<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 3, 2000
The Enstar Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 0-07477 63-0590560
(State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification Number)
</TABLE>
401 MADISON AVENUE
MONTGOMERY, ALABAMA 36104
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (334) 834-5483
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
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<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On July 3, 2000, The Enstar Group, Inc. ("Enstar"), through B.H.
Acquisition Limited ("B.H. Acquisition") a joint venture, acquired two
reinsurance companies of Petrofina S.A., a subsidiary of TotalFina Elf
S.A. The reinsurance companies, Brittany Insurance Company Ltd.,
incorporated under the laws of Bermuda ("Brittany"), and Compagnie
Europeenne d'Assurances Industrielles S.A., a Belgium corporation
("CEAI"), were purchased by B.H. Acquisition for $28.5 million. In
exchange for a capital contribution of approximately $9.6 million,
including approximately $200,000 for the paying of expenses and working
capital, Enstar received 50% of the voting stock and a 33% economic
interest in B.H. Acquisition. Enstar's capital contribution to B.H.
Acquisition was derived from cash on hand. The total consideration paid to
Petrofina S.A. and the amount of Enstar's capital contribution to B.H.
Acquisition were determined through arm's length negotiations among
representatives of the parties. Neither Enstar, nor any of its affiliates
had, nor to the knowledge of Enstar did any director or officer or any
associate have, any material relationship with Petrofina S.A., TotalFina
Elf S.A., or the participants in the joint venture.
On July 5, 2000, Enstar issued a press release (the "Press Release")
announcing the completion of the acquisition of the two reinsurance
companies. The Press Release is filed herewith as Exhibit 99.1 and is
incorporated herein by reference thereto.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
1. Audited Financial Statements of Brittany as of and
for the years ended December 31, 1999 and 1998,
attached as Appendix A hereto.
2. Audited Financial Statements of Brittany as of and
for the six month period ended June 30, 2000,
attached as Appendix B hereto.
3. Audited Financial Statements of CEAI as of and for
the years ended December 31, 1999 and 1998, attached
as Appendix C hereto.
4. Audited Financial Statements of CEAI as of and for
the six month period ended June 30, 2000, attached as
Appendix D hereto.
(b) Pro Forma Financial Information.
Unaudited Pro Forma Consolidated Balance Sheet of Enstar and
Subsidiary as of June 30, 2000 and Unaudited Pro Forma
Consolidated Statements of Income for the year ended December
31, 1999 and for the six months ended June 30, 2000, attached
as Appendix E hereto.
(c) Exhibits
2.1 Shareholders Agreement, dated as of July 3, 2000,
among B.H. Acquisition, Enstar and other parties
thereto.*
<PAGE> 3
2.2 Investment Agreement, dated as of July 3, 2000, among
B.H. Acquisition, Enstar and other parties thereto.*
2.3 Share Sale and Purchase Agreement, dated as of March
31, 2000, between PetroFina S.A. and B.H.
Acquisition.*
2.4 Share Sale and Purchase Agreement, dated as of March
31, 2000, between PetroFina S.A., Brittany Holdings
Limited and B.H. Acquisition.*
99.1 Text of Press Release of Enstar, dated July 5, 2000.*
------------------
* Previously filed.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 18, 2000
THE ENSTAR GROUP, INC.
By: /s/ CHERYL D. DAVIS
-------------------------------------
Cheryl D. Davis
Chief Financial Officer, Vice President of Corporate
Taxes and Secretary
<PAGE> 4
APPENDIX A
BRITTANY INSURANCE COMPANY LTD.
FINANCIAL STATEMENTS
(With Auditors' Report Thereon)
Years Ended December 31, 1999 and 1998
<PAGE> 5
AUDITORS' REPORT TO THE SHAREHOLDER
We have audited the balance sheets of Brittany Insurance Company Ltd. as at
December 31, 1999 and 1998 and the statements of income and retained earnings
and cash flows for the years then ended. These 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 United States generally accepted
auditing standards. Those standards require that we plan and perform an 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 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, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as at December 31,
1999 and 1998 and the results of its operations and its cash flows for the years
then ended in conformity with United States generally accepted accounting
principles.
/s/ KPMG
Chartered Accountants
Hamilton, Bermuda
February 11, 2000
<PAGE> 6
BRITTANY INSURANCE COMPANY LTD.
Balance Sheets
December 31, 1999 and 1998
(Expressed in United States Dollars)
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<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Cash at banks - current accounts $ 296,306 $ 82,455
Deposits with related party 89,890 125,330,764
Accrued interest receivable 1,281,907 3,767,732
Marketable securities 52,929,057 201,198,465
Unquoted investment -- 12,300,000
Insurance balances receivable (Net of provision for
doubtful reinsurance $4,650,000, 1998 - $8,475,000) 2,907,089 35,468,972
Advances to intermediaries and reinsureds 5,045,366 3,193,484
Funds withheld by ceding companies 358,945 4,002,674
Prepaid reinsurance premium -- 84,326
Outstanding losses recoverable from reinsurers 15,022,651 31,036,328
Other receivables -- 83,049
----------- ------------
Total assets $77,931,211 $416,548,249
=========== ============
LIABILITIES
Outstanding losses and loss expenses $50,981,665 $139,834,142
Insurance balances payable 6,174,381 4,783,612
Unearned premiums 3,912 697,427
Dividend payable -- 120,000,000
Accounts payable and accrued expenses 1,456,976 223,994
----------- ------------
Total liabilities 58,616,934 265,539,175
----------- ------------
SHAREHOLDER'S EQUITY
Share capital
Authorised, issued and fully paid
120,000 shares of $1 each 120,000 150,000,000
Additional paid-in capital 15,000,000 --
Retained earnings 4,194,277 1,009,074
----------- ------------
Total shareholder's equity 19,314,277 151,009,074
Contingent liabilities
----------- ------------
Total liabilities and shareholder's equity $77,931,211 $416,548,249
=========== ============
</TABLE>
See accompanying notes to financial statements
<PAGE> 7
BRITTANY INSURANCE COMPANY LTD.
Statements of Income and Retained Earnings
Years Ended December 31, 1999 and 1998
(Expressed in United States Dollars)
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<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Premiums written and assumed $ 35,348,492 $ 42,628,103
Change in unearned premiums written and assumed 693,515 178,043
------------- -------------
Earned premiums written and assumed 36,042,007 42,806,146
Premiums ceded (23,702,995) (18,839,748)
Change in unearned premiums ceded 84,326 27,187
------------- -------------
Net earned premiums 12,423,338 23,993,585
Commissions earned on premiums ceded 1,555,345 1,604,399
Commission and acquisition expenses (1,667,509) (3,262,046)
Losses and loss expenses incurred 18,020,825 62,281,291
------------- -------------
Net underwriting profit 30,331,999 84,617,229
General and administrative expenses (2,171,335) (785,461)
Net financial (loss) income (3,981,461) 36,622,918
------------- -------------
Net income 24,179,203 120,454,686
Retained earnings at beginning of year 1,009,074 554,388
Dividends (20,994,000) (120,000,000)
------------- -------------
Retained earnings at end of year $ 4,194,277 $ 1,009,074
============= =============
</TABLE>
See accompanying notes to financial statements
<PAGE> 8
BRITTANY INSURANCE COMPANY LTD.
Statements of Cash Flows
Years Ended December 31, 1999 and 1998
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 24,179,203 $ 120,454,686
Adjustments to reconcile net income to net cash
provided by operating activities:
Unrealised loss (gain) on marketable securities 11,777,771 (9,043,562)
Unrealised gain on unquoted investment -- (10,157,281)
Profit on sale of unquoted investment (75,328) --
Depreciation 52,990 44,225
Amortisation of marketable securities (58,597) (97,039)
Proceeds from sale and maturity of marketable securities 254,093,338 175,884,889
Purchase of marketable securities (121,778,815) (185,928,967)
Loss (gain) on sale of marketable securities 4,235,711 (2,591,638)
Proceeds from sale of unquoted investment 12,375,328 --
Insurance balances receivable 32,561,883 (25,489,659)
Advances to intermediaries and reinsureds (1,851,882) (3,193,484)
Insurance balances payable 1,390,769 22,654
Funds withheld by ceding companies 3,643,729 1,834,064
Funds withheld from reinsurers -- (43,845,430)
Outstanding losses and loss expenses (88,852,477) (26,490,047)
Outstanding losses recoverable from reinsurers 16,013,677 34,614,186
Unearned premiums (693,515) (178,043)
Prepaid reinsurance premium 84,326 (27,187)
Other 3,748,866 288,993
------------- -------------
Cash provided by operating activities 150,846,977 26,101,360
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of share capital (149,880,000) --
Additional paid-in capital 15,000,000 --
Dividends paid (140,994,000) (50,000,000)
------------- -------------
Cash used by financing activities (275,874,000) (50,000,000)
------------- -------------
Decrease in cash and cash equivalents (125,027,023) (23,898,640)
------------- -------------
Cash and cash equivalents at beginning of year 125,413,219 149,311,859
------------- -------------
Cash and cash equivalents at end of year $ 386,196 $ 125,413,219
============= =============
REPRESENTED BY:
Cash at banks - current accounts $ 296,306 $ 82,455
Deposits with related party 89,890 125,330,764
------------- -------------
$ 386,196 $ 125,413,219
============= =============
</TABLE>
See accompanying notes to financial statements
<PAGE> 9
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
1. GENERAL
Brittany Insurance Company Ltd. ("the Company") is incorporated under
the laws of Bermuda and is a wholly owned subsidiary of Brittany
Holdings Limited. The ultimate parent company is TotalFina S.A. whereas
in prior years it was PetroFina S.A.
During June 1999 PetroFina S.A. was acquired by Total S.A. with the
resulting entity renamed TotalFina S.A. The Company had insured or
reinsured risks of subsidiaries of PetroFina S.A. These were mainly
onshore and offshore oil and gas property risks with some related
liability coverages. In the ordinary course of business, the Company
ceded premiums to other reinsurance companies under excess of loss and
aggregate protections which limited its primary exposure on any one
occurrence and over the whole account. These arrangements during 1999
in general limited the net loss to the Company for physical damage,
business interruption and third party liabilities combined to a maximum
of approximately $25 million for any one occurrence. In certain
circumstances of major loss, the Company retained a share in excess
reinsurance layers and also may have incurred liability for additional
premium adjustments in the future. There were no circumstances reported
in 1999 to which this applied.
Effective June 11, 1999 the unexpired risk relating to the 1999 group
business was fully reinsured to an existing insurance subsidiary of
Total S.A., Omnium Insurance and Reinsurance Company Limited (OIRC).
The Company's unexpired 1999 reinsurance programme was then cancelled.
Effective October 1, 1999 the Company assigned all of its rights and
obligations arising from the PetroFina S.A. business written prior to
October 1, 1999 together with the relevant reinsurances covering this
business to OIRC. The run off of a third party book of general
reinsurance business from the international markets remains within the
Company. This business includes excess liability risks such as
environmental and health hazard exposures.
As the Company is no longer involved in the group insurance programme
there was a review of the necessary capital required. Previously the
Company had maintained a large capital base to cover the risk exposure
the Company retained on group business, with this requirement now
relieved the Registrar of Companies approved the reduction of the
issued capital to the minimum of $120,000.
The Company holds a Class 3 license under the Insurance Act 1978, as
amended, of Bermuda. The Company is required by its license to maintain
a minimum statutory capital and surplus which is the greater of an
amount based on net premiums written and assumed or an amount based on
the reserves for outstanding losses. At December 31, 1999 the minimum
requirement is approximately $5.4 million whereas actual statutory
capital and surplus is approximately $19.1 million. Actual statutory
capital and surplus has been reduced by $196,000 relating to letters of
credit issued by the Company's bankers as discussed in Note 7(a).
The Company is also required to maintain a minimum liquidity ratio
whereby the value of its relevant assets are not less than 75% of the
amount of its relevant liabilities. Relevant assets include cash,
marketable securities, accrued interest, insurance balances receivable
and funds withheld by ceding companies. Certain categories of assets do
not qualify as relevant assets under the statute. The relevant
liabilities are all the liabilities. At December 31, 1999 the Company
was required to maintain relevant assets of at least $32.7 million. At
that date relevant assets were approximately $62.9 million and the
minimum liquidity ratio was therefore met.
<PAGE> 10
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the period. Actual results could differ from those
estimates. The following are the significant accounting policies
adopted by the Company:
(a) Outstanding losses and loss expenses and provision for doubtful
reinsurance
Outstanding losses and loss expenses represent the amount needed to
provide for the estimated ultimate expected cost of settling claims
related to insured events (both reported and unreported) that have
occurred on or before each balance sheet date. Amounts recoverable from
reinsurers are estimated in a manner consistent with the underlying
liabilities. The provision for doubtful reinsurance represents the
estimated uncollectible amounts on insurance balances. The liability
for outstanding losses and loss expenses, the provision for doubtful
reinsurance, and outstanding losses recoverable from reinsurers do
not take into consideration the time value of money.
The liability for outstanding losses and loss expenses is periodically
reviewed and evaluated in the light of emerging claim experience and
changing circumstances. The resulting changes in estimates of the
ultimate liabilities are recorded in the period in which they are
determined.
Advances to intermediaries and reinsureds represent payments that the
Company has made to intermediaries or reinsureds in respect of losses
which have yet to be advised on the regular cession statements. It is
the Company's policy to book amounts as paid losses when reported on
cession statements. Therefore these payments have been shown as
advances with a corresponding amount shown within outstanding losses.
(b) Premiums and acquisition costs
Premiums assumed are recorded on the accruals basis, based on the most
current information known, with any adjustments reflected in the period
in which they are determined. They are included in income on a pro-rata
basis over the lives of the treaties with the unearned portion deferred
in the balance sheet. Reinsurance premiums are similarly pro-rated over
the terms of the treaties with the unearned portion being deferred in
the balance sheet as prepaid reinsurance premium.
(c) Marketable securities and net financial income
Management considers all the marketable securities as trading
securities, therefore the investments are carried at their fair value.
Realised and unrealised gains and losses on investments are included as
financial income in the statement of operations for the current year.
Interest income is recognised when earned.
<PAGE> 11
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Unquoted investment
The unquoted investment was carried at estimated fair value. The
Company determined fair value based on the Company's share of the net
assets of the underlying investment at December 31, 1998. The Company
was notified on December 10, 1998 that the unquoted investment was
going into voluntary liquidation and received the liquidation proceeds
during 1999. The Company had recognized an unrealised gain of
$10,157,281 relating to this investment in 1998.
(e) Translation of foreign currencies
Foreign currency assets and liabilities are translated at exchange
rates in effect at the balance sheet date. Income and expenses are
translated at the rates in effect at the date of the transaction.
Exchange gains and losses are included in net financial income reported
for the year.
(f) Cash and cash equivalents
For the purposes of the statement of cash flows the Company considers
all short term deposits, with an original maturity of three months or
less, as equivalent to cash.
(g) Derivative financial instruments
The Company, through its asset managers, is party to certain derivative
financial instruments, specifically forward foreign exchange contracts,
which are used to manage foreign currency exposures on non-U.S. dollar
denominated marketable securities. The Company does not engage in
derivatives for any other purpose. Derivative financial instruments are
carried at fair value as a component of marketable securities in the
balance sheet with unrealised gains and losses recorded in the
statement of operations.
(h) Transactions with related parties
All transactions with related parties are carried out in the normal
course of operations and are measured at the exchange amount, which is
the consideration established and agreed to by the related party.
Management believe that these transactions are carried out at market
rates and conditions.
<PAGE> 12
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
3. MARKETABLE SECURITIES
The amortised cost and fair value of marketable securities held on a
trading basis are summarised as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealised Unrealised
1999 Maturity Amortised Cost Gains Losses Fair Value
------------------ -------- -------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Cash 3,510,789 -- -- 3,510,789
U.S. Treasury within one year 1,991,367 -- -- 1,991,367
one to five years 3,393,272 251 (30,483) 3,363,040
over five years 3,875,691 (83,191) 3,792,500
Foreign Government within one year 1,057,560 -- (18,251) 1,039,309
one to five years 6,769,160 8,287 (565,473) 6,211,974
over five years 8,874,181 -- (1,042,469) 7,831,712
Corporate one to five years 1,692,099 -- (63,796) 1,628,303
over five years 5,520,678 -- (430,745) 5,089,933
Supranational one to five years 10,896,357 -- (962,701) 9,933,656
over five years 7,038,968 -- (380,964) 6,658,004
Mortgage backed one to five years 968,979 -- (8,879) 960,100
Forward Foreign
Exchange Contracts 1,350,093 (431,723) 918,370
Total 55,589,101 1,358,631 (4,018,675) 52,929,057
</TABLE>
<PAGE> 13
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
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3. MARKETABLE SECURITIES (continued)
<TABLE>
<CAPTION>
Gross Gross
Unrealised Unrealised
1998 Maturity Amortised Cost Gains Losses Fair Value
------------------ -------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash 7,223,320 -- -- 7,223,320
U.S. Treasury one to five years 31,210,250 699,331 (15,547) 31,894,034
over five years 49,964,339 3,580,811 -- 53,545,150
Foreign Government one to five years 13,999,158 418,291 (145,999) 14,271,450
over five years 59,043,393 3,496,351 (38,450) 62,501,294
Corporate one to five years 1,691,678 80,334 -- 1,772,012
over five years 11,679,289 452,448 (67,737) 12,064,000
Supranational one to five years 2,485,595 84,405 -- 2,570,000
over five years 9,590,714 530,042 (59,721) 10,061,035
Mortgage backed one to five years 78,988 -- -- 78,988
over five years 5,084,985 193,012 -- 5,277,997
Forward Foreign
Exchange Contracts -- 577,878 (638,693) (60,815)
Total 192,051,709 10,112,903 (966,147) 201,198,465
</TABLE>
Fair values have been determined on the basis described in Note 8.
The amounts are shown by contractual maturity. Actual maturity may
differ from contractual maturity because certain borrowers have the
right to call or prepay certain obligations with or without call or
prepayment penalties.
The Company is exposed to interest rate, currency and credit risk
on these marketable securities. Management attempts to mitigate
these risks by the use of the investment guidelines provided to its
asset managers. Details of significant terms and conditions of
these guidelines are set out below.
(a) Cash
These amounts are mainly invested in an overnight cash fund or in
short term deposits. Interest rates vary depending on the currency
and amount held, rates range up to 5.75%. The portfolio managers
are restricted by the Company's investment guidelines to having no
more than 20% of their portfolio deposited with any one bank which
must be rated P1 or Al or better by recognised rating agencies.
<PAGE> 14
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
3. MARKETABLE SECURITIES (continued)
(b) Fixed Income Securities
These are international fixed income securities which are listed
and regularly traded on official exchanges of any OECD member
country. The maximum investment in the securities of any one
institution or borrower is 15% of the portfolio and the limit on
any outstanding issue is 5%, except for the sovereign paper of
certain governments and certain supranational institutions where
the limit is 25% and 10% respectively. All fixed income securities
must have a credit rating of AA1 or AA+ or better by recognised
rating agencies, except for sovereign paper which must be rated AA3
or AA- or better.
Interest is received semi-annually on the majority of the fixed
income securities. Coupon rates range from 0% to 9.00% with a
weighted average of 5.9% (1998 range 0% to 13%, weighted average
5.5%).
(c) Forward Foreign Exchange Contracts
The Company, through its asset managers, is party to certain
derivative financial instruments, specifically forward foreign
exchange contracts, which are used to manage foreign currency
exposures on non-U.S. dollar denominated marketable securities.
Under the investment guidelines, any currency may be overhedged up
to 5% (of total market value of the portfolio) above the market
value of the investments denominated in the relevant currency.
There is also a maximum and minimum limit placed on the total US
Dollar content of the market value of the portfolio. The
counterparties to these contracts must be rated P1 or Al or better
by a recognised rating agency. All contracts must have an initial
maturity of less than one year.
At December 31, 1999 the US dollar equivalent of the contractual
value of the Company's commitments to purchase and sell foreign
currencies (principally between US dollars and Euro) were
$44,969,437 and $45,914,978 respectively (1998 - $101,879,224 and
$101,818,408).
4. RELATED PARTY TRANSACTIONS
(a) Transactions with related parties
The following table summarises the Company's material related party
transactions for the year:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
$ $
<S> <C> <C>
Earned premiums written and assumed 35,342,818 42,457,667
Earned ceded premium (18,732,439) --
Commission and acquisition expenses (938,376) (965,638)
Commissions earned on premiums ceded 888,515 --
Losses and loss expenses incurred (3,039,472) (3,323,110)
Net financial income - Ultimate parent 3,598,975 6,615,879
- Fellow subsidiaries 63,916 194,925
</TABLE>
<PAGE> 15
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
--------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS (continued)
Except where shown, all amounts are with fellow subsidiaries. All
transactions were conducted in the normal course of operations,
except as explained below. In respect of the premiums written and
assumed, some of these amounts are received as reinsurance of third
party insurance companies which insure the group risks.
As stated in Note 1, during June 1999 the Company's ultimate
parent, PetroFina S.A., was acquired by Total S.A. and the
unexpired risk relating to the 1999 group business was reinsured to
a subsidiary insurance captive of Total S.A., OIRC. This
transaction involved the Company ceding premium to OIRC of
$18,732,439.
Effective October 1, 1999, the Company assigned all of its rights
and obligations arising from the PetroFina S.A. business written
prior to October 1, 1999 to OIRC together with the relevant
reinsurances covering this business. Accordingly, as at December
31, 1999, the Company no longer records any outstanding loss
reserves in the balance sheet on the PetroFina S.A. group business.
Under the terms of this transaction, the Company transferred the
total group reserves of $51,184,661, funds withheld of $3,324,501,
receivable balances of $2,630,894 plus the bad debt associated with
those receivable balances of $2,275,000 to OIRC for a payment of
$47,504,266. There was no gain or loss for income statement
purposes arising through this transaction.
(b) Amounts due (to)/from related parties
At the end of the year, the amounts due (to)/from related parties
are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ------------
$ $
<S> <C> <C>
Deposits with ultimate parent 89,890 125,330,764
Insurance balances receivable -- 2,568,536
Insurance balances payable 3,211,175 --
Funds withheld by ceding companies -- 2,160,792
Other receivables -- 38,034
Reserve for outstanding losses -- (55,637,451)
Unearned premiums -- (546,151)
Dividend payable -- (120,000,000)
</TABLE>
The above amounts, except for the deposits, and dividend payable,
arise out of the Company's normal insurance operations described in
Note 1 and are settled on the same basis as those with unrelated
parties. The deposits with ultimate parent are made at commercial
rates and have earned interest over the year in the range of
4.665% and 6.21% (1998 - range 5.02% to 5.5625%).
(c) Termination costs
The parent company has approved a plan to sell the Company.
Accordingly, at December 31, 1999 the Company has accrued a
liability of $1,250,000 relating to the anticipated costs of sale
including the termination of the employment of the Company's
employees.
<PAGE> 16
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
(Expressed in United States Dollars)
-------------------------------------------------------------------------------
5. OUTSTANDING LOSSES AND LOSS EXPENSES, OUTSTANDING LOSSES
RECOVERABLE FROM REINSURERS AND PROVISION FOR DOUBTFUL REINSURANCE
The liability for outstanding losses and loss expenses combines
estimates for reported losses and losses incurred but not reported
(IBNR). The estimates for reported losses are based on adjusters'
reports and ceding company statements. Management have recorded an
IBNR reserve based on their best estimate of ultimate loss ratios
developed from loss histories, adjusted for actual development of
previously established reserves and considering the recommendations
of an independent actuarial study. The liability for outstanding
losses and loss expenses does not take into consideration the time
value of money. Outstanding losses recoverable from reinsurers are
estimated in a manner consistent with the underlying liabilities.
Reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honour their
obligations could result in losses to the Company; consequently,
allowances are established for amounts deemed uncollectable. The
Company evaluates the financial condition of its reinsurers and
monitors their economic characteristics to minimise its exposure to
significant losses from reinsurer insolvencies.
Management believes, after considering the recommendations of the
independent actuary, that the liability for outstanding losses and
loss expenses and the provision for doubtful reinsurance are
adequate to cover the ultimate net cost of losses incurred to date
and any amounts that may prove uncollectable from reinsurers, but
these provisions are necessarily estimates and may ultimately be
settled for significantly greater or lesser amounts in the near
term. Any subsequent differences arising are recorded in the period
in which they are determined.
<PAGE> 17
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
5. OUTSTANDING LOSSES AND LOSS EXPENSES, OUTSTANDING LOSSES RECOVERABLE
FROM REINSURERS AND PROVISION FOR DOUBTFUL REINSURANCE (continued)
Activity in the liability for outstanding losses and loss expenses is
summarised as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Gross balance - January 1 $139,834,142 $ 166,324,189
Less: reinsurance recoverable (31,036,328) (65,650,514)
------------ -------------
Net balance - January 1 108,797,814 100,673,675
------------ -------------
Incurred losses related to - current year 2,895,611 5,664,266
Prior years (20,916,436) (22,190,557)
Gain on Commutation -- (45,755,000)
------------ -------------
Total incurred (18,020,825) (62,281,291)
------------ -------------
Paid losses related to - current year (2,895,611) (758,365)
Prior years (51,922,364) (9,591,205)
Commutation proceeds -- 80,755,000
------------ -------------
Total paid (54,817,975) 70,405,430
------------ -------------
Net balance - December 31 35,959,014 108,797,814
Add: reinsurance recoverable 15,022,651 31,036,328
------------ -------------
Gross balance - December 31 $ 50,981,665 $ 139,834,142
============ =============
</TABLE>
As detailed in Note 1, the group business has all been assigned to
a fellow TotalFina group company and this transfer was at the
carried value of the loss reserves with no income statement gain or
loss arising under the transaction. The amount of group loss
reserves transferred, and shown as paid losses above was
$50,991,555. The reduction in prior year incurred losses for 1999
is therefore predominantly in respect of a reduction in
management's estimate of ultimate losses on third party business,
which followed an independent actuarial review.
<PAGE> 18
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
-------------------------------------------------------------------------------
5. OUTSTANDING LOSSES AND LOSS EXPENSES, OUTSTANDING LOSSES
RECOVERABLE FROM REINSURERS AND PROVISION FOR DOUBTFUL REINSURANCE
(continued)
During 1998 the Company commuted, effective December 31, 1998, a
multi-year reinsurance contract which encompassed both prospective
and retroactive covers. The prospective covers provided protection
in respect of the Company's retentions on various group risks while
the retroactive cover gave excess of loss protection on the run-off
of a portfolio of third party excess liability business. Prior to
commutation the retroactive cover was recorded through the balance
sheet in accordance with the FASB 113 "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts". Under
the terms of the commutation agreement the Company has relieved the
reinsurer of all past, present and future liabilities on the
various group risks and the portfolio of third party excess
liability business. The consideration for this commutation was
$80,755,000 and resulted in, after taking into account the
reduction of reinsurance recoveries of $35,000,000, a gain on
commutation of $45,755,000. The consideration was satisfied by a
reduction in the funds withheld from reinsurers of $47,265,373 and
a cash amount, shown in insurance balances receivable in 1998, and
received in 1999, of $33,489,627.
The reserves relating to the portfolio of third party excess
liability business, previously contained in the multi-year
reinsurance contract, were reassessed following the negotiation of
the commutation. This reassessment took place after reviewing the
recent actuarial development together with the recommendations of
an independent actuary. This resulted in a decrease in those
reserves of approximately $19,486,000 and accounts for the majority
of the reduction in the prior year incurred losses for 1998.
The Company is party to litigation, and has appointed legal
representation, over certain claims in the ordinary course of
business. These are in respect of some of the third party excess
liability business and management takes into account the reports of
the legal representatives in determining the level of reserves.
6. NET FINANCIAL INCOME
Net financial income consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Interest income $ 12,613,607 $ 16,656,909
Dividends received -- 877,454
Realised gain on unquoted investment 75,328 --
Unrealised gain on unquoted investment -- 10,157,281
Net realised (loss)/gain on sale of marketable securities (4,235,711) 2,591,638
(Loss)/gain on foreign exchange (783,088) 849,745
Amortisation of premium/discount on cost of
marketable securities 58,597 97,039
Interest received on funds withheld 67,577 245,956
Interest due on funds withheld -- (3,896,666)
Change in unrealised value of marketable securities (11,777,771) 9,043,562
------------ -------------
$ (3,981,461) $ 36,622,918
============ =============
</TABLE>
<PAGE> 19
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
7. CONTINGENT LIABILITIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
(a) In the normal course of reinsurance operations the Company's
bankers have issued letters of credit of $13,818,137 (1998 -
$31,596,190) in favour of ceding insurance companies. All letters
of credit are collateralised by fixed income securities held in
trust accounts or cash deposits.
As at December 31, 1999 the Company's bankers have issued letters
of credit of $196,000 in favour of insurance companies to guarantee
certain obligations of OIRC.
(b) The Company's asset managers have entered into various forward
foreign exchange contracts as described in Note 3.
(c) In July 1997 Belvedere Underwriting Agency Ltd. (BUAL)
presented the Company with a claim for remuneration for run-off
expenses for the period from 1986 (date of termination of the
underwriting agreement) to 1997. The Company denied liability and
BUAL has not advanced its claim any further. In 1998 BUAL's parent
company, Belvedere Insurance Company Limited, went into
liquidation. The liquidator has not taken any steps to advance
BUAL's claim and management is uncertain whether or not the
liquidator will pursue this matter further. If arbitration
proceedings were to be brought, management, under advice of legal
counsel, consider it unlikely that arbitrators would find the
Company liable beyond the commissions already paid to the agency.
Consequently, no amount has been accrued in the financial
statements.
8. FAIR VALUE DISCLOSURE
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument:
(a) General:
For certain of the Company's financial instruments, including:
(a) Cash at banks
(b) Deposits with related party
(c) Accrued interest receivable
(d) Insurance balances receivable
(e) Funds withheld by ceding companies
(f) Other receivables
(g) Insurance balances payable
(h) Accounts payable and accrued expenses,
the carrying amounts approximate fair value due to the immediate or
short-term nature of these balances.
(b) Marketable securities and unquoted investments:
The fair value of marketable securities is estimated based on
quoted market prices obtained by the custodian and asset managers
from market sources. In respect of forward foreign exchange
contracts the fair value is obtained by reference to forward
exchange rates at the year end. The fair value of the unquoted
investment was estimated according to the principles discussed in
Note 2(d).
<PAGE> 20
BRITTANY INSURANCE COMPANY LTD.
Notes to Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
9. ADDITIONAL PAID-IN CAPITAL
During the year, additional paid in capital of $15,000,000 was
contributed by the parent company.
10. SHARE CAPITAL
The authorized share capital is $120,000 (1998 - $150,000,000)
comprised of 120,000 (1998 - 150,000,000) common shares of $1 par
value. During the year, 149,880,000 shares at par value of $1 were
cancelled for total reduction of share capital of $149,880,000.
11. TAXATION
Under current Bermuda law, the Company is not obligated to pay any
taxes in Bermuda on either income or capital gains. The Company has
received an undertaking from the Minister of Finance in Bermuda
pursuant to the provisions of the Exempted Undertakings Tax Protection
Act, 1966 which exempts the Company from any such Bermuda taxes, at
least until the year 2016.
<PAGE> 21
APPENDIX B
BRITTANY INSURANCE COMPANY LTD.
Financial Statements and
Independent Auditors' Report
June 30, 2000
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Brittany Insurance Company Ltd.
We have audited the accompanying balance sheet of Brittany Insurance
Company Ltd. as of June 30, 2000, and the related statements of income and
retained earnings and cash flows for the period from January 1, 2000 to June 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the 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 management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Brittany Insurance Company Ltd. as
of June 30, 2000, and the results of its operations and its cash flows for the
period from January 1, 2000 to June 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/DELOITTE & TOUCHE
Hamilton, Bermuda
September 8, 2000
<PAGE> 23
BRITTANY INSURANCE COMPANY LIMITED
BALANCE SHEET
as of June 30, 2000
(expressed in U.S. dollars)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents (Note 3)................................. $ 23,378,080
Investments (Note 3)............................................... 27,687,717
Accrued interest receivable........................................ 602,604
Insurance balances receivable...................................... 3,762,075
Funds withheld by ceding companies................................. 349,868
Losses and loss adjustment expenses recoverable from reinsurers.... 19,853,786
------------
$ 75,634,130
============
LIABILITIES
Losses and loss adjustment expenses (Note 6)....................... $ 53,907,702
Insurance balances payable......................................... 2,180,973
Unearned premiums.................................................. 3,778
Net unrealized loss on forward foreign currency contracts (Note 5). 485,676
Accounts payable................................................... 35,000
------------
56,613,129
------------
SHAREHOLDER EQUITY
Share capital (Note 7)............................................. 120,000
Additional paid-in capital......................................... 15,000,000
Retained earnings.................................................. 3,901,001
------------
19,021,001
------------
$ 75,634,130
============
</TABLE>
See accompanying notes to the financial statements
- 2 -
<PAGE> 24
BRITTANY INSURANCE COMPANY LIMITED
STATEMENT OF INCOME AND RETAINED EARNINGS
for the period from January 1, 2000 to June 30, 2000
(expressed in U.S. dollars)
<TABLE>
<S> <C>
Underwriting operations
Net premiums earned.................................... $ 12,487
------------
Losses and loss adjustment expenses.................... 8,131,509
Reinsurance recoveries................................. (7,164,522)
------------
Net losses and loss adjustment expenses................ 966,987
Commissions and brokerage.............................. 77,281
Premium taxes.......................................... 20,509
------------
1,064,777
------------
Net underwriting loss.................................. (1,052,290)
Net investment income (Note 4).......................... 1,446,656
General and administrative expenses..................... (714,599)
Foreign exchange gain................................... 26,957
------------
NET LOSS................................................ (293,276)
RETAINED EARNINGS, BEGINNING OF PERIOD.................. 4,194,277
------------
RETAINED EARNINGS, END OF PERIOD........................ $ 3,901,001
============
</TABLE>
See accompanying notes to the financial statements
- 3 -
<PAGE> 25
BRITTANY INSURANCE COMPANY LIMITED
STATEMENT OF CASH FLOWS
for the period from January 1, 2000 to June 30, 2000
(expressed in U.S. dollars)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $ (293,276)
Adjustments to reconcile net income to
net cash provided by operating activities:
Changes in assets and liabilities:
Investments....................................................... 25,241,340
Accrued interest receivable....................................... 679,303
Insurance balances receivable..................................... (854,986)
Funds withheld by ceding companies................................ 9,077
Losses and loss adjustment expenses recoverable from reinsurers... (4,831,135)
Losses and loss adjustment expenses............................... 2,926,037
Insurance balances payable........................................ 1,051,958
Unearned premiums................................................. (134)
Net unrealized loss on forward foreign currency contracts......... 485,676
Accounts payable.................................................. (1,421,976)
-----------
Net cash provided by operating activities,
being net increase in cash and cash equivalents................. 22,991,884
-----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..................... 386,196
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................... $23,378,080
===========
</TABLE>
See accompanying notes to the financial statements
-4-
<PAGE> 26
BRITTANY INSURANCE COMPANY LIMITED
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
1. DESCRIPTION OF BUSINESS
Brittany Insurance Company Ltd.("the Company") is incorporated under
the laws of Bermuda and is a wholly-owned subsidiary of Petrofina S.A.
The Company is currently in run-off. Prior to run-off, the principal
activity was the insurance and reinsurance of risks of its former
parent and affiliated companies. During 1999, all related business was
transferred to an affiliate company through a novation agreement.
In 1976 the Company began writing third party business. A further
expansion in non-related writings began in 1981 when the Company
extended underwriting authority to an unrelated underwriting agency.
The Company moved into underwriting third party business directly,
rather than through agents, in 1983. The business underwritten included
property, casualty and excess liability risks such as environmental and
health hazard exposures. The Company ceased underwriting third party
business in 1993.
On July 3, 2000 100% of the common shares of the Company were purchased
by B.H. Acquisition Ltd., a company incorporated under the laws of
Bermuda.
2. ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at 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.
Cash and cash equivalents
Cash and cash equivalents include cash, commercial paper and certain
U.S. Government securities with an original maturity of three months
or less. The carrying amount approximates fair value.
Investments
Debt securities are classified as trading securities and are carried
at fair value, with unrealized holding gains and losses included in
net income. Realized gains and losses on sales of securities
classified as trading are recognized in net income on the specific
identification basis.
-5-
<PAGE> 27
BRITTANY INSURANCE COMPANY LIMITED
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
2. ACCOUNTING POLICIES (cont'd)
Forward foreign currency contracts
The Company is party to forward exchange contracts with off balance
sheet risk, in the normal course of its business, to manage its
exposure to fluctuations in the value of its foreign currency
denominated investment portfolio due to movements in exchange rates.
The change in market value is recorded in income by the Company as an
unrealized gain or loss. When the contract is closed or delivery
taken, the Company records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened
and the value at the time it was closed. Risks arise from the possible
inability of counterparties to meet the terms of their contracts.
Premiums
Premiums are recognized as revenue on a pro-rata basis over the
periods of the respective policies and contracts of reinsurance. The
portion of premiums that will be earned in the future are deferred and
reported as unearned premiums.
Premiums which are subject to adjustments are estimated based upon
available information. Any variances from the estimates are recorded
in the periods in which they become known.
Losses and loss adjustment expenses
The liability for losses and loss adjustment expenses includes an
amount determined from loss reports and individual cases and an
amount, based on historical loss experience and industry statistics,
for losses incurred but not reported. These estimates are continually
reviewed and are necessarily subject to the impact of future changes
in such factors as claim severity and frequency. While the directors
and management believe that the amount is adequate, the ultimate
liability may be significantly in excess of, or less than, the amounts
provided and any adjustments will be reflected in the periods in which
they become known.
Reinsurance
Reinsurance premiums ceded are accounted for on a pro-rata basis over
the terms of the respective reinsurance contracts. Commissions on
reinsurance ceded are deferred and amortized over the terms of the
contracts of reinsurance to which they relate. Losses and loss
adjustment expenses recoverable from reinsurers are estimated in a
manner consistent with the reinsured policy. In the event that all or
any of the reinsuring companies are unable to meet their obligations
under existing reinsurance agreements, the Company will be liable for
such defaulted amounts.
Translation of foreign currencies
At each balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of the company are adjusted
to reflect the current exchange rate. Revenue and
- 6 -
<PAGE> 28
BRITTANY INSURANCE COMPANY LIMITED
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed U.S. dollars)
2. ACCOUNTING POLICIES (cont'd)
expense items are translated into U.S. dollars at average rates of
exchange for the years. The resulting exchange gains or losses are
included in net income.
Fair value of financial instruments
Estimated fair value of financial instruments held by the Company
approximates carrying value. The Company's investments have been valued
at the date of the Balance Sheet at the last reported sales price on a
recognized stock exchange.
Accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
becomes effective for the Company on January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company will be required to
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for a change in the fair value of a derivative
in earnings or other comprehensive income will depend on the intended
use of the derivative and the resulting designation. Derivatives can be
designated as (a) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or a firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in
foreign operations, an unrecognized firm commitment, an
available-for-sale security, or a foreign currency denominated
forecasted transaction. The difference between a derivative's previous
carrying amount and its fair value at the date of implementation of
SFAS No. 133 shall be reported as a transition adjustment. Such
adjustment shall be reported in net income or other comprehensive
income as the effect of a change in accounting principle and be
presented in a manner similar to the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." The Company is currently reviewing the impact of the
implementation of SFAS No. 133 on its financial statements.
3. PLEDGED ASSETS
Certain of the Company's cash equivalents and investments in the amount
of $12,818,000 as of June 30, 2000, are pledged as collateral against
letters of credit in the same amount.
- 7 -
<PAGE> 29
BRITTANY INSURANCE COMPANY LIMITED
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
4. NET INVESTMENT INCOME
Major categories of net investment income are summarized as follows:
<TABLE>
<S> <C>
Cash equivalents............................................................ $ 15,682
Interest from debt securities............................................... 1,361,851
Net loss on sale of debt securities......................................... (1,679,410)
Investment expenses......................................................... (92,886)
Change in net unrealized holding gain or loss on trading securities......... 1,841,419
-----------
$ 1,446,656
===========
</TABLE>
5. FORWARD EXCHANGE CONTRACTS
The Company enters into foreign currency forward contracts as part of
its overall investing strategy. As of June 30, 2000 the Company had
foreign exchange contracts to buy several major currencies, with total
notional amounts and fair values, based on year end exchange rates, as
follows:
<TABLE>
<S> <C>
Notional contract purchase commitments...................................... $ 11,219,506
Fair value.................................................................. $ (485,676)
</TABLE>
The Company is exposed to maximum credit losses in the event of
non-performance by the counterparties to its forward currency
contracts in an amount approximately equal to the fair values of such
contracts. However, the Company monitors the credit standing of
counterparties and believes the credit risk associated with its
forward currency contracts to be insignificant.
6. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<S> <C>
Outstanding................................................................. $19,186,720
Incurred but not reported................................................... 34,720,982
-----------
$53,907,702
===========
</TABLE>
Net incurred losses of $966,987 and net paid losses of $2,872,085
relate to prior years.
7. SHARE CAPITAL
<TABLE>
<S> <C>
Authorized, issued and fully paid
120,000 common shares of par value $1 each.................................. $ 120,000
===========
</TABLE>
- 8 -
<PAGE> 30
BRITTANY INSURANCE COMPANY LIMITED
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
8. CONTINGENCIES
On or about July 8, 1997, the Company was informed by correspondence
that an underwriting agency company who provided underwriting agency
and run off services has claimed that they are owed run-off
remuneration totaling $2,321,000 for the period January 1, 1984 to
December 31, 1996. The parent of the underwriting agency is currently
in liquidation. The Company continues to deny any liability under this
claim, and will vigorously defend this position.
9. TAXATION
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. The Company has received an
undertaking from the Bermuda government that, in the event of income
or capital gains taxes being imposed, the Company will be exempted
from such taxes until the year 2016.
-9-
<PAGE> 31
APPENDIX C
C.E.A.I.
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1999 AND 1998
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
To the Shareholder of C.E.A.I. S.A.,
We have audited the accompanying balance sheets of C.E.A.I. S.A. as of December
31, 1999 and 1998 and the related statements of income, shareholder's equity,
and cash flows for the years then ended. These 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 auditing standards generally accepted
in the 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 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 financial statements present fairly, in all material
respects, the financial position of C.E.A.I. S.A. as of December 31, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
September 14, 2000
/s/ DELOITTE & TOUCHE
Brussels, Belgium
REVISEURS D'ENTREPRISES
REPRESENTED BY
GERARD HOF
PARTNER
<PAGE> 33
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
1. BALANCE SHEETS (IN USD) AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents 13,494,834 7,247,002
Investments 46,189,225 51,987,887
Due from parent company 8,900,539 26,029,403
Accrued interest receivable 671,650 818,567
Insurance balances receivable 8,218,485 9,234,728
Reinsurance balances receivable 12,093,118 21,666,400
Funds withheld by ceding companies 1,866,789 2,482,414
Other assets 60,748 165,640
---------- -----------
TOTAL ASSETS 91,495,388 119,632,041
========== ===========
LIABILITIES
Losses and loss adjustment expenses 83,519,830 109,441,531
Unearned premiums 207,782 531,228
Reinsurance balances payable 62,923 166,422
Accounts payable and accrued expenses 671,540 464,550
---------- -----------
TOTAL LIABILITIES 84,462,075 110,603,731
---------- -----------
SHAREHOLDER'S EQUITY
Share capital 36,532,373 36,532,373
Additional paid-in capital 959,220 959,220
Deficit (30,458,280) (28,463,283)
---------- -----------
TOTAL SHAREHOLDER'S EQUITY 7,033,313 9,028,310
---------- -----------
91,495,388 119,632,041
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
<PAGE> 34
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
2. STATEMENTS OF INCOME (IN USD) FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NET PREMIUMS EARNED 207,720 285,535
----------- ----------
Losses and loss adjustment expenses (8,619,961) (2,313,592)
Reinsurance recoveries (2,993,461) (1,682,092)
----------- ----------
NET LOSSES AND LOSS ADJUSTMENT EXPENSES (11,613,422) (3,995,684)
Commissions and brokerage (18,712) (32,139)
----------- ----------
NET UNDERWRITING LOSS (11,424,414) (3,742,288)
Net investment income 11,759,113 7,747,761
General and administrative expenses (689,332) (581,224)
Foreign exchange gain (loss) (1,640,364) 509,577
----------- ----------
Net income (loss) (1,994,997) 3,933,826
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
<PAGE> 35
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
3. STATEMENTS OF SHAREHOLDER'S EQUITY (IN USD) FOR THE YEARS ENDED DECEMBER 31,
1999 AND 1998
<TABLE>
<CAPTION>
SHARE CAPITAL ADDITIONAL DEFICIT TOTAL
------------- ---------- ------- -----
PAID-IN-
--------
CAPITAL
-------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997 36,532,373 959,220 (32,397,109) 5,094,484
---------- ------- ----------- ----------
Net income 3,933,826 3,933,826
----------- ----------
DECEMBER 31, 1998 36,532,373 959,220 (28,463,283) 9,028,310
---------- ------- ----------- ----------
Net loss (1,994,997) (1,994,997)
----------- ----------
DECEMBER 31, 1999 36,532,373 959,220 (30,458,280) 7,033,313
========== ======= =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
<PAGE> 36
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
4. STATEMENTS OF CASH FLOWS (IN USD) FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net income (loss) (1,994,997) 3,993,826
Changes in assets and liabilities:
Investments 5,798,662 1,336,902
Accrued interest receivable 146,917 (96,487)
Insurance balances receivable 1,016,243 1,785,866
Reinsurance balances receivable 9,573,282 5,402,191
Due from parent company 17,128,864 (5,157,742)
Funds withheld by ceding companies 615,625 332,761
Other assets 104,892 1,792,308
Losses and loss adjustment expenses (25,921,701) (10,394,942)
Unearned premiums (323,446) 327,057
Reinsurance balances payable (103,499) (194,794)
Accounts payable and accrued expenses 206,990 (204,495)
--------- -----------
Net cash provided by operating activities, being net increase
(decrease) in cash and cash equivalents 6,247,832 (1,077,549)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,247,002 8,324,551
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR 13,494,834 7,247,002
========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
<PAGE> 37
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
5. NOTES TO THE FINANCIAL STATEMENTS
5.1. DESCRIPTION OF BUSINESS
The Company is incorporated under the laws of Belgium and was a wholly
owned subsidiary of TOTALFINA, a company incorporated in Belgium, before
being acquired on July 3, 2000 by B.H. Acquisition Ltd., a company
incorporated under the laws of Bermuda. Its principal activities are the
run off of its insurance and reinsurance risks taken throughout the
world.
5.2. SIGNIFICANT ACCOUNTING POLICIES
5.2.1. BASIS OF PREPARATION
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at 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.
5.2.2. CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
5.2.3. INVESTMENTS
Debt securities are classified as trading securities and are carried at
fair value, with unrealized holding gains and losses included in net
income. Realized gains and losses on sales of securities classified as
trading are recognized in net income on the specific identification
basis.
<PAGE> 38
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
5.3. ACCOUNTING POLICIES
5.3.1. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value of financial instruments held by the Company
approximates carrying value. The estimated fair value of investments is
based on quoted market prices.
5.3.2. LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses includes an amount
determined from loss reports on individual cases and an amount, based on
past experience and external actuaries' opinion, for losses incurred but
not reported. These estimates are continually reviewed and are
necessarily subject to the impact of future changes in such factors as
claim severity and frequency. While management believes that the amount
is adequate, the ultimate liability may be significantly in excess of, or
less than, the amounts provided, and any adjustments will be reflected in
the periods in which they become known.
5.3.3. TRANSLATION OF FOREIGN CURRENCIES
At each balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of the company are adjusted
to reflect the current exchange rate. Revenue and expense items are
translated into U.S. dollars at average rates of exchange for the years.
The resulting exchange gains or losses are included in net income.
5.4. PLEDGED ASSETS
Time deposits and investments in debt securities in the amount of
$3,940,490 and $2,500,000 as of December 31, 1999 and 1998, respectively,
are pledged as collateral against letters of credit in the same amounts.
<PAGE> 39
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
5.5. NET INVESTMENT INCOME
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest on cash equivalents 213,980 321,286
Interest on balances with the parent company 589,701 1,113,687
Interest on investments 2,411,042 2,962,368
Net gain/(loss) on sale of investments 8,393,022 3,689,204
Change in unrealized gain or
loss on holding securities 268,906 (228,542)
Investment expenses (117,538) (110,242)
---------- ---------
Totals 11,759,113 7,747,761
========== =========
</TABLE>
5.6. REINSURANCE BALANCES RECEIVABLE
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Recoverable from reinsurers on:
Outstanding losses 11,389,618 20,993,650
Losses incurred but not reported 703,500 672,750
---------- ----------
12,093,118 21,666,400
========== ==========
</TABLE>
In the event that all or any of the reinsuring companies are unable to
meet their obligations under existing reinsurance agreements, the Company
will be liable for such defaulted amounts.
<PAGE> 40
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
5.7. SHARE CAPITAL
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Authorized, issued and fully paid
150,000 common shares of par value 10,000
Belgian Francs each 36,532,373 36,532,373
========== ==========
</TABLE>
5.8. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Outstanding 46,447,697 67,859,112
Incurred but not reported 37,072,133 41,582,419
---------- ----------
83,519,830 109,441,531
========== ===========
</TABLE>
For the year ended December 31, 1999 and 1998, net incurred losses of
$11,613,422 and $3,995,684, respectively, and net paid losses of
$14,238,358 and $9,092,141, respectively, relate to prior years.
Following Belgian regulations, costs for incurred but not reported claims
also include provisions for administrative costs in running off the
supported risks; those provisions amount respectively to $6,700,000 and
$7,300,000 for 1999 and 1998, respectively.
5.9. RELATED PARTY TRANSACTIONS
There are no other related party transactions than due from the parent
company, which has been presented on the balance sheet.
<PAGE> 41
C.E.A.I. S.A. - Financial statements and independent
auditors' report - December 31, 1999 and 1998
5.10. TAXATION
The Company effective tax rate is approximately 40%. The Company has tax
loss carry-forwards of approximately $31,550,000, and $20,358,000, as of
December 31, 1999 and 1998, respectively. The tax loss carry-forwards do
not expire. A valuation allowance has been provided for the tax benefit
of these loss carry-forwards as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Benefit of loss carry forward 12,620,000 8,140,000
Valuation allowance (12,620,000) (8,140,000)
----------- ----------
0 0
=========== ==========
</TABLE>
5.11. STATUTORY REQUIREMENTS
The Company is placed under the prudential supervision of the Belgian
regulatory authorities in charge of the insurance activities (OCA, Office
de Controle des Assurances); the Company has met its regulatory
obligations in 1999 and 1998.
<PAGE> 42
APPENDIX D
COMPAGNIE EUROPEENNE
D'ASSURANCES INDUSTRIELLES S.A.
FINANCIAL STATEMENT AND
INDEPENDENT AUDITORS' REPORT
JUNE 30, 2000
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Compagnie Europeenne d'Assurances Industrielles S.A.
We have audited the accompanying balance sheet of Compagnie Europeenne
d'Assurances Industrielles S.A. as of June 30, 2000, and the related statements
of income and retained earnings and cash flows for the period from January 1,
2000 to June 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the 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 management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Compagnie Europeenne d'Assurances
Industrielles S.A. as of June 30, 2000, and the results of its operations and
its cash flows for the period from January 1, 2000 to June 30, 2000 in
conformity with accounting principles generally accepted in the United States
of America.
/s/ DELOITTE & TOUCHE
Hamilton, Bermuda
September 8, 2000
<PAGE> 44
COMPAGNIE EUROPEENNE D'ASSURANCES INDUSTRIELLES S.A.
BALANCE SHEET
as of June 30, 2000
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents (Note 3) $ 6,469,964
Investments 545,523
Due from parent company 57,270,577
Insurance balances receivable 6,612,025
Funds withheld by ceding companies 1,757,237
Losses and loss adjustment expenses recoverable from reinsurers 13,445,070
------------
TOTAL ASSETS $ 86,100,396
============
LIABILITIES
Losses and loss adjustment expenses (Note 5) $ 82,256,866
Unearned premiums 66,924
Accounts payable 38,485
Insurance balances payable 104,486
------------
TOTAL LIABILITIES 82,466,761
------------
SHAREHOLDER EQUITY
Share capital (Note 6) 36,532,373
Additional paid-in capital 959,220
Deficit (33,857,958)
------------
TOTAL SHAREHOLDER EQUITY 3,633,635
------------
$ 86,100,396
============
</TABLE>
See accompanying notes to the financial statements
-2-
<PAGE> 45
COMPAGNIE EUROPEENNE D'ASSURANCES INDUSTRIELLES S.A.
STATEMENT OF INCOME AND DEFICIT
for the period from January 1, 2000 to June 30, 2000
(expressed in U.S. dollars)
<TABLE>
<S> <C>
Underwriting operations
Net premiums earned $ 34,256
------------
Losses and loss adjustment expenses 6,884,112
Reinsurance recoveries (2,900,498)
------------
Net losses and loss adjustment expenses 3,983,614
Commissions and brokerage (51,627)
------------
3,931,987
------------
Net underwriting loss (3,897,731)
Net investment income (Note 4) 1,733,136
General and administrative expenses (1,006,579)
Foreign exchange loss (228,504)
------------
NET LOSS (3,399,678)
DEFICIT, BEGINNING OF PERIOD (30,458,280)
------------
DEFICIT, END OF PERIOD $(33,857,958)
============
</TABLE>
See accompanying notes to the financial statements
-3-
<PAGE> 46
COMPAGNIE EUROPEENNE D'ASSURANCES INDUSTRIELLES S.A.
STATEMENT OF CASH FLOWS
for the period from January 1, 2000 to June 30, 2000
(expressed in U.S. dollars)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,399,678)
Changes in assets and liabilities:
Investments 45,643,702
Accrued interest receivable 671,650
Insurance balances receivable 1,606,460
Funds withheld by ceding companies 109,552
Losses and loss adjustment expenses recoverable from reinsurers (1,351,952)
Other assets 60,748
Losses and loss adjustment expenses (1,262,964)
Insurance balances payable 41,563
Unearned premiums (140,858)
Accounts payable (633,055)
------------
Net cash provided by operating activities 41,345,168
INVESTING ACTIVITIES:
Advances to parent company,
being net cash used in investing activities (48,370,038)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,024,870)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,494,834
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,469,964
============
</TABLE>
See accompanying notes to the financial statements
-4-
<PAGE> 47
COMPAGNIE EUROPEENNE D'ASSURANCES INDUSTRIELLES S.A.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
1. DESCRIPTION OF BUSINESS
Compagnie Europeenne d'Assurances Industrielles S.A. ("the Company") is
incorporated under the laws of Belgium and is a wholly owned subsidiary
of Petrofina S.A. The Company is currently in run-off. In 1974 the
Company began writing third party business. During the period from 1974
to 1993 the Company wrote direct business of its parent and affiliated
companies in Europe together with third party business around the
world. In 1993 a progressive reduction of underwriting commenced and
was completed by 1995, since which time the Company has been in
run-off.
On July 3, 2000, 100% of the common shares of the Company were
purchased by B.H. Acquisition Ltd., a company incorporated under the
laws of Bermuda.
2. ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at 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.
Cash and cash equivalents
Cash and cash equivalents include cash, commercial paper and certain
U.S. Government securities with an original maturity of three months or
less. The carrying amount approximates fair value.
Investments
Equity securities are classified as trading securities and are carried
at fair value, with unrealized holding gains and losses included in net
income. Realized gains and losses on sales of securities classified as
trading are recognized in net income on the specific identification
basis.
-5-
<PAGE> 48
COMPAGNIE EUROPEENNE D'ASSURANCES INDUSTRIELLES S.A.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
2. ACCOUNTING POLICIES (cont'd)
Premiums
Premiums are recognized as revenue on a pro-rata basis over the periods
of the respective policies and contracts of reinsurance. The portion of
premiums that will be earned in the future are deferred and reported as
unearned premiums.
Premiums which are subject to adjustments are estimated based upon
available information. Any variances from the estimates are recorded in
the periods in which they become known.
Losses and loss adjustment expenses
The liability for losses and loss adjustment expenses includes an
amount determined from loss reports and individual cases and an amount,
based on historical loss experience and industry statistics, for losses
incurred but not reported. These estimates are continually reviewed and
are necessarily subject to the impact of future changes in such factors
as claim severity and frequency. While the directors and management
believe that the amount is adequate, the ultimate liability may be
significantly in excess of, or less than, the amounts provided and any
adjustments will be reflected in the periods in which they become
known.
Reinsurance
Reinsurance premiums ceded are accounted for on a pro-rata basis over
the terms of the respective reinsurance contracts. Commissions on
reinsurance ceded are deferred and amortized over the terms of the
contracts of reinsurance to which they relate. Losses and loss
adjustment expenses recoverable from reinsurers are estimated in a
manner consistent with the reinsured policy. In the event that all or
any of the reinsuring companies are unable to meet their obligations
under existing reinsurance agreements, the Company will be liable for
such defaulted amounts.
Translation of foreign currencies
At each balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of the company are adjusted
to reflect the current exchange rate. Revenue and expense items are
translated into U.S. dollars at average rates of exchange for the
years. The resulting exchange gains or losses are included in net
income.
Fair value of financial instruments
Estimated fair value of financial instruments held by the Company
approximates carrying value. The Company's investments have been valued
at the date of the balance sheet at the last reported sales price on a
recognized stock exchange.
-6-
<PAGE> 49
COMPAGNIE EUROPEENNE D'ASSURANCES INDUSTRIELLES S.A.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
2. ACCOUNTING POLICIES (cont'd)
Accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
becomes effective for the Company on January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company will be required to
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for a change in the fair value of a derivative in
earnings or other comprehensive income will depend on the intended use
of the derivative and the resulting designation. Derivatives can be
designated as (a) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or a firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in foreign
operations, an unrecognized firm commitment, an available-for-sale
security, or a foreign currency denominated forecasted transaction. The
difference between a derivative's previous carrying amount and its fair
value at the date of implementation of SFAS No. 133 shall be reported
as a transition adjustment. Such adjustment shall be reported in net
income or other comprehensive income as the effect of a change in
accounting principle and be presented in a manner similar to the
cumulative effect of a change in accounting principle in accordance
with APB Opinion No. 20, "Accounting Changes." The Company is currently
reviewing the impact of the implementation of SFAS No. 133 on its
financial statements.
3. PLEDGED ASSETS
Certain of the Company's cash and cash equivalents in the amount of
$4,455,023 as of June 30, 2000, are pledged as collateral against
letters of credit in the same amount.
4. NET INVESTMENT INCOME
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Interest on cash equivalents $1,245,804
Interest on balances with parent company 416,215
Interest from investments 196,817
Net loss on sale of investments (134,322)
Investment expenses (57,963)
Change in net unrealized holding gain or loss on
trading securities 66,585
----------
$1,733,136
==========
</TABLE>
-7-
<PAGE> 50
COMPAGNIE EUROPEENNE D'ASSURANCES INDUSTRIELLES S.A.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 2000
(expressed in U.S. dollars)
5. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<S> <C>
Outstanding $39,704,558
Incurred but not reported 42,552,308
-----------
$82,256,866
===========
</TABLE>
Net incurred losses of $3,983,614 and net paid losses of $6,680,262
relate to prior years.
6. SHARE CAPITAL
<TABLE>
<S> <C>
Authorized, issued and fully paid
150,000 common shares of par value
10,000 Belgian Francs each $36,532,373
===========
</TABLE>
7. INCOME TAXES
The Company's effective tax rate is approximately 40%. The Company has
tax loss carry-forwards of approximately $33,400,000, which do not
expire. A valuation allowance has been provided for the tax benefit of
these loss carry-forwards as follows:
<TABLE>
<S> <C>
Benefit of loss carry-forward $ 13,360,000
Valuation allowance (13,360,000)
------------
$ --
============
</TABLE>
-8-
<PAGE> 51
APPENDIX E
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information should be
read in conjunction with the historical consolidated financial statements and
notes thereto in The Enstar Group, Inc. and Subsidiary ("Enstar") Annual Report
on Form 10-K for the year ended December 31, 1999 and quarterly report on Form
10-Q for the six months ended June 30, 2000 previously filed with the Securities
and Exchange Commission.
The following unaudited pro forma financial information gives effect to Enstar's
33% investment in B.H. Acquisition on July 3, 2000 in the amount of $9.6
million. Enstar accounts for this investment using the equity method of
accounting. Also, the unaudited pro forma financial information gives effect to
B.H. Acquisition's purchases of Brittany Insurance Company Ltd. ("Brittany") and
Compagnie Europeenne d'Assurances Industrielles S.A. ("CEAI") on July 3, 2000
for $28.5 million, which are accounted for using the purchase method of
accounting. Prior to B.H. Acquisition's purchases of Brittany and CEAI, it had
no assets other than the capital contributed to effect the purchases.
The unaudited pro forma consolidated balance sheet of Enstar as of June 30, 2000
gives effect to Enstar's investment in B.H. Acquisition as though it had been
made on that date.
The unaudited pro forma consolidated statements of income for the year ended
December 31, 1999 and six months ended June 30, 2000 give effect to Enstar's
investment in B.H. Acquisition and B.H. Acquisition's purchase of Brittany and
CEAI as if they had occurred on January 1, 1999. Enstar's pro forma equity in
earnings of B.H. Acquisition for the periods presented in the unaudited pro
forma consolidated statements of income are based on the historical operations
of Brittany and CEAI. The historical results of operations for CEAI have been
translated from Euros into U.S. dollars using the average exchange rate for the
period. In addition, the unaudited pro forma consolidated statements of income
for the periods presented also include assumptions related to the amortization
of the goodwill resulting from B.H. Acquisition's purchase of Brittany and CEAI.
All material adjustments required to reflect Enstar's investment in B.H.
Acquisition and B.H. Acquisition's purchase of Brittany and CEAI are set forth
in the "Pro forma Adjustments" column and are described in more detail in the
notes to the pro forma consolidated financial statements. The pro forma
adjustments are based on available information and certain assumptions that
Enstar believes are reasonable.
The pro forma financial information is not necessarily indicative of the
operating results and financial position that would have been reported had
Enstar's investment in B.H. Acquisition and B.H. Acquisition's purchase of
Brittany and CEAI occurred at the pro forma dates specified, nor is it
necessarily indicative of future results.
<PAGE> 52
THE ENSTAR GROUP, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
JUNE 30, 2000
<TABLE>
<CAPTION>
Pro forma
Enstar Adjustments Pro forma
--------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 79,972 $(9,617) (1) $ 70,355
Certificates of deposit 3,696 3,696
Other 634 634
Investment in B-Line LLC 1,088 1,088
Investment in B. H. Acquisition Limited -- 9,617 (1) 9,617
Property and equipment, net 62 62
--------- ------- ---------
Total assets $ 85,452 $ 0 $ 85,452
========= ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 424 $ 424
Deferred liabilities 311 311
Other 389 389
--------- ------- ---------
Total liabilities 1,124 0 1,124
--------- ------- ---------
Shareholders' equity:
Common stock ($.01 par value; 55,000,000 shares authorized,
5,708,104 shares issued) 57 57
Additional paid-in capital 183,191 183,191
Accumulated deficit (93,110) (93,110)
Treasury stock, at cost ( 442,351 shares) (5,810) (5,810)
--------- ------- ---------
Total shareholders' equity 84,328 0 84,328
--------- ------- ---------
Total liabilities and shareholders' equity $ 85,452 $ 0 $ 85,452
========= ======= =========
</TABLE>
<PAGE> 53
THE ENSTAR GROUP, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro forma
Enstar Adjustments Pro forma
----------- ----------- -----------
<S> <C> <C> <C>
Investment income $ 4,391 $ 4,391
Equity in earnings of unconsolidated subsidiaries 37 $ 7,321 (2) 8,561
922 (3)
(281)(4)
Litigation income, net 244 244
General and administrative expenses (2,399) (2,399)
Interest expense (12) (12)
----------- ------- -----------
Income before income taxes 2,261 8,524 10,785
Income taxes (124) (3,410) (5) (3,534)
----------- ------- -----------
Net income $ 2,137 $ 5,114 $ 7,251
=========== ======= ===========
Weighted average shares outstanding 5,265,724 5,265,724
=========== ===========
Weighted average shares outstanding - assuming dilution 5,332,251 5,332,251
=========== ===========
Net income per common share $ 0.41 $ 1.38
=========== ===========
Net income per common share - assuming dilution $ 0.40 $ 1.36
=========== ===========
</TABLE>
<PAGE> 54
THE ENSTAR GROUP, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Pro forma
Enstar Adjustments Pro forma
----------- ----------- -----------
<S> <C> <C> <C>
Investment income $ 2,314 $ 2,314
Equity in earnings (losses) of unconsolidated subsidiaries 216 $(1,219) (2) (862)
141 (4)
Litigation income, net (4) (4)
General and administrative expenses (1,226) (1,226)
Interest expense (6) (6)
----------- ------- -----------
Income before income taxes 1,294 (1,078) (216)
Income taxes (64) (5) (64)
----------- ------- -----------
Net income $ 1,230 $(1,078) $ 152
=========== ======= ===========
Weighted average shares outstanding 5,265,753 5,265,753
=========== ===========
Weighted average shares outstanding - assuming dilution 5,332,077 5,332,077
=========== ===========
Net income per common share $ 0.23 $ 0.03
=========== ===========
Net income per common share - assuming dilution $ 0.23 $ 0.03
=========== ===========
</TABLE>
<PAGE> 55
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. To record Enstar's initial investment in B.H. Acquisition.
2. To record Enstar's equity in the earnings (losses) of B.H. Acquisition
based on the historical results of operations of Brittany and CEAI.
3. To eliminate Enstar's share of net investment losses attributable to assets
of Brittany that were not acquired by B.H. Acquisition. These investment
losses were incurred in 1999 in connection with the liquidation of certain
investments in order to provide funds for the return of approximately
$134.9 million to Brittany's shareholder. Such capital ceased to be
required by Brittany when it transferred certain insurance business related
to risks of its parent to another subsidiary of the parent company.
4. To record Enstar's share of B.H. Acquisition's amortization of the excess
of fair value of net assets acquired over purchase price resulting from the
purchase of Brittany and CEAI. Pro forma amortization is computed as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Estimated fair value of net assets acquired $ 33,193
Purchase price paid by B.H. Acquisition, including acquisition
costs of $442 28,942
---------
Excess of fair value of net assets acquired over purchase price 4,251
Amortization period (years) 5
---------
Annual amortization 850
Enstar's proportionate share 33%
---------
Annual pro forma amortization $ 281
=========
</TABLE>
5. To record the income tax effect of the net pro forma adjustments for the
year ended December 31, 1999 and for the six months ended June 30, 2000. An
income tax benefit of $431,000 related to the pre-tax loss of $1,078,000
for the six months ended June 30, 2000 has been fully offset by an increase
in an assumed valuation allowance for deferred tax assets due to
uncertainty of realization of the tax benefit.
