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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 811-854
IIC INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-5675984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 LEXINGTON AVENUE
NEW YORK, NEW YORK 10170
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 297-6132
Securities registered pursuant to Section 12(b) of the Act: NONE
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.25 PAR VALUE
-----------------------------
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrant as of March 31, 1999 was $13,552,055 based on
the average of bid and asked quotations for the Common Stock on that date, as
reported by the NASDAQ Automated Quotation System.
The number of shares outstanding of the Registrant's Common Stock, as
of March 31, 1999: 5,693,472.
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DOCUMENTS INCORPORATED BY REFERENCE:
N/A
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IIC INDUSTRIES, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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<S> <C>
Part I
Item 1. Business................................................................... 1
Item 2. Properties................................................................. 13
Item 3. Legal Proceedings.......................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 16
Item 6. Selected Financial Data.................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 18
Item 7A. Quantitative and QualitativeDisclosure about Market Risk................... 30
Item 8. Financial Statements and Supplementary Data................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 31
Part III
Item 10. Directors and Executive Officers of the Registrant........................ 32
Item 11. Executive Compensation.................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 34
Item 13. Certain Relationships and Related Transactions............................ 36
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K........... 37
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ITEM 1. BUSINESS
HISTORY
IIC Industries Inc. (the "Company") was incorporated pursuant to the laws
of the State of Delaware on October 14, 1958 under the name "Israel Investors
Corporation." The Company registered itself as a closed-end "investment
company" under the Investment Company Act of 1940, as amended (the "Act"), in
1959. As an investment company, the Company made investments in Israel or
Israel related businesses. Pursuant to shareholder approval received in 1982,
the Company determined to cease its activity as an investment company and to
become an operating company with flexibility to enter into non-Israel related
businesses. This decision was prompted by conflicts of interests caused by the
fact that the Company's majority shareholder, Koor Industries ("Koor"), had
substantial interests in a large number of businesses in Israel and that the
Act precludes certain affiliated transactions. In September 1989, Koor sold its
interest in the Company to CP Holdings Limited, a private United Kingdom
company. In anticipation of the Company's transition to an operating company,
substantially all of the Company's investments were converted into short-term
deposits and the Company's name was changed to IIC Industries Inc. The Company
filed an application on November 23, 1990, with the Securities and Exchange
Commission ("SEC") to deregister as an investment company registered under the
Act. On October 6, 1992, the SEC approved the deregistration application and
the Company was deregistered as an investment company.
GENERAL
The Company is presently operated as a holding company with subsidiaries
in three principal operating geographic areas: (1) Investor RT, a Hungarian
holding company ("Investor"), which through its subsidiaries, engages in a
variety of commercial activities in Hungary; (2) The Israel Tractors and
Equipment Company Limited ("Israel Tractor"), an Israeli corporation, which
distributes tractors and related heavy machinery in Israel and (3) Balton C.P.
Limited, an English holding company with African subsidiaries ("Balton")
engaged in the trading business in several African countries.
The Company's holdings in Balton and Investor were acquired as part of
the Company's transition to an operating company and in connection with the
Company's deregistration application. The Company acquired 51% of Balton and
made certain loan advances to Balton in May 1991 for approximately $3.5 million
in total acquisition costs (of which $1.5 million has been refunded). In
addition, in January 1992, the Company purchased a 60% interest (equivalent to
70% after adjusting for treasury stock and unpaid shares) in Investor for
approximately $34 million, with an option to purchase an additional 20% for
$11.3 million. The option was never exercised, but in December 1994, in
settlement of various claims against the sellers, the Company acquired an
additional 23% interest for the sum of approximately $900,000. At December 31,
1998, the Company owned a 99% interest in Investor.
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Through its subsidiaries, the Company is principally engaged in the
following lines of business: (1) the sales and service of vehicles; (2) the
export/import and processing/storage of agricultural products; (3) other
industries including retail and wholesale consumer products; (4) the
distribution of tractors and other heavy equipment; and (5) the sale of
agricultural, communications and electrical equipment. The first three of the
aforementioned lines of business are conducted through subsidiaries of
Investor, while the distribution of agricultural, communications and electrical
equipment is conducted through Balton and its subsidiaries. The distribution of
tractors and heavy equipment is conducted through Israel Tractor.
Between February 1995 and January 1996, Investor, through its 78% owned
subsidiary, Interag, RT ("Interag') acquired a 29% equity interest in Danubius
Hotel & Spa RT ("Danubius Hotel") for a purchase price of approximately $19.5
million. See, below under "Investor-Interag." The Company purchased a 8.1%
equity interest in Danubius Hotel for approximately $9.2 million and an
additional 7.8% of Interag for $1 million. During 1998, Israel Tractor
purchased a 4.2% interest for approximately $8 million. At December 31, 1998,
the Company's effective interest in Danubius is approximately 37%.
INVESTOR
General
Investor was founded by the Hungarian Trade Ministry in 1989 in order to
function as a quasi-owner of certain state owned trading companies. In July
1990, it was converted into a company with share ownership.
Investor is primarily a holding company with subsidiaries engaged in a
variety of activities in Hungary. Investor's principal subsidiaries are
Agrimpex RT ("Agrimpex"), in which Investor has a 63% interest, and Interag, in
which Investor has a 78% interest. In addition, Investor has small minority
investment positions in some Hungarian companies. In 1998, Interag continued
the rationalization of certain unprofitable operations.
At December 31, 1998, Investor and its subsidiaries, and Danubius Hotel
employed a total of 6,675 persons.
Agrimpex
Until 1998, as more fully described below, Agrimpex, imported and
exported a wide variety of agricultural products (excluding livestock)
operating through a domestic and foreign business network, including agents and
commercial representatives in various countries throughout the world. The main
products traded include cereals (wheat, corn and barley), vegetable oils, oil
seeds, sugar, legumes and proteins.
In May 1993, Agrimpex, through its newly-formed, wholly-owned subsidiary,
Agrimill RT ("Agrimill"), acquired the assets of a business engaged in the
processing of agricultural products.
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Agrimill's business includes four flour mills, four compound feed plants,
a rice mill and extensive storage facilities in silos and warehouses. Its main
business involves the production and supply of flour which is sold through
retail outlets in the area and the sale of animal feed to local farmers.
In September 1995, Agrimpex, together with its wholly-owned subsidiary
Agrimill purchased 93.5% of Viktoria RT, a Company engaged in the processing of
agricultural products. Viktoria's business includes flour mills, one compound
feed plant, one corn flaking plant,a port facility on the Danube and extensive
storage facilities in silos and warehouses. Its main business is in the
production of flour and animal feeds, which are sold on the local domestic
market.
At the beginning of 1996, Agrimpex was reorganized, so that the company
itself became a holding company and the trading activity was transferred into a
newly formed and 100% owned company called Agrimpex Commodities Kft. (Limited
Liability Company). The objective was to establish a realistic structure for
the group and to limit the exposure from the trading activity. In 1997 Agrimpex
Commodities suffered significant losses due to poor management in a time of
difficult market conditions. In January 1998, the Board of Agrimpex changed the
complete management of the company and later that year, 90% of Agrimpex
Commodites was sold and a loss of $250 thousand was recognized.
In October 1996, Agrimpex entered into a joint venture, in which it had a
51% ownership to expand its trade in the northern part of Hungary. The new
company, Agrimont supplies the farmers with basic inputs for production and was
authorized to purchase the crop, which was traded by Agrimpex afterwards.
Agrimont had a difficult year in 1997 due to unfavorable market conditions, so
Agrimpex sold its stake in May 1998 and a gain of $22 thousand was recognized.
In 1997 and 1998, a rationalization of Agrimill's and Vikoria's business
was carried out, involving a new management structure whereby Vikoria's
facilities were rented to Agrimill, which took full responsibility for
operations. In addition, in order to reduce costs and to achieve a more
efficient utilization of facilities, two flour mills and three compound feed
plants were mothballed, one flour mill was fully rented and the rice mill was
closed.
After the loss of 1997 and as a consequence of decisions in connection
with the group's reorganization and change of profile, the Agrimpex Group
operated with a profit of HUF 148 million in the second half of 1998 and was
able to recoup its loss of the first half of 1998. The Group's continuing
activities realized a profit before taxation of $1.1 million in 1998. The Group
achieved these results during difficult market circumstances, and accordingly,
significantly strengthened its position against its competitors. ......
Agrimpex has a 50% interest in Harmashatarhegyi Udvarhaz (the other 50%
is owned by Interag), a company which operates a restaurant in Budapest.
In November 1997, the Danube port and a silo were contributed to a joint
venture, DP Invest, as contribution in kind with the result that the Company
acquired a 50% interest in DP Invest. (See details of this business in the next
section.)
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Interag
Interag now operates as a holding company. Following a significant
reorganization in 1993, the investments of Interag and its subsidiaries are now
primarily involved in the hotel industry, car dealerships, service and repair
of vehicles and property management. Interag is also involved in trading of
food products utilizing a cold storage facility and the distribution of power
products. In addition, Interag has certain small minority investments.
The car business operates through several dealerships and service
stations, mainly in Budapest. Interag acts as a dealer for Suzuki, Peugeot and
Daewoo.
In February 1995, Interag concluded the purchase of a 17.3% interest in
Danubius Hotel, and to date, has increased its holdings to approximately 29% at
a total cost of approximately $19.5 million.
Danubius Hotel, a company listed on the Budapest Stock Exchange, owned
and/or managed, ten major hotels comprising approximately 2,000 rooms. An
additional eleven hotels comprise the smaller Beta Hotels Chain. It owns the
Hilton Hotel in the historic old town of Budapest and two hotels, the Grand and
Thermal, on Margaret Island, a famous island on the River Danube in Budapest.
Hotel Gelbert, which was only managed by Danubius Hotel, was bought in 1996 and
shareholding in another spa hotel, Helia, was increased to 100%.
The Danubius Hotel chain, including several spa hotels, is the foremost
of its kind in Hungary and attracts many tourists from Western Europe and
further afield. Its occupancy rate of 68.4% in 1996, increased to 69.5% in
1997, and to 71.1% in 1998.
The management of Interag was particularly attracted to this investment
by its strong asset base and because of its substantial income from foreign
currency.
During 1996, negotiations were held with a view to Danubius Hotel
acquiring a controlling stake in the HungarHotels chain. After an official
tender, an 85% share was acquired by Danubius Hotel in beginning of 1997. The
purchase price was approximately $45 million. The HungarHotels chain consists
of fourteen hotels, of which seven hotels are in Budapest. The chain has a
capacity of 1,105 rooms in 4-star hotels and 2,346 rooms in 3-star hotels.
During 1997, Danubius acquired an additional 14% of the HungarHotels chain, and
as of today, owns nearly 100% of the shares. The occupancy rate in 1997 and
1998 was 55.7% and 52.7%, respectively. In 1998, the average revenue achieved
per room increased significantly.
During 1997 and 1998, the operation and structure of the two hotel chains
were rationalized. More specifically, the purchasing , technical development
and marketing functions were centrally organized and coordinated. As a result,
a major improvement in operating profit was achieved. From January 1st , 1999,
the final reorganization was implemented, whereby all head office activities
were merged and separate property and hotel management companies were
established in line with recognized international practice in the hotel
industry.
In 1997, Interag directly acquired a 50% ownership in two companies, ATI
Depo and DP Invest. ATI Depo is involved in public and other warehousing
business and operates one freehold warehousing
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site and nine rented ones. DP Invest is a real estate holding company, whose
holdings are rented by ATI Depo.
In 1998, Interag bought the remaining 50% of the shares of ATI Depo and
DP Invest for $3.5 million. The basic strategy of the management is to develop
this network by establishing logistic centers utilizing the locations of the
warehouses all over the country.
Governmental Regulation
Hungary made all current account items convertible on January 1st, 1996
when the Foreign Exchange Law came into force. Accordingly, on January 2nd,
1996, the IMF acknowledged that Hungary was in compliance with Article VIII of
the Articles of Association.
Many liberalization measures have already been adopted or their timing
has been accepted by the Hungarian Government. The underlying principle has
remained the same as at the time of the establishment of the Foreign Exchange
Law: first, transactions with longer maturities, then-- after the relatively
significant interest differentials between Hungary and its partners have
decreased- transactions with shorter maturaties have been or will be
liberalized. Companies with foreign participation may keep their initial hard
currency share capital in the currency of the investment. Dividends, net of
withholding tax and consideration received on the sale of shares may be
repatriated in the original currency of investment without restrictions or the
need for approval. Businesses can convert Hungarian Forints into another
currency to import goods provided sufficient Forint funds are available.
Services rendered within Hungary should be paid for in Forints and Hungarian
companies may not conduct trade among themselves in foreign currency.
Hungarian companies which are not established in duty-free zones are
obliged to keep their books in local currency only. With the modification of
the Foreign Exchange Law, a new foreign exchange accounting system was set up
commencing on April 1, 1995, in which companies can keep their foreign exchange
revenues from exports and from which they can transfer foreign exchange for
their rising costs. This system extends the previous entitlement by which a
Hungarian company with foreign participation or a wholly foreign-owned
Hungarian company may keep the cash portion of the foreign partners' share
capital in a separate convertible currency bank account. Money in the
convertible currency account can always be converted into local currency.
Restrictions are not imposed on foreign ownership of Hungarian
businesses. As a foreign owner of a Hungarian company, the Company is entitled
to receive dividends or refunds of its capital in a convertible currency,
without restrictions. As such, it may have such dividends or refunds converted
into United States currency by the Hungarian central bank, and then
repatriated. Dividends of Hungarian companies may only be paid from retained
earnings as determined in accordance with Hungarian statutory accounting
regulations. Such retained earnings are different from the Company's
consolidated retained earnings due to a number of differences in accounting
standards used.
Foreigners may acquire real estate with the prior consent of the
County Public Administration Office. However, any registered company with
foreign participation may acquire real estate only to the extent it is needed
for undertaking the company's commercial activities.
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Any legal entity or private entrepreneur engaged in foreign trade
activity must notify the Ministry of Industry and Trade at the commencement of
such activity. Approximately 95% of products and services may be imported
freely into Hungary. Although in theory every product and service may be
exported and imported, certain strategic items require a special import or
export license, procured from the Ministry of Industry and Trade. In addition,
there are certain items, such as armaments, precious metals and their alloys,
cars, medicines, radioactive materials, cereals and some consumer goods that
may be imported and exported only by Hungarian companies with a license or an
ad hoc permission. The business of Investor is affected by this system in the
case of cars and cereals for which both Interag and Agrimpex, respectively,
have obtained the required licenses from the Hungarian government.
Companies incorporated in Hungary are subject to a corporate income
tax on their worldwide profits. Foreign companies carrying out taxable
activities in Hungary are subject to corporate income tax on their net profits
derived from Hungarian sources. The corporate tax rate until the end of 1996
consisted of two levels of taxation: an 18% rate on profits and a 23% rate on
dividends paid. The two level tax was a significant change from the rate that
that had previously existed until the end of 1994. However, because of the
method of taxation, the total corporate rate was 33.3%.
From 1997, the 23% supplementary tax was abolished, and profits will
be subject to a linear tax levied at 18%. A typical dividend tax at 20% was
introduced, which is subject to the provisions of the double taxation treaties.
Dividend tax is not payable on:
o distributions to Hungarian resident companies- unless the
distribution is made in cash;
o dividends reinvested by foreign shareholders directly into
existing or new Hungarian companies;
o increase in share capital if the capital was increased from
1995 or 1996 profits and the decision is made before May
31st, 1997 and reported to the Court of Registration ...
before June 30th, 1997, and the increase is maintained for
three calendar years; or
o 1997 and 1998 dividends, if the source of the dividend
payment is pre-1995 profits.
Business Conditions in Hungary
Investor conducts business primarily in Hungary and as such is
significantly affected by the general business and political conditions in that
country. Prior to the economic reforms which began in 1968, Hungary had a
socialist, centrally-planned economy based on physical output targets and
central administrative directives. In 1968, a new system of economic management
was initiated, aimed at developing a more market-oriented economy. Fundamental
economic reforms introduced in recent years include privatizing state-owned
enterprises, instituting external trade reforms, creating a two-tier banking
system, modernizing the infrastructure, developing a Western European-style tax
system and implementing laws on banking, accounting and bankruptcy. The
Government also has liberalized prices and wages, reduced government subsidies
and granted state-owned businesses greater freedom in decision-making. In
addition, customs-free zones have been established for joint ventures between
Hungarian enterprises and foreign companies.
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The economic stabilization program launched in Spring 1995 bought
about a genuine turn in the Hungarian economy, rapidly improving equilibrium
position and debt service indicators of the country. Although the restrictive
measures had substantial economic and social costs, (drastic decline in real
wages, fiscal adjustment, transitory rise in the rate of inflation), the
significant improvement of the economic fundamentals avoided the necessary
economic stabilization in a later period, under less favorable external
conditions and with even more economic and social sacrifice. The stability of
the Hungarian economy, of the domestic capital markets and of the Forint
justified the adjustment program especially in 1998, when during a global
economic crisis in emerging markets, international investors reduced their
willingness to assume risk in the emerging markets. In Hungary, however, after
a temporary period of capital flight, business returned to normal with foreign
investors.The exchange rate of the Forint regained its strength, interest rates
reverted to their downward trend, propensity to save was maintained and the
corporate sector continued to build up net borrowings. Foreign direct capital
continues to flow into the Hungarian market.
The Hungarian economy had performed better than expected in 1998, with
a growth rate of 5%. The main reasons for the growth rate were an approximately
23% growth in exports, an approximately 14% increase in investments and an
approximately 4.5% increase in consumption. One of the most significant
achievements of 1998 was the reduction of the inflation rate to 10.3%, which
was well below the target rate. For the first time in a decade, inflation fell
markedly for three successive years, particularly in 1998, while the rate of
economic growth accelerated and external equilibrium remained stable. While
approximately a quarter of the 8% decrease in inflation from 1997 was caused by
external factors, (i.e. a decline in world market prices), the bulk of the fall
resulted from the strong performance of the economy and strong fiscal
discipline.
Regarding the outlook for 1999, the forecast is for real economic
growth of 3-4%, a current account deficit of approximately $3 billion, and a
rate of inflation of less than 10% by the end of the year.
Political Conditions in Hungary
During the late 1980s, the political system in Hungary underwent
dramatic changes. In 1989 non-communist political parties were established and
initial steps were taken toward the first free elections in the country since
1947. On October 23, 1989, the country's name was changed from "The Hungarian
People's Republic" to the "Republic of Hungary" and a new constitution was
adopted. Under its new constitution, Hungary has instituted a multiparty
democratic government.
The former opposition parties (socialists and liberals) won the second
free elections in June 1994. When their mandate expired in May 1998,
Fidesz-Hungarian Civic Party won the free election. They formed the new
government along with the Hungarian Democratic Forum and the Smallholders'
Party.
Hungary is pursuing political as well as economic integration with
Western Europe, including membership in the European Community ("EC"). The
timing of Hungary's accession to full EC membership will depend on political
developments and the continued restructuring and development of
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Hungary's economy, and will require the approval of all EC member nations.
Hungary is among the six countries with which the EC started detailed
negotiations in April 1998. Hungary became a full member of NATO in March 1999.
At the time of filing the 1998 Form 10-K, the Kosovo crisis continues. The
effect of the crisis on the Hungarian economy, (a neighboring country to
Yugoslavia), and the particular businesses being operated by the Company is
inconclusive since the crisis is in its early stages.
ISRAEL TRACTOR
General
Israel Tractor is a corporation organized under the laws of the state
of Israel. It is engaged in the sale of tractors and other heavy equipment such
as construction equipment, diesel engines and trucks, and spare parts for such
equipment. Israel Tractor is the exclusive dealer in Israel for Caterpillar and
Bobcat tractors and Navistar trucks and is also a dealer for Ingersoll Rand
equipment. Israel Tractor also services the machinery it sells. Israel Tractor
believes that it has good relationships with all of its suppliers.
Israel Tractor serves a large number of customers in Israel,
approximately 55% of whom are in the construction business and 18% of whom are
in the mining business. For the year ended December 31, 1998, approximately 70%
of the total sales were of Caterpillar tractors, parts and service, 14% were of
Navistar trucks, and Bobcat and Ingersol-Rand equipment were 8% each. Israel
Tractor faces competition from other distributors of tractors and heavy
equipment, as most manufacturers of such equipment operate in Israel through
dealers.
Israel Tractor's current agreement with Caterpillar was entered into
in April 1992. The agreement may be terminated without cause, which may occur
upon six months notice by either party, or for cause by Caterpillar upon the
occurrence of certain events (such as bankruptcy, insolvency, cessation of
business by the dealer, or default on financing agreements with Caterpillar).
Israel Tractor's current agreement with Navistar is on an annual basis
commencing in January 1997 and may be terminated prior to expiration by mutual
consent of the parties, upon 60 days' written notice by either party, or for
cause by Navistar upon the occurrence of certain events (such as default in the
payment of obligations to Navistar, insolvency or change of corporate control
or management of the dealer).
At December, 1998, Israel Tractor employed 298 persons.
Political and Economic Conditions in Israel
As a corporation organized and operated in Israel, Israel Tractor is
subject to certain general business conditions applicable to Israeli
businesses. The principal offices and workshop facilities of Israel Tractor are
located in Israel and are directly affected by economic, political and military
conditions in that country.
Since its war of independence in 1948, Israel has sought peace with
its Arab neighbors. A breakthrough took place due to the courageous step taken
in 1977 by the late President of Egypt, Anwar Sadat, who agreed to negotiate
directly with and recognize Israel. The talks led to the Camp
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David Agreement in 1978 and to the signing of a peace agreement with Egypt in
1979. The second step occurred after the Gulf War with the collapse of the
Soviet Union communist regime, and the setting up of a new political order,
which lead to bilateral talks between Israel, Syria and Jordan and the
Palestinians.
The following is the time line of major events and agreements:
October 30, 1991 Opening of the Madrid peace conference
between Israel and the Palestinians,
Jordan, Syria and Lebanon
September 13, 1993 Declaration of Principles between Israel
and the PLO in Washington
May 4, 1994 The Cairo agreement on "Gaza Strip and
Jericho First"
July 15, 1994 Israel-Jordan Declaration, in Washington
August 29, 1994 Early empowerment to the Palestinians
October 16, 1994 Peace Treaty between Israel and Jordan
On September 9th, 1993, after almost two years of talks since the
Madrid Conference, a breakthrough was achieved between Israel and the PLO,
representing the Palestinians. Yasser Arafat, Chairman of the PLO, sent a
letter to Prime Minister Rabin in which he declared the following:
o Recognition of Israel's existence and its right to live in
peace and security;
o Acceptance of United Nations resolutions 242 and 338;
o Commitment to solve the conflict by peaceful means;
o Cessation of all types of terror;
o Assumption of responsibility over all factions of the PLO;
o Confirmation that those articles of the Palestinian Charter
calling for the destruction of Israel and denying its right
to exist would no longer be valid; and
o Obligation to submit to the Palestinian National Council an
approval of the need for changes in the Palestinian Charter.
Due to the above, Israel agreed to recognize the PLO as the
Palestinian representative to the peace talks.
In September 1993, Israel and the Palestinians signed a Declaration of
Principles which dealt with matters relating to the transfer of power to the
Palestinians.
The Gaza Strip and Jericho agreement of May 4, 1994 involves various
topics relating to the Gaza Strip area and sixty-five square kilometers of the
Jericho area. The civilian administration in the Gaza Strip and Jericho will be
disbanded and its responsibilities passed on to the Palestinian authorities, in
twenty-five sectors of which the major ones are education, tourism,
agriculture, water, transportation, electricity, health, finances, commerce.
Early in 1997, an additional agreement was signed regarding the Hebron area and
the civilian administration was transferred to the PLO. However, in recent
months, little process has been made in the peace process.
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Economic relations between the State of Israel and the Palestinian
Authority have been agreed upon within the scope of the Paris Agreement, signed
in April 1994. This agreement applies initially to the Gaza Strip and Jericho
and later on will apply to the entire West Bank for the interim period.
Both sides agreed on the establishment of a Joint Economic Committee
to supervise the implementation of the agreement. The fact that there is no
physical border between Israel and the Territories, and a situation of near
free movement, led to an agreement establishing a relationship between the
parties on this point.
The dramatic developments in the political sphere, with the signing of
the Accord of Principle between Israel and the PLO in September 1993 and the
Peace Treaty with Jordan in October 1994, are opening new doors and
opportunities for business and economic activity. The changing political
relations are already spilling-over, transforming Israel's economic relations
both with its immediate neighbors and with the rest of the world.
Two important elements stand behind such a development. The ongoing
peace process between Israel and its neighbors (see above) and the large wave
of immigration that shook the economy into action in 1990. Since 1990, some
600,000 new immigrants have arrived, mostly from the former Soviet Union (CIS)
increasing the population of Israel by an additional 12% and the labor market
by even more due to the immigrant's high participation rate. The exceptionally
high level of skills and education of this wave of immigrants with double the
proportion of university post-graduates than that of the established
population, has made the Israeli labor force one of the most highly skilled in
the world. Two thirds of the immigrants arrived during the first two years,
1990-91, after which the flow decelerated to a constant stream of approximately
75,000 new immigrants a year, thus easing the problem of economic integration
for Israel. The impact on the Israeli economy has been to propel it to a fast
track both with a one time jump and with long term effects.
The immediate impact was felt in the residential construction sector
which became a locomotive for the economy for almost three years. Housing
starts, doubled in 1990 and doubled again in 1991, thus quadrupling the 1989
level. Later, the strain put on an already deteriorating infrastructure brought
about a dramatic expansion in activity which saw a 26% rise in expenditures in
1992, followed by a further rise of 34% in 1993 and 20% in 1994. This activity
includes road construction, water and sewage works, electric and
telecommunication facilities, among others. This had a beneficial effect on the
trade of Israel Tractor.
1997 was a year of contrasting economic developments. A particularly
favorable development was the rise of only 7% in the consumer price index, the
lowest since the 3.9% increase recorded in 1969. In addition, the current
account deficit fell by some two billion dollars, from $5.3 billion in 1996 to
$3.5 billion in 1997, a reasonable level of 3.5% of GDP. On the other hand, the
year was notable for a serious slowdown in the GDP growth rate, to only 2.1% in
1997 compared with 4.5% in 1996 and an annual average of 6% during the years
1992 to 1995. This slowdown was accompanied by a large rise in the unemployment
rate to an average of 7.8% in 1997, compared with 6.7% in 1996.
These developments were heavily affected by the policy of severe
monetary restraint as reflected by an average real interest rate of 5.3% and 7%
in 1996 and 1997, respectively. Fiscal constraint also increased, resulting in
an aggregate budget deficit of only 2.4% of GDP in 1997 compared with 3.6% in
1996.
10
<PAGE>
The government's economic policy is based on the priority of reducing
inflation to Western European levels (currently 1% to 2%). The achievement of
this objective is expected to make a higher pace of growth. Targeting these low
levels of inflation will lead to a persistently severe policy of monetary and
fiscal constraint during the coming years. This will prevent growth in
infrastructure investment, and the exchange rate adjustment necessary for
remedying the appreciation of the shekel.
In 1998, the Israeli economy generally worsened. GDP grew by only
1.9%, unemployment continued to rise and reached a level of 8.8%. However, the
balance of payments current account deficit was substantially improved to $1.5
billion. In the area of inflation, until August 1998, it appeared then that an
annual inflation rate of only 4% would be acheived for 1998. But the large
depreciation of the Shekel during August to October led to higher inflation
during the later half of 1998. As a result, the inflation rate for 1998 was
8.6%, which was at the middle of the targeted range of inflation that was set
at the middle of 1997.
The results of the policy maintained in the Israeli economy were
clearly reflected by the continuing large downturn in non-housing investment
for the second consecutive year. Investment in fixed assets dropped by 4.1%
after falling by 3% in 1997. Although construction investment in the area of
infrastructure increased by 10%, this increase was not enough to compensate for
the reduced investment in housing and in non-residential construction. As a
result, total investment in construction works, including infrastructure,
decreased by 4%.
Non-housing investment, which includes machinery and equipment,
transportation equipment, intangible assets and non-residential construction,
fell by 0.7% in 1998. A particularly large decrease of 23% was recorded in
investment in land transportation vehicles. In its most recent published
estimates, the Government began to include within its category of fixed assets,
investment in intangible assets, which manly consists of software. During the
last years, this item has grown at an annual average rate of 17%, and obviously
led to an upward adjustment of data. Investment in infrastructure and
development rose by 10.2% in 1998, following a decrease of 1.5% in 1997.
Investment in roads, which account for 40% of investment in infrastructure and
development, grew by approximately 15% in 1998.
We believe that the policy of monetary restraint will be maintained in
1999 in an attempt to achieve a low 4% level of inflation. Apprehension over
the possible failure to adhere to the targeted budget deficit, whether due to
the elections to be held in May 1999, the waiting period until the formation of
the new government or to lower than planned tax revenue, will serve as a
pretext for maintaining this policy.
11
<PAGE>
BALTON
General
Balton is a management and holding company serving its African
subsidiaries which operate in Nigeria, Zambia, Ghana, Kenya, Tanzania, Uganda
and Cote D'Ivoire. These subsidiaries are located in and organized under the
laws of the jurisdiction where they operate. The subsidiary in Cote D'Ivoire
was first registered in 1997 and commenced trading on April 7th, 1997. Balton
controls the financial and commercial activities of its subsidiaries and acts
as a trading house for its subsidiaries and customers in other African
countries maintaining contact with suppliers, manufacturers, shipping
companies, and banks.
The primary subsidiaries of Balton are Amiran Ltd. ("Amiran Zambia"),
Dizengoff Ghana Ltd. ("Dizengoff Ghana"), Amiran Kenya Ltd. ("Amiran Kenya"),
Balton Tanzania, Ltd. ("Balton Tanzania"), Dizengoff W.A. (Nigeria) Ltd.
("Dizengoff Nigeria"), Balton BV-DWA Nigeria Ltd. ("Balton (Nigeria)"), Balton
(U) Ltd. Uganda ("Balton Uganda") and Balton SNES ("Balton Cote D'Ivoire").
The principal products traded by Balton and its subsidiaries are
agri-chemicals and agricultural implements, radio communication,
telecommunications, air conditioning and electrical equipment. Balton has
dealership concessions with Motorola Communications and Radius Equipment which
it holds on behalf of its subsidiaries in Nigeria, Ghana, Kenya and Uganda. The
current distribution agreements with Motorola Communications are for a one-year
period expiring in December 1997, renewable for successive one-year periods and
may be terminated by either party upon 60 days' written notice. In addition,
Balton Nigeria is involved in the installation of water supply equipment and
Balton Tanzania is involved in the manufacture of animal foodstuffs.
During the first quarter of 1994, Balton Nigeria commenced preliminary
work for the construction and installation of a water treatment plant and
related facilities in Katsina, Nigeria, pursuant to a contract with the
Nigerian Ministry. Work on this contract continued during 1995 and 1996 but at
a slower pace than specified by the contract agreement due to insufficient
funding from the client. A substantial portion of the work has been
subcontracted. By November 1996, the original period for completion of the
total contract expired and the work completed amounted to approximately 20% of
the total contract. The Nigerian Ministry has agreed that the company complete
the project at a remaining, revised, contract price of $76 million. Completion
of this project is subject to the political and economic risks associated with
doing business in Nigeria, and is dependent upon the Nigerian Ministry's
ability to fund the contract. No significant progress has been achieved on this
contract during 1998. See Note B of Notes to Consolidated Financial Statements.
Roughly 50% of the goods supplied by Balton are from Israeli
suppliers, although virtually all irrigation and air conditioning equipment is
from Israel. Balton's other sources of supply come from a diverse group of
suppliers worldwide. The bulk of Balton's customers are located in the African
countries where it conducts business. The Company's business is not dependent
on a single customer or small group of customers. Approximately 30% of sales by
Balton's subsidiaries are for cash, with the balance on credit terms with an
average of 90 days.
At March 31, 1999, Balton and its subsidiaries and associated
companies, employed a total of approximately 690 persons.
12
<PAGE>
Economic and Political Conditions in Africa
The economic and political climate of the African countries may
directly affect the transaction of business by Balton and its African
subsidiaries. In particular, the currencies of the African countries where
Balton transacts business have been subject to significant devaluation against
the United States dollar. During 1998, there were significant devaluations in
Zambia and Uganda, which resulted in foreign currency exchange losses. In
addition, business activity in certain countries is subject to significant
foreign exchange regulation as well as price verification.
In addition, the economies of individual African countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resources, self-sufficiency and balance of payments position. In
particular, there were high rates of inflation during 1998 in the African
countries where Balton transacts business. Further, the economies of African
countries generally are heavily dependent upon international trade and,
accordingly, may be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist
measures imposed or negotiated by the countries with which they trade. These
economies also may be adversely affected by economic conditions in the
countries with which they trade.
With respect to any African country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the value
of the Company's investments in those countries.
FINANCIAL INFORMATION ABOUT INDUSTRY AND GEOGRAPHIC SEGMENTS
For disclosure regarding the Company's business segments and
geographic areas, see Note K of Notes to Consolidated Financial Statements
filed under Item 8 of this Annual Report on Form 10-K (the "Report").
ITEM 2. PROPERTIES
Israel Tractor operates from substantial workshop facilities in three
locations in Israel which are adequate for its purposes: it owns the freehold
on one piece of land in Holon on which is situated a building and leases two
pieces of property - one property located in Kiriat Bialik under a lease from
the Israel Land Administration which expires in 2023; the second property in
Beersheba pursuant to a lease with the Israel Land Administration whose term is
49 years and expires in 2028.
Investor currently operates from an office building (located in
Budapest), which is owned by Interag. Investor and Interag use 384 square
meters of office space which is adequate for their current
13
<PAGE>
needs and the remaining part of the building (over 2500 square meters) is being
rented to Danubius, HungarHotels and Agrimpex Commodities Kft. Interag
continues to own or lease several properties which, following the
reorganization of Interag are now utilized, principally by third parties, for
retail operations. The other office building (total square meters of 2,900)
comprising the former headquarters was refurbished in 1998 and sublet.
Agrimpex leases office space in Budapest. Its Agrimill subsidiary owns
a head office in Bekescsaba, 17 sites in Bekes County and leases one in
Budapest from Investor. Agrimill's facilities in the aggregate are situated on
470,000 square meters of land and include 113,900 square meters in building
space.
Viktoria operates from a head office in Kecskemet, and owns 11 sites
in Bacs-Kiscun County. The corn flaking plant was sold in 1998.
ATI Depo and DP Invest lease office space in Budapest. Warehousing
sites owned and used by them are located in Budapest, Gyor, Szabadbattyan,
Pecs, Miskolc, Baja and Szajol.
In 1998, Balton purchased, subject to finalizing, the office and
warehouse space it utilizes in Cote d'Ivoire, and has long leasehold properties
on which it pays peppercorn rentals in all of the African countries in which it
opearates. In addition, Balton leases warehouse space in Dar Es Salaam,
Tanzania and up country locations in Ghana, Tanzania and Uganda under annual
leases.
Balton leases various residential premises under annual leases for its
expatriate employees. In addition, Balton rents office space from the parent
undertaking CP Holdings Limited in Watford, England and office space in Tel
Aviv, Israel from a company within the CP Holdings Limited Group, both under
annual leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation in the ordinary course of
business. None of this litigation is expected to have a material adverse
effect on the consolidated results of operations or financial position of the
Company.
At the beginning of 1997, it became apparent that in 1996 the Managing
Director of Agrimill Rt. and two of his Deputies were involved in irregular
transactions that have caused material loss to the Company. The nature of the
irregular activities was such that certain transactions were made between
Agrimill Rt. and companies that were owned directly and indirectly by the
managers for their own personal benefit. The three managers concerned have
subsequently been relieved of all responsibilities within the group. They
repaid a sum of approximately $350,000 to Agrimill Rt. Legal action is being
pursued against these managers in order to recover damages for the losses
incurred. However, no assurances can be made regarding future recoveries from
the litigation at this time.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 annual meeting of stockholders was held on
October 29, 1998. At that meeting, the following proposals were submitted to
the Company's stockholders: (1) election of the Company's current Board of
Directors and (2) ratification of Grant Thornton LLP as independent accountants
of the Company for the fiscal year ended December 31, 1998.
At the meeting, the Company's nominees for directors were
elected. For Bernard Schreier 5,170,832 shares were voted for and 6,480 shares
were voted against; for Michael Wreschner 5,170,856 shares were voted for and
6,456 shares were voted against; for John Smith 5,170,616 shares were voted for
and 6,696 shares were voted against; for Leonard Goldfine 5,170,832 shares were
voted for and 6,480 shares were voted against; for Wilfred Wyler, 5,170,832
shares were voted for and 6,480 were voted against; and for Alfred Simon
5,170,856 shares were voted for and 6,456 shares were voted against. The
appointment of Grant Thornton LLP as the Company's independent accountants for
the fiscal year ended December 31, 1998 was approved with 5,167,748 shares were
voted for, and 6,408 shares being voted against.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ SmallCap Market
(Symbol: IICR). The following tables set forth, for the periods indicated, the
high and low bid price of the Common Stock as reported by NASDAQ. These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------ ---- ---
1997
- ----
<S> <C> <C>
1st quarter $ 9 3/4 $ 9
2nd quarter $11 3/4 $ 9 3/4
3rd quarter $11 $10 3/4
4th quarter $11 1/4 $10 1/4
1998
- ----
1st quarter $11 3/4 $10 1/2
2nd quarter $11 1/2 $ 9
3rd quarter $10 3/4 $ 8
4th quarter $10 1/4 $ 7 1/4
1999
- ----
1st quarter $11 1/2 $ 9
</TABLE>
As of March 31, 1999, there were 1,450 record holders of the Company's
Common Stock.
The Company's policy has been to conserve cash for future operating
and capital expenditures and accordingly, the Company does not plan to declare
dividends in the foreseeable future. No dividend payments were made in 1996,
1997 or 1998.
On March 3, 1998, the Company's Board of Directors declared a 4-for-1
stock split, which was distributed on March 16, 1998 to shareholders on record
at the close of business on March 3, 1998. The above share prices have been
retroactively restated to reflect the stock split.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for
the Company as at and for the years ended December 31, 1998, 1997, 1996, 1995,
and 1994 which should be read in conjunction with the Consolidated Financial
Statements (including the notes thereto) and Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing
elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ----------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Net sales................................. $ 203,710 $ 239,617 $ 275,820 $ 280,921 $ 245,185
Gross profit.............................. 48,651 48,388 65,227 60,946 51,512
Selling, general and administrative
expenses ...... 43,543 44,461 49,083 43,401 37,978
Operating income.......................... 5,108 3,927 16,144 17,545 13,534
Other
Interest income.......................... 1,253 2,186 2,285 3,624 6,729
Dividend income.......................... 31 13 22 254 149
Equity in earnings (loss) of
affiliates.............................. 4,361 4,156 4,230 3,823 (28)
Foreign currency gain (loss)............. (2,563) (2,453) (263) (385) 1,330
Gain on sale of non-current assets....... 410 2,486 2,230 1,373 1,632
Interest expense......................... (2,776) (4,753) (4,100) (4,764) (4,705)
Rental income............................ 1.950 1,585 1,710 1,249 1,356
Nonrecurring gain-settlement of
warranty claim........................... 6,746
Other-net ............................... (1,504) (1,342) (1,566) (1,199) 573
Income before minority interest and
income taxes............................. 6,270 5,805 20,692 21,520 27,316
Net income............................... 3,629 5,373 12,711 11,641 16,141
Basic net income per common share........ $0.64 $0.94 $2.23 $2.04 $2.84
Basic average number of common shares
outstanding.......................... ... 5,693 5,693 5,693 5,693 5,693
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 1997 1996 1995 1994
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance Sheet Data:
Working capital............................. $ 36,329 $ 50,822 $ 47,464 $ 49,416 $ 67,576
Total assets................................ 166,838 176,042 203,556 175,449 175,949
Short-term debt, including current
maturities of long term debt............... 11,964 25,151 35,838 17,046 21,539
Long-term debt, excluding current maturities 3,281 1,508 2,160 2,528 2,179
Total liabilities........................... 78,405 88,897 95,032 70,979 73,936
Minority interest in subsidiaries........... 14,738 15,149 20,494 22,171 24,643
Stockholders' equity........................ 88,433 87,145 88,030 82,299 77,370
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company has three principal areas of operation with respect
to its subsidiaries: Investor and its subsidiaries in
Hungary; Israel Tractor in Israel, and Balton and its
subsidiaries in Nigeria, Ghana, Zambia, Tanzania, Kenya,
Uganda and the Cote d'Ivoire.
The Company has five principal business segments:
(a) vehicle sales and service;
(b) export/import and processing/storage of agricultural products
(c) the distribution of tractors and other heavy equipment
(d) the sale of agricultural, communications and electrical
equipment
(e) other industries including retail and wholesale consumer
products and corporate.
1998 Compared to 1997
The table below sets forth for 1998 and 1997 certain
information with respect to the results of operations of the Company and its
principal subsidiaries.
<TABLE>
<CAPTION>
1998 Net Sales Gross Profit Income before Net Income (Loss)
- ---- --------- ------------ Income Taxes and -----------------
Minority Interests
------------------
Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In millions) (In millions) (In (In millions)
millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $ (0.5) (7.9) $(0.6) (16.7)
(parent company)
Israel Tractors & $57.8 28.4 $15.7 32.2 0.5 7.9 (0.3) (8.3)
Equipment Co. (Israel)
Balton CP Group (Africa) 68.0 33.4 18.6 38.2 2.7 42.9 0.9 25.0
Investor RT Group 77.9 38.2 14.4 29.6 3.6 57.1 3.6 100.0
(Hungary) ---- ---- ---- ---- --- ---- --- -----
$203.7 100 $48.7 100 $6.3 100 $3.6 100
====== === ===== === ==== === ==== ===
</TABLE>
<TABLE>
<CAPTION>
1997 Net Sales Gross Profit Income before Net Income (Loss)
- ---- --------- ------------ Income Taxes and -----------------
Minority Interests
------------------
Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In millions) (In millions) (In (In
millions) millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $0.6 10.3 $0.4 7.4
(parent company)
Israel Tractors & $67.7 28.2 $19.1 39.6 2.4 41.4 1.7 31.5
Equipment Co. (Israel)
Balton CP Group (Africa) 51.0 21.3 14.8 30.6 1.7 29.3 0.6 11.1
Investor RT Group 120.9 50.5 14.4 29.8 1.1 19.0 2.7 50.0
(Hungary) ----- ---- ---- ---- --- ---- --- ----
$239.6 100 $48.3 100 $5.8 100 $5.4 100
====== === ===== === ==== === ==== ===
</TABLE>
18
<PAGE>
The table below sets forth for 1998 and 1997 certain
information with respect to the results of operations of the Company and its
five principal business segments.
<TABLE>
<CAPTION>
1998 1997
Operating Operating
Net sales Gross Profit Income (Loss) Net Sales Gross Profit Income (Loss)
--------- ------------ ------------- --------- ------------ -----------
Amount % Amount % Amount Amount % Amount % Amount
(In millions) (In millions) (In millions) (In millions) (In millions) (In millions)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vehicle sales and $13.7 6.7 $1.4 2.9 $0.1 $11.9 5.0 $1.5 3.1 $(0.1)
distribution
(Investor)
Export and import of 60.0 29.5 10.3 21.1 0.3 107.1 44.7 12.6 26.1 (0.5)
agricultural products
(Investor)
Other Industries 4.2 2.1 2.7 5.5 (2.4) 1.9 0.8 0.3 0.6 (2.2)
(Investor)
Tractors and heavy 0.7 2.3
equipment 57.8 28.4 15.7 32.3 67.7 28.2 19.1 39.6
(Israel Tractor)
Agricultural, 6.4 4.4
communications and 68.0 33.3 18.6 38.2 51.0 21.3 14.8 30.6
electrical equipment
(Balton)
------ --- ----- --- ---- ------ --- ----- ---- ----
$203.7 100 $48.7 100 $5.1 $239.6 100 $48.3 100 $3.9
====== === ===== === ==== ====== === ===== ==== ====
</TABLE>
1997 Compared to 1996
- ----------------------
The table below sets forth for 1997 and 1996 certain information with
respect to the results of operations of the Company and its principal
subsidiaries.
<TABLE>
<CAPTION>
1997 Net Sales Gross Profit Income before Net Income (Loss)
- ---- --------- ------------ Minority Interests ------------------
and Income Taxes
-----------------
Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In millions) (In millions) (In (In
millions) millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $0.6 10.3 $0.4 7.4
(parent company)
Israel Tractors & $67.7 28.2 $19.1 39.6 2.4 41.4 1.7 31.5
Equipment Co. (Israel)
Balton CP Group (Africa) 51.0 21.3 14.8 30.6 1.7 29.3 0.6 11.1
Investor RT Group 120.9 50.5 14.4 29.8 1.1 19.0 2.7 50.0
(Hungary) ----- ---- ---- ---- --- ---- --- ----
$239.6 100 $48.3 100 $5.8 100 $5.4 100
====== === ===== === ==== === ==== ===
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
1996 Net Sales Gross Profit Income before Net Income
- ---- --------- ------------ Minority Interests ----------
and Income Taxes
------------------
Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In millions) (In millions) (In (In
millions) millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $0.9 4.4 $0.8 6.3
(parent company)
Israel Tractors & $81.8 29.6 $24.2 37.1 6.3 30.4 4.8 37.8
Equipment Co. (Israel)
Balton CP Group (Africa) 57.3 20.8 18.4 28.2 8.9 43.0 2.9 22.8
Investor RT Group 136.7 49.6 22.6 34.7 4.6 22.2 4.2 33.1
(Hungary) ----- ---- ---- ---- --- ---- --- ----
$275.8 100 $65.2 100 $20.7 100 $12.7 100
====== === ===== === ===== === ===== ===
</TABLE>
The table below sets forth for 1997 and 1996 certain information with
respect to the results of operations of the Company and its five principal
business segments.
<TABLE>
<CAPTION>
1997 1996
Operating Operating
Net sales Gross Profit Income (Loss) Net Sales Gross Profit Income (Loss)
--------- ------------ ------------ --------- ------------ ------------
Amount % Amount % Amount Amount % Amount % Amount
(In millions) (In millions) (In millions) (In millions) (In millions) (In millions)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vehicle sales and $11.9 5.0 $1.5 3.1 $(0.1) $12.0 4.4 $1.7 2.6 $(0.2)
distribution
(Investor)
Export and import of 107.1 44.7 12.6 26.1 (0.5) 121.6 44.1 20.0 30.7 2.3
agricultural products
(Investor)
Other Industries 1.9 0.8 0.3 0.6 (2.2) 3.1 1.1 0.9 1.4 (2.2)
(Investor)
Tractors and heavy 2.3 81.8 29.7 24.2 37.1 6.6
equipment 67.7 28.2 19.1 39.6
(Israel Tractor)
Agricultural, 4.4 57.3 20.7 18.4 28.2 9.6
communications and 51.0 21.3 14.8 30.6
electrical equipment
(Balton)
------ ----- ----- ---- ----- ------ ---- ----- ---- -----
$239.6 100 $48.3 100 $3.9 $275.8 100 $65.2 100 $16.1
====== ==== ===== ==== ===== ====== ==== ===== ==== =====
</TABLE>
20
<PAGE>
1998 COMPARED TO 1997
Net Sales. Net sales on a consolidated basis in 1998 decreased by $36
million as compared to 1997. This decrease was mainly attributable to a
reduction in demand for Israel tractor's products and the rationalization of
Investor's agricultural commodity trading business.
Gross Profit. Gross Profit on a consolidated basis in 1998 increased
by only $263 thousand or approximately 0.5%, to approximately $49 million, or
approximately 24% of net sales, from approximately $48 million, or
approximately 20% of net sales, in 1998. The increase in the gross margin
percentage was due to the rationalization of Investor's agricultural commodity
trading business.
Operating income. Operating income on a consolidated basis in 1998
increased by approximately $1.2 million, to approximately $5.1 million, or
approximately 2.5% of net sales, from approximately $3.9 million, or
approximately 1.6% of net sales in 1998. This increase was principally due to
higher sales and gross profit in Balton.
Interest income. Interest income decreased in 1998 by approximately
$900 thousand, or approximately 43%, to approximately $1.3 million, due to
lower cash balances and lower rates of interest in the various countries of
operations.
Equity in earnings of affiliates Equity in earnings of affiliates
increased in 1998 by $200 thousand, primarily due to the Danubius investment.
Foreign currency gains and losses. There was a foreign currency net
loss in 1998 of $2.6 million compared to a loss in 1997 of $2.5 million. This
increase was primarily attributable to devaluations of local currency in
Africa.
In addition, the foreign translation adjustment loss (see stockholders' equity
calculation) increased from approximately $32.1 million in 1997 to
approximately $34.4 million in 1998 due primarily to the weakness of the
various local currencies.
Gain on sale of non-current assets. Gain on sale of non-current assets
in 1998 decreased by approximately $2.1 million, to approximately $410
thousand. This decrease was primarily due to the sale of the remaining parcels
of land to Shell in Hungary in 1997.
Interest expense. Interest expense in 1998 decreased by approximately
$2 million. This decrease is primarily due to an decrease in bank loans in
Hungary.
Income before income taxes, and minority interests. Income before
income taxes and minority interests in 1998 increased by approximately $465
thousand, or approximately 8%, to approximately $6.3 million in 1998
(representing approximately 3.1% of net sales for that year) from approximately
$5.8 million in 1997 (representing approximately 2.4% of net sales for that
year).
Minority interest. Minority interest in 1998 increased by
approximately $1.5 million, due to higher income in Balton and the reduction of
losses in Agrimpex.
21
<PAGE>
Income Taxes Income taxes in 1998 increased by approximately $700
thousand, or approximately 45% to $2.2 million in 1998. This increase was
primarily due to the higher income in the year.
Net Income Net income for 1998 decreased by $1.7 million from
approximately $5.4 million in 1997 to approximately $3.6 million in 1998. The
decrease is primarily due to the reduction in demand for Israel Tractor's
products.
Investor
The operations of three of the Company's segments are conducted in
Hungary through Investor. During 1998, Investor continued to rationalize
certain unprofitable operations. See Item 1. Business - Investor.
Vehicle Sales and Service Segment
o Net sales for 1998 increased by approximately $1.8 million
or approximately 15%, as compared to 1997.
o Gross Profit for 1998 decreased by approximately $100
thousand to approximately $1.4 million (representing 10.3% of
net sales for such year) from approximately $1.5 million in
1997 (representing 13% of net sales for such year).
o Operating income was approximately $100 thousand in 1998 and
a loss of $100 thousand in 1997.
The increase in net sales arose from increased marketing in the motor
trade business.
Export/Import and Processing/Storage of Agricultural
Products Segment
o Net sales for 1998 decreased by approximately $47 million, or
approximately 44%, as compared to 1997.
o Gross Profit for 1998 decreased by approximately $2.3
million, or approximately 18% to approximately $10.3 million
(representing 17.1% of net sales for such year) from
approximately $12.6 million in 1997 (representing 12% of net
sales for such year).
o Operating income for 1998 increased by $800 thousand, or
approximately 160%, to an operating income of $300 thousand
from approximately an operating loss of $500 thousand in
1997.
22
<PAGE>
The decrease in net sales and gross profit was primarily due to the
disposal of Agrimpex Commodities. The increase in operating income was
primarily affected by the disposal of lossmaking activities and the
rationalization of the milling companies.
Other Industries
o Net sales for 1998 increased by approximately $2.3 million,
or approximately 121%, as compared to 1997.
o Gross Profit for 1998 increased by approximately $2.4
million, or approximately 800% to approximately $2.7 million
(representing 64% of net sales for such year) from
approximately $300 thousand in 1997 (representing 16% of net
sales for such year).
o Operating loss for 1998 increased by $200 thousand.
The increase in net sales and gross profits was due to the consolidation
during the year of the warehousing and distribution business. The increase in
the operating loss was primarily due to losses incurred at the warehousing and
distribution business.
Israel Tractor: Tractors and Heavy Equipment Segment
o Net sales for 1998 decreased by approximately $9.9 million,
or approximately 15% as compared to 1997, due to a reduction
in demand for the Company's products.
o Gross Profit for 1998 decreased by $3.4 million, or 18%, to
$15.7 million (representing 27% of net sales for such year)
from $19.1 million in 1997 (representing 28.2% of net sales
for such year). This decrease was due the reduction in Sales.
o Operating income for 1998 decreased by $1.6 million to $700
thousand (representing 1.2% of net sales for such year) from
$2.3 million in 1997 (representing 3.4% of net sales for such
year) as a result of lower trading activity.
Balton: Agricultural, Communications and Electrical Equipment Segment
o Net sales for 1998 increased by $17 million, or approximately
33%, as compared to 1997 principally due to higher demand for
the products.
23
<PAGE>
o Gross Profit for 1998 increased by $3.8 million, or
approximately 26%, to $18.6 million (representing 27% of net
sales for such year) from $14.8 million in 1997 (representing
29% of net sales for such year). This increase was due to the
increase in Sales.
o Operating income for 1998 increased by $2 million to $6.4
million, (representing 9.4% of net sales for such year)
from $4.4 million in 1997. This increase was due to the
increase in Sales or Gross Profit.
1997 COMPARED TO 1996
Net Sales. Net sales on a consolidated basis in 1997 decreased by
$36.2 million as compared to 1996. This decrease was mainly attributable to a
reduction in demand for the Company's products
Gross Profit. Gross Profit on a consolidated basis in 1997 decreased
by approximately $16.8 million, or approximately 25.8%, to $48.4 million, or
approximately 20.2% of net sales, from approximately $65.2 million, or
approximately 23.6% of net sales, in 1996. This decrease was mainly
attributable to depressed market conditions, and reductions of margins in the
Investor group, primarily in the agricultural sector. Furthermore, the legacy
of the irregular activities of the previous management of Agrimill, who were
removed from their posts in February 1997 contributed to the decrease. Agrimill
operates in the agricultural sector of the Investor group.
Operating income. Operating income on a consolidated basis in 1997
decreased by approximately $12.2 million, to approximately $3.9 million, or
approximately 1.6% of net sales, from approximately $16.1 million, or
approximately 5.9% of net sales in 1996. This decrease was principally due to
the reasons stated in the Gross Profits section.
Interest income. Interest income increased in 1997 by approximately
$100 thousand, or approximately 4.3%, to approximately $2.2 million.
Equity in earnings of affiliates Equity in earnings of affiliates
decreased in 1997 by $74 thousand primarily due to the Danubius investment.
Foreign currency gains and losses. There was a foreign currency net
loss in 1997 of $2.5 million compared to a loss in 1996 of $0.3 million. This
increase was primarily attributable to devaluations of local currency in Africa
and Hungary.
In addition, the foreign translation adjustment loss (see stockholders' equity
calculation) increased from approximately $25.8 million in 1996 to
approximately $32.1 million in 1997 due primarily to the weakness of the
Hungarian Forint.
Gain on sale of non-current assets. Gain on sale of non-current assets
in 1997 increased by approximately $256 thousand, to approximately $2.5
million. This increase was primarily due to the sale of the remaining parcels
of land to Shell in Hungary.
24
<PAGE>
Interest expense. Interest expense in 1997 increased by approximately
$700 thousand. This increase is primarily due to an increase in bank loans in
Hungary.
Income before income taxes, and minority interests. Income before
income taxes and minority interests in 1997 decreased by approximately $14.9
million, or approximately 71.9%, to approximately $5.8 million in 1997
(representing approximately 2.4% of net sales for that year) from approximately
$20.7 million in 1996 (representing approximately 7.5% of net sales for that
year).
Minority interest. Minority interest in 1997 decreased by
approximately $4.0 million, due to losses in the Investor group.
Income Taxes Income taxes in 1997 decreased by approximately $3.6
million, or approximately 71% to $1.5 million in 1997. This decrease was
primarily due to a reduction in Net Income.
Net Income Net income for 1997 decreased by approximately $7.3 million
from approximately $12.7 million in 1996 to approximately $5.4 million in 1997.
The decrease is due to adverse trading conditions in the countries of
operation.
Investor
The operations of three of the Company's segments are conducted in
Hungary through Investor. During 1997, Investor continued to rationalize
certain unprofitable operations. See Item 1. Business - Investor.
Vehicle Sales and Service Segment
o Net sales for 1997 decreased by approximately $153 thousand
or approximately 1.3%, as compared to 1996.
o Gross Profit for 1997 decreased by approximately $200
thousand to approximately $1.5 million (representing 12.6% of
net sales for such year) from approximately $1.7 million in
1996 (representing 14% of net sales for such year).
o Operating losses were approximately $50 thousand in 1997 and
$200 thousand in 1996.
The decrease in net sales arose from increased competition in the
motor trade business.
Export/Import and Processing/Storage of Agricultural
Products Segment
o Net sales for 1997 decreased by approximately $14.5 million,
or approximately 11.9%, as compared to 1996.
o Gross Profit for 1997 decreased by approximately $7.4
million, or approximately
25
<PAGE>
37 % to approximately $12.6 million (representing 12% of net
sales for such year) from approximately $20 million in 1996
(representing 16% of net sales for such year).
o Operating income for 1997 decreased by approximately $2.9
million, or approximately 123%, to approximately an operating
loss of $500 thousand from approximately $2.4 million in
1996.
The decrease in net sales was primarily due to lower export activity and a
competitive domestic market. The gross profit and operating income were
adversely affected by depressed market conditions in the domestic and export
markets, a reduction of margins due to fierce competition, and the legacy of
the irregular activities of the previous management of Agrimill, who were
removed from their posts in February 1997.
Other Industries
o Net sales for 1997 decreased by approximately $1.2 million,
or approximately 40%, as compared to 1996.
o Gross Profit for 1997 decreased by approximately $600
thousand, or approximately 67% to approximately $300 thousand
(representing 16% of net sales for such year) from
approximately $900 thousand in 1996 (representing 29% of net
sales for such year).
o Operating loss for 1997 and 1996 was approximately
$2.2 million.
The decrease in net sales and gross profits, as well as the reduction in
operating loss, was due to the continued rationalization and disposal of
marginal businesses.
Israel Tractor: Tractors and Heavy Equipment Segment
o Net sales for 1997 decreased by approximately $14.1 million,
or approximately 17.2% as compared to 1996, due to a
reduction in demand for the Company's products.
o Gross Profit for 1997 decreased by $5.1 million, or 21.1%, to
$19.1 million (representing 28.2% of net sales for such year)
from $24.2 million in 1996 (representing 29.6% of net sales
for such year). This decrease was due the reduction in Sales.
o Operating income for 1997 decreased by $4.3 million to $2.3
million (representing 8.1% of net sales for such year) from
$6.6 million in 1996 (representing 3.4% of net sales for such
year) as a result of lower trading activity.
26
<PAGE>
Balton: Agricultural, Communications and Electrical Equipment Segment
o Net sales for 1997 decreased by $6.3 million, or approximately
11%, as compared to 1996 principally due lower demand for the
Company's products.
o Gross Profit for 1997 decreased by $3.6 million, or
(approximately 20%), to $14.8 million (representing 29% of
net sales for such year) from $18.4 million in 1996
(representing 32% of net sales for such year). This decrease
was due the decrease in Sales.
o Operating income for 1997 decreased by $5.2 million to
$4.4 million, (representing 8.6% of net sales for such
year) from $9.6 million in 1996. This decrease was due to
the reduction of sales and gross profit.
INCOME TAXES
The Company may be subject to tax in some or all of the foreign
countries in which it has operations. However, foreign taxes imposed on the
Company's income may qualify as a foreign income tax and therefore be eligible
for credit against the Company's United States income tax liability subject to
certain limitations set out in the Internal Revenue Code of 1986, as amended
(or alternatively, for deduction against income in determining such liability).
The limitations set out in the Code include, among others, computation rules
under which foreign tax credits allowable with respect to specific classes of
income cannot exceed the United States federal income taxes otherwise payable
with respect to each class of income. Foreign income taxes exceeding the credit
limitation for the year of payment or accrual can be carried back for two
taxable years and forward for five taxable years, in order to reduce United
States federal income taxes, subject to the credit limitations applicable in
each of such years. Other restrictions on the foreign tax credit include a
prohibition on the use of the credit to reduce liability for the United States
corporate alternative minimum taxes by more than 90%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through funds generated
internally and through cash and cash equivalents available at the beginning of
1998. At December 31, 1998, the Company and its wholly-owned Israel Tractor
subsidiary, had working capital of $27.7 million, including cash and cash
equivalents of $6.5 million. Cash of subsidiaries that are not wholly-owned
(including the Investor Group and the Balton Group) is generally not available
for use by the Company or other subsidiaries (except to the extent paid to the
Company as reimbursement for general overhead paid by the Company or as
management fees) other than in the form of dividends, if and when declared.
Dividends to the Parent Company from its Israel Tractor subsidiary are subject
to a withholding tax of 15% to 25%. The Parent Company does not expect to
receive cash dividends or other distributions in the foreseeable future from
any of its subsidiaries.
27
<PAGE>
At December 31, 1998, Balton, Investor and Israel Tractor had outstanding
short-term indebtedness of approximately $5.5 million, $5.1 million and $1
million, respectively. At December 31, 1998, Agrimpex and its subsidiaries, had
credit lines of $11.3 million which are considered adequate for the present
purposes of the business. At December 31, 1998, Israel Tractor & Balton had
unused lines of short-term credit of $2.6 million and $5.9 million,
respectively.
Due to the weakness of the Hungarian currency and the current low
rates of return on dollar deposits, the Company sought other investments.
Between February 1995 and January 1996, approximately 2.87 HUF billion
(approximately $25 million at exchange rates at the time of each purchase, and
approximately $19.5 million at the current exchange rate ) was spent for the
purchase of a 34.5% interest in Danubius Hotel. During 1998, Israel Tractor
purchased an additional 4.2% interest for approximately $8 million. To date,
the Company's effective interest is approximately 37%.
The Investor Group made capital expenditures of approximately $2.1
million in 1998 for the purchase of property, vehicles and equipment from
internally generated funds. In 1998, Balton and Israel Tractor made capital
expenditures of approximately $2.2 million and $800 thousand, respectively, for
the purchase of vehicles and equipment. Such expenditures were made from
internally generated funds.
INFLATION
Inflation has been a persistent aspect of the Hungarian economy in
recent years, although the annual rate of inflation has been predictable and
has therefore been taken into account by the government and private businesses.
Inflation has contributed to the devaluation of the Hungarian currency and has
therefore had a result on Investor's financial condition. See Note A(10) of
Notes to Consolidated Financial Statements.
Inflation in Israel was moderate in 1998 and therefore did not
significantly affect operations in that country. Furthermore, the devaluation
of the Israeli shekel against the U.S. Dollar in 1998 was 17.6 %.
Significant rates of inflation persisted in the African countries
where Balton operates, triggering significant devaluations of certain local
currencies.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect that the adoption of
SFAS No. 133 will have a significant impact on the Company's results of
operations.
28
<PAGE>
YEAR 2000 COMPLIANCE
In July 1996, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF 96-14, "Accounting for the
Costs Associated with Modifying Computer Software for the Year 2000," which
requires that costs associated with modifying computer software for the Year
2000 be expensed as incurred.
The Company is in the process of conducting a comprehensive review of its
systems, equipment, product and services, suppliers, customers and building
facilities to identify its exposure to any adverse impact of Year 2000
non-compliance. The Company has implemented or will implement procedures that
it deems necessary to safeguard the Company from computer-related issues
associated with adverse effects as a result of improperly recognizing the
millennial date change. Based upon its review and efforts to date, the Company
believes that future external and internal costs to be incurred for the
modification of internal-use software to address Year 2000 issues will not have
a material adverse effect on the Company's financial position, cash flows or
results of operations.
The Company believes, based upon its review and efforts to date, that external
and internal remediation costs to be incurred for the modification of
internal-use software to address Year 2000 issues will not be material. These
cost estimates include the costs of external contractors, non-capitalizable
purchases of software and hardware, and the direct cost of internal employees
working on Year 2000 projects. The Company's cost estimate does not include the
cost of implementing contingency plans, which are in the process of being
developed, and also does not include any potential litigation or warranty costs
related to Year 2000 issues if the Company's remediation efforts are not
successful.
The Company has undertaken a program to alert its suppliers and dealers of Year
2000 issues. Based on its contacts with suppliers and dealers, the Company
believes that a majority of our most important suppliers are Year 2000
compliant, and the Company anticipates that most of its dealers will be Year
2000 compliant by mid-1999. The Company will continue to work with its
remaining suppliers and its dealers throughout 1999 to secure Year 2000
compliance by December 31, 1999. Based on third-party representations and
internal testing, and subject to the Company's ongoing compliance efforts, the
costs and uncertainties relating to timely resolution of Year 2000 issues
applicable to the Company's business and operations are not reasonably expected
by the Company to have a material adverse effect on the Company's financial
position, cash flows or results of operations. For those suppliers and dealers
that have not adequately responded to our Year 2000 concerns, we are following
up to ultimately achieve an acceptable level of compliance within our supply
chain. As there can be no assurance that an acceptable level of Year 2000
compliance will be achieved, the Company is in the process of developing
contingency plans to address potential issues.
Based upon the Company's review and efforts to date, the Company currently
anticipates completion of critical Year 2000 compliance issues by mid-1999, and
the Company plans to continue integration testing throughout the balance of
1999. If the Company's Year 2000 compliance efforts, as well as the efforts of
the Company's suppliers and dealers, individually and in the aggregate, are not
successful, it could have a material adverse effect on the Company's financial
position, cash flows and results of operations. Factors that could cause actual
results to differ include unanticipated supplier or dealer failures, disruption
of utilities, transportation or telecommunications breakdowns, foreign or
domestic
29
<PAGE>
governmental failures, as well as unanticipated failures on our part to
address Year 2000 related issues. The Company's most reasonably likely worst
case scenario in light of these risks would involve a potential loss in sales
resulting from order, production and shipping delays throughout the Company's
supply chain caused by Year 2000 related disruptions. The degree of sales loss
impact would depend on the severity of the disruption, the time required to
correct it, whether the sales loss was temporary or permanent, and the degree
to which our primary competitors were also impacted by the disruption. The
Company is in the process of developing Year 2000 contingency plans that will
be designed to mitigate the impact on the Company if its Year 2000 compliance
efforts are not successful. The targeted completion date for the Company's
contingency planning is mid-1999. The Company's contingency plans may include
the use of alternative systems and non-computerized approaches to our business
including manual procedures for machine operation, collecting and reporting of
its business information, as well as alternative sources of supply. At this
time, the Company has not determined whether it will be necessary to stockpile
inventory or supplies as part of its contingency planning.
The information included in this "Year 2000" section represents forward-looking
statements and involves risks and uncertainties that could cause actual results
to differ materially from those in the forward-looking statements. The Company
has evaluated the impact of the Year 2000 issue on the business and does not
expect to incur significant costs with year 2000 compliance. The Company
believes that all software and hardware requirements to enable it to cope with
year 2000 issue have been or are being currently implemented. However, there
can be no assurance that unanticipated costs may arise in implementing these
requirements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Substantially all of the Company's revenues are derived from foreign
operations. As such, its income is significantly affected by fluctuations in
currency exchange rates and by currency controls. Most of the countries where
the Company operates such as Hungary and several African countries do not have
freely convertible currencies and their currencies have been subject to
devaluations in recent years. In particular, during 1998, the income from the
Company's Hungarian, African and Israeli subsidiaries was significantly reduced
by losses arising from foreign exchange transactions due to significant
currency devaluations against the U.S. dollar. The Hungarian currency, which
floats against a basket of two currencies (the U.S. dollar and the European
Currency Unit) underwent devaluations against the U.S. dollar at the rate of 7%
during 1998. Since the beginning of 1999, the Hungarian currency has been
further devalued by approximately 8% against the U.S. Dollar. Since the
functional currency for Investor is the Forint, these devaluations have
resulted in certain currency translation adjustments directly impacting
stockholders' equity. Furthermore, certain of African countries such as Zambia
and Uganda operate in hyper-inflationary economies, and. the Israeli shekel
devalued 17.6% against the U.S. dollar in 1998, even though the devaluation was
modest in previous years. See Notes A(10) and I of Notes to Consolidated
Financial Statements filed under Item 8 of this Report.
Derivative financial instruments are utilized by the Company to reduce foreign
exchange risk and price risk relating to its heavy equipment distribution and
agricultural commodity business. The Company does not hold or issue derivative
financial instruments for trading purposes.
30
<PAGE>
Israel Tractor enters into foreign currency forward contracts and call option
contracts to reduce the impact of fluctuations of certain currencies against
the U.S. dollar. Gains and losses resulting from such transactions are
reflected in the results of operations. These contracts reduce exposure to
currency movements resulting primarily from nondollar-denominated trade
receivables and the Israeli tax effects of dollar-denominated trade purchases.
At December 31, 1998, Israel Tractor had foreign currency forward contracts,
with notional values of $2 million, to purchase and sell Israeli shekels. All
of the contracts matured in January 1999.
Current pricing models were used to estimate the fair values of foreign
currency forward contracts, and call options. The counterparties to these
contracts are creditworthy multinational commercial banks or other financial
institutions, which are recognized market makers.
DISCLOSURE ABOUT INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in
interest rates based on its financing, investing, and cash management
activities. The Company utilizes a balanced mix of debt maturities along with
both fixed-rate and variable-rate debt to manage its exposures to changes in
interest rates. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in 1999, although there can be no
assurances that interest rates will not significantly change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and required financial statement
schedules of the Company are located beginning on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company and certain
executive officers of its subsidiaries are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Bernard Schreier 80 Chairman of the Board, President and Director
Fortunee F. Cohen 71 Secretary
Michael M. Wreschner 54 Director, Assistant Secretary
Leonard Goldfine 82 Director
John E. Smith 50 Director
Wilfred Wyler 91 Director
Alfred L. Simon 58 Director
Jozsef Ferenc Polgar 56 Chief Executive Officer of
Investor
Zvi Borowitsh 61 Managing Director of Israel
Tractor
Moshe Gershi 47 General Manager of Balton
</TABLE>
Bernard Schreier has been the Chairman of the Board and a Director of
the Company since August 6, 1989, and has been President of the Company since
October 25, 1989. Mr. Schreier serves as Chairman of the Board and Managing
Director of the CP Holdings Limited group of companies and is a director of
Bank Leumi (UK) PLC. CP Holdings Limited is an affiliate which wholly owns the
majority stockholder of the Company.
Fortunee F. Cohen has served as Secretary of the Company since October
25, 1989. Prior to her appointment as Secretary, Ms. Cohen was the director of
Shareholder Relations of the Company.
Michael M. Wreschner has been a Director of the Company since October
25, 1989 and an Assistant Secretary of the Company since November 1991. Mr.
Wreschner is an executive director of the CP Holdings Limited group of
companies. CP Holdings Limited is an affiliate which wholly owns a majority
stockholder of the Company.
John E. Smith was appointed a Director of the Company on October 29,
1998. Mr. Smith is an executive director of the CP Holdings Limited group of
companies. CP Holdings Limited is an affiliate which wholly owns a majority
stockholder of the Company.
Leonard Goldfine has been a Director of the Company since October 6,
1976 and served as Vice President of the Company from December 1982 to
August 1985. In the past five years, Mr. Goldfine has had the following
positions: Director of Development Corporation for Israel (Underwriter for
State of Israel bonds), Chairman of the Board and Director of Tensiodyne
Corporation (a scientific materials testing company) (1986-1989).
32
<PAGE>
Wilfred Wyler was elected as a Director of the Company on December 8,
1982 and is a senior partner in the certified public accounting firm of Wilfred
Wyler and Co.
Alfred L. Simon has been a Director of the Company since September 4,
1990. He is currently a Managing Associate of American Capital Group (since
June, 1988). Prior to his current position he was Vice President of corporate
finance at Gruntal & Co., Incorporated (1985-1987).
The following executive officers of the Company's subsidiaries perform
significant policy making functions for the Company:
Jozsef Ferenc Polgar is the Chief Executive Officer of Investor and
Chairman of the Board of Interag. On March 31, 1994, Mr. Polgar was appointed a
Director of Agrimpex and subsequently elected by the Board as Chairman of
Agrimpex. Prior to his positions with Investor and its subsidiaries, Mr. Polgar
was the General Manager of trade development and finance at the Hungarian
Ministry of Trade (1975-1988) and head of the business department of Prometheus
company (1970-1975).
Zvi Borowitsh has been the Managing Director of Israel Tractors since
July 1989. Mr. Borowitsh is also the Chairman of Israel Quarrying & Mining
Associations and an Assistant Professor of Earthmoving Technology and
Management at Haifa Technion.
Moshe Gershi has been the General Manager of Balton since April 1991.
In his prior positions he served as General Manager (January 1991 to June
1991), Director of corporate finance (January 1989 to January 1991) and
Treasurer (January 1987 to December 1988) of Koor Trade Ltd. which, through its
wholly-owned subsidiary Koor USA, Inc., was the principal shareholder (49.71%)
of the Company's outstanding voting securities until July 25, 1989.
All Directors of the Company are elected by the shareholders for a
one-year term and hold office until the next annual meeting of shareholders of
the Company or until their successors are elected and qualify. The Board of
Directors has appointed Messrs. Bernard Schreier, Wreschner and Goldfine to
serve on the Investment and Finance Committee of the Board of Directors.
Executive officers are appointed by the Company's Board of Directors for a
one-year term and hold office until their successors are chosen and qualify,
subject to earlier removal by the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
Mr. Bernard Schreier was not given any compensation from the Company
for serving as Chairman of the Board and President in 1998. No executive
officer of the Company was paid compensation equal to or exceeding $100,000 in
1998.
In November 1989, the Company entered into an agreement with CP
Holdings Limited ("CP Holdings") pursuant to which the Company pays CP Holdings
$4,000 per month in reimbursement of amounts paid by CP Holdings to certain
officers of the Company for time spent working for the Company. In addition, the
Company's subsidiaries paid CP Holdings an aggregate of $1.05 million in
management fees for management services in 1998. CP Holdings beneficially owns
approximately 77.2% of the Company's Common Stock.
The Company has not granted restricted stock or options to purchase
Common Stock to its officers or employees.
33
<PAGE>
Compensation of Directors
All Directors of the Company receive a fee of $10,000 per annum plus
$500 for attendance at each meeting of the Board of Directors. All Directors
are reimbursed for all reasonable expenses incurred by them in acting as a
Director or as a member of any committee of the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31,
1999, concerning the ownership of the Common Stock by (a) each of the Company's
current directors and nominees, (b) all current directors, officers and
significant employees of the Company as a group, and (c) each person who, to
the Company's knowledge, beneficially owned on that date more than 5% of the
outstanding Common Stock. Except as otherwise indicated, the stockholders
listed in the table have the sole voting and investment power with respect to
the shares indicated.
34
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================
Shares of
Name and Address of Common Stock Percent
Beneficial Owner Beneficially Owned of Class
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bernard and Lilly Schreier 4,393,371(1) 77.2%
Heriots
Stanmore Common
Middlesex HA7 3HG England
- -----------------------------------------------------------------------------------------------------------------
The Estate of Gideon Schreier 4,461,371(2) 78.4%
Kensworth House
The Lynch, Nr Kensworth
S Beds LU6 3QZ, England
- -----------------------------------------------------------------------------------------------------------------
Michael M. Wreschner 4,393,371 (3) 77.2%
10 Raleigh Close
Hendon
London NW4 2TA, England
- -----------------------------------------------------------------------------------------------------------------
John E. Smith 4,393,371 (3) 77.2%
10 Bearswood End
Beaconsfield, Buckinghamshire HP9 2NR England
- -----------------------------------------------------------------------------------------------------------------
Leonard Goldfine 800 *
1424 Melrose Avenue
Melrose Park, PA 19027
- -----------------------------------------------------------------------------------------------------------------
Wilfred Wyler -0- __
333 Central Park West
New York, New York 10025
- -----------------------------------------------------------------------------------------------------------------
Alfred L. Simon -0- *
334 West 87th Street, Apt 6A
New York, New York 10024
- -----------------------------------------------------------------------------------------------------------------
Fortunee F. Cohen 96(4) *
1967 East 1st Street
Brooklyn, New York 11223
- -----------------------------------------------------------------------------------------------------------------
Kenyon Phillips Limited/ 4,393,371 (5) 77.2%
CP Holdings Limited
CP House, Otterspool Way,
Watford By-Pass,
Watford WD2 8HG England
- -----------------------------------------------------------------------------------------------------------------
Jozsef Ferenc Polgar -0- *
1133 Budapest
Ipoly,Utca 5/F
Hungary
- -----------------------------------------------------------------------------------------------------------------
Moshe Gershi -0- __
65 The Vale
London NW II
35
<PAGE>
- -----------------------------------------------------------------------------------------------------------------
Zvi Borowitsh -0- __
8 Hamanor Street
P.O.B. 214 Holon
58101 Israel
- -----------------------------------------------------------------------------------------------------------------
All directors and officers as a 4,462,267 78.4%
group (7 persons)
=================================================================================================================
</TABLE>
- -------------
(1) Represents 4,393,371 shares of Common Stock beneficially owned by CP
through its wholly owned subsidiary Kenyon Phillips Ltd ("Kenyon").
(2) Includes 68,000 shares of Common Stock for The Estate's account and
4,393,371 shares of Common Stock beneficially owned by CP through its
wholly owned subsidiary Kenyon.
(3) Represents 4,393,371 shares of Common Stock beneficially owned by CP
through its wholly owned subsidiary Kenyon. Mr. Wreschner and Mr.
Smith are directors of CP.
(4) Represents 96 shares of Common Stock beneficially owned by Fortunee
F. Cohen, as custodian for Joyce Cohen and Elliott Cohen, who each
own 48 shares of Common Stock.
(5) Kenyon beneficially owns an aggregate of 4,393,371 shares of Common
Stock of the Company, constituting 77.2% of the Company's outstanding
voting securities. According to the Schedule 13D filed by Kenyon, it
is owned and controlled by CP. The Company is also informed that 90%
of CP's voting securities is owned either beneficially or as trustees
of family trusts, and CP is controlled, by Bernard and Lilly
Schreier.
* Represents beneficial ownership of less than 1% of the Common Stock
of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an agreement with CP Holdings, the Company pays CP
Holdings $4,000 per month in reimbursement of amounts paid by CP Holdings to
certain officers of the Company for time spent working for the Company. In
addition, the Company's subsidiaries paid CP Holdings an aggregate of $1.05
million in management fees for management services in 1998.
During 1998 and 1997, Israel Tractor purchased machinery and
equipment, which at the request of the supplier, was channeled through CP. For
the rendering of this service, CP received a fee of 2% of the purchases, or
approximately $287,000 and $292,000, respectively. The fee was used to cover
administration, financing, and dealings with the major supplier.
See also Note H to the Consolidated Financial Statements.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
IIC INDUSTRIES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(a)(1) Financial Statements Page
<S> <C>
Financial Statement Index
Report of Independent Certified Public Accountants..............................................................F-1
Consolidated Balance Sheets as at
December 31, 1998 and December 31, 1997.........................................................................F-2
Consolidated Statements of Income for the
years ended December 31, 1998, 1997 and 1996....................................................................F-4
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996............................................................F-5
Consolidated Statements of Consolidated Cash Flows
for the years ended December 31, 1998, 1997 and 1996............................................................F-6
Notes to Consolidated Financial Statements......................................................................F-8
(a)(2) Financial Statement Schedules
Schedule II - Valuation Allowance Accounts.....................................................................F-32
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the period covered by this report.
(c) DANUBIUS HOTEL & SPA, RT. AND SUBSIDIARIES
Report of Ernst & Young .......................................................................................F-34
Consolidated Balance Sheets at December 31, 1998 and December 31, 1997 ........................................F-35
Consolidated Statements of Income for the years ended December 31, 1998 and 1997...............................F-36
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997.................................................................F-37
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997...........................F-38
Notes to Consolidated Financial Statements.....................................................................F-39
</TABLE>
<PAGE>
(d) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Articles of Incorporation of Registrant, as amended
(Incorporated by reference to Exhibit 1 filed with Amendment
No. 101 to Form N-2 filed with the Securities and Exchange
Commission (the "Commission") on April 29, 1980, filed with
Amendment No. 106 to Form N-2 filed with the Commission on
April 29, 1985, filed with Amendment No. 108 to Form N-2
filed with the Commission April 29, 1987 and to Amendment
No. 112 filed with the Commission on April 29, 1992)
3.2 By-Laws of Registrant (Incorporated by reference to Exhibit
2 filed with Amendment No. 101 to Form N-2 filed with the
Commission on April 29, 1980, filed with Amendment No. 106
to Form N-2 filed with the Commission on April 29, 1985,
filed with Amendment No. 108 to Form N-2 filed with the
Commission April 29, 1987 and to Amendment No. 112 filed
with the Commission on April 29, 1992)
10.1 Agreement dated May 2, 1991 by and between the Registrant,
Balton B.V., Koor Trade Limited and Balton C.P. Limited for
acquisition of 51% interest in Balton C.P. Limited
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992)
10.2 Share Purchase Agreement dated January 28, 1992 by and
between the Registrant and the State Property Agency of the
Republic of Hungary for acquisition of 60% interest in
Investor Rt. (Incorporated by reference to Exhibit G to
Amendment No. 2 to Application for an Order pursuant to
Section 8(f) of the Investment Company Act of 1940 declaring
that IIC Industries, Inc. (formerly Israel Investors
Corporation) has ceased to be an Investment Company)
10.3 Agreements dated May 26, 1993 between Interag Kereskedelmi
Reszvenytarsag and Shell Overseas Holdings Limited
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993)
10.4 Agreement dated May 26, 1993 between GMV of Bekes and
Agrimpex Rt. (Incorporated by reference to Exhibit 10.4 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993)
10.5 Agreement dated December 9, 1994 between the Registrant and
the State Property Agency of the Republic of Hungary for the
acquisition of an additional 23% interest in Investor Rt.
(Incorporated by ...reference by Exhibit 10.5 to the
Registrant's Annual report on Form 10-K for the year ended
December 31, 1994)
21.1 List of Subsidiaries
27 Financial Data Schedule
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
IIC INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheets of IIC Industries,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IIC Industries,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flow for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
We have also audited Schedule II of IIC Industries, Inc. and Subsidiaries for
the years ended December 31, 1998, 1997 and 1996. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
New York, New York
March 25, 1999
F-1
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
--------- -------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $10,957 $ 22,781
Accounts receivable, net of allowances for doubtful 34,797 37,487
accounts of $3,023 in 1998 and $3,043 in 1997
Inventories, net 32,603 44,859
Deposits 2,000
Other current assets 8,143 10,484
------ --------
Total current assets 88,500 115,611
RESTRICTED CASH 367 211
PROPERTY AND EQUIPMENT, NET 34,738 29,585
INVESTMENTS 40,585 28,361
OTHER ASSETS 2,648 2,274
-------- ---------
$ 166,838 $176,042
========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31,
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---------- --------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 18,492 $ 22,301
Bank loans 11,609 23,490
Current maturities of long-term debt 355 1,661
Accrued expenses and other payables 13,813 11,243
Due to related parties 3,247 2,162
Advances from customers 4,655 3,932
----------- ---------
Total current liabilities 52,171 64,789
LONG-TERM DEBT, less current portion 3,281 1,508
DUE TO AFFILIATES 1,738 1,692
OTHER LIABILITIES AND DEFERRED
CREDITS 6,477 5,759
MINORITY INTERESTS 14,738 15,149
--------- --------
78,405 88,897
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.25 par value per share; authorized
7,200,000 shares; issued 6,343,224 shares 1,586 1,586
Additional paid-in capital 22,941 22,941
Retained earnings 101,055 97,426
Accumulated other comprehensive loss (34,424) (32,083)
Less treasury stock - at cost (649,752 shares) (2,725) (2,725)
---------- ---------
88,433 87,145
---------- --------
$ 166,838 $176,042
========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
Net sales $203,710 $239,617 $275,820
Cost of sales 155,059 191,229 210,593
-------- ------- -------
Gross profit 48,651 48,388 65,227
Selling, general and administrative expenses 43,543 44,461 49,083
---------- -------- --------
Operating income 5,108 3,927 16,144
---------- --------- --------
Other income (expense)
Interest income 1,253 2,186 2,285
Dividend income 31 13 22
Equity in earnings of affiliates 4,361 4,156 4,230
Foreign currency loss (2,563) (2,453) (263)
Gain on sale of noncurrent assets 410 2,486 2,230
Interest expense (2,776) (4,753) (4,100)
Rental income 1,950 1,585 1,710
Other, net (1,504) (1,342) (1,566)
----------- --------- ---------
1,162 1,878 4,548
------- --------- ---------
Income before income taxes and
minority interest 6,270 5,805 20,692
Income taxes 2,207 1,519 5,046
--------- -------- --------
Income before minority interests 4,063 4,286 15,646
Minority interests (434) 1,087 (2,935)
------------- --------- ---------
NET INCOME $ 3,629 $ 5,373 $ 12,711
===== ===== ======
Basic net income per common share $0.64 $0.94 $2.23
==== ==== ====
Basic average number of common shares
outstanding 5,693,472 5,693,472 5,693,472
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in Retained comprehensive Treasury
stock capital earnings loss stock Total
------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $1,586 $22,941 $79,342 $(18,845) $(2,725) $82,299
Comprehensive income (loss):
Net income 12,711 12,711
Foreign translation adjustment (6,980) (6,980)
------------
5,731
------- ---------- ----------- ------------ ------------ ------------
Balance at December 31, 1996 1,586 22,941 92,053 (25,825) (2,725) 88,030
Comprehensive income (loss):
Net income 5,373 5,373
Foreign translation adjustment (6,258) (6,258)
------------
(885)
------- ---------- ----------- ------------ ------------ ------------
Balance at December 31, 1997 1,586 22,941 97,426 (32,083) (2,725) 87,145
Comprehensive income (loss):
Net income 3,629 3,629
Foreign translation adjustment (2,341) (2,341)
------------
1,288
------- ---------- ----------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 $ 1,586 $ 22,941 $101,055 $(34,424) $ (2,725) $ (88,433)
========= ======= ======== ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,629 $ 5,373 $ 12,711
------- ------- -------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 3,428 3,555 3,253
Amortization 25 67 75
Equity in (earnings) of affiliates, net
of dividends (4,361) (4,156) (4,230)
Minority interest (434) (1,087) 2,935
Gain on sale of noncurrent assets 410 (2,486) (2,230)
Foreign currency loss 2,563 2,453 263
Changes in operating assets and liabilities, net of effects of
acquisition and dispositions of businesses:
Accounts receivable 2,165 3,122 (13,339)
Inventories 7,983 12,012 (20,880)
Advances to subcontractors 1,054
Other assets 405 64 (188)
Accounts payable and accrued expenses 4,426 (3,932) 7,772
Advances from customers 372 (7,018) 1,681
-------- -------- --------
Total adjustments 17,030 2,594 (23,834)
-------- ------- -------
Net cash provided by (used in)
operating activities 20,659 7,967 (11,123)
-------- ------- -------
Cash flows from investing activities
Purchase of subsidiaries, net of cash acquired (3,668) (359) (2,510)
Purchase of property and equipment (5,092) (5,264) (10,636)
Purchase of investments (12,993) (3,730) (1,713)
(Purchase) sale of other assets (1,984) 234 74
Deposits 2,000
Advances (to) from affiliates (56) 158 (71)
Proceeds on disposal of property and equipment 1,600 2,733 3,178
Proceeds on disposal of investments 717 2,549 1,558
Restricted cash (156) 8,145 (2,637)
Redemption of notes and loan receivable 94 389 196
---------- -------- ---------
Net cash (used in) provided by
investing activities (19,538) 4,855 (12,561)
---------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31,
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from financing activities
Issuance of long-term debt $1,240 $ 911 $ 422
Principal payments on long-term debt (2,641) (100) (381)
Net (payments) receipts of short-term bank loans (11,799) (6,766) 23,074
-------- ------- -------
Net cash (used in) provided by
financing activities (13,200) (5,955) 23,115
-------- ------- ------
(Decrease) increase in cash and cash
equivalents during the year before
effect of exchange rate on cash (12,079) 6,867 (569)
Effect of exchange rate on cash 255 (1,297) (1,634)
--------- ------- --------
(Decrease) increase in cash and cash
equivalents during the year (11,824) 5,570 (2,203)
Cash and cash equivalents at beginning of year 22,781 17,211 19,414
------ ------ -------
Cash and cash equivalents at end of year $10,957 $22,781 $ 17,211
======== ====== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 2,336 $ 5,976 $ 6,077
Income taxes 2,170 3,457 3,225
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Business and Principles of Consolidation
IIC Industries, Inc. and Subsidiaries ("IIC" or the "Company") is a
majority-owned subsidiary (77%) of a corporation which is wholly-owned
by CP Holdings Limited ("CP").
The consolidated financial statements include the accounts of IIC and
all material majority-owned subsidiaries, except where control does
not rest with the Company. All material intercompany transactions and
balances have been eliminated. IIC is a holding company with
subsidiaries in three principal geographic areas: (1) Investor Rt.
("Investor"), a 99%-owned Hungarian holding company which engages in a
variety of commercial activities in Hungary, (2) Israel Tractor, a
wholly-owned Israeli corporation which distributes tractors and
related heavy machinery in Israel, and (3) Balton C.P. Limited
("Balton"), a 51%-owned English holding company with African
subsidiaries engaged in the trading business in several African
countries.
Investor's principal subsidiaries are Agrimpex RT ("Agrimpex" -
63%-owned) and Interag RT ("Interag" - 78%-owned). Agrimpex is
primarily engaged in flour milling and animal feed manufacture.
Interag is a diversified company whose principal activities consist of
a 29% interest in Danubius Hotel & Spa RT. ("Danubius") (see Note E),
and the operation of motor dealerships, vehicle service and repair
centers and a cold storage facility.
2. Revenue Recognition
Revenues from the sale of motor vehicles, tractors and heavy equipment
are recognized at the time they are shipped to customers. Service
revenues from maintenance and repairs are recognized in the period in
which they are performed.
Other revenues are recognized when substantially all the risks and
rewards of ownership are transferred to the purchaser.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid
investments with a maturity of three months or less when purchased.
F-8
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A (CONTINUED)
4. Inventories
Inventories are stated at the lower of cost (specific identification
for heavy machinery or first-in, first-out) or market values.
5. Valuation of Long-Lived Asset
The Company continually reviews long-lived assets and certain
identifiable intangibles held and used for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has determined
that no provision is necessary for the impairment of long-lived assets
at December 31, 1998.
6. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
at rates calculated to write off the cost of the asset over its
expected economic useful life. The rates are as follows:
Annual
percentage
----------
Buildings 2 - 4 %
Machinery and equipment 10 - 20
Furniture and fixtures 10 - 20
Motor vehicles 15 - 25
Leasehold improvements are amortized over the shorter of the useful
life of the asset or the lease term.
7. Investments
Investments in affiliates (owned greater than 20% but not in excess of
50%) and noncontrolled subsidiaries are recorded under the equity
method. Under such method, the investment is recorded at cost and
adjusted by the Company's share of earnings or losses less
distributions.
F-9
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A (CONTINUED)
8. Long-Term Contracts
Income on long-term contracts is measured by using the
percentage-of-completion method of accounting, based on the costs
incurred to date compared with total estimated costs. Income is
recognized upon the attainment of specific contract milestones. Full
provision is made for losses on all contracts in the year in which
they are first foreseen.
9. Income Taxes
The Company uses the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Under this method, deferred income
taxes, when required, are provided on the basis of the difference
between the financial reporting and income tax bases of assets and
liabilities at the statutory rates enacted for future periods. The
effect on deferred taxes of a change in tax rate is recognized in
income in the period that included the enactment date.
10. Foreign Currency Exchange
Investor uses the local currency, the Hungarian forint, as its
functional currency and all assets and liabilities are translated at
year-end exchange rates, all income and expense accounts at average
rates and records adjustments resulting from the translation as a
separate component of stockholders' equity and comprehensive income.
The translation adjustments for 1998, 1997 and 1996 were approximately
$2.3 million, $6.3 million and $7.0 million, respectively.
Israel Tractor uses the U.S. dollar as the functional currency, since
the dollar is the currency in which most of the significant business
of Israel Tractor is conducted or to which it is linked.
Balton uses the U.S. dollar as the functional currency. In 1997 and
1996, most of the African subsidiaries operated in hyperinflationary
economies. These subsidiaries translate monetary assets and
liabilities at year-end exchange rates and nonmonetary assets and
liabilities at historical rates. Income and expense accounts are
translated at the rate of exchange prevailing at the date of
transaction, except that depreciation is translated at historical
rates. Gains and (losses) resulting from the translation of these
entities are included in results of operations and are as follows:
1998 - $(951,000); 1997 - $(291,000) and 1996 - $179,000. In 1998,
three of the African subsidiaries operated in hyperinflationary
economies. For all other subsidiaries, the
F-10
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A (CONTINUED)
local currency is the functional currency and all assets and
liabilities are translated at year end exchange rates, and all income
and expense accounts at average rates.
Transactions arising in a foreign currency are translated into the
functional currency at the rate of exchange effective at the date of
the transaction and gains or (losses) are included in results of
operations and are as follows: 1998 - $ (1,612,000) , 1997 -
$(2,162,000) and 1996 - $(442,000).
11. Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income."
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS
No. 130 had no impact on the Company's net income or stockholders'
equity. SFAS No. 130 requires cumulative translation adjustments,
which prior to adoption were reported separately in stockholders'
equity, to be included in accumulated other comprehensive income
(loss). Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130. The cumulative
translation adjustment was $(34,424,000) and $(32,083,000) as of
December 31, 1998 and 1997, respectively.
12. Segment Information
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No.
14 replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization
that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable
segments. SFAS No.131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS
No. 131 did not affect the results of operations or financial position
but did affect the disclosure of segment information (see "Note L-
Industry Segment and Geographic Information").
F-11
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A (CONTINUED)
13. Basic Net Income Per Share
Basic net income per share has been computed by dividing net income by
the weighted average number of common shares outstanding. The Company
has no potentially dilutive securities and, accordingly, diluted
income per common share is not presented. On March 3, 1998, the Board
of Directors declared a four-for-one stock split, which was
distributed on March 16, 1998 to shareholders on record at the close
of business on March 3, 1998. All references to share and per share
amounts have been restated to reflect the stock split.
14. Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amount of assets and liabilities
and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
15. Reclassification
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
16. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company
does not expect that the adoption of SFAS No. 133 will have a
significant impact on the Company's results of operations.
NOTE B - ADVANCES FROM CUSTOMERS
In 1994, Balton B.V. - DWA (Nigeria) Ltd. ("BV-DWA"), a wholly-owned
subsidiary of Balton, contracted with a Nigerian Ministry for the
construction and installation of a water treatment plant and related
facilities in Katsina, Nigeria. In 1996, the original contract period
expired. During 1996
F-12
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B (CONTINUED)
and 1995, the Company recognized revenues of $11.3 million and $9.9
million, respectively, related to the project. Prior to 1996, no profit
was recognized since the project was in its early stages. The parties have
agreed, in principle, that phase one of the project has been completed and
that BV-DWA will continue the project, subject to revised terms and
conditions at a contract price of $76 million. During 1998 and 1997, the
Company recognized revenue of $1.3 million in each year related to the
project. The revenue recognized is low compared to the previous years due
to the extended negotiation period over the revised terms and conditions.
No profit has been recognized in 1998 or 1997.
Unaffiliated entities have been subcontracted for the construction work.
The original contract price was divided into a U.S. dollar element and a
Nigerian naira element. Balton received $21.5 million and BV-DWA received
$8.2 million from the Nigerian Ministry. The advance receipts to Balton
and BV-DWA were made in order to facilitate payments to the subcontractors
of $20.1 million. All of the receipts were covered by repayment guarantees
to the Nigerian government in the event the contract was terminated, in
which event, the amount of the repayment is subject to arbitration.
Furthermore, all of the payments to the subcontractors were covered by
repayment guarantees to Balton and BV-DWA.
Of the original advances, $7.0 million was received for the U.S. dollar
element and $400 thousand at current rates of exchange for the Nigerian
naira element at the end of phase one of the project. Of these amounts,
$5.7 million and $300 thousand, respectively, are held by the
subcontractor. These remaining advances are not covered by repayment
guarantees to the Nigerian Ministry.
NOTE C - INVENTORIES
Inventories at December 31 are as follows (in thousands):
1998 1997
--------- ------
Raw material $ 5,380 $ 5,826
Work in progress 536 519
Finished goods 26,687 38,514
------- -------
$32,603 $44,859
======= =======
F-13
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Land $ 7,281 $ 5,728
Buildings and improvements 23,874 18,732
Machinery and equipment 5,241 4,802
Automotive 8,980 9,782
Furniture and fixtures 7,403 6,480
Construction in progress 159 210
-------- ---------
52,938 45,734
Less allowances for depreciation and amortization (18,200) (16,149)
-------- -------
$34,738 $ 29,585
------ =======
</TABLE>
NOTE E - INVESTMENTS
Significant investments in and advances to affiliated companies at
December 31 are (in thousands):
<TABLE>
<CAPTION>
% owned in
1998 and 1997 1998 1997
--------------- --------- --------
<S> <C> <C> <C>
Danubius Hotel & Spa Rt. ("Danubius") 37 and 30 $40,370 $24,378
DP Invest Kft ("DP") 100 and 50 1,981
ATI Depo Rt ("ATI") 100 and 50 1,268
Other 215 734
---------- --------
$ 40,585 $28,361
======= ======
</TABLE>
During 1997, Investor acquired a 50% interest in DP and ATI, which are
public warehousing facilities by contributing certain facilities and other
assets to DP and ATI. During 1998, Interag acquired the remaining 50% of
the outstanding shares of DP and ATI for $3.5 million and are now
consolidated within these financial statements. The acquisition was
accounted for by the purchase method, and the excess of the fair value of
the net assets acquired over the purchase price was allocated to reduce
the value of the fixed assets acquired.
F-14
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE E (CONTINUED)
Danubius. a publicly quoted company on the Budapest Stock Exchange, owns a
number of hotels in Hungary and specializes in spa facilities. In 1995,
Interag purchased a 17.3% interest in Danubius, and to date, has increased
its holding to approximately 29% at a total cost of approximately $19.5
million. During 1998, the Company purchased another 2.6% equity interest
for approximately $5 million and Israel Tractor purchased a 4.2% equity
interest for approximately $8 million.
At December 31, 1998, the quoted market value of the Company's effective
investment in Danubius was approximately $61.5 million.
The following is summarized financial information of Danubius (in
thousands) which was prepared in accordance with international accounting
standards. There were no significant differences between international
accounting standards and generally accepted accounting standards in the
United States.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
-------- ---------
<S> <C> <C>
Current assets $ 24,507 $ 30,767
Noncurrent assets 144,543 150,850
Current liabilities 18,018 19,440
Noncurrent liabilities 34,151 50,409
Stockholders' equity 116,881 111,768
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1998 1997
------- ---------
<S> <C> <C>
Sales $ 113,463 $111,633
Net income 16,700 15,173
Company's share of equity in earnings 4,343 4,053
</TABLE>
In connection with Danubius' acquisition of Hungar Hotels in 1997,
Danubius received as a capital contribution approximately $5 million in
accordance with the Hungarian Privitization Act of 1989. In addition,
Danubius received approximately $4 million of interest relating to the
contribution, which Danubius recorded as an extraordinary income in 1997.
In 1998, Danubius received legal advice that the interest received in 1997
should be paid to the previous owners of Hungar Hotels. As a result, the
Company adjusted its 1998 share of equity in earnings by approximately
$1.1 million after tax.
F-15
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - SHORT-TERM DEBT
The Company's short-term debt consists of notes payable to banks,
primarily Hungarian, Kenyan and English banks, with a weighted average
interest rate of approximately 14 % and 20% in 1998 and 1997,
respectively. Unused lines of credit totaled $19.8 million in 1998 and
$37.8 million in 1997. The debt is collateralized by inventory, buildings
and machinery. At December 31, 1998 and December 31, 1997, the Company had
restricted cash deposits of $367,000 and $211,000, respectively, as
compensating balances.
NOTE G - LONG-TERM DEBT
Long-term debt at December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Israeli bank debt of 203 million Japanese yen payable in 2000, interest
of LIBOR + 0.5%, Guaranteed by IIC $1,741 $1,556
Hungarian bank debt for the purchase of fixed assets,
which are held as security,
interest of LIBOR + 0.5% 1,388 1,220
Hungarian State Municipalities loan for the purchase
of eight properties; interest rate of 20% 37 120
Other 470 273
------ ------
3,636 3,169
Less current maturities 355 1,661
-------- -----
$3,281 $1,508
======= ======
The aggregate loan maturities are as follows: 1999 - $355,000; 2000 - $2,636,000; 2001 - $175,000; and
2002 - $470,000.
</TABLE>
F-16
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE H - OTHER
Deposits
CP made an application to be considered for a tender issued by the
Government of Israel. As required by the tender, Israel Tractor, on behalf
of CP, made a deposit of $2 million with the Accountant General. The
deposit is linked to the exchange rate of the US Dollar and bears interest
at the LIBOR rate less one and one-eighth percent. The date of repayment
has not yet been determined.
Due to related parties
At December 31, 1998, due to related parties consisted of a fee of
$270,000 payable to a supplier, which was channeled through CP (See
Related party transactions), fees of $2,077,000 payable to the Directors
of Israel Tractor, and $900,000 due to a shareholder of Balton.
At December 31, 1997, due to related parties consisted of a fee of $
1,272,000 payable to a supplier, which was channeled through CP (See
Related party transactions), management fees and expense reimbursements of
$440,000 payable to CP, and $450,000 due to a shareholder of Balton.
Due to affiliates
At December 31, 1998 and 1997, amounts due to affiliates consist of
management fees and expense reimbursements of $383,000 and $93,000,
respectively, payable to CP; management fees of $9,000 and $256,000 in
1998 and 1997, respectively, payable to CP affiliates; and a loan due to a
shareholder of Balton of $1,343,000. The loan has an interest rate of 1%
above the twelve-month LIBOR rate.
Related party transactions
Related party transactions include purchases and sales of goods, providing
management services and purchases and sales of agricultural commodities
among subsidiary companies. All significant intercompany transactions and
balances have been eliminated.
The Company incurred management fees and other expenses payable to CP in
the amount of $ 1.1 million during 1998 and 1997 and $1.2 million during
1996, net of expense reimbursements.
F-17
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE H (CONTINUED)
During 1998 and 1997, Israel Tractor purchased machinery and equipment,
which at the request of the supplier, was channeled through CP. For the
rendering of this service, CP received a fee of 2% of the purchases, or
approximately $287,000 and $292,000, respectively. The fee was used to
cover administration, financing, and dealings with the major supplier.
Gain on sale of noncurrent assets
During 1998, Investor sold non-operational fixed assets, which resulted in
a gain of approximately of $500,000.
During 1997 and 1996, Interag completed the sale of several parcels of
land to Shell es Interag. The sales resulted in gains of approximately
$1.8 million in 1997 and $1.5 million in 1996.
NOTE I - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company is a party to a number of lease agreements, the majority of
which involve buildings or office space and are cancelable by either party
with notice of up to one year. Rent expense was $724,000 in 1998, $207,000
in 1997 and $461,000 in 1996. There are no significant noncancelable lease
commitments.
Contingent Liabilities
The Company has given a guarantee to the bankers of Balton, amounting to
$2.1 million. The guarantee is in respect to various outstanding letters
of credit, given by the bankers of certain of Balton's creditors. Investor
and certain of its subsidiaries are potentially liable with respect to
certain guarantees of debt and other financial instruments of other
related and nonrelated companies to the extent of approximately $212,000.
Litigation
The Company is a party to litigation in the ordinary course of business.
None of this litigation is expected to have a material adverse effect on
the consolidated results of operations or financial position of the
Company.
F-18
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I (CONTINUED)
At the beginning of 1997, it became apparent that in 1996 the Managing
Director of Agrimill Rt. and two of his Deputies were involved in
irregular transactions that have caused material loss to the Company. The
nature of the irregular activities was such that certain transactions were
made between Agrimill Rt. and companies that were owned directly and
indirectly by the managers for their own personal benefit. The three
managers concerned have subsequently been relieved of all responsibilities
within the group. They repaid a sum of approximately $350,000 to Agrimill
Rt. Legal action is being pursued against these managers in order to
recover damages for the losses incurred. However, no assurances can be
made regarding future recoveries from the litigation at this time.
NOTE J - FINANCIAL INSTRUMENTS AND CONCENTRATION
OF CREDIT RISK
Substantially all of the Company's revenues are derived from foreign
operations. Most of the countries where the Company operates, such as
Hungary and several African countries, do not have freely convertible
currencies and their currencies have been subject to devaluations in
recent years. The Hungarian currency has undergone devaluations against
the U.S. dollar at a rate of 7 % in 1998 and 24% in 1997. Several of the
African countries have undergone major currency devaluations in recent
years. Even the Israeli shekel devalued 17.6% against the U.S. dollar in
1998, even though the devaluation was modest in recent years.
With respect to any African country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political
changes, government regulation, social instability or diplomatic
developments (including war) which could affect adversely the economies of
such countries or the value of the Company's investments in those
countries.
As a foreign owner of a Hungarian company, the Company is entitled to
receive its dividends or return of its capital in the original currency of
investment without restrictions. Dividends of Hungarian companies may be
paid only from retained earnings as determined in accordance with
Hungarian statutory accounting regulations. Such retained earnings are
different from the Company's retained earnings included in the Company's
consolidated financial statements, due to a number of differences in the
accounting standards used. The Company's policy is not to distribute any
earnings for any of its subsidiaries. These earnings are to be permanently
reinvested in the applicable subsidiaries.
F-19
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J (CONTINUED)
As part of its risk management activities, derivative financial
instruments are utilized by the Company to reduce foreign exchange risk
and price risk relating to its heavy equipment distribution business. The
Company does not hold or issue derivative financial instruments for
trading purposes. Israel Tractor enters into foreign currency forward
contracts and call option contracts to reduce the impact of fluctuations
of certain currencies against the U.S. dollar. Gains and losses resulting
from such transactions are reflected in the results of operations. These
contracts reduce exposure to currency movements resulting primarily from
nondollar-denominated trade receivables and the Israeli tax effects of
dollar-denominated trade purchases.
At December 31, 1998, Israel Tractor had foreign currency forward
contracts, with notional values of $2 million, to purchase and sell
Israeli shekels. All of the contracts matured in January 1999. Current
pricing models were used to estimate the fair values of foreign currency
forward contracts, and call options. At December 31, 1998, the fair market
value of the forward contracts was approximately $100,000. The
counterparties to these contracts are creditworthy multinational
commercial banks or other financial institutions, which are recognized
market makers.
Based on borrowing rates currently available to the Company for bank loans
with similar terms and maturities, the fair value of the Company's
short-term and long-term debt approximates the carrying value. The
carrying value of financial instruments potentially subject to valuation
risk except as noted above (principally consisting of cash, accounts
receivable and accounts payable) approximates fair market value due to the
short term nature of these items.
F-20
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K - INCOME TAXES
An analysis of the components of income tax expense is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Current income tax expense
Federal $ $ 23 $ 33
State 44 9 20
Foreign 2,301 1,930 3,704
------ ----- -----
2,345 1,962 3,757
Deferred income tax expense
Foreign (138) (443) 1,289
-------- ------ -----
Income tax expense $2,207 $1,519 $5,046
====== ===== =====
</TABLE>
The foreign portion of income before taxes was $7.4 million in 1998, $4.8
million in 1997 and $20.6 million in 1996.
Taxes on income of foreign consolidated subsidiaries and affiliates are
provided at the rates applicable to their respective foreign tax
jurisdictions.
F-21
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K (CONTINUED)
The deferred income tax balance sheet accounts result from temporary
differences between the amount of assets and liabilities recognized for
financial reporting and tax purposes. The components of the deferred
income tax assets and liabilities, which are included in current assets
and accrued expenses, are shown in the following table (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Deferred tax assets
Impairment of investments $ 26 $ 46 $ 111
Reserves for guarantees and loss contracts 200 241 535
Bad debt and inventory reserves 138 474 825
Net operating loss carryforwards 1,253 1,225 537
Vacation pay 327 338 385
Other 184 9 37
-------- --------- --------
2,128 2,333 2,430
Valuation allowance (1,130) (1,158) (834)
--------- --------- ---------
Deferred tax assets 998 1,175 1,596
Deferred tax liabilities
Deferred income on sales and services (1,114) (1,392) (2,207)
Other (37) (86)
-------- --------- ----------
Net deferred tax liabilities $ (116) $ (254) $ (697)
========= ========= ==========
</TABLE>
A valuation allowance has been established due to the uncertainty of
whether the Company will generate sufficient taxable earnings in Hungary
to fully realize the deferred tax asset.
F-22
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE K (CONTINUED)
Included in other liabilities and deferred credits at December 31, 1998
and 1997, are deferred tax credits of approximately $4.4 million which
represent the liability for taxes due upon repatriation of foreign
earnings of previous years prior to deregistration as an investment
company.
The Company has available for income tax purposes net operating losses
aggregating approximately $1.8 million expiring in the years ending 1999
to 2002.
A reconciliation of the difference between the Company's consolidated
effective income tax and the tax at the Federal statutory rate is shown in
the following table (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
<S> <C> <C> <C>
Income tax at U.S. Federal statutory rate $2,580 $2,481 $7,263
Effect of different foreign tax rates (690) (549) (942)
State and local tax, net of Federal effect 29 6 13
Change in valuation allowance 268 324
Dividends received exclusion (Hungary) (784)
Nondeductible losses of subsidiaries 147 110
Currency exchange 894 175 (716)
Equity in earnings of affiliate (851) (785)
Miscellaneous items (23) (280) 102
-------- ------ ------
Income tax expense $ 2,207 $1,519 $5,046
====== ===== =====
</TABLE>
No provision has been made for U.S. or additional foreign taxes on the
current undistributed earnings of foreign subsidiaries because such
earnings are expected to be reinvested indefinitely in the subsidiaries'
operations. It is not practicable to estimate the amount of additional tax
that might be payable on these foreign earnings in the event of
distribution or sale; however, under existing law, foreign tax credits
would be available to reduce U.S. taxes payable.
F-23
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L - INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company's operations have been classified into five business segments:
Sale and distribution of motor vehicles, export and import of agricultural
products, distribution of tractors and heavy equipment, trading of
agricultural, communications and electrical equipment and other
industries, which includes wholesale and retail consumer and corporate
expenses.
More specifically, the motor vehicle segment is engaged as a dealer for
Suzuki, Peugeot, and Daewoo motor cars. The agricultural products segment
is primarily engaged in flour milling and animal feed manufacture and
distribution. The tractors and heavy equipment segment distributes
tractors, generators and various accessories for Caterpillar, Inc.,
trucks, forklifts and spare parts for International, tools for Ingersoll
Rand and Bobcat-Melro tractors. The agricultural, communications and
electrical equipment segment trades agri-chemicals, radio communications
for Motorola, air conditioning and electrical equipment.
The Company's subsidiary Israel Tractor, which distributes tractors and
heavy equipment has obtained the franchises to sell machines and spare
parts manufactured by four suppliers, which represent a significant
portion of Israel Tractor's revenues. According to the terms of the
agreements, the franchises may be terminated by an advance notice of 60 -
90 days, in accordance with the usual practice with other companies.
Operating income (loss) for each segment includes gross profit less
selling, general and administrative expenses. Identifiable assets for each
segment include all assets of the businesses in the related segments,
except for investments in affiliated companies which are not part of the
relevant segments. The reportable segments are distinct business
units operating in different industries. They are separately managed, with
separate marketing and distribution systems. The following information
about the five segments is for the years ended December 31, 1998, 1997 and
1996 (in thousands).
F-24
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
Agricul-
tural,
Export commu-
and Tractors nications,
import of and and Other
agricul- heavy electrical industries
Motor tural equip- equip- including Elimi- Consoli-
1998 vehicles products ment ment Corporate Nations dated
- ---- -------- -------- ---------- ---------- --------- -----------------------
------------------------------------(amounts in thousands)-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Sales to
unaffiliated
customers $13,752 $59,954 $57,823 $68,020 $ 4,161 $203,710
Operating income
(loss) 72 292 717 6,419 (2,392) 5,108
Interest income 24 293 1,176 43 498 $(781) 1,253
Interest expense 1 1,221 192 1,178 965 (781) 2,776
Depreciation and
Amortization 90 908 1,115 705 635 3,453
Equity in earnings of 4,361 4,361
affiliates
Capital expendi- 39 331 783 2,176 1,763 5,092
tures
Identifiable assets 3,586 18,846 51,237 45,513 7,071 126,253
Net worth 2,435 13,781 47,922 13,725 10,570 88,433
</TABLE>
F-25
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
Agricul-
tural,
Export commu-
and Tractors nications,
import of And and Other
agricul- heavy electrical industries
Motor tural equip- equip- including Elimi- Consoli-
1997 vehicles products Ment ment Corporate nations dated
- ---- -------- -------- ---------- ---------- --------- ------- ---------
---------------------------------------(amounts in thousands)---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Sales to
unaffiliated
customers $11,851 $107,169 $67,754 $50,980 $ 1,863 $239,617
Operating income
(loss) (49) (534) 2,302 4,382 (2,174) 3,927
Interest income 18 555 1,426 187 754 (754) 2,186
Interest expense 21 3,683 127 832 844 (754) 4,753
Depreciation and 103 1,349 1,118 506 546 3,622
Amortization
Equity in earnings of 4,156 4,156
affiliates
Capital expendi- 252 446 1,252 2,866 448 5,264
Tures
Identifiable assets 3,441 42,091 50,387 41,321 10,441 147,681
Net worth 2,489 15,407 48,227 12,185 8,837 87,145
</TABLE>
F-26
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
Agricul-
Export tural,
and Tractors commu-
import of and And Other
agricul- heavy electrical industries
Motor tural equip- equip- including Elimi- Consoli-
1996 vehicles products ment ment Corporate nations dated
- ---- -------- -------- ---------- ---------- --------- ------- -----------
--------------------------------------(amounts in thousands)-------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Sales to
unaffiliated
customers $12,004 $121,631 $81,824 $57,276 $ 3,085 $275,820
Operating income
(loss) (214) 2,352 6,613 9,599 (2,206) 16,144
Interest income 34 1,214 566 371 666 (566) 2,285
Interest expense 15 3,393 210 482 4,100
Depreciation and 119 1,371 959 384 495 3,328
amortization
Equity in earnings of
affiliates
Capital expendi- 402 2,930 3,037 1,357 2,910 10,636
tures
Identifiable assets 3,971 64,518 50,178 42,471 15,893 177,031
Net worth 3,106 22,336 46,586 11,011 4,991 88,030
</TABLE>
F-27
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L (CONTINUED)
The Company has three principal areas of operation with respect to its
subsidiaries: Investor and its subsidiaries in Hungary; Israel Tractor in
Israel; and Balton and its subsidiaries in Nigeria, Ghana, Zambia,
Tanzania, Uganda, Kenya and Cote D'Ivoire.
<TABLE>
<CAPTION>
England Elimi- Consoli-
1998 Hungary Israel Africa and other Nations dated
- ---- ------- ------ ------ --------- ------- -------
---------------------------------------(amounts in thousands)---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Sales to unaffiliated
customers $77,867 $57,823 $45,019 $23,001 $203,710
Transfers between
geographic areas 23,001 (23,001)
---------- ---------- -------- --------- ----------
$77,867 $57,823 $68,020 $ $203,710
========== ========== ======= ========= ========
Operating income (loss) $(1,472) $717 $6,419 $ (556) $5,108
Interest income 358 1,176 15 485 (781) 1,253
Interest expense 1,491 192 752 1,122 (781) 2,776
Depreciation and 1,633 1,115 649 56 3,453
amortization
Equity in earnings of affiliates 4,361 4,361
Capital expenditures 2,133 783 2,121 55 5,092
Identifiable assets 33,785 51,237 36,900 4,331 126,253
Net worth 29,377 47,922 4,208 6,926 88,433
</TABLE>
F-28
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
Adjust-
ments
and
England elimi- Consoli-
1997 Hungary Israel Africa and other nations dated
- ---- ------- ------ ------ --------- ------- -------
----------------------------------------(amounts in thousands)---------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
Sales to unaffiliated
customers $120,883 $67,754 $19,531 $ 31,449 $ 239,617
Transfers between 31,449 (31,449)
------------- ------------ ------- ------------ ----------
geographic areas
$120,883 $67,754 $50,980 $ - 239,617
============= ============ ======= ============= ==========
Operating income (loss) $ (2,306) $ 2,302 $ 4,382 $ (451) $ 3,927
Interest income 760 1,426 17 737 (754) 2,186
Interest expense 3,889 127 573 918 (754) 4,753
Depreciation and
amortization 1,998 1,118 454 52 3,622
Equity in earnings of
affiliates 4,156 4,156
Capital expenditures 1,146 1,252 2,866 5,264
Identifiable assets 46,277 50,387 16,556 34,461 147,681
Net worth 28,665 48,227 4,606 5,647 87,145
</TABLE>
F-29
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
Adjust-
ments
and
England elimi- Consoli-
1996 Hungary Israel Africa and other nations dated
- ---- ------- ------ ------ --------- ------- -------
--------------------------------------(amounts in thousands)-----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Sales to unaffiliated
Customers $136,720 $81,824 $23,051 $ 34,225 $ 275,820
Transfers between 34,225 (34,225)
geographic areas --------- ------- ------- ----------- ---------
$136,720 $81,824 $57,276 $ - $ 275,820
======== ======= ======= =========== =========
Operating income (loss) $ 357 $ 6,613 $ 9,174 $ 16,144
Interest income 1,478 566 14 793 (566) 2,285
Interest expense 3,485 210 128 277 4,100
Depreciation and 1,985 959 288 96 3,328
Amortization
Equity in earnings of affiliates 4,192 59 (21) 4,230
Capital expenditures 6,242 3,037 1,357 10,636
Identifiable assets 75,690 50,178 12,445 38,718 177,031
Net worth 33,456 46,586 4,184 3,804 88,030
</TABLE>
F-30
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
December 31 September 30 June 30 March 31
------------- ------------ --------- ---------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Fiscal 1998 quarters ended:
Net sales $48,896 $42,311 $55,774 $56,729
Gross profit 14,326 10,973 12,736 10,616
Income (loss) before income taxes and (752) 4,211 3,250 (439)
minority interest
Net (loss) income (1,204) 3,576 2,108 (851)
Net (loss) income per share $ (0.21) $ 0.63 $ 0.37 $(0.15)
======== ====== ======= =======
Fiscal 1997 quarters ended:
Net sales $61,035 $58,161 $59,980 $60,441
Gross profit 11,678 12,102 12,521 12,087
Income before income taxes and (965) 3,114 2,870 786
Minority interest
Net (loss) income (754) 3,493 2,337 297
Net (loss) income per share $(0.13) $0.61 $0.41 $0.05
====== ===== ===== =====
Fiscal 1996 quarters ended:
Net sales $78,849 $69,761 $67,712 $59,498
Gross profit 17,262 17,835 16,172 13,958
Income before income taxes and 4,557 5,836 7,721 2,578
minority interest
Net income 2,935 3,644 4,378 1,754
Net income per share $0.51 $0.64 $0.77 $0.31
===== ===== ===== =====
</TABLE>
During the fourth quarter of 1997, Investor incurred inventory write-downs
of approximately $1.5 million, respectively, as a result of decreases in
the market value of soya, wheat and other commodities.
F-31
<PAGE>
IIC Industries, Inc. and Subsidiaries
SCHEDULE II - VALUATION ALLOWANCE ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
(amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- --------------------------------------- --------
Balance at Charged to Deduction - Deduction - Balance at
beginning costs and foreign currency credit to end of
Description of year expenses translation reversal year
----------- ---------- --------- ----------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
1998
Doubtful accounts $3,043 $317 $(47) $(290) $ 3,023
Inventory reserves 1,728 543 (71) (1,373) 827
Investments 2,950 13 (151) (2,078) 734
Loan provisions 327 2 (20) 309
Customer credits and discounts 349 113 462
Warranty 395 (48) 347
---------- --------- ----------------- --------------- ----------
$ 8,792 $ 988 $ (289) $ (3,789) $ 5,702
========== ========= ================= ===============- ==========-
1997
Doubtful accounts $ 3,358 $ 260 $ (370) $ (205) $ 3,043
Inventory reserves 4,000 (2,272) 1,728
Investments 2,722 882 (54) (600) 2,950
Loan provisions 422 (95) 327
Customer credits and discounts 340 9 349
Warranty 479 (84) 395
---------- --------- ----------------- --------------- ----------
$11,321 $1,151 $ (424) $(3,256) $ 8,792
========== ========= ================= ===============- ==========-
1996
Doubtful accounts $ 3,058 $1,048 $ (265) $ (483) $ 3,358
Inventory reserves 744 3,866 (394) (216) 4,000
Investments 3,847 (617) (508) 2,722
Loan provisions 2,895 (148) (2,325) 422
Customer credits and discounts 378 (38) 340
Warranty 456 34 (7) (4) 479
---------- --------- ----------------- --------------- ----------
$11,378 $4,948 $ (1,431) $(3,574) $11,321
========== ========= ================= ===============- ==========-
</TABLE>
F-32
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1998
with Report of Independent Auditors
33
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Directors
Danubius Hotel and Spa Rt.
We have audited the accompanying consolidated balance sheet of Danubius Hotel
and Spa Rt. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year 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 audit.
We conducted our audit in accordance with International Standards on Auditing.
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, the financial statements give a true and fair view of the
consolidated financial position of Danubius Hotel and Spa Rt. and Subsidiaries
at December 31, 1998, and of the consolidated results of their operations and
their cash flows for the year then ended in accordance with International
Accounting Standards.
Ernst & Young
Budapest, Hungary
March 12, 1999.
34
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All amounts in HUF 000,000's)
<TABLE>
<CAPTION>
At December 31,
Notes 1998 1997
---------- -------------------- --------------------
<S> <C> <C> <C>
ASSETS
Cash and bank 4 1,448 3,204
Accounts receivable 5 2,043 1,611
Inventory 6 304 357
Other current assets 7 1,572 1,126
-------------------- --------------------
Total current assets 5,367 6,298
Property, plant and equipment 8 31,393 30,676
Other non-current assets 9 262 203
-------------------- --------------------
Total non-current assets 31,655 30,879
==================== ====================
Total assets 37,022 37,177
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable 1,149 934
Advance payments from guests 95 64
Other payable and accruals 10 1,356 1,264
Current portion of long-term debt 11 1,346 1,718
-------------------- --------------------
Total current liabilities 3,946 3,980
Long-term debt 11 4,613 7,204
Negative goodwill 12 2,866 3,023
-------------------- --------------------
Total long term liabilities 7,479 10,227
-------------------- --------------------
Total liabilities 11,425 14,207
Minority interest 13 72 91
Shareholders' Equity:
Share capital 15 8,000 8,000
Capital reserve 8,010 7,329
Treasury shares (819)
Retained earnings 10,334 7,550
-------------------- --------------------
Total shareholders' equity 25,525 22,879
==================== ====================
Total liabilities and shareholders' equity 37,022 37,177
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(All amounts in HUF 000,000's)
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1998 1997
--------- ------------------- ----------------------
<S> <C> <C> <C>
Net sales 24,508 20,224
Cost of sales 12,629) (10,675)
------------------- ----------------------
Gross profit 11,879 9,549
Selling, general and administration (7,134) (6,259)
Amortisation of negative goodwill 12 166 124
------------------- ----------------------
Operating income 4,911 3,414
Other income (expense):
Interest income 398 406
Gain on securities 230 370
Interest expense (384) (432)
Foreign exchange loss on loans (901) (828)
Other income (expense) net (70) 22
------------------- ----------------------
Total other income (expense) (727) (462)
------------------- ----------------------
Income before minority interest and income taxes 4,184 2,952
Minority interest 13 (2) (241)
------------------- ----------------------
Income before income taxes 4,182 2,711
Corporate income tax expense 14 (717) (473)
Extraordinary income net of income tax 16 -- 681
------------------- ----------------------
Net income 3,465 2,919
=================== ======================
Earnings per Share (expressed in HUF per share):
Basic 433 365
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(All amounts in HUF 000,000's)
<TABLE>
<CAPTION>
Share Capital Treasury Retained
Note Capital Reserve Shares Earnings Total
------- ----------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997 8,000 6,253 -- 4,631 18,884
Net Income 2,919 2,919
Capital 16 1,076 1,076
Contribution
----------- -------------- -------------- ------------- ---------------
December 31, 1997 8,000 7,329 -- 7,550 22,879
Transfer re: Capital Contribution 16 681 (681) --
Net Income 3,465 3,465
Purchase of treasury shares (819) (819)
----------- -------------- -------------- ------------- ---------------
December 31, 1998 8,000 8,010 (819) 10,334 25,525
=========== ============== ============== ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(All amounts in HUF 000,000's)
<TABLE>
<CAPTION>
Year ended December 31,
Note 1998 1997
--------- ------------------ -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income before extraordinary income 3,465 2,238
Adjustments for:
Depreciation and amortisation 1,450 1,122
Unrealised foreign exchange loss on loans 949 762
Provision for write down of investments -- 36
Gain on sale of fixed assets (8) (2)
Minority interest in income 2 241
Changes in assets and liabilities:
Accounts receivable and other current assets (367) 116
Inventory 52 12
Accounts payable and accruals 816 482
------------------ -------------------
Cash generated from operations 6,359 5,007
Interest paid (478) (344)
Corporate income tax paid (950) (823)
------------------ -------------------
Cash flow before extraordinary item 4,931 3,840
Capital contribution 16 -- 446
------------------ -------------------
Net cash flow provided by operations 4,931 4,286
------------------ -------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,346) (1,813)
Cash acquired on purchase of Hungar Hotels -- 533
Cash paid on acquisition of subsidiaries (13) (8,033)
Interest received 439 397
Proceeds from disposal of investment 34 --
Cash outflow from other non-current assets (93) (70)
Proceeds on sale of property, plant and equipment 23 24
------------------ -------------------
Net cash flow provided by (used in) investing (1,956) (8,962)
------------------ -------------------
Cash flows from financing activities:
Net increase / (repayment) of long-term debt (3,912) 3,763
Purchase of treasury shares (819) --
Capital contribution 16 -- 811
------------------ -------------------
Net cash flow provided by / (used in) financing (4,731) 4,574
------------------ -------------------
Decrease in cash (1,756) (102)
Cash at beginning of year 3,204 3,306
------------------ -------------------
Cash at end of year 1,448 3,204
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
1. GENERAL
Danubius Hotel and Spa Rt. ("Danubius" or "the Company") is a company
limited by shares incorporated under the laws of the Republic of
Hungary. The Company and its subsidiaries (the "Group") provide
hospitality services in Hungary, with an emphasis on 4 and 5 star spa
and city hotels.
Danubius operated as a self-administered State enterprise (Danubius
Hotel and Spa Company) controlled by an Enterprise Council until July
31, 1991. Effective July 31, 1991, Danubius was transformed into a
company limited by shares and ownership was passed to the State Property
Agency ("SPA"). In November 1992, a portion of Danubius' outstanding
shares was publicly sold and such shares were listed for trading on the
Budapest Stock Exchange.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING CONVENTION
Danubius Hotel and Spa Rt. and its subsidiaries maintain their official
accounting records and prepare their financial statements for domestic
purposes in accordance with the accounting regulations of Hungary. The
accompanying financial statements have been prepared in accordance with
International Accounting Standards and, as a consequence, reflect
adjustments not recorded in the Hungarian statutory records.
The accompanying financial statements are prepared under the historical
cost convention. In connection with the transformation of the state
enterprise into a limited liability company at July 31, 1991 the Company
valued certain non-current assets to their estimated market values based
on independent valuations. These amounts became the accounting and tax
bases.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements
of Danubius Hotel and Spa Rt. and its significant subsidiaries after
elimination of all material inter-company transactions and balances.
39
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
BASIS OF CONSOLIDATION (CONTINUED)
The Company's principal subsidiary undertakings at December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Proportion of
Country Shares Held at
Name Principal Activity of Incorporation 31 December
---- ------------------ ---------------- -----------
1998 1997
---- ----
<S> <C> <C> <C> <C>
Hungaria Szalloda Rt. Hotel/Restaurant Hungary 99.9% 99%
operator
Hotel Helia Rt. Hotel/Restaurant Hungary 100% 99%
operator
Hotel Hullam Kozos Hotel/Restaurant Hungary 53% 53%
Vallalat operator
Danubius Beta Hotel/Restaurant Hungary 100% 100%
Hotels Kft. operator
Hotelreservierung und Hotel Reservation Germany 100% 100%
Reiseservice fur operator
Ungarn GmbH
</TABLE>
CASH AND CASH EQUIVALENTS
Cash equivalents are liquid investments with original maturities of
three months or less.
40
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
PROPERTY, PLANT AND EQUIPMENT
Depreciation
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method.
The rates used by the Company are 2.5% for buildings, 2.5% to 6% for
building and leasehold improvements and 14.5% to 33% for machinery and
equipment.
Where the Group has the legal right to use a certain property the value
of these rights is amortised over either the term in which the Group
holds the rights, or six years where this term is undefined except for
land handling rights on Margaret Island which are being amortised over
100 years.
Refurbishment
Significant refurbishment costs are capitalised and depreciated in
accordance with the policy for buildings.
Management have been unable to identify the cost of assets replaced
during refurbishment projects as the cost is included in the hotel
valuation performed in 1991. The written down cost of these assets has
not been removed from the fixed asset register. These fixed assets were
mainly purchased prior to transformation into a company limited by
shares and are carried at July 31, 1991 valuation. These replaced assets
will continue to be depreciated in accordance with Company policy.
The expected period of major refurbishments is 20 years.
INVESTMENTS
Investments in which the Company has greater than 20% ownership but less
than 50% (associated companies) are accounted for under the equity
method. Other investments are carried at cost, less provision for any
permanent diminution in value.
GOODWILL
Negative goodwill arising on acquisition of subsidiaries is shown as
deferred income and amortised over 20 years on a straight line basis.
41
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
INCOME TAXES
Tax on the profit or loss for the year comprises current tax and the
change in deferred tax. The Company adopted IAS 12 (revised) "Income
Taxes" effective January 1, 1998. Deferred tax is provided using the
balance sheet liability method on all temporary differences between the
carrying amounts for financial reporting purposes. Currently enacted tax
rates are used to determine deferred income tax. The Group provides
valuation allowances for temporary differences which will not be
recovered in the foreseeable future.
FOREIGN CURRENCY TRANSLATION
Transactions arising in foreign currency are translated into Forints at
the rate of exchange prevailing at the date of the transaction. Assets
and liabilities denominated in foreign currencies at the balance sheet
date are translated into Forints at the year end rates of exchange set
by the National Bank of Hungary. The resulting foreign currency exchange
gains and losses are recognised in the statement of income.
REVENUE RECOGNITION
Revenue is recognised on the basis of completed guest nights net of VAT.
PENSION SCHEMES
The Company operates a defined contribution pension scheme for
employees. Pension costs are charged against profit in the period in
which the contributions are payable. The assets of the fund are held in
a separate trustee administered fund.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments approximate fair values due
to either the short term duration or the proximity of interest rates of
the various instruments to market rates.
3. RECLASSIFICATION OF PRIOR YEAR
Certain amounts in the 1997 financial statements have been reclassified
to conform with the 1998 presentation.
42
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
4. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Cash in hand and at bank 1,341 3,149
Marketable securities 107 55
=================== ===================
1,448 3,204
=================== ===================
</TABLE>
The maturity period of the marketable securities is three months or less.
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Trade receivables 1,022 977
Receivable from non-consolidated subsidiaries 55 279
Prepayments and accrued income 536 389
Income taxes recoverable 243 29
Other receivable 299 291
Provision for doubtful receivables (112) (354)
=================== ===================
2,043 1,611
=================== ===================
</TABLE>
6. INVENTORY
<TABLE>
<CAPTION>
1998 1997
------------------- --------------------
<S> <C> <C>
Food and beverages 194 201
Materials 110 156
=================== ====================
304 357
=================== ====================
</TABLE>
7. OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
<S> <C> <C>
Short-term state securities 872 1,126
Other short-term securities 700 --
==================== ===================
1,572 1,126
==================== ===================
</TABLE>
43
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
8. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Furniture,
Buildings and Fittings and Capital
Improvements Equipment projects in
Land progress Total
------------- ---------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Cost/Valuation:
January 1, 1998 4,893 25,640 4,015 407 34,955
Additions 2 850 1,194 1,911 3,957
Cost of disposals (26) (76) (357) (1,532) (1,991)
------------- ---------------- -------------- --------------- -----------
December 31, 1998 4,869 26,414 4,852 786 36,921
============= ================ ============== =============== ===========
Depreciation:
January 1, 1998 -- 1,931 2,348 -- 4,279
Charge for year -- 834 781 -- 1,615
Relating to disposals -- (40) (326) -- (366)
------------- ---------------- -------------- --------------- -----------
December 31, 1998 -- 2,725 2,803 -- 5,528
============= ================ ============== =============== ===========
Net book value:
December 31, 1997 4,893 23,709 1,667 407 30,676
============= ================ ============== =============== ===========
December 31, 1998 4,869 23,689 2,049 786 31,393
============= ================ ============== =============== ===========
</TABLE>
The values of land and buildings occupied by the Company were determined
with reference to a professional appraisal at April 30, 1991, on an open
market existing use basis. Land and Buildings occupied by subsidiary
companies are shown at cost except for Hungar Hotels where land and
buildings are revalued by an independent valuer at January 1, 1997.
Effective August 1, 1991, ownership of land and buildings was passed to
Danubius, except for the land on which the Margaret Island hotels are
located. This land is not subject to "handling rights" or private
ownership. The operation of the two hotels on Margaret Island is
authorised by license from the XIII. Municipality of Budapest. Included
in buildings there is HUF 538 million relating to the usage right of
real estate on Margaret Island.
44
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
9. OTHER NON-CURRENT ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
Investment in non consolidated subsidiaries 145 137
Loans given to employees 76 24
Other investments, unquoted 41 42
==================== ====================
262 203
==================== ====================
</TABLE>
The book value of the non-consolidated subsidiaries are:
<TABLE>
<CAPTION>
Name Principal activity 1998 1997
------------------- --------------------
<S> <C> <C> <C>
% %
Kastelykert Kft. Hotel 43 100 43 100
Solar Kemping Hotel 19 100 19 100
Hungaria Hotel und Reisen GmbH
(Hannover) Travel agency 3 100 3 100
Hungaria Hotel und Restaurant Hotel and
GmbH (Munich) Catering -- -- -- 60
Egeszseg-Szepseg Kft. Health club -- -- 34 100
Danube Travel Travel agency 77 100 38 50
Marcali Szalloda Hotel 1 50 -- --
Hotel Kastely Hotel 2 50 -- --
========== ==========
145 137
========== ==========
</TABLE>
The above subsidiaries are immaterial to the Group and accordingly have
not been consolidated.
EGESZSEG-SZEPSEG KFT.
Egeszseg-Szepseg Kft. was liquidated on October 5, 1998. Proceeds from
the liquidation was HUF 34 million.
HUNGARIA HOTEL UND RESTAURANT GMBH (MUNICH)
On April 1, 1995, Hungar Hotels decided to close the operations of its
Munich subsidiary, Hungaria Hotel und Restaurant GmbH. The company had
made payments under a guarantee of HUF 250 million. The subsidiary's
final liquidation was recorded by the Court of Registration in Germany
in 1998.
DANUBE TRAVEL
On October 7, 1997, the Company entered into an agreement to acquire
Danube Travel, a
45
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
travel agency incorporated in London for GBP 230,000 and also to
provide a GBP 150,000 loan to Danube Travel. The purchase price was
fully paid by the end of 1998. The loan from Danube Travel is included
in receivables.
10. OTHER PAYABLE AND ACCRUALS
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
Payroll 308 200
Social security 235 192
Taxes payable 340 248
Provisions 45 90
Accrued expense 234 320
Other payable 194 214
==================== ====================
1,356 1,264
==================== ====================
</TABLE>
11. LONG TERM DEBT
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
1 year 1,346 1,718
1 to 2 years 1,632 1,437
2 to 5 years 2,961 5,446
over 5 years 20 321
-------------------- --------------------
Total long term debt 5,959 8,922
Amounts maturing in less
than one year (1,346) (1,718)
==================== ====================
4,613 7,204
==================== ====================
</TABLE>
Outstanding loans include the following:
o DEM 25 million long term loan with an interest rate of 6-month LIBOR
+ a margin of 0.75% to 0.95%, secured by mortgages on Thermal Hotel
Buk and Thermal Hotel Sarvar.
o DEM 10 million long term loan with an interest rate of 3-month
LIBOR + 0.95% secured by a mortgage on the Budapest Hilton Hotel.
o DEM 10.3 million long term loan with an interest rate of 6-month
LIBOR + 1.25% secured by a mortgage on the Hotel Helia.
46
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
12. NEGATIVE GOODWILL
Negative goodwill arisen on the following acquisitions:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
Hungar Hotels 2,993 2,993
Hotel Helia 154 154
Amortisation of negative goodwill (281) (124)
==================== ====================
2,866 3,023
==================== ====================
</TABLE>
The negative goodwill is being amortised over a period of 20 years by
reference to the estimated average useful life of the assets underlying
the negative goodwill. In 1998, HUF 9 million of negative goodwill (net)
arose on the additional purchases of Helia and Hungar Hotels. The entire
amount was brought into income in 1998.
13. MINORITY INTEREST
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
Hungar Hotels 8 27
Hotel Helia -- 1
Hullam Kft. 64 63
==================== ====================
72 91
==================== ====================
</TABLE>
Minority interest represents the minority shareholders' proportionate
share of the equity of subsidiaries.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
Opening balance 91 625
Minority interest relating to subsidiary acquired during
the year -- 1,753
Income attributable to minority shareholders 2 241
Share in subsidiary acquired from minority shareholders
(21) (2,528)
==================== ====================
72 91
==================== ====================
</TABLE>
47
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
14. INCOME TAXES
The effective income tax rate varied from the statutory income tax rate
due to the following items:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Income before tax and minority interest 4,184 2,952
=================== ===================
Tax at statutory rate of 18% 753 531
Effect of IAS adjustments (12) (58)
Other differences, net --
(24)
=================== ===================
Income tax expense
717 473
=================== ===================
</TABLE>
The major cumulative temporary differences, which will give rise to a
future tax benefit less a valuation allowance for those differences
which are not expected to reverse in the near future, are stated below.
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Provision 203 374
Depreciation 662 613
----------------- ----------------
Total temporary Differences 865 987
Less: valuation allowance (865) (987)
================= ================
Total temporary differences with a future tax benefit -- --
================= ================
</TABLE>
48
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
15. SHARE CAPITAL
Registered share capital at December 31, 1998 consists of 8 million
(1997: 8 million) authorised and issued ordinary shares, each of par
value HUF 1,000.
The share capital of Danubius was issued effective with the
transformation of Danubius Hotel and Spa Company into a company limited
by shares on July 31, 1991. The transformation of share capital has been
accounted for as a transfer of the Accumulated Funds balance and
Revaluation Reserve at December 31, 1990 into Share Capital and Capital
Reserve accounts.
Under the terms of Danubius' Articles of Association, the Company may
also issue shares to employees from time to time as part of the
Company's compensation arrangements.
During the year, Danubius repurchased 230,898 of its own shares for HUF
819 million. These shares are shown as a component of shareholders'
equity. The Hungarian Companies acts requires these shares to be sold
within one year from the date of purchase. The unrealised gain on these
shares at December 31, 1998 was HUF 232 million.
16. CAPITAL CONTRIBUTION
In accordance with the Hungarian Privatisation Act of 1989 which allows
20% of the proceeds of certain shares sold by APV Rt. to be paid to the
Company as a capital contribution the Company received HUF 1,076 million
in 1997. The Company became entitled to the contribution based on
agreements made with APV Rt. in 1997 relating to shares sold in 1992,
1993 and 1994. The Company is required to issue shares to the employees
from this amount.
In addition to the capital contribution the Company received HUF 831
million (HUF 681 million net of tax) late payment interest determined by
reference to the date of the shares sold by APV Rt. During the year, the
Company received legal advice that the late payment interest received
during 1997 must be included in the employee share issue. Consequently,
in 1998 the HUF 681 million after tax late payment interest has been
transferred to the capital reserve. In the prior year financial
statements this item was recorded as extraordinary income net of tax.
Of the total amount of HUF 1,907 million, HUF 1,407 was received after
deducting HUF 500 million owed to APV Rt., as more fully described in
note 20.
49
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
17. COMMITMENTS
a) The acquisition of Hungar Hotels required HUF 2 billion to be spent
on refurbishment of that hotel chain over a three a year period.
(See note 20.) Total spending to satisfy this commitment to the end
of 1998 was HUF 1,893 million (1997: HUF 822 million). The amount to
be committed in 1999 has not yet been approved by is expected to be
around HUF 1,000 million.
b) The Group has also made commitments to spend HUF 289 million (1997:
HUF 45 million) on refurbishment and renovations of the remaining
hotel buildings and facilities during 1999.
c) In 1998, the Company decided to implement the Oracle enterprise
system to improve management information systems. By the end of
1998, HUF 197 million had been spent with respect to the
implementation of this new system. Commitments to spend an
additional HUF 305 million in 1999 remain.
18. CONTINGENT LIABILITY
In 1997, the Company was reviewed by the tax and the social security
authority. The authorities claimed net HUF 76 million tax and social
security including penalties (and including HUF 17 million VAT may be
recovered). The Company has challenged the findings of the review and in
1997 raised a provision of HUF 24 million. There was no change in the
status of this issue in 1998.
19. RELATED PARTY TRANSACTIONS
During 1998, HUF 81 million (1997: HUF 61 million) was paid for
management services and HUF 130 million (1997: HUF 55 million) in rental
fees to the Investor group (the ultimate parent company of Danubius in
Hungary).
50
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
20. ACQUISITION OF HUNGAR HOTELS
On January 6, 1997, the Company acquired from APV Rt. 85% of the shares
of Hungaria Szalloda Rt. ("Hungar Hotels"), a company incorporated under
the laws of Hungary and operating in the hotel industry, with a
commitment to purchase the remaining 15% of the shares if they are not
acquired by employees of Hungar Hotels within 300 days. The shares
acquired have a nominal value of HUF 4.7 billion.
Under the purchase agreement, the significant undertakings of the
Company were as follows:
o 50% of the shares must be offered to the public on the Budapest Stock
Exchange within one year of the closing date; and
o within three years of the closing date, a minimum of HUF 2 billion
including 100% of the 1996 profit must be spent on refurbishment on
hotels owned by Hungar Hotels.
On October 4, 1997 the Company agreed, as part of a complex agreement
with the APV Rt., to amend the contract such that there is no longer an
obligation for a public offering of 50% of the acquired shares. A
purchase price differential of HUF 500 million was paid by the Company
in respect of this. The agreement also included a property swap between
APV Rt. and Hungar Hotels, the implementation of which was deferred into
1998.
The acquisition was made as follows:
<TABLE>
<CAPTION>
HUF 000,000
--------------------
<S> <C>
Cost of investment
Cash and tender bonds 7,000
Compensation coupons 572
Tax on gain on compensation coupons 190
Acquisition costs incurred 91
--------------------
Total purchase price 7,853
Less: book value of net assets acquired 11,726
Fair value adjustments (41)
Plus: minority interest therein 1,753
--------------------
Negative goodwill 2,079
====================
</TABLE>
The redemption value of the compensation coupons as per the purchase
contract was HUF 1,625 million. These were purchased by the Company on
the open market at a cost of HUF 572 million. The difference between the
redemption value and the purchase cost of HUF
51
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
1,053 million was subject to corporation tax at the statutory rate of
18%. The tax on the gain on compensation coupons has been included as
part of the cost of investment.
ACQUISITION OF HUNGAR HOTELS (CONTINUED)
On September 24, 1997 the Company acquired further 14.78% of the shares
from the employee consortium. The cost of investment was HUF 813 million
which resulted in an additional HUF 914 million negative goodwill.
21. SUMMARY FINANCIAL INFORMATION OF ACQUISITIONS
Summary financial information for significant subsidiaries acquired
during 1997:
<TABLE>
<CAPTION>
Acquisition Balance sheet Hungar Hotels
<S> <C>
Total Current Assets 1,500
Total Fixed Assets 11,053
Total Liabilities (827)
-------------------
Net Assets 11,726
===================
Income Statement
Included from - January 1,
Net Sales 8,209
Pro forma Operating profit 1,162
Net profit 1,074
</TABLE>
22. RETAINED EARNINGS
Dividends are only available for payment from retained earnings
calculated according to the Hungarian Accounting Law. The following
retained earnings are available for payment of dividends:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------------- -------------------
<S> <C> <C>
Hungarian Accounting Law retained earnings 11,479 8,072
=================== ===================
</TABLE>
52
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
If dividends are paid to non-resident shareholders, a withholding tax
of up to 20% must be paid. The rate of tax payable is dependent on the
residency of the shareholder which may reduce this rate of tax.
23. LEGAL MATTERS
Prior to May 1995 Hotel Gellert was managed by the Company based on a
verbal agreement with APV Rt. as the ownership right of the hotel was
not clear. On May 15, 1995 the court decided that the ownership right of
the hotel was due to the Company. As the result of that the Company paid
HUF 1,419 million to APV Rt. The Land Registration Office was unable to
complete the registration of the legal ownership right as the Gellert
hotel and Gellert spa is built on the same land as the spa owned by
Budapest Gyogyfurdoi es Hevizei Rt. (Budapest Spa). Budapest Spa is
challenging the validity of the contract between the Company and APV Rt.
at the court as a prepurchase right of Budapest Spa relating to Gellert
hotel was not taken into consideration.
24. PENSION SCHEME
The pension scheme is available for all employees after half year
employment. The contribution expense was HUF 164 million (1997: 121
million) and charged against profit for the year in which the
contribution is payable. The contribution is paid on 5% of the salary by
the Group. The assets of the fund are held in a separate trustee
administered funds.
25. FINANCIAL INSTRUMENTS
Currency risk
The Company's sales prices are primarily quoted in Deutschmarks or US
dollars and income received in hard currencies or Hungarian forints.
The Group has DEM 45.3 million loans outstanding at year end. See note
10.
Management believes that its sales revenue is substantially protected
against the effects of forint devaluation against hard currencies and
has not therefore regularly entered into foreign currency hedging
contracts or other derivative products.
Interest rate risk
Interest rates on loans are listed in note 11. Management did not enter
into any interest rate hedging contract as management believes the
contracted interest rates are favourable for the Company.
53
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(All amounts in HUF 000,000's, unless otherwise noted)
Credit risk
Financial assets which may be subject to credit risk consist of short
term investment, cash in bank and trade receivable. Short term
investments are government securities, cash is held at major Hungarian
banks and the provision for doubtful receivables reflects credit risk on
trade receivables. The Company has no significant concentrations of
credit risk.
26. BUSINESSES MANAGED FOR APV RT.
The ownership of the following businesses were retained by APV Rt. on
the transformation of Hungar Hotels and as at December 31, 1998 are
still being managed by Hungar Hotels in return for management fee:
Hungaria Hotel
Nador Hotel (closed)
The following managed business units were sold during 1998 to Ravill Rt.
and continue to be managed by the Company:
Claudius Hotel
Savaria Hotel
Sales income amounting to HUF 632 million and cost of sales of the
managed business units are not included in the accompanying financial
statements. Any losses are charged to APV Rt. and profits paid to APV
Rt. for the operation of these business units.
27. SUBSEQUENT EVENTS
Management and the investors decided to reorganise the Danubius Group
into a more efficient structure. The reorganisation involves Danubius
Rt., Helia Rt. and Hungar Hotels Rt. It is planned to establish a
holding company (Danubius), a hotel operator (Helia) and a property
management company (Hungar Hotels).
At the shareholders' meeting on December 18, 1998 it was decided to
increase the share capital of Hungar Hotels by transferring the hotel
buildings from Danubius and Helia on January 1, 1999 (except for
Margitsziget and Gellert) at net book value. The Court of Registration
registered the share capital increase effective January 12, 1999. The
Hungar Hotels name was changed to Hungaria Szalloda-Ingatlankezelo Rt.
The other fixed assets, inventories and receivables were sold by
Danubius and Hungar Hotels to Helia in January 1999. The Helia Rt. name
was changed to Danubius Szallodauzemelteto es Szolgaltato Rt.
54
<PAGE>
(c) Exhibits
--------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Articles of Incorporation of Registrant, as amended (Incorporated by reference
to Exhibit 1 filed with Amendment No. 101 to Form N-2 filed with the Securities
and Exchange Commission (the "Commission") on April 29, 1980, filed with
Amendment No. 106 to Form N-2 filed with the Commission on April 29, 1985, filed
with Amendment No. 108 to Form N-2 filed with the Commission April 29, 1987 and
to Amendment No. 112 filed with the Commission on April 29, 1992)
3.2 By-Laws of Registrant (Incorporated by reference to Exhibit 2 filed with
Amendment No. 101 to Form N-2 filed with the Commission on April 29, 1980, filed
with Amendment No. 106 to Form N-2 filed with the Commission on April 29, 1985, filed
with Amendment No. 108 to Form N-2 filed with the Commission April 29, 1987 and
to Amendment No. 112 filed with the Commission on April 29, 1992)
10.1 Agreement dated May 2, 1991 by and between the Registrant, Balton B. V., Koor Trade
Limited and Balton C.P. Limited for acquisition of 51% interest in Balton C. P. Limited
(Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992)
10.2 Share Purchase Agreement dated January 28, 1992 by and between the Registrant and the
State Property Agency of the Republic of Hungary for acquisition of 60% interest in Investor
Rt. (Incorporated by reference to Exhibit G to Amendment No. 2 to Application for an Order
pursuant to Section 8(f) of the Investment Company Act of 1940 declaring that IIC Industries, Inc.
(formerly Israel Investors Corporation) has ceased to be an Investment Company)
10.3 Agreements dated May 26, 1993 between Interag Kereskedelmi Reszvenytarsag and Shell Overseas
Holdings Limited (Incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993)
10.4 Agreement dated May 26, 1993 between GMV of Bekes and Agrimpex Rt. (Incorporated by
reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993)
10.5 Agreement dated December 9, 1994 between the Registrant and the State Property Agency
of the Republic of Hungary for the acquisition of an additional 23% interest in Investor Rt.
(Incorporated by reference by Exhibit 10.5 to the Registrant's Annual report on Form 10-K
for the year ended December 31, 1994)
21.1 List of Subsidiaries
27 Financial Data Schedule
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 20, 1999 IIC Industries Inc.
By: /s/ Bernard Schreier
---------------------
Bernard Schreier, Chairman
of the Board and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Bernard Schreier Chairman of the Board, April 21, 1999
- -------------------- President and Director
Bernard Schreier (Principal Executive Officer)
/s/ Michael M. Wreschner Director April 21, 1999
- ------------------------ (Principal Financial Officer
Michael M. Wreschner and Chief Accounting Officer)
/s/ Leonard Goldfine Director April 21, 1999
- ---------------------
Leonard Goldfine
/s/ John E. Smith Director April 21, 1999
- -----------------
John E. Smith
/s/ Wilfred Wyler Director April 21, 1999
- ------------------
Wilfred Wyler
/s/ Alfred L. Simon Director April 21, 1999
- -------------------
Alfred L. Simon
</TABLE>
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
EXHIBITS
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 811-854
--------------------
IIC INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
--------------------
===============================================================================
<PAGE>
Exhibit 21.1
------------
IIC INDUSTRIES INC.
------------------
List of Subsidiaries
--------------------
Israel Tractors and Equipment Co. Ltd. (Israel)
Ambache Engineering, Ltd. (Israel)
Investor Rt. (Hungary)
Interag Rt. (Hungary)
Agrimpex Rt. (Hungary)
Agrimpex International Ltd. (UK)
Agrimill Rt. (Hungary)
Viktoria Rt. (Hungary)
Zenit Kft. (Hungary)
Interag Rt. (Hungary)
Interag Auto Kft.
Kompakt Auto Kft.
Ferencvarosi Autoszerviz Kft.
Motor Pedo, Kft.
Frigoland Kft.
Royal Motor, Kft.
Bunter Kft.
H.H.H. Udvarhaz Kft.
ATI Depot, Rt.
Multisales, Kft.
DP Invest, Kft.
Agriterminal, Kft.
Balton C.P. Limited (England)
Amiran Zambia Ltd. (Zambia)
Dizengoff Ghana Ltd. (Ghana)
Amiran Kenya Ltd. (Kenya)
Tanzania Transcontinental Trading Co. Ltd. (Tanzania)
Balton BV-DWA (Nigeria) Ltd. (Nigeria)
Balton (U) Ltd. Uganda (Uganda)
Dizengoff (WA) Nigeria Limited (Nigeria)
Balton SNES S.A. (Ivory Coast)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,957
<SECURITIES> 0
<RECEIVABLES> 34,797
<ALLOWANCES> 3,023
<INVENTORY> 32,603
<CURRENT-ASSETS> 88,500
<PP&E> 34,738
<DEPRECIATION> 18,200
<TOTAL-ASSETS> 166,838
<CURRENT-LIABILITIES> 52,171
<BONDS> 0
0
0
<COMMON> 1,586
<OTHER-SE> 86,847
<TOTAL-LIABILITY-AND-EQUITY> 166,838
<SALES> 203,710
<TOTAL-REVENUES> 203,710
<CGS> 155,059
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,543
<LOSS-PROVISION> 317
<INTEREST-EXPENSE> 2,776
<INCOME-PRETAX> 6,270
<INCOME-TAX> 2,207
<INCOME-CONTINUING> 3,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,629
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
</TABLE>
