BERMUDA LAND DEVELOPMENT COMPANY LIMITED FINANCIAL STATEMENT MARCH 31, 1999 BERMUDA %ce OfirbQ S^^cUfa^t AUDITOR'S REPORT To the Shareholders of the Bermuda Land Development Company Limited I have audited the balance sheet of the Bermuda Land Development Company Limited as at March 31, 1999 and the statements of revenue, expense and deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with auditing standards generally accepted in Bermuda and Canada. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In my opinion, these financial statements present fairly, in all material respects, the financial position of the Bermuda Land Development Company Limited as at March 31, 1999 and the results of its operations and the changes in its cash flows for the year then ended in accordance with accounting principles generally accepted in Bermuda and Canada. Hamilton, Bermuda August 2, 1999 Larry T7 Dennis, C.A. Auditor Address all correspondence nn n^ w I )* * OQOI Mjimtltrtn u i * t v ri T ,, l (AA-W Ofl7 7 n r * to the Auditor; o 4 \ J"t/~i ' Bermuda Land Development Company Limited Balance Sheet As at March 31, 1999 1999 S Assets Current assets Cash and deposits . Inventory of residential properties (note 3 (b)) Accounts receivable and recoverable expenses Prepaid expenses (note 10) 1998 S 5,041,459 1,741,365 261,175 70,171 7,114,170 7,270,590 8,048,863 3,258,227 15.163.033 11.212.243 1,062,450 99,362 784,998 311,277 1.161,812 1.096,275 Unamortized capital grants (note 6) 12,623.465 5,881,873 Shareholders' equity Share capital (note 5) Deficit 5,000,000 (3,622,244) 5,000,000 (765.905) Capital assets (note 4) Liabilities Accounts payable and accrued charges Developer and tenant deposits 595,577 87.849 7,954,016 1,377,756 4.234,095 15,163.033 11,212.243 Approved by the Board of Directors r Director j*r~ The accompanying notes are an integral part of these financial statements. Director Bermuda Land Development Company Limited Statement of Revenue, Expense and Retained Earnings For the year ended March 31, 1999 1999 $ $ 1,059,250 388,200 308,318 155,206 412,562 275,269 110,870 60,219 1,910,974 858.920 1,342,675 1,262,331 1,248,337 464,819 258,408 154,305 109,774 79,996 56,664 45,000 3,412 2,006,621 1,211,467 1,356.342 1,125,832 182,198 108.309 91,437 12,356 30,448 109.230 5,025,721 Revenue Rental income Interest income Tenant recoveries (note 3 (f)) Miscellaneous income (note 10) 1998 6,234,240 (3.114,747) (5,375,320) Expenses Repairs and facilities maintenance Salaries and consulting fees Insurance and security Professional services Amortization Travel and promotion Office administration Project costs Miscellaneous expense Bad debt expense Utilities (net of recoveries of $1,118,343, 1998 - $965,266) Excess of expenses over revenues before grants Capital grant amortization Operating grants received from the Government of Bermuda Excess of (expenses over revenues) / revenue over expenses Deficit - Beginning of year Deficit - End of rear 258,408 (2,856,339) 182,198 5,552,631 359,509 (765,905) (1,125.414) (3,622.244) (765.905) The accompanying notes are an integral part of these financial statements. Bermuda Land Development Company Limited Statement of Cash Flows For the year ended March 31, 1999 1999 S Cash flows from operating activities Excess of expenses over revenues before grants Item not affecting cash Amortization Changes in non-cash items Accounts receivable and recoverable expenses Receivable from Government of Bermuda Prepaid expenses Inventory of residential properties Accounts payable and accrued charges Developer and tenant deposits (3,114,747) 1998 $ (5,375,320) 258,408 182,198 334,402 (3,430) 387.948 (20,554) (975,810) 41,285 (4,180,087) (5,763,683) 7,000,000 4,300,000 5,552,631 7,000,000 9,852,631 (5,049.044) (1,676,354) (2,229.131) 2.412,594 7,270,590 4,857,996 5.041,459 Cash flows from financing activities Capital contribution from the Government of Bermuda Operating grant from the Government of Bermuda 17,678 (1,741,365) 277,452 (211,915) 7,270.590 Cash flows from investment activity Purchase of capital assets Increase (decrease) iii cash during the year Cash and deposits - Beginning of year Cash and deposits - End of year The accompanying notes are an integral part of these financial statements. Bermuda Land Development Company Limited Notes to Financial Statements March 31, 1999 A Nature of business The Bermuda Land Development Company Limited (the "Company") was incorporated under the authority of The Base Lands Development Act 1996 (the "Act") on November 12, 1996. The shares of the Company are held by the Minister of Development and Opportunity and the Minister of Finance in trust for the benefit of the country. The general purpose of the Company is to manage and develop the land entrusted to it. In particular to integrate the land into the economic and social fabric of Bermuda and to create opportunities for increased employment now and in the future. 2. Economic dependence Significant initial investment will be required to prepare the former base properties for development, develop appropriate infrastructure services, demolish unsafe and uneconomic structures and upgrade other structures to be functionally efficient. It is recognized that in order to position the Company to achieve its development goals and become commercially viable, the Company will be dependent on Government funding in the first few years. 3. Summary1 of significant accounting policies These financial statements have been prepared in accordance with generally accepted accounting principles. Those polices considered particularly significant are set out below: (a) Grants from the Government of Bermuda Capital grants received from the Government for the purpose of capital developments are shown as capital grants and are deferred and taken into income on the same basis as the amortization of the related capital assct^perating grants are taken into income in the current period. (b) Inventory of residential properties Inventory of residential properties represents houses held for future sale. The inventory is valued at cost which includes direct costs associated with the renovation of the properties. (c) Capital assets Capital assets are valued at cost. Costs incurred by the Company for improvements to buildings and infrastructure, purchase of equipment and site preparation and demolition have been capitalized. Amortization is calculated using the straight-line basis over the following estimated remaining useful lives: Building Infrastructure Equipment 5 to 10 years 5 to 10 years 3 to 5 years (1) Bermuda Land Development Company Limited Notes to Financial Statements March 31, 1999 Amortization has not yet been charged against site preparation costs, which includes costs to clear land and demolish obsolete structures as these costs were necessary to bring the property into condition for future development. It is the intention of the Company to amortize these costs over the estimated useful life of each of the properties once development is completed. No carrying value has been assigned to land, buildings and assets assumed by the Company as these assets are included as part of the lease and are not capitalized. (d) Financial assets and liabilities The estimated fair value of the Company's financial instruments which include cash and deposits, accounts receivable and recoverable expenses, accounts payable, developer and tenant deposits approximate their carrying value. (e) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the carrying amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the revenues and expenses during the reported period. Actual results could differ from these estimates. (f) 4. Tenant recoveries Common area expenses recovered from tenants are shown as revenue on the statement of revenue, expense and retained earnings. Other recoveries such as building maintenance, electricity and telephone are netted with the corresponding expense on the statement of revenue, expense and deficit retained earnings. Capital Assets Capital assets comprise: Cost S Site preparation Infrastructure Equipment Buildings Amortization S 1999 S 1998 $ 7,038,657 521,902 547,344 417,361 198,680 197,338 80,383 7,038,657 323,222 350,006 336,978 2,329,652 409,659 328,579 190,337 8.525.264 476.401 8,048,863 3.258,227 (2) Bermuda Land Development Company Limited Notes to Financial Statements March 31, 1999 5. Share capital 1999 S 50% call and fully paid in cash 10.000.000 10.000.000 5,000.000 Authorized and issued 10,000,000 common shares of the par value SI each 1998 5.000,000 $ Upon incorporation the Company issued 10,000,000 common shares, of which 50% were called. 6. Capital grants from the government of Bermuda Capital grants represent the aggregate amount of capital grants received from the Government of Bermuda less amounts amortized to income and comprise: 1999 1998 S $ Balance - Beginning of year Capital grant received Capital grant amortized Balance -end of year 5,881,873 7,000,000 (258,408) 12.623,465 1,764,071 4.300,000 (182.198) 5.8S1.S73 Total capital grants from the Government of Bermuda to date exceed costs expended on capital assets by 54,609,841. This balance represents cash which is currently on hand, but is restricted for future capital expenditure. 7, Contingencies and commitments (a) On May 13, 1997, the Company entered into a lease for a period of 131 years. The lease is effective from the Company's date of incorporation on November 12, 1996 and includes the four properties known as the Southside, St. David's (formerly the US Naval Air Station, excluding the airport), the Naval Annex in Southampton, Daniel's Head in Sandys and the Operating Base at Tudor Hill in Southampton including all buildings as described in detail in the schedule which forms part of the lease. The rent for the whole period is $ 131 and has been paid, (b) The Base Lands Development Act 1996 (the "Act") provides certain assurances with respect to the scheduled lands including that the Government owns the land in fee simple, absolute in possession and provides tor indemnification of the Company for any losses relating to pollution or contamination of the land which existed prior to the commencement of the Act on September 20, 1996. (c) At March 31. 1999, the Company was committed to capital projects at Southside, St. David's with a value outstanding on the contracts of $6,060,000. (3) Bermuda Land Development Company Limited Notes to Financial Statements March 31, 1999 The Company is also committed to service contracts for security and facilities maintenance for the various properties totalling approximately SI,540,000. These contracts expire during the year ending March 31. 1999. The Legislature has approved $6,750,000 in capital grants (1999 - $7,000,000, 1998 - $4,300,000, and $Nil in operating grants (1999 - SNil, 1998-55,552,631) for the fiscal year ending March 31, 2000. S, Related party transactions The Company is related in terms of common ownership to all Government of Bermuda departments and agencies. The Company enters into transactions with these entities in the normal course of business. During the year ended March 31, 1999, the Company received $365,000 of rental income from various Government departments. At March 31, 1999, amounts outstanding from various Government departments totalled $52,991 and have been included in accounts receivable and recoverable expenses. 9. Uncertainty due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in possible errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect a company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the company, including those related to the efforts of customers, suppliers or other third parties, will be fully resolved. / 0. Comparative figures During the year, the Company retroactively changed its method of accounting for Government capital grants. Such grants were previously directly taken into shareholders' equity as contributed surplus. They are now deferred and taken into income on the same basis as the amortization of the related capital assets. This change has resulted in the opening 1998 contributed surplus of $1,835,135 less amortization of $71,064 being transferred to unamortized capital grants and deficit respectively. The 1998 reported excess of revenue over expenses has been adjusted by $182,198. (4)