2001.
(6) Provida International sold its investments in SFPC Porvenir Colombia in
September 2003 for ThCh$26,785.
b. Goodwill, net consists of the following:
--------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
--------------------------------------------------------------------------------
AFP Proteccion (Chile) (1) 55,837 52,379
Afore Bancomer (Mexico) 14,540 11,229
AFP Union (Chile) (1) 8,131 7,605
AFP El Libertador (Chile) (1) 961 884
AFPC Porvenir (Colombia) 1,071 -
AFP Porvenir (R.D.) - 8,874
AFP Crecer (El Salvador) 610 469
AFP Genesis (Ecuador) 458 355
AFP Horizonte ( Peru) 413 312
--------------------------------------------------------------------------------
Total 82,021 82,107
--------------------------------------------------------------------------------
(1) Absorbed by Provida S.A.
F-21
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Goodwill amounts are amortized over a maximum of 20 years, based upon the
estimated period of return on the investment. Amortization was MCh$24,944,
MCh$4,979 and MCh$4,993 for the years 2001, 2002 and 2003, respectively, and
includes an extraordinary write-off of MCh$19,860 during 2001 generated by the
sale of Afore Profuturo in Mexico.
NOTE 15. OTHER ASSETS
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
----------------------------------------------------------------------------------------------------------
Bond union agreement 391 14
Loan origination costs for purchase of former
AFP Proteccion and AFP Union (*) 194 72
Employee loans and advances 42 26
Remodeling of leased customer service centers 79 56
Guarantees for leased premises and others 52 77
Reimbursable financing contributions contracts with service companies 95 1
Mandatory investments of AFP Genesis 175 914
Mandatory investments of AFP Porvenir Republica Dominicana - 34
Others - 82
----------------------------------------------------------------------------------------------------------
Total 1,028 1,276
----------------------------------------------------------------------------------------------------------
(*) These commissions are being amortized over the term of the bank loans
NOTE 16. OBLIGATION WITH BANKS AND FINANCIAL INSTITUTIONS
a. Short-term obligations
Obligations with banks and financial institutions are as follows:
--------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
--------------------------------------------------------------------------------
Syndicated loans with Banco Scotiabank Sudamericano
and others, with maturity less than one year 3,382 3,384
Bank overdrafts, maturity 0 to 30 days:
Banco de Chile 528 297
Banco Santander Santiago 4,873 5,613
Banco BBVA Chile 4 9,984
Banco del Estado de Chile 17 8
Banco Credito e Inversiones 5 7
Accrued interest expenses of syndicated loan 6 20
--------------------------------------------------------------------------------
Total 8,815 19,313
--------------------------------------------------------------------------------
The use of the above overdraft required to finance business operations generates
interest expenses by applying a variable interest rate agreed upon between both
parties, the average interest rate paid during 2003 was 1.75% (annual). As of
December 31, 2003 the unused credit lines amount to MCh$46,096.
F-22
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
b. Long-term obligations
Provida has syndicated loans with Banco Scotiabank Sud Americano, Banco
Santander Santiago and Bank Boston N.A.
These long-term obligations are for UF 100,000 maturing in March 2005. The
interest rate is the TAB rate (active banking rate), for 90-day indexed
operations plus 0.75% per year (1.00% until June 12, 2001), payable quarterly.
The outstanding balance of this loan was MCh$5,074 and MCh$1,692 as of December
31, 2002 and 2003, respectively.
NOTE 17. NOTES AND ACCOUNTS DUE TO RELATED COMPANIES
BBVA Pensiones Chile S.A.
Provida purchased 89.1% of the share ownership of AFP Proteccion S.A. for a
price of UF 1,506,001.59 plus ThUS$ 100,000, payable in 9 semi-annually variable
maturing installments starting on May 15, 1999. Interest was calculated using
the six month LIBOR rate plus 2.25% per year for dollars, and the TAB rate for
180 days plus 2.00% for UF. The debt in dollars was fully paid and the
obligation in UF was renegotiated at the TAB rate for 90 days plus 0.75% (1.00%
until June 12, 2001).
As of December 31, 2003 the principal outstanding is UF 179,942.39 plus interest
of UF 1,242.60 with a rate 5.65%.
a. Short-term
As of December 31, 2002, the principal is UF 350,535.07 plus interest of UF
915.07, which is equivalent to MCh$5,944. The final semi-annual payment is due
on May 15, 2004 for a total of UF179,942.39 plus accrued interest through
December 31, 2003 in the amount of UF 1,242.60 through December 31, 2003, which
is equivalent to the liability as of December 31, 2003 of MCh$3,066.
b. Long-term
Total liabilities are UF 0 and UF 179,942.39, which is equivalent to MCh$0 and
MCh$3,043 as of December 31, 2003 and 2002, respectively.
NOTE 18. WITHHOLDINGS FROM PENSIONERS
In conformity with the stipulations in D.L. 3,500, the Administrator must
collect the independent affiliates' health contributions and discount health
contributions from pensions financed by the Pension Fund and transfer these
amounts to the Fondo Nacional de Salud (National Health Fund) or the
corresponding health insurance institution.
Accordingly, balances in these accounts represent contributions collected that
must be transferred to the National Health Fund or the respective health
insurance institutions in the following month, in accordance with current
regulations.
F-23
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The balances owed as of December 31, 2002 and 2003 are as follows:
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
------------------------------------------------------------------------------------------------------------------
a. Independent affiliates
o Balance at closing of previous year 42 156
o Withholding of health contributions from participants during the year 3,311 4,102
o Payments to National Health Fund during the year (3,195) (3,750)
------------------------------------------------------------------------------------------------------------------
Independent participants' health withholding 158 508
------------------------------------------------------------------------------------------------------------------
b. Pensioners
o Balance at closing of previous year 887 981
o Withholding of health contributions from pensioners during the year 8,396 8,778
o Payments to National Health Fund during the year (5,856) (6,495)
o Payments to Health Insurance institutions during the year (2,689) (2,577)
------------------------------------------------------------------------------------------------------------------
Pensioners health withholdings (*) 738 687
------------------------------------------------------------------------------------------------------------------
(*) These amounts are included in "Withholdings from pensioners" on the balance
sheet but do not represent the entire amount.
NOTE 19. WITHHOLDINGS
Withholdings are is as follows:
--------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
--------------------------------------------------------------------------------
Retention of taxes from foreign shareholders 689 1,191
Social security payments 309 272
Payroll taxes withholdings 115 119
Other payroll withholdings 284 264
--------------------------------------------------------------------------------
Total 1,397 1,846
--------------------------------------------------------------------------------
F-24
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 20. ACCRUED EXPENSES
Accrued Expenses are as follows:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------
As of December 31,
2002
(As restated
Note 40) 2003
---------------------------------------------------------------------------------------------------------------
MCh$ MCh$
---------------------------------------------------------------------------------------------------------------
Provisions for unfavorable casualty rate, net of favorable anticipated adjustments 9,623 16,439
Employee profit-sharing and other 1,441 1,436
Accruals vacation 958 1,165
Age bonuses 167
Accruals for incurred expenses as yet uninvoiced 649 1,104
Other accruals 223 354
---------------------------------------------------------------------------------------------------------------
Total 12,894 20,665
---------------------------------------------------------------------------------------------------------------
Long-term provisions: This account has a balance equivalent to MCh$2,707 in the
2003 period, corresponding to a provision for casualty rate of the contract
2003-2004 with BBVA Seguros de Vida S.A.
Other Provisions: During the years ended December 31, 2003 and 2002, the Company
has not established any provisions for asset impairment.
Write-offs: In the 2003 and 2002 periods the Company made write-offs of MCh$261
and M$166, as detailed below:
--------------------------------------------------------------------------------
2002 2003
ThCh$ ThCh$
--------------------------------------------------------------------------------
Additional contributions and unrecoverable pensions 70 27
Circular 650 (claims and profits) 27 217
Collections 18 12
Other 50 5
--------------------------------------------------------------------------------
Balance at year-end 166 261
--------------------------------------------------------------------------------
Also, in 2003 and 2002, the Company made write-offs of out-of-service fixed
assets for ThCh$2,955 and ThCh$3,225 respectively.
NOTE 21. OTHER CURRENT LIABILITIES
--------------------------------------------------------------------------------
As of December 31,
2002 2003
MCh$ MCh$
--------------------------------------------------------------------------------
Professional fees and other 91 175
--------------------------------------------------------------------------------
Total 91 175
--------------------------------------------------------------------------------
F-25
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 22. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------
Interest As of December 31,
-----------------------
rate 2002 2003
MCh$ MCh$
-----------------------------------------------------------------------------------------------------
Capital leasing obligations:
o U.A.P. Seguros de Vida (**) 8.97% 343 332
o Seguros de Vida Euroamerica (*) 8.70% 56 52
o Santiago Leasing (**) 8.01% 112 94
Other:
o Provision for pensions Banco Hipotecario Chile 447 370
o Guarantees 66 62
-----------------------------------------------------------------------------------------------------
Total 1,024 910
-----------------------------------------------------------------------------------------------------
(*) Semi-annual payments
(**) Monthly payments
NOTE 23. INCOME TAXES
In accordance with Chilean law, the Company and each of its subsidiaries compute
and pay tax on a separate return basis rather than on a consolidated basis. The
Chilean statutory first category (corporate) income tax rate was 16.5%. Enacted
income tax rates in Chile are scheduled to be 17% for the taxation year end
December 31, 2004.
a. Income taxes:
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------
As of December 31,
2001 2002 2003
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------------------------
Taxable income 37,721 36,298 23,677
Taxes payable (receivable) 5,701 5,940 4,027
Special taxes 2 1 1
Retained earnings for Tax purposes 35,753 49,237 42,489
Shareholders' credit for future dividends 5,363 8,071 8,716
--------------------------------------------------------------------------------------------------
F-26
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
b. Deferred income taxes:
Deferred income taxes consist of the following as of December 31, 2002 and 2003:
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------
Short-term Long-term
2002 2002
(As restated (As restated
Note 40) 2003 Note 40) 2003
------------------------------------------------------------------------------------------------------------------------
MCh$ MCh$ MCh$ MCh$
------------------------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Accrued life and disability insurance 1,038 635 - -
Accrued vacation 162 189 - -
Leased assets, net (3) (3) (76) (71)
Unearned commissions 109 - - -
Leasing obligations, net 11 13 81 74
Provision BHC - - 90 74
Other deferred income taxes, net of complementary accounts 5 4 (95) (77)
------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 1,322 838 - -
------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Contracts of change insurance - - 145 434
Severance indemnities 59 52 66 13
Gains on mandatory investment - - 2,131 2,572
Other deferred income taxes, net of complementary accounts 15 8 34 82
------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 74 60 2,376 3,101
------------------------------------------------------------------------------------------------------------------------
As of December 31, 2003, deferred income taxes are mainly composed of temporary
differences in mandatory investment funds Types A,B,C,D and E that are shown at
present values of MCh$2,572, and other temporary differences of MCh$248.
Deferred income taxes and amortization of complementary accounts resulted in
deferred tax benefit MCh$3,653 and MCh$494, respectively for the years ended
December 31, 2001 and 2002 and in deferred tax expense of MCh$1,195 in 2003.
c. Income taxes for the years ended December 31, 2001, 2002 and 2003 are as
follows:
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
-------------------------------------------------------------------------------------------------------------------
Provision for 1st category taxes (5,701) (5,808) (4,027)
Mandatory reserve deferred income taxes and deferred charges (950) (87) (649)
Deferred income tax arising from application of Technical Bulletin 60 (6,074) - -
Income tax arising from foreign investments (8,694) - -
Credits for provision for 1st category taxes 5,651 1,892 -
Complementary accounts amortization 3,370 581 (546)
Adjustment to prior year income tax - (78) (273)
Other charges and credits to the account (AFPC Porvenir Colombia) - - (2,637)
Provision for additional tax (1) (1) (1)
-------------------------------------------------------------------------------------------------------------------
Income tax (12,399) (3,501) (8,133)
-------------------------------------------------------------------------------------------------------------------
F-27
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
d. Receivable and (payable) taxes are as follows:
--------------------------------------------------------------------------------
As of December 31,
---------------------
2002 2003
MCh$ MCh$
--------------------------------------------------------------------------------
1st category income taxes payable (5,808) (4,027)
Special tax (1) (2)
Provisional monthly payments 1,299 3,712
Credits for training costs 66 117
Credits for taxes paid on foreign investment 1,893 1,281
Credits from AFP Genesis (Ecuador) 51 147
Adjustment to prior year income tax 822 404
--------------------------------------------------------------------------------
Total (1,678) 1,632
--------------------------------------------------------------------------------
NOTE 24. LONG-TERM LIABILITIES:
Maturities of long-term liabilities as shown in Notes 16 and 22 are the
following:
-------------------------------------------------------------------
As of
December 31,
-------------
2003
MCh$
-------------------------------------------------------------------
2005 1,737
2006 47
2007 51
2008 and thereafter 767
-------------------------------------------------------------------
Total 2,602
-------------------------------------------------------------------
F-28
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 25. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for the years ended December 31, 2001, 2002 and
2003 are as follows:
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------------------------------
Retained
Additional Accumulated Earnings Net income
Paid-in Paid-in Other deficit (As (As Interim
capital capital reserves during restated restated Dividends Total
development Note 40) Note 40)
--------------------------------------------------------------------------------------------------------------------------
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
--------------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2001 78,726 113 867 (7,691) 43,031 29,119 (5,083) 139,082
Transfer of 2000 net income - - - - 24,036 (29,119) 5,083 -
Final dividends paid - - - - (10,184) - - (10,184)
Deficit during development stage - - - 24 - - - 24
Interim dividend - - - - - - (7,700) (7,700)
Absorption of deficit during
development stage - - - 4,172 (4,172) - - -
Cumulative translation
adjustment
of foreign affiliates - - 1,998 (737) - - - 1,261
Price-level restatement 2,441 4 27 (133) 1,735 - (69) 4,005
Net income for the year - - - - - 29,320 - 29,320
--------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001
(as restated, Note 40) 81,167 117 2,892 (4,365) 54,446 29,320 (7,769) 155,808
--------------------------------------------------------------------------------------------------------------------------
Restated to constant Chilean 84,438 121 3,009 (4,541) 56,640 30,502 (8,082) 162,087
pesos of December 31, 2003 (as
restated,
Note 40)
--------------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2002 81,167 117 2,892 (4,365) 54,446 29,320 (7,769) 155,808
Transfer of 2001 net income - - - - 21,551 (29,320) 7,769 -
Final dividends paid - - - - (14,952) - - (14,952)
Interim dividend - - - - - - (9,277) (9,277)
Absorption of deficit during
development stage - - - 4,365 (4,365) - - -
Cumulative translation
adjustment
of foreign affiliates - - 1,944 - - - - 1,944
Price-level restatement 2,435 3 82 - 1,588 - (148) 3,960
Net income for the year - - - - - 33,856 - 33,856
--------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002
(As restated, Note 40) 83,602 120 4,918 - 58,268 33,856 (9,425) 171,339
--------------------------------------------------------------------------------------------------------------------------
Restated to constant Chilean
pesos of December 31, 2003 (as
restated,
Note 40) 84,438 121 4,967 - 58,850 34,195 (9,519) 173,052
--------------------------------------------------------------------------------------------------------------------------
Balances as of January 1, 2003 83,602 120 4,918 - 58,268 33,856 (9,425) 171,339
Transfer of 2002 net income - - - - 24,431 (33,856) 9,425 -
Interim dividend - - - - - - (7,952) (7,952)
Final dividends paid - - - - (17,930) - - (17,930)
Cumulative translation
adjustment
of foreign affiliates - - (6,568) - - - - (6,568)
Price-level restatement 836 1 49 - 1,008 - 24 1,918
Net income for the year - - - 32,005 - 32,005
--------------------------------------------------------------------------------------------------------------------------
Balances as of December 31, 2003 84,438 121 (1,601) 65,777 32,005 (7,928) 172,812
--------------------------------------------------------------------------------------------------------------------------
F-29
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Common stock:
331,316,623 common shares with no par value represent Provida's authorized,
issued, and outstanding common stock at December 31, 2003.
Majority shareholders:
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------------
2001 2002 2003
--------------------------------------------------------------------------------------------------------------------------
Purchases Sales Purchases Sales Purchases Sales
Shares Shares Shares Shares Shares Shares
BBVA Pensiones Chile S.A. - - - - - -
The Bank of New York (C.1375 SVS) 762,675 2,175,000 11,631,195 22,728,455 25,048,980 21,713,505
BBVA Securities Inc. - 525,000 - 1,050,000 - -
--------------------------------------------------------------------------------------------------------------------------
The Bank of New York acts as custodian for Provida's American Depositary Shares.
Profit Distributions:
As required by the Chilean Companies Law, unless otherwise decided by the
unanimous vote of the issued and subscribed shares, Provida must distribute a
cash dividend in an amount equal to at least 30% of Provida's net income for
each year. In compliance with the law, it is the intention of the Board of
Directors to pay an interim dividend during October and a final dividend after
the General Shareholders' meeting in the following year. The total dividend will
not be less than the legal minimum, however it will not exceed 80% of the net
income for the year. The dividend will depend on fulfillment of budgeted income,
cash requirements to finance the mandatory reserve, development of the company,
and final income for the year.
However, Provida cannot distribute as dividends the part of earnings generated
by investee companies, which should be allotted to cover the balance of the
account "Development Period Accumulated Deficit" of the respective companies. In
the year 2002, the balance of this account was transferred to retained earnings.
Accumulated deficit during development stage:
Accumulated deficit during development stage is the result of organizational and
start-up expenses incurred by foreign related companies. Such expenses are
recorded directly against equity as permitted by the SAFP. The deficit
originated in each related company is offset by the net income generated by the
corresponding company after the commencement of the operating stage which flows
through retained earnings in shareholders' equity. At year-end 2002 and 2003,
this account is zero.
F-30
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Other Reserves - Cumulative Translation Adjustment:
The Company through its subsidiary Provida International S.A. accounts for its
investments outside of Chile in accordance with Technical Bulletin No. 64
of the Chilean Association of Accountants. As of December 31, 2002 and 2003 the
cumulative translation adjustments related to those foreign investments due to
changes in the valuation of the Chilean peso total MCh$4,967 and MCh$(1,601),
respectively, and are included under the caption "Other reserves" within the
shareholders' equity of the Consolidated Balance Sheets.
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------
As of December 31,
-------------------------
2002 2003
Cumulative translation adjustment MCh$ MCh$
----------------------------------------------------------------------------------------------------
Balance at beginning of the year 2,921 4,918
Foreign exchange translation adjustments (Provida Internacional) 1,963 (6,568)
Price-level restatement of cumulative translation adjustment 83 49
----------------------------------------------------------------------------------------------------
Total 4,967 (1,601)
----------------------------------------------------------------------------------------------------
Interim dividends: In accordance with the dividends distribution policy, the
Board of Directors' intention is to pay an interim dividend in October. The
Board of Directors' meeting held on September 23, 2003 agreed to pay the interim
dividend No. 41 of MCh$7,952 (historical) corresponding to Ch$24 per share.
In-hand shares: There are not any.
Final Dividends. The Ordinary Meeting of shareholders held on April 28, 2003
approved to distribution of a final dividend of Ch$82.12 per share out of income
for the year 2002, that was paid on May 23, 2003.
F-31
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 26. OTHER OPERATING REVENUE
[Enlarge/Download Table]
The detail of other operating revenue is as follows:
-------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
(As restated (As
Note 40) restated
Note 40)
MCh$ MCh$ MCh$
-------------------------------------------------------------------------------------------------------------------------
a. Insurance Contract Settlements: (1)
o Preliminary settlements contract, August 93 - July 95 187 - -
o Preliminary settlements contract, August 95 - July 97 1,398 88 -
o Preliminary settlements contract, August 97 - July 99 388 309 6
o Preliminary settlements contract, August 99 - July 01 558 2,148 482
o Preliminary settlements contract, August 01 - July 03 - 435 617
b. Additional revenue from contributions before January 1, 1988 (1) 656 607 530
c. Surcharge and collection costs (1) 47 13 25
d. Revenues from services rendered by Administradora de Fondos de Cesantia
Chile S.A. (2) - 218 736
e. Other operating revenues from AFP Genesis Ecuador, AFP Porvenir Republica
Dominicana (3) 426 1,798 1,849
-------------------------------------------------------------------------------------------------------------------------
Totals 3,660 5,616 4,245
-------------------------------------------------------------------------------------------------------------------------
(1) Other operating Revenues is derived from favorable settlements from
Insurance Contracts, recognition of net interest revenues, recovery of
pending additional contributions (see Note 8 d) and collection of surcharge
and collections costs for contributions not paid on time, benefiting the
Administrator under D.L. 3,500, Article 19.
(2) Revenue from services provided and software sold to Administradora de
Fondos de Cesantia Chile S.A., as detailed in Note 33.
(3) Revenue as described in (1) for the Company's subsidiaries.
NOTE 27. OTHER NON-OPERATING INCOME
The detail of other non-operating income is as follows:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
-----------------------------------------------------------------------------------------------------------------------
Gain on sale of Afore Profuturo 26,443 - -
Gain on sale of AFPC Porvenir Colombia - - 8,585
Rental of premises 597 579 673
Gain on sale of assets 7 12 20
Penalty interest 20 18 12
Fraud recovery - - 82
Other 35 41 200
-----------------------------------------------------------------------------------------------------------------------
Total 27,102 650 9,572
-----------------------------------------------------------------------------------------------------------------------
F-32
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 28. DIRECTORS' FEES
Directors received fees as follows:
--------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------
Attendance fees 186 111 78
Other fees 4 7 5
--------------------------------------------------------------------------------
Total 190 118 83
--------------------------------------------------------------------------------
NOTE 29. INTEREST EXPENSES
Interest expenses were as follows:
--------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------
Interest on BBVA loan 1,072 501 199
Interest on Bank loans 778 474 384
Use of bank overdrafts 652 86 445
Amortization of debt issuance costs 133 134 59
Interest on leasing contracts 52 49 46
Others 321 268 227
--------------------------------------------------------------------------------
Total 3,008 1,512 1,360
--------------------------------------------------------------------------------
F-33
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 30. OTHER EXPENSES
a. Other Operating Expenses
In the Consolidated Statements of Income, Other operating expenses were
MCh$1,293, MCh$1,519 and MCh$1,732 for the years ended December 31, 2001, 2002
and 2003, respectively. These expenses are affected by the disability severity
of the participant and the associated medical costs.
b. Other non-Operating Expenses
The detail of other non-operating expenses is as follows:
--------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------
Rental expense 123 222 333
Loss on sale of assets 67 8 1
Fines by SAFP 4 4 35
Disposal of Property, Plant and Equipment 5 3 3
Insurance deductible expense - - 62
Other 34 63 116
--------------------------------------------------------------------------------
Total 233 300 550
--------------------------------------------------------------------------------
NOTE 31. PRICE-LEVEL RESTATEMENT
The detail of the price-level restatement is as follows:
--------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------
2001 2002
(As restated (As restated
Note 40) Note 40) 2003
--------------------------------------------------------------------------------
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------
Shareholders' equity 4,166 3,999 1,918
Other assets (5,217) (2,925) (1,189)
Property, plant and equipment, net (936) (903) (300)
Liabilities (972) 599 288
Accumulated depreciation 171 175 57
Income statement amounts 404 842 4
--------------------------------------------------------------------------------
Net charge (credit) to income (2,384) 1,787 778
--------------------------------------------------------------------------------
F-34
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 32. SERVICE CONTRACTS
Provida has entered into service agreement with different companies to
complement management, operation and sale operations in its line of business.
The relevant aspects of these contracts are indicated below:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
-----------------------------------------------------------------------------------------------------------
a. Collection services contracts
Costs charged to the "Administrative expenses" account In the Consolidated
Statements of Income
a.1) Banco del Estado de Chile Line of business: Banking activities
Value of service including VAT: UF 0.053 per payroll
Net costs recorded 175 172 234
Amount owed 14 71 26
Form of payment: cash
a.2) Banco Santander Santiago
Line of business: Banking activities
Value of Service including VAT: UF 0.022 per payroll
Net costs recorded 82 77 88
Amount owed 13 7 15
Form of payment: cash
a.3) Banco de Chile
Line of business: Banking activities
Value of service including VAT(*): UF 0.041 by payroll
Net costs recorded 4 4 4
Amount owed 1 1 1
Payment: cash
(*) Puerto Williams branches only.
a.4) BBVA Banco
Line of business: Banking activities
Value of service including VAT (*): UF 0.026 by payroll
Net costs recorded - - 181
Amount owed - - 21
Payment: cash
(*) Contract outstanding since February 1, 2003
F-35
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
-----------------------------------------------------------------------------------------------------------
a.5) Caja de Compensacion Los Andes
Line of business: Compensation Administrator
Value of service including VAT: Ch$90.84 per payroll and Ch$16.33 per
register, readjustable semi-annually
Net costs recorded 6 22 39
Amount owed 2 2 7
Payment: cash
Contract outstanding since June 2001
a.6) Caja de Compensacion Los Heroes
Line of business: Compensation Administrator
Value of service including VAT: Ch$90.84 per payroll and Ch$16.33 per
register, readjustable semi-annually
Net costs recorded - 1 6
Amount owed - - 1
Payment: cash
Contract outstanding since October 2001
a.7) Caja de Compensacion La Araucana
Line of business: Compensation Administrator
Value of service including VAT: Ch$90.84 per payroll and Ch$16.33 per
register, readjustable semi-annually
Net costs recorded - 6 15
Amount owed - 1 1
Payment: cash
Contract outstanding since October 2001
a.8) Servicios de Administracion Previsional Line of business: Electronic
collection services Value of service including VAT: Ch$91.00 per payroll
by a factor
between 1 and 0.1765, depending on the number of payroll paid and Ch$16.33
per register readjustable semi-annually.
Net costs recorded - 4 18
Amount owed - - 44
Payment: cash
Contract outstanding since May 2001
a.9) Caja de Compensacion 18 de Septiembre
Line of business: Compensation Administrator
Value of service including VAT: Ch$90.84 per payroll and Ch$16.33 per
register, readjustable semi-annually
Net costs recorded - - 11
Amount owed - - 11
Payment: cash
Contract outstanding since October 2001
F-36
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
b. Depository Services
Depository services for securities and financial instruments of the pension
funds and mandatory reserve resulting in costs included in "Administrative
Expenses", are as follows:
--------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------
b.1. Deposito Central de Valores S.A..
Line of business: Depositary Services
Net costs recorded 424 459 466
Amount owed - - -
Payment: Cash
b.2 Brown Brothers Harriman & Co.
Line of business: Banking activities
Type services rendered: Custodian
Net costs recorded 210 200 343
Amount owed 90 189 -
--------------------------------------------------------------------------------
c. Stock exchange transaction services
Brokerage costs are included in "Administrative Expenses", as follows:
--------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
Bolsa de Comercio de Chile MCh$ MCh$ MCh$
--------------------------------------------------------------------------------
Broker commissions 149 84 93
Fixed costs 53 41 41
--------------------------------------------------------------------------------
Total 202 125 134
--------------------------------------------------------------------------------
Bolsa de Comercio de Chile
Line of business: Brokerage
Amount owed: -
Payment: Cash
F-37
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
d. Administration and maintenance equipment services
Provida has signed administration and maintenance equipment services contracts,
the main services contracts are as follows:
Unisys (Chile) Corporation:
The service agreement includes maintenance and repair of data processing
equipment, technical professional services for programming licensed products and
licenses for use of product programs. The costs of these services included in
"Data Processing Expenses" are MCh$14, MCh$11 and MCh$8 in the years ended
December 31, 2001, 2002 and 2003, respectively.
Telefonica CTC Chile S.A.:
Telefonica CTC Chile S.A. in 2003 and Entel in prior years, provides
telecommunications services for long distance and allows the transportation of
wire line signals, lines and terminal equipment associated with the agreement,
which were as follows:
--------------------------------------------------------------------------------
Years ended December 31,
2001 2002 2003
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------
Processing data expenses 31 - 113
Administrative expenses 32 27 96
--------------------------------------------------------------------------------
Total 63 27 209
--------------------------------------------------------------------------------
Amounts owed: 17 - -
--------------------------------------------------------------------------------
e. Microfilm Services
Comicrom S.A.
This company provides microfilming services. The costs incurred for these
services are included in "Administrative Expenses, " and were MCh$44, MCh$45 and
MCh$39 for the years ended December 31, 2001, 2002 and 2003, respectively.
f. Design and management of centralized database
Comicrom S.A.
This company has a service agreement with Provida for the management,
safekeeping and maintenance of the participant database, which contains the
customer data transferred since 1981and respective contributions. Provida
accesses and manager this database through centralized consultation. The
agreement was signed on March 1, 2000. The costs for these services were MCh$51,
MCh$110 and MCh$53 for the years ended December 31, 2001, 2002 and 2003,
respectively, and are included in "Administrative Expenses."
F-38
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
g. Agreement for supplying digital forms
This contract is for the implementation of an information capture process for
participant contribution forms and other documents related to the
Administrator's operations, using digital imaging technology in general forms.
This contract is currently in the preliminary stage of testing, reviewing,
planning and modifying the documents in accordance with Provida requirements.
The effect in income is included in "administrative expenses" of MCh$567 in
2001, MCh$382 in 2002 and MCh$264 in 2003.
Amounts owed to Comicron S.A.: MCh$NIL in 2001, MCh$37 in 2002 and MCh$NIL in
2003.
h. Transmission and reception of electronic messages service
Transbank S.A.
This company has an agreement with Provida to electronically transfer
information through electronic mailboxes specialized in processing free form
messages. The costs for these services were MCh$10, MCh$14 and MCh$8 for the
years ended December 31, 2001, 2002 and 2003, respectively, and are included in
"data processing expenses".
i. Rental and maintenance equipment contracts
Xerox de Chile S.A.
The company has a contract with Provida for photocopy equipment rental,
technical service, and maintenance of printers. The costs for these services
were MCh$113, MCh$104 and MCh$54 for the years ended December 31, 2001, 2002 and
2003, respectively, and are included in "administrative expenses".
Amounts owed were MCh$3, MCh$3 and MCh$3 for the years ended December 31, 2001,
2002 and 2003, respectively.
j. Other minor services
Other contracts with Wackenhut Ltda. and Slim Ltda. (cleaning services),
Comunicaciones Capitulo S.A. (telephone line), resulted in costs of MCh$96,
MCh$115 and MCh$117 for the years ended December 31, 2001, 2002 and 2003,
respectively, and are included in "administrative expenses".
Amounts owed were MCh$8, MCh$ NIL and MCh$ NIL for the years ended December 31,
2001, 2002 and 2003.
F-39
NOTE 33. TRANSACTIONS WITH RELATED PARTIES
a. Amounts
Significant transactions with related companies for the years ended December 31,
2001, 2002 and 2003 are summarized as follows:
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------------
Company Transaction Amount of transactions Effect on income Gain (loss)
2001 2002 2003 2001 2002 2003
------------------------------------------------------------------------------------------------------------------------------
BBVA Pensiones Chile S.A.(a) Pending Balance Th UF 873 702 180 MCh$ (1,072) (501) (158)
Lease MCh$ 35 36 71 MCh$ 35 36 71
BBVA S.A. Oficina de
Representacion Chile (b) Lease MCh$ - 22 9 MCh$ - 22 9
BBVA Corredores de Bolsa S.A. (b) Financial services MCh$ 60 56 48 MCh$ (60) (56) (48)
BBVA Chile S.A. (b) Lease MCh$ - - 678 MCh$ - - 354
BBVA Compania de Seguros de Vida
S.A. (b) Paid premiums MCh$ - - 8,419 MCh$ - - (8,419)
Paid claims MCh$ - - 610 MCh$ - - (610)
Servicio de Adm. Previsional S.A.(c) Collections services MCh$ - 4 18 MCh$ - (4) (18)
Pending balance MCh$ - - 235 MCh$ - - 12
Administradora de Fondos de Technological support
Cesantia Chile S.A. (c) services MCh$ - 218 491 MCh$ - 218 491
Computer system sale MCh$ - - 428 MCh$ - - 246
Nature of relationship:
(a) Parent
(b) There is a relationship through common shareholder BBVA Group.
(c) Affiliated Company
b. Transactions
BBVA Pensiones S.A.
The purchase agreement, through which Provida acquired 89.1% of the equity
ownership of the company formerly known as AFP Proteccion S.A. was consummated
at a price of UF1,506,001.59 plus US$100,000,000, payable in 9 variable
semiannual installments maturing from May 15, 1999. The calculation of interest
is at six month-LIBOR plus 2.25 percent per year, in the case of dollars and 180
day-TAB rate plus 2.00 percent in the case of UF. The US dollar denominated debt
was fully paid off and the UF denominated debt was renegotiated to 90 day-TAB
rate plus 0.75 percent (1.00 percent until June 12, 2001). At year-end 2003, the
balance of this debt is UF179,942.39 plus interest equivalent to UF1,242.60 with
a 5.65% rate.
F-40
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Short term
Semiannual installments are due under an agreement with BBVA Pensiones Chile
S.A. maturing on May 15, 2004, equivalent to UF179,942.39 plus interest
amounting to UF1,242.60 accrued for MCh$3,066 at year-end. At December 31, 2002,
the balance was UF350,535.07 plus interest amounting to UF915.07 equivalent to
MCh$5,944.
Long term
At December 31, 2002, the balance was UF179,942.39 equivalent to MCh$3,043 and
at December 31, 2003, the balance was 0.
NOTE 34. HEDGE CONTRACTS
At December 31, 2003 the detail of hedge contracts, recorded in conformity with
Note 2, is as follows:
[Enlarge/Download Table]
Balance sheet / income statement effect
Purchase Hedge
Type of Type of Contract Maturity or Specific sale amount or
hedge contract amount expiry item /position transaction Asset/liability Effect on income
Name Amount Name Amount Realized Unrealized
MCh$ MCh$ MCh$
Loan in
FR CCPE 15,000,000 I quarter 2004 US$ P US$ 15,000,00 Creditors 443 - -
Closing
FR CCPE 15,000,000 I quarter 2004 US$ S position 15,000,00 Creditors 439 - (4)
CCPE: Contract for hedge of existing items
NOTE 35. COMMITMENTS AND CONTINGENCIES
a. Guarantees granted
AFP Provida, authorized by the Extraordinary Meeting of Shareholders held on
January 7, 2002, guaranteed Administradora de Fondos de Cesantia de Chile S.A.,
debt amounting to UF 400,000, in order to comply with its agreement concerning
the Administration of Unemployment Insurance.
The guarantee delivered by AFP Provida S.A. of 38.46% of the aforementioned
amount to cover possible payments of certificate of deposits entered into by the
aforementioned Sociedad Administradora de Fondos de Cesantia de Chile S.A., as
well as for respective promissory notes.
F-41
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
b. Disability and Survival Pensions and Life Annuities
Article 82 of D.L. 3,500 established that when an insurance company does not
fulfill obligations originated from signed contracts; the State Guarantee will
cover the minimum fixed income defined in Articles 73, 77 and 78. For income or
pensions exceeding those amounts, the State Guarantee will cover 75% of the
excess, with a maximum of UF 45.
The Company's contingency is approximately MCh$20,422. The basic assumptions of
this calculation made on pensions generated before January 1, 1988 are based on
a life expectancy of 28 years for pension beneficiaries, an annual discount rate
of 5% and application of the previously mentioned State Guarantee. Pension fund
participants' claims against insurance companies would be subject to the
privilege established in Article 2,472, No. 4 of the Civil Code.
The Company believes that the probability of its having to pay out these amounts
is remote and therefore has not accrued a provision.
c. Litigation
Provida has filed a lawsuit against Banco del Estado de Chile, claiming damages
for the losses suffered by Provida and the Pension Funds when the bank made
extraordinary write-offs of mortgage-backed bonds in violation of the applicable
legal and contractual statutes in 1986. In a subsequent action, Provida filed a
demand for payment based on Law No. 18,010.
In 1993, 1995 and 1997, the labor union, which represents certain Provida
employees, filed actions against Provida on behalf of the union members for
1990, 1991, 1992, 1993, 1994 and 1995. The action, which was filed in the labor
Court of Santiago, alleges certain miscalculations of payment of contractually
required profit sharing in those periods. According to Provida's legal advisors'
opinion, none of these lawsuits would have a material impact on the
Provida's financial position, results of operations or cash flows.
For the year ended December 31, 2003 there were 55 labor lawsuits presented by
the Administrator's former employees, which are filed in various courts
throughout the country. These labor lawsuits seek damages of approximately
MCh$557. However, management believes that none of these lawsuits would have a
material impact on the Provida's financial position, results of operations or
cash flows.
d. Derivative financial instruments
Provida has foreign exchange forward contracts as of December 31, 2003 in order
to hedge changes in the US dollar exchange rate, which would affect their
liabilities denominated in US dollars. These contracts are explained in Note 34.
F-42
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Market value of gains or losses on futures contracts are recognized offsetting
foreign exchange losses or gains on those liabilities. These contracts resulted
in gains of MCh$426 for the year ended December 31, 2001, respectively, and a
loss of MCh$251 and MCh$4 as of December 31, 2002 and 2003.
e. Unremitted deductions from participants' pay
Pension contributions that have not been completely paid as of October 1, 1982,
must be communicated by employers to Provida, as stipulated in Law 18,646 dated
August 19, 1987.
The amount of pension contributions that have not been declared nor paid by
employers has been estimated based on participants with positive balances in
their individual capitalization accounts that have unpaid periods in the last 32
months, adjusted for the official unemployment rate and increase by indexation
and interest.
The estimated amounts are as follows:
Unaudited
--------------------------------------------------------------------------------
As of December 31,
2002 2003
--------------------------------------------------------------------------------
MCh$ MCh$
--------------------------------------------------------------------------------
Declared contributions 84,182 92,269
Originating from unreconciled accounts 259 266
--------------------------------------------------------------------------------
Total 84,441 92,535
--------------------------------------------------------------------------------
f. Investment Abroad
o As a consequence of the introduction of pension systems based on individual
capitalization in other Latin American countries, AFP Provida, as well as
other administrators, is taking part in these projects through capital
contributions and sales of their internally developed software.
o At year-end, the Administrator maintains investments, through its
subsidiary Provida International S.A., in AFP Horizonte (Peru) with a
15.87% ownership over the paid-in capital and an investment equivalent to
US$4,096,919; in Genesis AFP (Ecuador) with a 99.999994% ownership and
investment equivalent to US$2,855,282; in Afore Bancomer (Mexico) with a
7.5% ownership and an investment equivalent to US$66,263,572; in AFP Crecer
(formerly AFP Porvenir, El Salvador) with a 19.00% ownership and an
investment equivalent to US$15,384,686 and AFP Porvenir Republica
Dominicana with a 99.9999% ownership and an investment equivalent to
US$4,306,470.
g. Statement of Cash Flow - cash flow related to transaction booked as equity
o Provida International S.A. agreed to enter into a contract with Grupo
Nacional Provincial Pensiones S.A. de C.V. of Mexico, in virtue of which
Provida Internacional sold its total ownership in Afore Profuturo GNP, S.A.
de C.V. amounting to 14.45%. The agreed price is equivalent to MCh$42,027
which was paid in cash when the contract was signed. Such transaction was
performed in March 2001, once the corresponding government authorization
was obtained in Mexico, which resulted in a gain recognized of MCh$26,443.
h. Mandatory investments
o The Company, as disclosed in Note 6, is responsible for a minimum return on
its investments. Should that minimum return not meet the requirements, the
Company may make up the difference with gains on its mandatory investment
or buying more shares in the Pension Fund. To date, the minimum return has
met the requirements.
F-43
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 36. OPERATING REVENUES AND EXPENSES BY FUND
The operating Revenues and expenses by fund for the year ending December 31,
2001, 2002 and 2003 are as follows:
Year 2001
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
A. OPERATING REVENUES
Fund Fund Fund Fund Fund
Type A Type B Type C Type D Type E Total
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
----------------------------------------------------------------------------------------------------------------
Fees for contribution deposits
Fixed fee - - 6,307 - - 6,307
Variable fee - - 85,994 - 7 86,001
Fees from programmed withdrawals and
temporary income
Variable fee - - 769 - 3 772
Gains on mandatory investments - - 6,439 - 6 6,445
----------------------------------------------------------------------------------------------------------------
Total 99,509 16 99,525
----------------------------------------------------------------------------------------------------------------
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
B. OPERATING EXPENSES (As restated, Note 40)
Fund Fund Fund Fund Fund
Type A Type B Type C Type D Type E Total
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
----------------------------------------------------------------------------------------------------------------
Life and disability insurance premium expenses - - 33,879 - 1 33,880
Sales personnel payroll expenses - - 9,068 - - 9,069
Commissions paid for custody of securities
National - - - 424 - - 424
Foreign - - 210 - - 210
Commissions paid on investment principals abroad
Stock exchange transaction expenses - - 61 - 8 69
Transporting of securities and insurance - - 5 - - 5
--------------------------------------------------------------------- ------------------------------------------
Total - - 43,647 - 9 43,657
----------------------------------------------------------------------------------------------------------------
Other operating expenses not included in the previous table are directly or
indirectly related to the Type 1 Pension Fund.
F-44
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Year 2002
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
A. OPERATING REVENUES
Fund Fund Fund Fund Fund
Type A Type B Type C Type D Type E Total
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
----------------------------------------------------------------------------------------------------------------
Fees for contribution deposits
Fixed Fee 20 462 5,699 104 25 6,310
Variable Fee 347 5,808 80,746 1,377 471 88,749
Fee s from programmed withdrawals and
temporary income
Variable Fee - - 769 9 15 793
Gains on mandatory investments 17 98 4,685 76 31 4,907
----------------------------------------------------------------------------------------------------------------
Total 384 6,368 91,899 1,566 542 100,759
----------------------------------------------------------------------------------------------------------------
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
B. OPERATING EXPENSES (As restated, Note 40)
Fund Fund Fund Fund Fund
Type A Type B Type C Type D Type E Total
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
----------------------------------------------------------------------------------------------------------------
Life and disability insurance premium expenses 66 938 32,461 189 76 33,730
Sales personnel payroll expenses - - 7,791 - - 7,791
Commissions paid for custody of securities
National 1 8 440 7 3 459
Foreign 1 10 176 9 4 200
Stock exchange transaction expenses - - 125 - - 125
----------------------------------------------------------------------------------------------------------------
Total 68 956 40,993 205 83 42,305
----------------------------------------------------------------------------------------------------------------
Other operating expenses not included in the previous table are directly or
indirectly related to the Type C Pension Fund.
F-45
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Year 2003
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
A. OPERATING REVENUES
Fund Fund Fund Fund Fund
Type A Type B Type C Type D Type E Totals
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
----------------------------------------------------------------------------------------------------------------
Fees for contribution deposits
Fixed fee 169 2,793 2,805 565 129 6,461
Variable fee 3,112 35,910 43,692 7,678 2,561 92,953
Fees from programmed withdrawals
and temporary income
Variable fee - 1 524 221 86 832
Gains on mandatory investments 400 1,845 6,588 833 140 9,806
----------------------------------------------------------------------------------------------------------------
Total 3,681 40,549 53,609 9,297 2,916 110,052
----------------------------------------------------------------------------------------------------------------
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
B. OPERATING EXPENSES
Fund Fund Fund Fund Fund
Type A Type B Type C Type D Type E Total
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
----------------------------------------------------------------------------------------------------------------
Life and disability insurance premium expenses 962 12,411 28,217 2,271 839 44,700
Sales personnel payroll expenses - - 8,999 - - 8,999
Commissions paid for custody of securities
National 9 56 341 45 15 466
Foreign 3 19 311 8 2 343
Stock exchange transaction expenses 3 18 93 15 5 134
----------------------------------------------------------------------------------------------------------------
Total 977 12,504 37,961 2,339 861 54,642
----------------------------------------------------------------------------------------------------------------
Other operating expenses not included in the previous table are directly or
indirectly related to the Type C Pension Fund.
F-46
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 37. SEVERANCE PAYMENTS FOR YEARS OF SERVICE
Provida has recorded provisions of MCh$55 and MCh$30 in 2002 and 2003,
respectively, to cover its severance indemnities in accordance with the
collective bargaining agreement with its workers.
NOTE 38. SANCTIONS
a) Superintendency of Pension Fund Administrators (SAFP)
In accordance with Resolution No. 0007, on January 23, 2003 SAFP assessed the
Administrator a penalty of UF 50, for breaking regulations concerning excessive
investment.
In accordance with Resolution No. 0008, on January 23, 2003 SAFP assessed the
Administrator a penalty of UF 200, for breaking regulations concerning the
remittance of information regarding the compliance with social security
obligations of employers from outlying areas.
In accordance with Resolution No. 0017, on April 10, 2003 SAFP assessed the
Administrator a penalty of UF 200, for breaking regulations forcing trade of
instruments of the Pension Funds in secondary formal exchange markets.
In accordance with Resolution No. 0023, on May 20, 2003 SAFP assessed the
Administrator a penalty of UF 300, for deficiencies detected in the calculation
of the coverage for Disability insurance of participants that have requested
their disability to be considered as such.
In accordance with Resolution No. 0027, on June 17, 2003 SAFP assessed the
Administrator a penalty of UF 100, for breaking regulations concerning
investment abroad.
In accordance with Resolution No. 0029, on August 25, 2003 SAFP assessed the
Administrator a penalty of UF 100, for breaking regulations concerning
investment limits on equity securities in a Pension Fund.
In accordance with Resolution No. 0037, on October 6, 2003 SAFP assessed the
Administrator a penalty of UF 600, for noncompliance with regulations concerning
collection of social security payments and maintenance of subsidiary ledgers of
Type C Pension Fund accounting.
In accordance with Resolution No. 0038, on October 23, 2003 SAFP assessed the
Administrator a penalty of UF 500, for breaking regulations concerning
calculation, documentation and payment of social security benefits.
In accordance with Resolution No. 0042, on December 18, 2003 SAFP assessed the
Administrator a penalty of UF 400, for breaking regulations concerning the
issuance of statements of accounts regarding Recognition Bond.
F-47
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 39. DISTRIBUTION OF SHAREHOLDERS
The percentage ownership of shareholders is as follows:
--------------------------------------------------------------------------------
Percentage Number of
holding shareholders
--------------------------------------------------------------------------------
a) As of December 31, 2002
10% holding or more 74.45 2
Less than 10% holding with
Investment of UF 200 or more 23.88 1,215
Less than 10% holding with
Investment of less than UF 200 1.67 1,339
--------------------------------------------------------------------------------
Total 100.00 2,556
--------------------------------------------------------------------------------
Controlling shareholder (BBVA Pensiones Chile S.A.) 51.62 1
--------------------------------------------------------------------------------
b) As of December 31, 2003
10% holding or more 75.58 2
Less than 10% holding with
Investment of UF 200 or more 24.16 1,753
Less than 10% holding with
Investment of less than UF 200 0.26 720
--------------------------------------------------------------------------------
Total 100.00 2,475
--------------------------------------------------------------------------------
Controlling shareholder (BBVA Pensiones Chile S.A.) (a) 51.62 1
--------------------------------------------------------------------------------
(a) BBVA Pensiones Chile S.A. is indirectly controlled by the BBVA Group in
Spain.
NOTE 40. CORRECTION OF AN ERROR
In accordance with written communication No. 1312 dated January 22, 2004
from the Superintendency of Pension Funds Administrators (SAFP), a more
appropriate measurement methodology to clearly match expenses and revenue
related to higher casualty rate experience for the Disability and Survival
pension premium was established.
The Company accounting policy had been to recognize the expense of the insurance
contracts during the contract year based on the agreed provisional rate. At the
end of the contract year the Company would recognize the difference between the
actual casualty rate experience for that contract year and the agreed
provisional rate as an increased expense or other income immediately. As the end
of the contract year did not always coincide with the end of the Company's
accounting year end the actual casualty experience was not always recognized
during the appropriate accounting year.
The Company changed its accounting policy to recognize the difference between
management's best estimate of the actual casualty rate experience and the agreed
provisional rate on a monthly basis based on historical experience (and current
information provided by the insurance carrier). This new accounting policy
results in a more appropriate matching of the actual insurance costs incurred
during the appropriate accounting year.
For 20-F purposes the Company has restated the Chilean financial statements
translated into English to recognize the correction of this error for the years
2001 and 2002 in accordance with United States Accounting Principles Board 20,
"Correction of an Error". The effects are disclosed below.
F-48
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
A summary of the significant effects of the restatement is as follows:
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------
As of January 1, 2001 As of December 31, 2001 As of December 31, 2002
As As As
previously previously previously
reported As restated reported As restated reported As restated
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Provision for unfavorable
casualty rate 3,714 10,128 2,831 9,623
Deferred income tax - assets 109 1,158 127 1,248
Retained earnings 84,425 79,060 89,196 83,526
Opening retained earnings 74,142 71,933
Opening shareholders' equity 151,381 149,172
Total shareholders' equity 167,452 162,087 178,723 173,052
Income Statements:
Insurance premium expenses, net
of tax (30,658) (33,880) (33,421) (33,730)
Price-level restatement (loss)
gain 2,324 2,384 (1,944) (1,787)
Net income 33,663 30,502 34,347 34,195
NOTE 41. SIGNIFICANT EVENTS
Law No.19,795 was published in the Official Gazette on February 28, 2002,
introducing changes in Act 3,500 of 1980, increasing the number of existing
Pension Funds from two to five by each Administrator, each with a different
percentage mix of investments in financial debt securities and equity
securities. Also, it introduced changes concerning investment in the Funds,
increasing the limits and instruments authorized for investment abroad and
improving the investment of Pension Funds in the country.
SAFP issued Circular No. 1235 on October 14, 2002, regulating Financial Report,
Annual Report and calculation of net shareholders equity of AFP's . This
Circular revokes Circulars No. 482, 957 and 958 and Chapters I, III and IV of
the Circular No. 180.
The Board of Directors' meeting held on January 21, 2003 approved leasing
contracts with BBVA Banco in Santiago, Rancagua and Concepcion. These leasings
would involve annual sublease income between UF 51,480 and UF 62,667, and annual
expenses between UF 16,610 and UF 18,622. The aforementioned leasing meets
similar equity conditions ruling in the market.
The same meeting approved service contracts concerning the collection of social
security payments and pension payment by BBVA Banco, which would be paid within
price ranges that banks generally charge for these services.
F-49
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
In the Board of Directors' meeting held on March 18, 2003 the Chief Executive
Officer noted the following:
The extraordinary meeting of shareholders of the investee Company "Servicios de
Administracion Previsional S.A." held on March 27, 2003 approved a capital
increase of MCh$1,300 through the issuance of 61,646 new shares. From that
capital increase, A.F.P. Provida S.A. should subscribe and pay 37.8%, that is,
23,302 shares amounting to MCh$491.
The Board of Director agreed to summon an Ordinary Meeting of Shareholders to be
held on April Monday 28, 2003.
In the Board of Directors' meeting held on April 22, 2003 the Chief Executive
Officer noted the following:
An Extraordinary Meeting of Shareholders of the investee company "Sociedad
Administradora de Fondos de Cesantia de Chile S.A." will be held on April 28,
2003 to approve a capital increase of UF 150,000 through the issuance of 15,000
new shares. From such capital increase, Provida would subscribe and pay 37.8%,
that is, 5,670 shares amounting to UF 56,700.
The leasing contract with BBVA Pensiones Chile S.A. will be changed, increasing
leased spaces to be used by the "Unified Technological Platform for Pension Fund
Administrators in the Americas" project, maintaining the value per square meter
and increasing the value of the monthly lease from UF 598 to UF 667.
The Ordinary Meeting of Shareholders held on April 28, 2003 approved the
following matters:
- Annual report, balance sheets and financial statements.
- Appointment of La Segunda newspaper to publish summons to Meetings of
Shareholders.
- Distribution of a final dividend of Ch$82.12 per each share charging
income for the year 2002, whose payment will be made beginning May 23,
2003. Also, the interim dividend of Ch$28 that was paid in October
2002 was ratified.
- Appointment of Deloitte & Touche as external auditors.
AFP Provida S.A. Board of Directors' meeting held on June 30, 2003 agreed the
following:
Awarding the public bid for the Disability and Survival Insurance Contract to
BBVA Seguros de Vida S.A., that will span for a seventeen-month period from
August 1, this year, for a monthly amount of UF 2,150.
Opening a credit line with Bilbao Vizcaya Argentaria, Chile Bank up to the sum
of MCh$20 to be used in similar conditions generally ruling in the market.
AFP Provida S.A. Board of Directors' Extraordinary Meeting held on August 28,
this year agreed to approve, through its subsidiary company, Provida
Internacional S.A., that it will negotiate the sale of its ownership in A.F.P.C.
Porvenir in Colombia and also the acquisition of all shares of A.F.P. Porvenir
in the Dominican Republic, properly authorizing the administration for such
purposes. These transactions are subject to due diligence processes and other
processes inherent in this type of negotiations, and would involve, if they are
consummated, transaction values of 26.8 million U.S. dollars approximately.
F-50
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
On September 30, 2003 the Administrator informed that the negotiations have been
completed and the following transactions have been approved, that were approved
by the Board of Directors and reported to the public, and they are:
1. Sale of Provida International S.A.'s ownership in AFPC Porvenir S.A. in
Colombia, representing 20% of the share capital of such company, amounting
to ThUS$26,785.
2. Purchase by Provida International S.A. of all shares of AFP Porvenir S.A.
in the Dominican Republic, amounting to ThUS$15,385.
The aforementioned sum, with respect to the share ownership transfer, is gross
and subject to taxes in conformity with Colombian laws.
The Administrator noted the following:
o The sale of our ownership in AFPC Porvenir S.A. in Colombia resulted in a
net effect on the Company's income at December 31, 2003 of ThUS$8,873
equivalent to MCh$5,865, at the exchange rate of Ch$660.97 per dollar. This
amount results from the sales price less tax estimates and the value of
assets.
o The purchase of AFP Porvenir S.A. in the Dominican Republic resulted in
goodwill from investments of ThUS$10,879, equivalent to MCh$7,191, at the
exchange rate of Ch$660.97 per dollar. For this calculation the Company's
interim financial statements were used.
o In accordance with Written Communication No. 1312 of January 22, 2004, SAFP
mandated that provisions be established for experienced higher casualty
rates of Disability and Survival Insurance Contracts. The administrators
should recognize in their quarterly financial statements loss contingencies
arising from experience under such contracts. Evolution of casualty rates
of current contracts and expired contracts should be periodically reviewed
in order to establish the amounts of appropriate estimated provisions that
should be recognized. In accordance with these instructions, to recognize
the changes in the casualty rates provision, the Administrator has
decreased net income for the year 2002 by MCh$152, for the year 2001
MCh$3,161, and for the prior years of MCh$2,209. (See Note 40).
NOTE 42. DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's consolidated financial statements have been prepared in accordance
with Chilean GAAP, which differ in certain significant aspects from generally
accepted accounting principles in the United States of America (U.S. GAAP).
F-51
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
I Differences in Measurement Methods
The principal methods applied in the preparation of the accompanying financial
statements that have resulted in amounts which differ from those that would have
otherwise been determined under U.S. GAAP are as follows:
a. Price-level restatement:
Under Chilean GAAP, financial statements are restated to reflect the full
effects of the gain (loss) in the purchasing power of the Chilean peso on the
financial position and results of operations of reporting entities. The method
is based on a model that enables calculation of net inflation gains or losses
caused by monetary assets and liabilities exposed to changes in the purchasing
power of local currency, by restating all non-monetary accounts in the financial
statements. The model prescribes that the historical cost of such accounts be
restated for general price-level changes between the date of origin of each item
and the year-end.
b. Translation of financial statements of investments outside of Chile:
Provida's operations outside of Chile are not considered extensions of the
parent company's operations and are therefore remeasured into U.S. dollars
(Latin American Countries, mainly) under Technical Bulletin No.64 as follows:
o Monetary assets and liabilities are translated at year-end rates of
exchange between the U.S. dollar and the local currency.
o All non-monetary assets and liabilities and shareholders' equity are
translated at historical rates of exchange between the U.S. dollar and the
local currency.
o Income and expense accounts are translated at average rates of exchange
between the U.S. dollar and the local currency.
o The effects of any exchange rate fluctuations on monetary assets and
liabilities, denominated in currencies other than the U.S. dollar, as
compared to the U.S. dollar, are included in the results of operations for
the period.
The foreign currency translation procedures prescribed by Chilean GAAP are part
of the comprehensive basis of preparation of price-level adjusted financial
statements. Inclusion of inflation and translation effects in the financial
statements is considered appropriate under the inflationary conditions that have
historically affected the Chilean economy and accordingly are not eliminated in
the reconciliation to U.S. GAAP as allowed under item 17 of the Securities and
Exchange Commission's (SEC) rules. In addition, as provided by the AICPA
International Task Force, Technical Bulletin No. 64 is exempted for purposes of
any U.S. GAAP - Chilean GAAP difference, as it is considered theoretically
similar to FAS 52 in its accounting methodology.
c. Minimum dividend:
As required by the Chilean Companies Law, unless otherwise decided by the
unanimous vote of the holders of issued and subscribed shares, Provida must
distribute a cash dividend in an amount equal to at least 30% of its income as
determined in accordance with Chilean GAAP, unless and except to the extent that
Provida has unabsorbed prior year losses. Since the payment of the 30% dividend
out of each year's income is required by Chilean law, an accrued liability was
included in the US GAAP reconciliation in paragraph m. below, whenever, and to
the extent that, interim dividends paid do not reach the 30% minimum dividend.
F-52
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
d. Marketable securities:
Under Chilean GAAP, mutual funds, bonds issued by corporations, bonds issued by
Chilean Government agencies and notes issued by financial institutions with
readily determinable market values are recorded at the lower of cost or market.
Unrealized losses on such investments are reflected in the statements of income.
Under U.S. GAAP, these investments are classified as available for sale and are
recorded at fair market value. Unrealized gains and losses on such investments
are reflected, net of tax, as other comprehensive income as a separate component
of shareholders' equity. Unrealized losses that are considered to be
other-than-temporary are recorded as impairment charges in the income statement.
As of December 31, 2001, 2002 and 2003, this difference was not significant and
no adjustment has been included in the reconciliation to U.S. GAAP.
e. Investments in related companies
Under both Chilean and US GAAP, investments in which the investor can exercise
significant influence over the investee's operating and financial policies are
recorded using the equity method of accounting. Under Chilean GAAP, an
investment of 10% or more of the voting stock of the investee leads to a
refutable presumption that the investor has the ability to exercise significant
influence. Under US GAAP, the threshold is considered to be 20% or more. The
corresponding adjustment is included in paragraph (n) below.
f. Results of subsidiaries during the development stage:
Under Chilean GAAP, net losses incurred during the development stage of a
subsidiary company are not charged to the income statement during the year in
which they were incurred, being charged instead directly to a shareholders'
equity account (subsidiary start-up deficit).
US GAAP requires that all such losses be reflected in the income statements,
regardless of the stage of development the subsidiary is in. The effects of
these differences are shown in the paragraph (n) below.
g. Goodwill
Under Chilean GAAP, goodwill is amortized on a straight-line basis over a
maximum 20 year period.
Excluding goodwill and intangibles with indefinite lives acquired after June 30,
2001 which have not been amortized, under US GAAP, goodwill and identifiable
intangible assets were amortized on a straight-line basis over the useful
economic life, not to exceed 40 years for years ended on or before December 31,
2001. Goodwill and identifiable intangible assets were evaluated for impairment
when events or changes in circumstances indicated that, in management's
judgment, the carrying value of such assets may not be recoverable.
F-53
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Under US GAAP, effective January 1, 2002, Provida adopted SFAS 142, "Goodwill
and Other Intangible Assets". The statement directs that goodwill and
intangible assets that have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. Intangible assets that
have finite lives will continue to be amortized over their useful lives. The
transitional impairment test performed under SFAS No. 142 did not result
in the recognition of an impairment loss. No losses for impairment were
recorded as the result of the annual impairment tests required under SFAS 142.
Had we adopted SFAS No. 142 effective January 1, 2001 and accordingly not
amortized goodwill for the year ended December 31, 2001, the Company's net
income and basic and diluted earnings per share would have been as follows:
[Download Table]
2001 2002 2003
-------- -------- --------
(As restated (As restated
Note 40) Note 40)
MCh$ MCh$ MCh$
Net income under US GAAP as reported 42,795 31,749 28,114
Add back: Goodwill amortization under US GAAP 146 -- --
-------- -------- --------
Adjusted net income under US GAAP 42,941 31,749 28,114
======== ======== ========
2001 2002 2003
-------- -------- --------
(As restated (As restated
Note 40) Note 40)
MCh$ MCh$ MCh$
Basic and diluted earnings per share:
Reported net income 0.13 0.10 0.09
Add back: Goodwill amortization 0.00 -- --
-------- -------- --------
Adjusted net income 0.13 0.10 0.09
======== ======== ========
h. Business combinations
During 2000, Provida, through its subsidiary, Provida International S.A.,
acquired 7.5% of Afore Bancomer, for the amount of ThUS$66,264. In March of
2001 and as a condition to this purchase, Provida International S.A. sold its
14.45% holding in Afore Profuturo, for the amount of ThUS$61,698 to an
unrelated party.
Under Chilean GAAP, the successive acquisition and sale of both companies
constituted a single financial transaction. The proceeds from the sale were
used to pay the debt originating in the acquisition of the stake in Afore
Bancomer, while the gain on sale of Profuturo of ThUS$29,155 (MCh$19,860) was
offset against the goodwill recognized from the acquisition of Bancomer.
For US GAAP purposes, the purchase of Afore Bancomer and the sale of Afore
Profuturo would be accounted for as two separate transactions, recognizing the
gain on sale in results of operations and recording goodwill to the extent that
the amount paid exceeded the fair value of the assets acquired and liabilities
assumed for the purchase. The effects of these differences are shown in the
paragraph (n) below.
The sale of the participation in AFPC Porvenir S.A. in Colombia on 2003,
resulted in a gain of ThUS$8,873 equivalent to MCh$5,864, at the exchange rate
of Ch$660.97 per dollar, net of taxes. The difference for U.S. GAAP purposes in
the gain on the sale relates to the non-amortization of goodwill under U.S. GAAP
in 2002.
F-54
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The purchase of AFP Porvenir S.A. in the Dominican Republic in 2003 resulted in
goodwill from investments of ThUS$10,879, equivalent to MCh$7,191, at the
exchange rate of Ch$660.97 per dollar under Chile GAAP at the date of
acquisition. Under U.S. GAAP, the Company is in the process of determining the
fair value of the assets acquired and liabilities assumed in the acquisition.
The Company expects to complete the U.S. GAAP accounting by September 2003.
The Company acquired a 99.99984% participation in AFP Porvenir S.A. in the
Dominican Republic.
The Company made this acquisition in order to enhance its foreign investments
in companies performing the same type of services as the Company outside of
Chile.
Currently, as the Company is still completing its fair value assessment, for
U.S. GAAP purposes, the goodwill recognized is equal to that recorded under
Chile GAAP. Once the fair value assessment of assets acquired and liabilities
assumed has been made, goodwill amortization reversed under U.S. GAAP in 2003
may be assigned to other assets requiring the adjustment of such reversal in
2004.
i. Derivatives:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities". In June 1999,
the FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133".
In June 2000, the FASB issued Statement 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement
No. 133". In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging contracts under FAS 133. SFAS
No.133, as amended, establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative instrument's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative instrument's gains and losses to
offset related results on the hedged item in the income statement, to the
extent effective, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that qualify for hedge
accounting.
The Company adopted SFAS No. 133, as amended, on January 1, 2001. SFAS No. 133
requires that as of the date of initial adoption, the difference between the
market value of derivative instruments recorded on the balance sheet and the
previous carrying amount to those derivatives be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a
change in accounting principle in accordance with Accounting Principles Board
Opinion No. 20, "Accounting Changes". Statement 133 cannot be applied
retroactively. SFAS No. 133 must be applied to (a) derivative instruments
and (b) certain embedded derivative instruments.
SFAS No. 133, in part, allows special hedge accounting for "fair value"
and "cash flow" hedges. SFAS No. 133 provides that the gain or loss on a
derivative instrument designated and qualifying as a "fair value" hedging
instrument as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk be recognized currently in earnings in the same
accounting period. The accounting standard provides that the effective portion
of the gain or loss on a derivative instrument designated and qualifying as a
"cash flow" hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same period or
periods during which the hedged forecasted transaction affects earnings.
F-55
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Current Chilean accounting rules do not consider the existence of derivative
instruments embedded in other contracts and therefore they are not reflected in
the financial statement. For US GAAP purposes, certain implicit or explicit
terms included in host contracts that affect some or all of the cash flows or
the value of other exchanges required by the contracts in a manner similar to a
derivative instrument, must be separated from the host contract and accounted
for at fair value. Under US GAAP, the Company separately measures embedded
derivatives as freestanding derivative instruments at their estimated fair
values recognizing changes in earnings when they occur. The only embedded
derivative instrument requiring bifurcation related to the financial guarantee
("encaje") that becomes payable if the rate of return falls below market value.
The Company estimates the fair value of this financial guarantee approximates
zero, as there is very low probability that the guarantee will become
effective. As a result, no adjustment has been included in paragraph (n) below.
Also, the Company has entered into forward exchange contracts. The treatment of
such contracts for accounting purposes, under Chile GAAP, differs depending on
whether they are considered speculative or hedge contracts and/or what type of
transaction they may hedge as well as whether or not the unrealized portion
represents a gain or loss.
The cumulative effect of the change in accounting principle in 2001 related to
the adoption of FASB No. 133. Under U.S. GAAP, the cumulative effect of the
change in accounting principle related to the effect of recording in income
under U.S. GAAP the deferred gains recorded on forward exchange contracts for
Chile GAAP purposes as of January 1, 2001. The derivative adjustment for the
year ending December 31, 2001 was, similarly, to record in the income statement
the unrealized gain for the year ended December 31, 2001 which had been
deferred on the balance sheet for Chilean GAAP purposes.
j. Deferred income taxes
Under Chilean GAAP, until December 31, 1999, deferred income taxes were
recorded based on non-recurring timing differences between the recognition of
income and expense items for financial statement and tax purposes. Accordingly,
there was an orientation toward the income statement focusing on differences in
the timing of recognition of revenues and expenses in pre-tax accounting income
and taxable income. Chilean GAAP also permitted not providing for deferred
income taxes where a deferred tax asset or liability was not expected to be
realized. Beginning on January 1, 2000, the Company recorded income taxes in
accordance with Technical Bulletin No. 60 of the Chilean Association of
Accountants, recognizing, using the liability method, the deferred tax effects
of temporary differences between the financial statement and tax values of
assets and liabilities.
In order to mitigate the effects of recording deferred income taxes that under
the prior income tax accounting standard were not recorded, Technical Bulletin
No. 60 provides for a period of transition, while at the same time
recording the deferred taxes using the liability method. Under this
transitional provision, a contra asset or liability has been recorded
offsetting the effects of the deferred tax assets and liabilities not recorded
prior to January 1, 2000. Such contra asset or liability must be amortized to
income over the estimated average reversal periods corresponding to the
underlying temporary differences to which the deferred tax asset or liability
relates.
F-56
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Under US GAAP, companies must account for deferred taxes in accordance with
SFAS No. 109, which requires an asset and liability approach for financial
accounting and reporting of income taxes, under the following basic principles:
o A deferred tax liability or asset is recognized for the estimated future
tax effects attributable to temporary differences and tax loss
carryforwards.
o The measurement of deferred liabilities and assets is based on the
provisions of the enacted tax law. The effects of future changes in tax
laws or rates are not anticipated.
o The measurement of deferred tax assets are reduced by a valuation
allowance, if based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
Temporary differences are defined as any difference between the financial
reporting basis and the tax basis of an asset or liability that at some future
date will reverse, thereby resulting in taxable income or expense. Temporary
differences ordinarily become taxable or deductible when the related asset is
recovered or the related liability is settled. A deferred tax liability or
asset represents the amount of taxes payable or refundable in future years as a
result of temporary differences at the end of the current year.
The principal difference between Chilean GAAP and U.S. GAAP relates to the
reversal of the complementary assets and liabilities recorded as a transitional
provision for unrecorded deferred taxes as of January 1, 2000 and their
corresponding amortization into income. Additionally, during the year ended
December 31, 2001, the Company began to recognize deferred taxes originating
from income on mandatory investments on a discounted basis (See Note 2). Under
U.S. GAAP, these deferred taxes would not be discounted. The effect of these
differences on the net income and shareholders' equity of the Company is
included under paragraph (n) below.
k. Customer list
In Chilean GAAP, the goodwill generated on the acquisition of AFP Proteccion in
1999 and other Chilean companies (Note 14) was determined as the difference
between the book value of the assets acquired and the liabilities assumed and
the purchase price.
Under U.S. GAAP, the goodwill is classified as definite lived intangible asset,
customer lists. The weighted average life of the customer lists is slightly
longer than the amortization period of 20 years for Chilean GAAP purposes. For
the years ended December 31, 2003, 2002 and 2001 and as of December 31, 2003
and 2002, this difference was not significant and no adjustment is included in
the reconciliation to U.S. GAAP.
l. Mandatory investments
The 1% mandatory investment is accounted for as described in Note 6 for Chilean
GAAP purposes. For US GAAP purposes, due to the highly liquid nature of the
investment and the Company's intentions, the mandatory investment would be
classified as "trading securities" under SFAS 115 with changes in fair value
recorded in the income statement. Therefore, in compliance with this
pronouncement, these marketable securities are recorded at their fair value and
accounted for similarly to Chilean GAAP. No difference is recorded in the US
GAAP reconciliation in Note 42 (n).
F-57
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
m. Financial guarantee:
The Company has provided a guarantee on the debt of its equity-method investee,
Administradora de Fondos de Cesantia de Chile S.A. Under Financial Accounting
Interpretation 45 and Financial Accounting Standards Board Concept No. 7, the
adjustment to U.S. GAAP is not material. The disclosure required is presented
in Note 35a.
n. Effect of Conforming to US GAAP:
The adjustments to reported net income required to conform with accounting
principles generally accepted in the United States of America are as follows:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
Ref. 2001 2002 2003 2003
(As restated - (As restated -
see Note 40) see Note 40
MCh$ MCh$ MCh$ ThUS$
-----------------------------------------------------------------------------------------------------------------------------------
Net income, as shown in the Chilean GAAP
Financial statements 30,502 34,195 32,005 53,899
Investments in Related Companies (e) (2,790) (2,855) (2,734) (4,604)
Results of subsidiaries during the development stage (f) 25 -- -- --
Gain on sale of Afore Profuturo, net (h) 18,804 -- -- --
Derivatives (i) 1,384 -- (1,324) (2,230)
Deferred income taxes (j) (5,717) (581) (658) (1,108)
Sale of AFPC Provenir Colombia (h) -- -- (112) (189)
Reversal of amortization of goodwill (g) -- 990 937 1,577
-----------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with US GAAP before cumulative
effect of change in accounting principles 42,208 31,749 28,114 47,345
Cumulative effect of change in accounting principles, net
of taxes MCh$ 102 (h) 587 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with US GAAP 42,795 31,749 28,114 47,345
Other comprehensive (loss) income:
Cumulative translation adjustments determined under
Chilean GAAP 1,312 1,963 (6,568) (11,061)
Cumulative translation adjustments related to US GAAP
adjustments 118 98 (247) (416)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income in accordance with US GAAP 44,225 33,810 21,299 35,868
===================================================================================================================================
F-58
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
n. Effect of Conforming to US GAAP, continued:
The adjustments required to conform shareholder's equity amounts with
accounting principles generally accepted in the United States are as follows:
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------
As of December 31,
Ref. 2002 2003 2003
(As
restated)
MCh$ MCh$ ThUS$
------------------------------------------------------------------------------------------------------------------------
Net equity, as shown in the Chilean GAAP
Financial statements 173,052 172,812 291,027
Minimum dividend (30% of Net income less interim dividends paid) (c) (739) (1,674) (2,819)
Gain on sale of Afore Profuturo, net (h) 18,921 18,921 31,864
Gain on sale Porvenir Colombia (h) -- (112) (189)
Derivatives (i) 2,075 751 1,265
Investments in related companies (e) (5,547) (8,528) (14,362)
Deferred income taxes (j) (13,963) (14,621) (24,623)
Reversal of amortization of goodwill (g) 990 1,927 3,245
------------------------------------------------------------------------------------------------------------------------
Net equity, in accordance with US GAAP 174,789 169,476 285,408
========================================================================================================================
The following summarizes the changes in shareholder's equity under US GAAP
during the years ended December 31, 2002 and 2003:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------
Year ended December 31,
2002 2003 2003
(As restated)
MCh$ MCh$ ThUS$
----------------------------------------------------------------------------------------------------
Balance at January 1 164,093 174,789 294,356
Dividends paid (23,444) (25,677) (43,242)
Accrual for mandatory dividends, previous year 1,069 739 1,244
Accrual for mandatory dividends, closing date (739) (1,674) (2,819)
Net income in accordance with US GAAP 31,749 28,114 47,345
Other comprehensive income (loss) 2,061 (6,815) (11,477)
----------------------------------------------------------------------------------------------------
Balance at December 31, 174,789 169,476 285,407
====================================================================================================
F-59
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
o. Reclassification for US GAAP purposes - Balance sheet
As of December 31, 2003, 2002 and 2001 the goodwill generated on the
acquisition of AFP Proteccion and other companies (Note 14) has been
reclassified to an intangible asset, customer list for U.S. GAAP. This
reclassification does not affect net income or shareholders equity under US
GAAP or Chilean GAAP. The reclassification is as follows:
-------------------------------------------------------------------------------
2001 2002 2003
MCh$ MCh$ MCh$
-------------------------------------------------------------------------------
Goodwill:
AFP Proteccion (59,344) (55,837) (52,379)
APF Union (8,664) (8,131) (7,605)
AFP El Libertador (1,038) (961) (884)
-------------------------------------------------------------------------------
Customer list 69,046 64,929 60,868
===============================================================================
Goodwill recorded under Chile GAAP for investments between 10% and 20% (as
equity-method investees) would be reclassified to investment in equity
securities (cost-method) for U.S. GAAP purposes as follows:
[Download Table]
-----------------------------------------------------------------------------------
Percentage 2001 2002 2003
Goodwill: held MCh$ MCh$ MCh$
-----------------------------------------------------------------------------------
AFP Horizonte (Peru) 15.87% 417 413 312
AFP Crecer (El Salvador) 19.00% 606 610 469
-----------------------------------------------------------------------------------
Investments in equity securities (held at cost) 1,023 1,023 781
===================================================================================
No other significant balance sheet reclassifications would be made for U.S.
GAAP purposes.
p. Correction of an error
The Company has determined that certain restatements to its U.S. GAAP
shareholders' equity and net income reconciliations for the years indicated will
be reflected as explained below in the amounts in the reconciliations presented
above:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------
For the year For the year
ended ended
2001 2002
MCh$ MCh$
-----------------------------------------------------------------------------------------------------------------------------
Net income, as previously reported under U.S. GAAP 48,251 30,810
Add: Goodwill (1) 1,091
Exclude: Extraordinary gain recorded in Chile GAAP (2) (2,295)
Add: Adjustments required as described in Note 40 (3) (3,161) (152)
-----------------------------------------------------------------------------------------------------------------------------
Net Income, as restated under U.S. GAAP 42,795 31,749
==============================================================================================================================
F-60
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------
As of December 31,
2002
MCh$
-----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity, as previously reported under U.S. GAAP 175,396
Add: Incorrect write-off of goodwill (1) 1,091
Less: Correction of an error as discussed in Note 40 under Chile GAAP (3) (5,370)
Add: Exclusion of the adjustment for derivatives posted to net income (4) 2,075
Add: Others, miscellaneous (5) 1,597
-----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity, as restated 174,789
=============================================================================================================================
1) For the year ended December 31, 2002, management has determined that
certain amounts of goodwill were inappropriately written off for U.S. GAAP
purposes.
2) For the year ended December 31, 2001, management has determined that an
extraordinary gain recorded under Chile GAAP related to the discounting of
a deferred tax liability was not removed from the U.S. GAAP reconciliation.
3) These adjustments relate to the correction of an error note under Chile
GAAP discussed in Note 40. Management has determined that these adjustments
pertained to U.S. GAAP as well for the periods noted.
4) This adjustment relates to the exclusion from shareholders' equity of the
accumulated effect of derivative adjustments posted to the net income
reconciliation.
5) This adjustment relates to various items, primarily consisting of reversal
of minimum dividend adjustment recalculated for 2001 and price-level
restatement adjustments.
The following is a detail of opening shareholders' equity at January 1, 2002 as
restated:
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------------
MCh$
---------------------------------------------------------------------------------------------------------------------------
Opening shareholders' equity as previously reported 168,572
Add: Adjustment for deferred taxes related to (1) in the table above for years prior to January 1, 2002 2,295
Less: Adjustment for exclusion of the extraordinary gain in Chile GAAP (see 2) in the above table (2,295)
Less: Chilean GAAP adjustment as described in Note 40. (See 3) in the above table (5,370)
Add: Effect of adjusting the prior year minimum dividend adjustment under U.S. GAAP for the error
described in Note 40. 891
---------------------------------------------------------------------------------------------------------------------------
Opening shareholders' equity at January 1, 2002 as restated 164,093
===========================================================================================================================
(1) Management has determined that deferred taxes at January 1, 2002 for U.S.
GAAP did not equal the sum of deferred taxes for Chile GAAP plus/minus
cumulative U.S. GAAP adjustments.
II Additional disclosure requirements
a. Earnings per Share and per ADS:
The following discloses earnings per share as required under US GAAP:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
2001 2002 2003 2003
(As (As
restated) restated)
-----------------------------------------------------------------------------------------------------------------------------
Earning per share:
Net income before cumulative effect of change in
accounting principle Ch$129 Ch$96 Ch$85 US$0.14
Cumulative effect of change in accounting principle Ch$2 - - -
----------- ---------- --------- -----------
Basic and diluted earnings per share under US GAAP Ch$131 Ch$96 Ch$85 US$0.14
Basic and diluted earnings per share under Chilean GAAP Ch$92 Ch$103 Ch$97 US$0.16
Weighted average number of shares of common stock
outstanding (in thousands of shares) 331,317 331,317 331,317 331,317
-----------------------------------------------------------------------------------------------------------------------------
The basic and diluted earnings per share data shown above is determined by
dividing net income for both Chilean GAAP and US GAAP purposes by the weighted
average number of shares of Common stock outstanding during each year.
F-61
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
b. Income statement - U.S. GAAP:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------------------
Year ended December 31,
2001 2002 2003
(As restated) (As restated)
MCh$ MCh$ MCh$
-----------------------------------------------------------------------------------------------------------------------
Operating revenues:
Fee income 93,080 95,852 100,246
Gain on mandatory investments 6,445 4,907 9,806
Other operating revenues 1,129 2,636 3,140
----------------- ---------------- ----------------
Total operating revenues 100,654 103,395 113,192
----------------- ---------------- ----------------
Cost of services provided:
Operating expenses (62,847) (59,042) (72,705)
Amortization of customer lists and goodwill (goodwill in
2001 only) (6,141) (3,989) (4,056)
Other (188) (221) (317)
----------------- ---------------- ----------------
Gross margin 31,478 40,143 36,114
Administrative expenses (7,269) (7,869) (9,574)
Selling and marketing expenses (1,030) (704) (717)
----------------- ---------------- ----------------
Income from operations 23,179 31,570 25,823
----------------- ---------------- ----------------
Other revenues (expenses)
Interest expense (1,624) (1,512) (1,360)
Investment income 132 176 55
Other income, net 614 571 (570)
Gain on sale of Afore Profuturo 26,443 -- --
Gain on sale of AFPC Porvenir Colombia -- -- 8,473
Price level restatement 2,384 (1,787) (778)
Foreign exchange gain (loss) (917) (141) 992
Equity method investee income 7,818 6,954 4,270
----------------- ---------------- ----------------
Income before provision for income taxes and 58,029 28,877 36,905
cumulative effect of change in accounting principle
----------------- ---------------- ----------------
Income taxes (15,821) (4,082) (8,791)
----------------- ---------------- ----------------
Net income before effect of change in
accounting principle 42,208 31,749 28,114
----------------- ---------------- ----------------
Cumulative effect of change in
accounting principle, net of taxes of $99 587 -- --
----------------- ---------------- ----------------
Net income 42,795 31,749 28,114
================= ================ ================
F-62
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
c. Cash Flow Information
Certain reclassifications would be made to the line items of the Chilean GAAP
cash flow statement, to show the presentation as would be required under a US
GAAP format. These reclassifications are: 1) the reclassification of certain
items not qualifying as cash equivalents under U.S. GAAP to investment in
marketable securities, net and 2) reclassification of dividend income from
financing activities in Chile GAAP to operating activities in U.S. GAAP (the
column labeled "US GAAP" presents amounts using US GAAP format although the
amounts displayed have been determined in accordance with Chilean GAAP):
[Enlarge/Download Table]
-------------------------------------------------------------------------------------------------------------------------
Reclassifications
Chile GAAP (1) (2) US GAAP
(As restated As explained As explained (As restated
Note 40) above above Note 40)
MCh$ MCh$ MCh$ MCh$
-------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by operating
activities
2001 36,463 (17) 36,446
2002 28,163 8,522 36,685
2003 33,997 12,427 46,424
Cash (used in) provided by investing
activities
2001 23,815 23,815
2002 (3,275) (3,275)
2003 10,103 10,103
Cash (used in) provided by financing
Activities
2001 (60,695) 17 (60,678)
2002 (24,467) (8,522) (32,989)
2003 (43,688) (12,427) (56,115)
Cash equivalents at end of period
2001 1,012 (144) 868
2002 1,512 (31) 1,482
2003 1,266 1,266
Supplementary disclosures 2001 2002 2003
MCh$ MCh$ MCh$
Income taxes paid 83 88 94
Interest paid 573 410 248
F-63
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Disclosures about fair value of financial instruments
The following methods and assumption were used to estimate the fair value of
each class of financial instruments as of December 31, 2002 and 2003 for which
it is practicable to estimate that value:
o Cash
The fair value of the Company's cash is equal to its carrying value.
o Time deposits
The fair value of time deposits approximates carrying value due to the
relatively short-term nature.
o Marketable securities
The fair value of marketable securities is based on quoted market prices
of the common stock held and equals carrying value.
o Accounts receivable
The fair value of long-term accounts receivable was estimated using the
interest rates that are currently offered for loans with similar terms and
remaining maturities.
o Long-term debt
The fair value of long-term debt was based on rates currently available to
the Company for debt with similar terms and remaining maturities.
Derivative instruments
Estimates of fair values of derivative instruments for which no quoted
prices or secondary market exists have been made using valuation techniques
such as forward pricing models, present value of estimated future cash
flows, and other modeling techniques. These estimates of fair value include
assumptions made by the Company about market variables that may change in
the future. Changes in assumptions could have a significant impact on the
estimate of fair values disclosed. As a result, such fair value amounts are
subject to significant volatility and are highly dependent on the qualify
of the assumptions used. No cost method investments under U.S. GAAP have
been included as their fair values are not determinable.
F-64
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The estimated fair values of the Company's financial instruments compared
to Chilean GAAP carrying amounts are as follows:
[Enlarge/Download Table]
As of December 31,
2002 2003
-----------------------------------------
Carrying Fair Carrying Fair
Amount value Amount value
MCh$ MCh$ MCh$ MCh$
Cash 796 796 960 960
Time deposits 686 686 306 306
Marketable securities 118 118 90 90
Accounts receivable 5,562 5,562 10,240 10,240
Receivables due from related companies 949 949 1,189 1,189
Mandatory investment 80,188 80,188 92,253 92,253
Accounts payable and other 28,938 28,938 47,058 47,058
Notes and accounts due to related companies 5,944 5,944 3,066 3,066
Long-term liabilities:
-------- -------- -------- --------
Obligations with banks and financial institutions 5,074 4,549 1,692 1,622
Derivatives instruments 247 247 4 4
d. Income taxes
The provision for income taxes charged to the results of operations
determined in accordance with USGAAP is a follows:
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------
Year ended December 31,
2001 2002 2003
(As restated (As restated
Note 40) Note 40)
MCh$ MCh$ MCh$
-----------------------------------------------------------------------------------------
Current tax expense under Chilean GAAP 8,745 3,995 6,938
Deferred income taxes as determined under
Chilean GAAP 3,654 (494) 1,195
---------- ---------- ----------
Total income tax provision under Chilean GAAP 12,399 3,501 8,133
Less: Extraordinary item classified as taxes for
US. GAAP purposes (2,295) -- --
US GAAP adjustment:
Deferred tax effects of applying SFAS 109 5,717 581 658
---------- ---------- ----------
Tax expense under US GAAP 15,821 4,082 8,791
========== ========== ==========
The deferred tax effects of reversing the amortization of the contra
asset/liability associated with the adoption of Technical Bulletin No.60
and the reversal of the discounting applied to the deferred tax liability
associated with the mandatory investment are the most significant
differences for U.S. GAAP purposes.
F-65
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Deferred income taxes consist of the following as of December 31, 2002 and
2003:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------
Short-term Long-term
2002 2003 2002 2003
----------------------------------------------------------------------------------------------------------------
MCh$ MCh$ MCh$ MCh$
----------------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Accrued life and disability insurance 1,038 635 -- --
Accrued vacation 162 189 -- --
Leased assets, net (3) (3) (76) (71)
Unearned commissions 109 -- -- --
Leasing obligations, net 11 13 81 74
Provision BHC -- -- 90 74
Other deferred income taxes 13 14 -- --
----------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 1,330 848 95 77
================================================================================================================
Deferred income tax liabilities:
Contracts of change insurance -- -- 145 434
Severance indemnities 59 52 66 13
Gains on mandatory investment -- -- 4,306 5,901
Other deferred income taxes 679 690 11,260 10,778
----------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 738 742 15,777 17,126
================================================================================================================
The provision for income taxes differs from the amounts of income tax
determined by applying the applicable local statutory income tax rate to
pretax income, calculated in accordance with US GAAP, as a result of the
following differences:
[Enlarge/Download Table]
============================================================================================
Year ended December 31,
2001 2002 2003
(As restated (As restated
Note 40) Note 40)
MCh$ MCh$ MCh$
--------------------------------------------------------------------------------------------
Pretax income in accordance with US GAAP 58,029 28,877 36,905
Statutory tax rate 15% 16% 16.5%
Statutory tax rate applied to pretax income 8,704 4,620 6,089
Permanent differences (1,590) 1,461 2,890
Price - level adjustments (500) (17) (88)
Income tax arising from foreign investment 8,694 -- --
Other 513 (1,893) (100)
--------------------------------------------------------------------------------------------
Effective income tax rate 15,821 4,082 8,791
============================================================================================
F-66
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
e. Advertising expenses
The advertising expenses are as follows:
---------------------------------------------------------------------------
For the year ending December 31,
2001 2002 2003
MCh$ MCh$ MCh$
---------------------------------------------------------------------------
Total expenses 409 105 162
f. Goodwill
For U.S. GAAP purposes, the following is carried as goodwill (net of
amortization).
[Download Table]
----------------------------------------------------------------------------------
2002 2003
Goodwill, net Goodwill, net
----------------------------------------------------------------------------------
MCh$ MCh$
----------------------------------------------------------------------------------
AFP Afore Bancomer (Mexico)(1) 15,355 15,355
AFP Porvenir (Republica Dominicana)(See note 42.I.h) -- 8,874
AFP Crecer (Salvador) 646 646
AFP Genesis (Ecuador) 482 482
AFP Horizonte (Peru) 444 444
AFP Porvenir (Colombia) 1,153 --
------------ ------------
Total 18,080 25,801
============ ============
(1) For U.S. GAAP purposes and Chilean GAAP purposes AFP Afore Bancomer
Mexico is carried as an equity method invester as entities under
common control with the BBVA Group in Spain also have ownership
interests.
For the year ended December 31, 2001 amortization expense of ThCh$20,938
was recorded. For the years ended December 31, 2002 and 2003 and in
accordance with SFAS No. 142, no amortization expense for goodwill has
been recorded. No impairment loss for U.S. GAAP purposes has been recorded
on this goodwill.
III. Recent Accounting Pronouncements
In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
clarifies classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of
financial instruments within its scope as liabilities. Such financial
instruments may include mandatory redeemable shares, financial instruments
which embody an obligation to repurchase shares or require the issuer to settle
the obligation by transferring assets, or financial instruments that embody an
unconditional obligation, or, in certain circumstances, a conditional
obligation. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS No.
150 will not have a significant impact on the Company's results of operations,
financial position or cash flows.
F-67
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
In November 2002, the FASB published FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 expands on the accounting guidance of
Statements No. 5, 57, and 107 and incorporates without change the provisions of
FIN 34: "Disclosure of Indirect Guarantees of Indebtedness of Others and
Interpretation of FASB Statement No. 5" which has been superseded. FIN 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. FIN 45 also
clarifies that at the time a company issues a guarantee, the Company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The provisions of FIN 45 are
required to be applied on a prospective basis to guarantees issued or modified
by the Company on January 1, 2003 and after. The expanded disclosure
requirements of FIN 45 were effective for the year ended December 31, 2002. The
adoption of FIN 45 did not have a significant impact on the Company's results
of operations, financial position or cash flows.
In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
("FIN 46R" or the "Interpretation"). FIN 46R clarifies the application of ARB
No. 51, "Consolidated Financial Statements," to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN 46R requires
the consolidation of these entities, known as variable interest entities
("VIEs"), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that will absorb a majority of the entity's expected
losses, receive a majority of the entity's expected residual returns, or both.
Among other changes, the revisions of FIN 46R (a) clarified some requirements of
the original FIN 46, which had been issued in January 2003, (b) eased some
implementation problems, and (c) added new scope exceptions. FIN 46R deferred
the effective date of the Interpretation for foreign private issuers to periods
ending December 31, 2004, except that all foreign private issuers must at a
minimum apply the provisions of the Interpretation to entities that were
previously considered "special-purpose entities" under the FASB literature prior
to the issuance of FIN 46R for the first reporting periods beginning after
January 1, 2004.
The Company is evaluating whether the adoption of FIN 46R will have a material
impact on its financial position, cash flows and results of operations. The
Company did not enter into any transactions under the scope of FIN 46R after
January 31, 2003.
In November 2003, the EITF reached a consensus on Issue No. 03-01 ("EITF No.
03-01"), "The Meaning of Other - Than - Temporary Impairments and its
applications to Certain Investments," as it relates to disclosures already
required by SFAS 115. In addition to the disclosures already required by SFAS
115, EITF requires both quantitative and qualitative disclosures for marketable
equity and debt securities. The new disclosure is effective for fiscal years
ending after December 15, 2003.
In December 2003, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The company believes it is following the guidance of SAB
104.
F-68
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 43. Subsequent Events
By Resolution No. 0001 of February 2, 2004, the Superintendency of Pension
Funds Administrators applied a penalty of 800 UF (Inflation index-linked units
of accounts) for infringement of the current regulation related with the delay
in the issue of the claim solution report, and corrective actions of the same.
At March 5, 2004, BBVA Seguros de Vida S.A., in conformity with article first
of particular conditions of Contrato de Seguro de Invalidez y Sobrevivencia,
communicated to Management the advanced termination. Due to the publication on
February 21, 2004 of the law No. 19,934 that modifies Decree Law 3,500.
The described legal modification, in force from August 19, 2004, regulates
among other issues the rights related to benefits of the Seguros de Invalidez y
Sobrevivencia, significantly affecting insurance conditions.
According to the Administration, there are no other subsequent events or
circumstances at year-end and to the date of issuance of these financial
statements, that could significantly affect the financial statements of the
Administrator.
F-69
Exhibit Index
Exhibit Number Description
-------------- --------------------------------------------------------------
1.1 Amended Bylaws of A.F.P. Provida S.A. (English translation)
8.1 List of Subsidiaries
12.1 Form 302 Certification of the Chief Executive Officer
12.2 Form 302 Certification of the Planning and Control Manager
12.3 Form 302 Certification of the Accounting and Consolidation
Manger
13.1 Form 906 Certification
Dates Referenced Herein and Documents Incorporated by Reference
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