Office of the Auditor General Hemisphere House 9 Church Street Hamilton HM 11, Bennuda Tel: (441)296-3148 Fax: (441) 295-3849 Email: auditbda@gov.bm Website: www.oagbermuda.gov.bm AUDITOR'S REPORT To the Shareholders of the Bennuda Land Development Company Limited I have audited the balance sheet of the Bennuda Land Development Company Limited as at March 31, 2002 and the statements of operations and retained earnings 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 Bennuda and Canada. Those standards require that I plan and perfonn 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, 2002 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in Bermuda and Canada. Larry T. Dennis, C.A. Auditor General Hamilton, Bermuda June 14, 2002 57 BERMUDA LAND DEVELOPMENT COMPANY LIMITED (Incorporated in Bermuda) BALANCE SHEET MARCH 31, 2002 (expressed in Bermuda dollars) 2002 2001 ASSETS Current assets Cash and deposits (Note 4) Accounts receivable and recoverable expenses ixpenses Prepaid expenses $ 12,375,388 159,377 8,650,987 521,567 7,552 $ 12,534,765 9,180,106 23,630,734 133,106 19,213,713 1,601,212 S 36,298,605 $ 29,995,031 $ 732,804 250,000 399,756 Capital assets (Note 5) Capital assets held for resale LIABILITIES Current liabilities Accounts payable and accrued charges Developer deposits Tenant deposits and deferred revenues 1,125,357 250,000 275,362 $ 1,382,560 2,030,330 24,753,150 1,309,109 21,231,753 28,166,040 24,191,581 5,000,000 3,132,565 5,000,000 803,450 8,132,565 Deferred revenues Deferred capital contributions (Note 6) 1,650,719 5,803,450 36,298,605 S 29,995,031 oHOLDERS' EQUITY Share capital (Note 7) Retained earnings $ The accompanying notes are an integral part of these financial statements. 58 BERMUDA LAND DEVELOPMENT COMPANY LIMITED STATEMENT OF OPERATIONS AND RETAINED EARNINGS YEAR ENDED MARCH 31, 2002 (expressed in Bermuda dollars) 2002 Revenues Rental income Sale of cottages Interest and other income Tenant recoveries 2,846,959 2,555,001 407,662 401,987 2001 $ 2,477,308 2,170,840 564,918 380,677 6,211,609 1,883,221 1,507,902 979,778 609,758 393,700 423,942 278,788 201,183 153,310 40,000 6,361,097 Net loss before the undernoted item 1,975,062 1,340,405 1,203,126 488,449 453,690 314,388 259,357 222,918 70,085 60,000 Expenses Cost of property sales Salaries and benefits (Note 8) Repairs and maintenance Amortization Utilities (net of recoveries of $392,124 (2001 - $1,413,308)) Security General and administrative Insurance Leasing and marketing Bad debts 5,593,743 6,497,965 (149,488) (904,222) Amortization of deferred capital contributions (Note 6) 2,478,603 2,449,329 Net income 2,329,115 1,545,107 803,450 (741,657) Retained earnings (deficit), beginning of year Retained earnings, end of year $ 3,132,565 $ The accompanying notes are an integral part of these financial statements 59 803,450 BERMUDA LAND DEVELOPMENT COMPANY LIMITED STATEMENT OF CASH FLOWS YEAR ENDED MARCH 31, 2002 (expressed in Bermuda dollars) 2002 Operating activities: Net income Items not affecting cash Amortization of capital assets Amortization of deferred capital contributions Gain on sale of capital assets held for resale Changes in non-cash items Accounts receivable Prepaid expenses Accounts payable and accrued charges Developer deposits Tenant deposits and deferred revenues $ 2,329,115 2001 $ 1,545,107 609,758 (2,478,603) (686,158) 362,190 7,552 (392,553) 845,615 (258,368) 214,242 (368,883) (1,500) 1,379,201 596,916 Investing activities: Purchase of capital assets Purchase of capital assets held for resale Proceeds from sale of capital assets held for resale 488,449 (2,449,329) (210,094) 338,825 (5,026,779) (400,737) 2,555,001 (3,672,362) (2,070,717) 2,170,840 (2,872,515) (3,572,239) Financing activity: Capital contribution from the Government of Bermuda (Note 6) 6,000,000 6,500,000 Net increase in cash and deposits 3,724,401 3,266,586 Cash and deposits, beginning of year 8,650,987 5,384,401 Cash and deposits, end of year $ 12,375,388 $ The accompanying notes are an integral part of these financial statements 60 8,650,987 BERMUDA LAND DEVELOPMENT COMPANY LIMITED NOTES TO THE FINANCIAL STATEMENTS MARCH 31, 2002 (expressed in Bermuda dollars) 1. 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 Works & Engineering 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. It will do this in a manner that will integrate the land into the economic and social fabric of Bermuda and create opportunities for increased employment now and in the future. 2. Economic dependence The Company will require significant funding for environmental remediation, construction of infrastructure, demolition of unsafe and uneconomic structures, renovation of viable existing structures and construction of new facilities. The Company is dependent on Government funding to achieve its development goals and to become financially selfsufficient. 3. Summary of significant accounting policies These financial statements have been prepared in accordance with accounting principles generally accepted in Bermuda and Canada. For financial reporting purposes, the Company is classified as a government business-type organization and has adopted accounting policies appropriate for this classification. Those policies 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 asset. (b) Capital assets held for resale Capital assets held for resale represents houses held for future sale. The inventory is valued at cost that 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, site preparation and demolition are capitalized. 61 BERMUDA LAND DEVELOPMENT COMPANY LIMITED NOTES TO THE FINANCIAL STATEMENTS, Cont'd. MARCH 31, 2002 (expressed in Bermuda dollars) 3. Summary of significant accounting policies, cont'd. Amortization is calculated using the straight-line basis over the estimated useful lives at the following rates: Infrastructure Equipment Buildings 5 to 10 years 3 to 5 years 5 to 20 years Amortization has not yet been charged against site preparation costs, which include 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 (Note 9(a)) 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 and accrued charges, deposits and deferred revenues 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) Revenue from the sale of houses and properties The Company renovates houses and properties and leases them for a period of 125 years. All proceeds from the lease are received at the time the lease agreement is executed. The long-tenn leases are treated as sales. (g) Tenant recoveries Common area expenses recovered from tenants are shown as revenue. Other recoveries such as water, electricity and telephone are netted against the corresponding expense. 4. Restricted cash At March 31, 2002, the Company had $292,435 (2001 - $288,098) of restricted cash deposits. Of this, $724 (2001 - $4,790) relates to deposits on cottage sales not yet completed. The remaining $291,711 (2001 - $283,308) is in respect of cottages sold. The cash is held on deposit with various mortgage lenders to guarantee a portion of the purchasers mortgage value. 62 BERMUDA LAND DEVELOPMENT COMPANY LIMITED NOTES TO THE FINANCIAL STATEMENTS, Cont'd. MARCH 31, 2002 (expressed in Bermuda dollars) 5. Capital assets Capital assets are comprised of: 2002 Accumulated Amortization Cost Site preparation Infrastmcture Equipment Buildings 2001 Net Book Value Net Book Value $ 780,226 492,270 660,752 $ 15,168,428 1,488,367 238,418 6,735,521 $ 11,692,611 1,456,195 286,927 5,777,980 $ 25,563,982 6. $ 15,168,428 2,268,593 730,688 7,396,273 $ 1,933.248 $ 23,630,734 $ 19,213,713 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 are comprised of: 2002 2001 Balance, beginning of year Capital grant received Housing sales amortization Capital grant amortization $ 17,181,082 6,500,000 (1,960,880) (488,449) Balance, end of year 7. $ 21,231,753 6,000,000 (1,868,845) (609,758) $ 24.753.150 $ 21,231.753 Share capital 2002 2001 Authorised and issued: 10,000,000 common shares of $1 par value each $ 10.000,000 $ 10,000.000 50% called and fully paid in cash $ $ 5,000,000 5,000.000 Upon incorporation the Company issued 10,000,000 common shares, of which 50% were called and paid. 63 BERMUDA LAND DEVELOPMENT COMPANY LIMITED NOTES TO THE FINANCIAL STATEMENTS, Cont'd. MARCH 31, 2002 (expressed in Bermuda dollars) 8. Pension The Company has a defined contribution pension plan. Employees join after three months with the Company and contributions levels are 5% of gross salary, which is matched by the Company. The pension expense to the Company for the year, included in salaries and benefits was $49,774 (2001 - $38,324). 9. 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 holds the Company harmless 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, 2002, the Company was committed to capital projects at Southside, St. David's with a value outstanding on the contracts of $6,278,000. The Company was also committed to service contracts for security and facilities maintenance for the various properties totaling approximately $271,000. (d) The Legislature has approved $1,000,000 in capital grants for the fiscal year ending March 31, 2003. 10. 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, 2002, the Company earned rental and other revenues in the amount of $1,171,000 (2001 - $1,378,000) from various Government departments and agencies. At March 31, 2002, net amounts outstanding to various Government departments and agencies totaled $26,000 (2001 - $29,000) and have been included in accounts payable and accounts receivable. 64 BERMUDA LAND DEVELOPMENT COMPANY LIMITED NOTES TO THE FINANCIAL STATEMENTS, Cont'd. MARCH 31, 2002 (expressed in Bermuda dollars) 10. Related party transactions, cont'd. During the year ended March 31, 2002, the Company purchased goods and services in the amount of $32,000 (2001 - $69,000) from other related parties and earned rental revenues in the amount of $33,000 (2001 - $22,000). At March 31, 2002, accounts receivable were $14,000(2001 -$11,000). 11. Comparative figures Certain comparative figures have been reclassified to conform to current presentation. 65