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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, 1999
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.)
171 MADISON AVENUE
NEW YORK, NEW YORK 10016
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (212) 889-7201
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)
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 [ ]
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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, 2000 was $11,956,291 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, 2000: 5,693,472.
DOCUMENTS INCORPORATED BY REFERENCE:
N/A
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IIC INDUSTRIES, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
<S> <C>
Item 1. Business.......................................................................4
Item 2. Properties....................................................................17
Item 3. Legal Proceedings.............................................................18
Item 4. Submission of Matters to a Vote of Security Holders...........................19
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........20
Item 6. Selected Financial Data.......................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................34
Item 8. Financial Statements and Supplementary Data...................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................35
Part III
Item 10. Directors and Executive Officers of the Registrant...........................36
Item 11. Executive Compensation.......................................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management...............38
Item 13. Certain Relationships and Related Transactions...............................40
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K..............41
</TABLE>
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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 Tractor and
Equipment Company Limited ("Israel Tractor"), an Israeli corporation, which
distributes tractors and related heavy machinery in Israel and (3) Balton C.P.
Limited ("Balton"), an English holding company with African subsidiaries 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 $2.1 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,
1999, 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 79% 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 has subsequently
purchased a 9.3% equity interest in Danubius Hotel for approximately $10.9
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,
1999, the Company's effective interest in Danubius Hotel is approximately 38%.
Between January 2000 and March 2000, the Company has purchased a further
approximately 2% of Danubius Hotel at a cost of approximately $3.1 million.
INVESTOR
General
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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 64% interest, and Interag, in which
Investor has a 79% interest. Through Interag Investor's major investments are
Danubius Hotel Group, ATI Depo and DP Invest. Due to the investment portfolio
rationalization carried out in the previous years, Investor sold most of its
small minority investments and restructured the whole Group.
At December 31, 1999, Investor and its subsidiaries and Danubius Hotel employed
a total of 5,744 people.
Agrimpex
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Until 1998, as more fully described below, Agrimpex, a Company listed on the
Budapest stock exchange, 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 included cereals (wheat, corn and
barley), vegetable oils, oil seeds, sugar, legumes and proteins.
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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.
Agrimill's business includes four flourmills, 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 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 at a time of
difficult market conditions. In January 1998, the Board of Directors of Agrimpex
(the "Board") changed the complete management of the company and later that
year, 90% of Agrimpex Commodities was sold and a loss of $250,000 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 reorganization of Agrimill's and Viktoria's business was
carried out, involving a new management structure whereby Viktoria's facilities
were rented to Agrimill, which took full responsibility for operations.
Additionally, 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.
To retain and widen the company's market position, the Board of Directors of
Agrimpex continued the reorganization of the business. At the annual general
meeting in April 1999, the Board approved the merger of Agrimill Rt. and
Viktoria Rt. into Agrimpex, the mother company. The merger was finalized in
February 2000. This step provided cost savings and more efficient production and
marketing in the very difficult circumstances of the flour and feed mix market
in Hungary.
The market situation changed towards the end of 1999, when Agrimpex began
exporting significant quantities to Romania. Due to the cost management and an
aggressive marketing policy, Agrimpex had a small profit in 1999 of $160,000,
compared to a profit before taxation of $1.1 million in 1998. Partly due to the
under-utilized sites, the company has built up significant cash reserves.
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Due to the continuing deterioration of the market in 1999, Agrimpex could not
repeat the profit of 1998. In Hungary the milling capacity is much higher than
the demands of the local market, so if there is no export opportunity to the
neighboring countries, competition is very keen.
Agrimpex also 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 Interag
acquired a 50% interest in DP Invest. (See details of this business in the next
section).
Interag
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Interag now operates as a holding company. Following a significant
reorganization in 1993 and restructuring of the portfolio, the investments of
Interag and its subsidiaries are now primarily involved in the hotel industry,
warehousing and logistics activity, 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.
The car business previously operated through several dealerships and service
stations, but in the process of the reorganization the unprofitable operations
were liquidated. Some sites were sold while others were rented out. Now the
business is concentrated on a fully refurbished major site in Budapest
(dealership for Suzuki and Peugeot) and a smaller site in Veszprem (Daewoo).
In February 1995, Interag concluded the purchase of a 17.3% interest in Danubius
Hotels and, to date, has increased its holdings to approximately 29% at a total
cost of approximately $19.5 million.
Danubius Hotels Rt., a company listed on the Budapest Stock Exchange, owns
and/or manages 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 Gellert, which received management services only from Danubius Hotel, was
bought in 1996, and an equity stake 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. 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 Hotels acquiring a
controlling stake in the HungarHotels chain. After an official tender an 85%
share was acquired by Danubius Hotel at the beginning of 1997. The purchase
price was approximately $45 million. The HungarHotels chain consists of fourteen
hotels, of which seven 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 Hotel
acquired an additional 14% of the HungarHotels chain and as of today owns nearly
100% of the outstanding shares.
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During 1997 and 1998 the operation and structure of the two hotel chains were
reorganized. 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 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.
The share capital of Danubius Hotel was increased by employee shares of
1,076,065 pieces (with a nominal value of HUF 1,000 each) which were issued
based on the resolution passed at the AGM in 1999 from money paid by APV Rt.
(State Privatization and Asset Management Company). Employee shares will be
transformed at the AGM in 2000 into marketable shares of a quantity depending on
the price of the Stock Exchange, and this is expected to result in a final
dilution of existing shareholders of around 3% - 4%.
In 1999, the Danubius Hotel started to expand its activity abroad by purchasing
a spa hotel in Marienbad (Czech Republic).
The high season in the hotel industry was heavily affected by the war in Kosovo
with the occupancy rate dropping by 0.6% in 1999. Despite this, the unified
hotel group increased its turnover and profit compared with 1998.
In 1997, Interag directly acquired a 50% ownership in ATI Depo and 50% jointly
with Agrimpex in DP Invest. ATI Depo is involved in public and other warehousing
business and operates one freehold warehousing site and seven 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. In 1999, a 50-50% joint venture (Z I Logistics) was
created from the former ownership of ATI Depo and DP Invest with Zeevi Group
based in Israel to develop this network by establishing logistics centers
utilizing the locations of the warehouses all over the country. Due to this
change in ownership, effective in the fourth quarter 1999, ATI Depo and DP
Invest are no longer consolidated.
In the fourth quarter 1999, Boma Kft., a wholly-owned subsidiary of Investor,
took over the Bobcat tractor business in Hungary from a subsidiary of CP
Holdings, a related party.
Government Regulations
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Hungary made all current account items convertible on January 1, 1996, when the
Foreign Exchange Law came into force. Accordingly, on January 2, 1996, the IMF
acknowledged that Hungary was in compliance with Article VIII of the Articles of
Association.
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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 maturities 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 costs. This
system extends the previous entitlement by which an Hungarian company with
foreign participation or a wholly foreign-owned Hungarian company may keep the
cash portion of the foreign partner's 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 an 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 U.S.
currency by 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.
Any legal entity or private entrepreneurs engaged in foreign trade activity must
notify the Ministry of Economy 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 Economy. 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.
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Companies incorporated in Hungary are subject to a corporate income tax on their
world-wide 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 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 are 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 was made before May 31, 1997, and
reported to the Court of Registration before June 30, 1997, and the
increase was maintained for 3 calendar years; or
o 1997 and 1998 dividends if the source of the dividend payment was
pre-1995 profits.
Business Conditions in Hungary
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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, custom-free zones have been established for joint ventures between
Hungarian enterprises and foreign companies, and off-shore company status is
available for foreign companies not trading in Hungary.
The economic stabilization program launched in spring 1995 brought 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 declines in real wages,
fiscal adjustment and 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 the 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, the savings rate
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was stabilized and the corporate sector continued to build up net borrowings.
Foreign direct investment continues to flow into the Hungarian economy and
foreign investment amounted to more than $20 billion by the end of 1999.
Despite the unfavorable external conditions, the Hungarian economy expanded
dynamically in 1999, achieving a GDP growth of above 4% for the third
consecutive year. Economic stability was further strengthened during 1999 with
both the external and the internal balance of trade, improving significantly
compared to 1998. The current account deficit reached $2.074 billion in 1999.
This represents 4.1% of GDP compared to 4.8% in 1998. The fall in the external
trade deficit and a lower outflow of investment income on debt were the main
contributors to the favorable year-to-year change. The general government fiscal
deficit was also lower than expected, reaching only 3.9%, decreasing
considerably from the previous year's 4.8%.
Export performance remained strong in 1999, reaching a growth rate of 8.7% which
is just slightly less than that of imports which expanded by 9%. Industrial
production was 10.5% higher in 1999 than in the previous year. The inflation
rate continued to decrease in 1999 - despite increasing crude oil prices -
falling to 10% on a yearly average from the previous year's 10.3%.
Economic prospects remain good for the year 2000 and further improvement of the
overall economy is expected. The forecast is for real economic growth of 4.5 -
5%, a current account deficit of approximately $2.5 billion, and a rate of
inflation of less than 8% by the end of the year.
Political Conditions in Hungary
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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 system of
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 then formed the new government along
with the Hungarian Democratic Forum and the Smallholders' Party.
Hungary is currently pursuing political as well as economic integration with
Western Europe, including membership in the European Union ("EU"). The timing of
Hungary's accession to full EU membership will depend on political developments
and the continued restructuring and development of Hungary's economy and will
require the approval of all EU member nations. Hungary is among the six
countries with which the EU started detailed negotiations in April 1998. Hungary
became a full member of NATO in March 1999.
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ISRAEL TRACTOR
General
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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 65%
of whom are in the construction business and 10% of whom are in the mining
business. For the year ended December 31, 1999, approximately 70% of the total
sales were of Caterpillar tractors, parts and service, 14% were of Navistar
trucks, and Bobcat & Ingersoll-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 Tractors' 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 Tractors'
current agreement with Navistar is on an annual basis commencing in January 1997
and may be terminated prior to expiration by mutual consent of both 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 31, 1999, Israel Tractor employed 270 people.
Political and Economic Conditions in Israel 1999 and forecast for 2000
- ----------------------------------------------------------------------
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.
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1999 saw a recovery in economic activity. Although Israel's gross domestic
product grew by only 2% in comparison with 1998, it actually fell by an
annualized rate of 4.1% during the first quarter of the year; however, during
the following three quarters the annualized GDP growth rate reached 5.5%. With
business sector GDP, which rose by only 1.6% during the whole of 1999, the
improvement was even more notable. After falling by 4.0% in the first quarter of
1999, business sector GDP subsequently increased by an average of 6.5%. This
turnaround, reflecting a sharp cyclical change from a long recession that had
continued since 1996, was reflected by a more rapid growth in exports,
non-housing investment and private consumption. However, a large decrease was
recorded in the various sectors of construction investment - housing
construction, non-residential construction and other building work. The overall
growth in economic activity was also reflected in a large rise in imports of
goods and services and by particularly large increases in imports of fuel,
ships, aircraft and rough diamonds.
As indicated, the turnaround in economic activity was largely cyclical in
nature. The more rapid pace of activity and the expectations of a continued
improvement in Israel's economic environment reflect the positive change in the
global economy. This change took the form of a rapid recovery from the crisis in
the Far East that emerged in the summer of 1997, the containment of the crisis
in Russia and the LTCM hedge fund that prevented it from expanding into a more
extensive and serious global crisis. The U.S. played a key and critical role in
avoiding the onset of a worldwide crisis during this period. In Israel itself,
following the elections, expectations grew of a change in economic policy to a
more growth-oriented course. The expectations emerged against the background of
more rapid progress in the Middle East peace process, and the continued reliance
on the flourishing state of the country's high tech industry. As a result of
these developments and favorable expectations, economic activity underwent a
positive cyclical change even before there was any real change in economic
policy. As the new millennium started, the previous fears over the effect of
Year 2000 (Y2K) proved to have been exaggerated, even with regard to the more
optimistic expectations which estimated that the damage resulting from Y2K would
amount to a loss of GDP of 0.5% in the developed countries. To date, no
significant damage has actually been reported even in developing countries. This
fact is leading to increased growth in Israel and worldwide during the year
2000.
It is believed that the upsurge in economic activity will continue in 2000, even
if it is not supported by any sharp change in economic policy. The trend growth
during the current year is expected to amount to 4.5% and to increase by an
average of 4% compared with 1999. Business sector GDP is expected to increase by
5% during the year and by an average of 4.5% compared to 1999.
Private consumption will grow by about 5% as it did in 1996, and compared with
an increase of 3.7% during 1998-99. The relatively high 9.0% level of
unemployment and consumer's relatively low confidence will prevent a large
increase in private consumption.
Exports of goods and services are expected to grow by 8% in real terms compared
with 7.4% in 1999. Exports of goods are expected to rise by 6% while exports of
services are expected to increase by 15% due to a 25% growth in exports of
tourism services. The rate of increase in imports of goods and services is
expected to fall to 6% in 2000 compared with 14.3% in 2000.
13
<PAGE>
Investment in fixed assets is expected to grow by 2.5% in 2000 compared with
1.5% in 1999. The pace of activity in the various types of construction is
expected to stabilize following three years of decline. Although non-housing
investment is expected to grow by a moderate 3.0% in 2000 but after exclusion of
investment in ships and aircraft, a larger increase of 6% is expected.
A low deficit of $1.6 billion is expected in the balance of payments current
account, which will be similar to the 1999 deficit. Direct foreign investment is
expected to remain at its current high level, of $3 billion. Israel's net
external debt is expected to stabilize at $11.5 billion or 11.5% of GDP.
Unemployment is expected to remain high, at 9% in 2000 as in 1999. A substantial
decrease in unemployment will be attainable only when the economy is growing at
a rate of 4.5% and more over time. This is because the civilian labor force is
expected to grow by 3% and labor productivity is expected to increase by 1.5% as
the recession ends.
The economic forecast for the current year assumes that budgetary policy will be
practically neutral. The need to adhere to a total budget deficit of 2.5% of GDP
will not present a problem, because government revenue is expected to grow
considerably due to the economic recovery. While GDP is expected to expand by
4%, revenue in the budget is estimated on the assumption of a growth rate of
only 3%. It should be noted that the total budget deficit in 1999 of 2.25% GDP
was lower than forecasted and was achieved due to the recovery in economic
activity. Although the total expenditure framework is expected to be more rigid,
changes may stem from spending items connected with the implementation of the
agreement with the Palestinians and planned withdrawal from Southern Lebanon.
Monetary policy became highly restrictive from 1994 onwards with the aim of
reaching low inflation that would be close to European levels, by cooling the
economy and preventing a depreciation of the shekel. While the inflation target
for 1999 was 4%, actual inflation was only 1.3%. This resulted from the
appreciation that had continued from the end of 1998 following the large
depreciation and upsurge in inflation in the summer of that year. Inflation in
1998 was 8.6% and the average inflation rate for 1998-99 amounted to 5% compared
to 7% in 1997. The government's inflation target for 2000 and 2001 has been set
at 3-4%. A measured reduction in the interest rate is necessary in order to
achieve this target. But in view of the Bank of Israel's natural tendency to
keep on the safe side the interest rate may actually be cut quite slowly and to
a minor extent. This would result in inflation remaining lower that its targeted
level. At the same time, high interest rates would hold down the cyclical
economic recovery that began in the second quarter of 1999.
As was expected, in its monetary program in February, the Bank of Israel cut the
interest rate by 0.4% to 10.3%. It is expected that inflation will amount to
3.5% in 2000, and the monetary interest rate will fall to 9.0 - 9.5% by the end
of the year. Actual and expected inflation during the second half of the year
will reach 4% with the result that the real interest rate for the term of a year
will drop from 10% at the end of 1999 to 6% at the end of 2000. The Shekel will
depreciate by 4% against the currency basket during 2000 but is not expected to
depreciate against the dollar, which is likely to weaken against the euro during
the year.
14
<PAGE>
Housing construction activity continued to decline in 1999 for the third
consecutive year. The slowdown in this activity mainly resulted from the
adjustment of investment to demand. During the first half of the 1990's
investment in housing construction doubled in response to the upsurge in demand
caused by the wave of mass immigration. The lower level of immigration during
recent years, the high level to which prices had risen, the onset of the
recession in the economy and the high real interest rate all have had the effect
of reducing demand, as well as prices. The number of housing starts in 1999 is
estimated at 38,000 units, compared with 71,000 in 1995. The number of housing
units under construction fell from 103,000 in 1996 to 76,000 at the end of 1999.
The level of housing construction activity is expected to stabilize in the year
2000. The number of building starts is expected to increase slightly to 45,000
units, a number matching the natural growth in demand.
Investment in fixed assets excluding ships and aircraft is expected to grow by
5% in 2000.
The budget for the year 2000 presents as its main objective an increased level
of economic activity. It is accepted that certain items in the budget,
especially those relating to investment, have a greater impact than other items.
Spending allocations in the budget for 2000 that are directed at investments
increased by less than half a billion Shekels compared to the 1999 budget.
The government assumes that an increasing proportion of infrastructure will be
built by private enterprise. A notable example is the Trans Israel Highway,
which is to be built and apparently also run by private entrepreneurs under the
BOT (Build, Operate, Transfer) method of PFI (Private Financial Institute). The
advantage of this method is that it does not affect the state budget. The
disadvantage is the length of time that is taken for such projects to reach
fruition. The return on infrastructure greatly exceeds the cost of government
borrowing. Increased government investment in infrastructure could contribute to
more rapid growth and to an improvement in the allocation of resources in the
economy, particularly during a slow period in the housing construction industry.
Political Situation in Israel
- -----------------------------
There is no doubt that the peace negotiations between Israel and her neighbors -
Syria and Lebanon, along with the Palestinians will influence substantially the
outcome of economic development in Israel, as the potential for 5 - 6% growth in
Israel is there and global economy experts favor this trend which is important
to Israel's exports.
In the coming months the outcome of the peace negotiations will be clearer and,
of course, its influence on the economy of Israel.
15
<PAGE>
BALTON
General
- -------
Balton is a management and holding company serving its African subsidiaries
which operate in Nigeria, the Zambia, Ghana, Kenya, Tanzania, Uganda and Cote
D'Ivoire. These subsidiaries are located in and organized under the laws of the
jurisdictions where they operate. The subsidiary in Cote D'Ivoire was first
registered in 1997 and commenced trading on April 7, 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").
During 1999, Balton acquired a 50% associated company interest in a new venture,
Skyline Ltd. ("Skyline") registered in Nigeria. The shares in Skyline are held
directly by Skyline Holdings Limited registered in the Isle of Man and Balton
owns 50% of the shares in this company. The activity is a joint venture in
conjunction with Arkia Israeli Airlines Limited, a company based in Tel-Aviv,
Israel. Skyline carries on the business of scheduled and non-scheduled passenger
and cargo air services operating presently solely in Nigeria.
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 2000, 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.
During the first quarter of 1994, Balton Nigeria commencing 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 sub-contracted. 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. An
extension of time was agreed for three years to November 1999 during which time
approximately a further 5% of the work required was completed at a remaining,
revised contract price of $76 million. The Nigerian Ministry wishes to complete
the project but completion 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. See Note B of Notes to Consolidated
Financial Statements.
16
<PAGE>
Roughly 50% of the goods supplied by Balton are from Israeli suppliers, although
virtually all irrigation and agricultural equipment is from Israel. Balton's
other sources of supply come from a diverse group of suppliers world-wide. The
bulk of Balton's customers are located in the African countries where it
conducts business. Balton'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 December 31 1999, Balton and its subsidiaries and associated companies
employed a total of approximately 770 persons.
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 U.S. dollar.
During 1999, there were significant devaluations throughout the subsidiaries
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 1999 in certain 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, diplomatic developments (including
war) or unfavorable climatic conditions which could affect adversely the
economies of such countries or the value of the Company's investments in those
countries.
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.
17
<PAGE>
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 needs and the remaining part of the building
(over 2,500 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 (2,900 square
meters) comprising the former headquarters was refurbished in 1998 and
subletted.
Agrimpex Rt. leases office space in Budapest. Its Agrimill subsidiary owns a
head office in Bekescsaba, seventeen sites in Bekes County and leases one in
Budapest from Investor.
Agrimill's facilities in the aggregate are situated on approximately 470,000
square meters of land and include 113,900 square meters in building space.
Viktoria operates from a head office in Kecskemeet and owns eleven sites in
Bacs-Kiskun 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, Szabadbattyaan, Pecs, Miskolc,
Baja and Szajol.
In 1998, Balton purchased the office and warehouse space it utilizes in Cote
D'Ivoire and completed the construction of long leasehold buildings on a new
site in Nairobi. Balton also has long leasehold properties on which it pays
peppercorn rentals in all of the African countries in which it operates. 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.
18
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 annual meeting of stockholders was held on October 28, 1999.
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 the selection of KPMG Hungaria Kft. as independent auditors of
the Company for the fiscal year ended December 31, 1999.
At the meeting, the Company's nominees for directors were elected. Bernard
Schreier, John Smith, Michael Wreschner, Wilfred Wyler, and Alfred Simon each
received 5,199,825 affirmative votes representing 99% of the votes cast. The
appointment of KPMG Hungaria Kft. was approved with 5,205,899 votes in favor
representing 99% of the votes cast.
19
<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.
PERIOD HIGH LOW
- ------ ---- ---
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
2nd quarter $11 1/4 $9 1/2
3rd quarter $11 1/2 $9 1/4
4th quarter $12 3/4 $9 1/2
2000
- ----
1st quarter $11 3/4 $9 3/4
As of March 31, 2000, there were 1,375 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 1997, 1998 or 1999.
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.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
Company as of and for the years ended December 31, 1999, 1998, 1997, 1996 and
1995 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, 1999 1998 1997 1996 1995
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Net sales ....................................... $ 179,111 $ 203,710 $ 239,617 $ 275,820 $ 280,921
Gross profit .................................... 47,628 48,651 48,388 65,227 60,946
Selling, general and administrative expenses .... 42,388 43,543 44,461 49,083 43,401
Operating income ................................ 5,240 5,108 3,927 16,144 17,545
Other income Interest income .................... 815 1,253 2,186 2,285 3,624
Dividend income ................................. -- 31 13 22 254
Equity in earnings (loss) of affiliates ......... 4,290 4,361 4,156 4,230 3,823
Foreign currency (loss) ......................... (4,299) (2,563) (2,453) (263) (385)
Gain on sale of noncurrent assets ............... 2,340 410 2,486 2,230 1,373
Interest expense ................................ (1,475) (2,776) (4,753) (4,100) (4,764)
Rental income ................................... 3,191 1,950 1,585 1,710 1,249
Other-net ....................................... (2,242) (1,504) (1,342) (1,566) (1,199)
Income before minority interest and income taxes 7,860 6,270 5,805 20,692 21,520
Net income ...................................... 5,761 3,629 5,373 12,711 11,641
Basic net income per common share ............... $ 1.01 $ 0.64 $ 0.94 $ 2.23 $ 2.04
Basic average number of common shares outstanding 5,693 5,693 5,693 5,693 5,693
AT DECEMBER 31, 1999 1998 1997 1996 1995
- --------------- ---- ---- ---- ---- ----
(IN THOUSANDS)
Balance Sheet Data:
Working capital............................. $30,589 $34,329 $50,822 $47,464 $49,416
Total assets................................ 173,164 166,838 176,042 203,556 175,449
Short-term debt, including current
maturities of long-term debt................ 22,023 11,964 25,151 35,838 17,046
Long-term debt, excluding current maturities 1,197 3,281 1,508 2,160 2,528
Total liabilities........................... 84,268 78,405 88,897 95,032 70,979
Minority interest in subsidiaries........... 14,851 14,738 15,149 20,494 22,171
Stockholders' equity........................ 88,896 88,433 87,145 88,030 82,299
</TABLE>
21
<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:
o Investor and its subsidiaries in Hungary;
o Israel Tractor in Israel,
o 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; and
(e) other industries including retail and wholesale consumer products and
corporate.
1999 Compared to 1998
- ---------------------
The table below sets forth for 1999 and 1998 certain information with respect to
the results of operations of the Company and its principal subsidiaries.
<TABLE>
<CAPTION>
1999 Net Sales Gross Profit Income before Net Income (Loss)
- ---- --------- ------------ Income Taxes and -----------------
Minority Interests
------------------
Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ ---
(In millions) (In millions) (In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. $ -- -- $ -- -- $(0.6) (7.5) $(0.6) (10.3)
(parent company)
Israel Tractor & $54.2 30.3 $14.3 30.0 $1.6 20.2 $1.1 19.0
Equipment Co. (Israel)
Balton CP Group (Africa) 69.2 38.6 19.0 40.0 0.9 11.4 0.1 1.7
Investor RT Group 55.7 31.1 14.3 30.0 6.0 75.9 5.2 89.6
(Hungary) ---- ---- ---- ---- ---- ---- ---- ----
$179.1 100 $47.6 100 $7.9 100 $5.8 100
====== ==== ===== ==== ==== ==== ==== ====
</TABLE>
22
<PAGE>
<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 millions) (In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. $ -- -- $ -- -- $ (0.5) (7.9) $(0.6) (16.7)
(parent company)
Israel Tractor & $ 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>
The table below sets forth for 1999 and 1998 certain information with respect to
the results of operations of the Company and its five principal business
segments:
<TABLE>
<CAPTION>
1999 1998
---- ----
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 $14.7 8.2 $1.8 3.8 $0.2 $13.7 6.7 $1.4 2.9 $0.1
distribution
(Investor)
Export and import of 30.8 17.2 8.8 18.5 (0.1) 60.0 29.5 10.3 21.1 0.3
agricultural products
(Investor)
Other Industries 10.2 5.7 3.7 7.6 (3.3) 4.2 2.1 2.7 5.5 (2.4)
(Investor)
Tractor and heavy 0.7 0.7
equipment 54.2 30.3 14.3 30.0 57.8 28.4 15.7 32.3
(Israel Tractor)
Agricultural,
communications and 69.2 38.6 19.0 40.1 7.7 68.0 33.3 18.6 38.2 6.4
---- ---- ---- ---- --- ---- ---- ---- ---- ---
electrical equipment
(Balton)
$179.1 100 $47.6 100.0 5.2 $203.7 100 $48.7 100 $5.1
====== === ===== ===== === ====== === ===== === ====
</TABLE>
1999 COMPARED TO 1998
Net Sales - Net sales on a consolidated basis in 1999 decreased by $25 million
as compared to 1998. This decrease was mainly attributable to a reduction in
demand for Israel Tractors' products and the reorganization of Investor's
agricultural commodity trading business.
23
<PAGE>
Gross Profit - Gross profit on a consolidated basis in 1999 decreased by $1.02
million or approximately 2.1%, to approximately $47.6 million, or approximately
26.6% of net sales, from approximately $48.7 million, or approximately 23.9% of
net sales in 1998. The decrease in the gross margin percentage was due to the
reorganization of Investor's agricultural commodity trading business.
Operating Income - Operating income on a consolidated basis in 1999 increased by
approximately $130 thousand, to approximately $5.2 million, or approximately
2.9% of net sales, from approximately $5.1 million, or approximately 2.5% of net
sales in 1998. This increase was principally due to higher sales and gross
profit in Balton.
Interest Income - Interest income decreased in 1999 by approximately $438,000,
or approximately 35%, to approximately $815,000, due to lower cash balances and
lower rates of interest in the various countries in which the Company's
operations are located.
Equity in Earnings of Affiliates - Equity in earnings of affiliates decreased by
$71,000 in 1999, primarily due to the Danubius investment.
Foreign Currency Gains and Losses - There was a foreign currency net loss in
1999 of $4.3 million compared to a loss in 1998 of $2.6 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 $34.4 million in 1998 to approximately
$39.7 million in 1999 due primarily to the weakness of the various local
currencies.
Gain on Sale of Noncurrent Assets - Gain on sale of noncurrent assets in 1999
increased by approximately $1.9 million, to approximately $2.3 million. This
increase was primarily due to the sale of 50% of the shares of ATI Depo and DP
Invest.
Interest Expense - Interest expense in 1999 decreased by approximately $1.3
million. This decrease is primarily due to the decrease in bank loans and lower
rates of interest.
Income Before Income Taxes and Minority Interests - Income before income taxes
and minority interests in 1999 increased by approximately $1.6 million, or
approximately 25.4%, to approximately $7.9 million in 1999 (representing
approximately 4.4% of net sales for that year) from approximately $6.3 million
in 1998 (representing approximately 3.1% of net sales for that year).
Minority Interest - Minority interest in 1999 decreased by approximately
$250,000.
Income Taxes - Income taxes in 1999 decreased by approximately $300,000, or
approximately 13% to $1.9 million in 1999.
24
<PAGE>
Net Income - Net income for 1999 increased by $2.2 million from approximately
$3.6 million in 1998 to approximately $5.8 million in 1999.
Investor
- --------
The operations of three of the Company's segments are conducted in Hungary
through Investor. During 1999, Investor continued to restructure certain
unprofitable operations. See Item 1. Business - Investor.
Vehicle Sales and Service Segment
---------------------------------
o Net sales for 1999 increased by approximately $1 million or approximately
7.3%, as compared to 1998.
o Gross profit for 1999 increased by approximately $400,000 to approximately
$1.8 million (representing 12% of net sales for such year) from
approximately $1.4 million in 1998 (representing 10% of net sales for such
year).
o Operating income was approximately $200,000 in 1999 and $100,000 in 1998.
These increases were primarily due to more vehicles being sold while
maintaining the margins.
Export/Import and Processing/Storage of Agricultural Products Segment
---------------------------------------------------------------------
o Net sales for 1999 decreased by approximately $29 million, or approximately
49%, as compared to 1998.
o Gross profit for 1999 decreased by approximately $1.5 million, or
approximately 15% to approximately $8.8 million (representing 29% of net
sales for such year) from approximately $10.3 million in 1998 (representing
17% of net sales for such year).
o Operating income for 1999 decreased by $400,000, to an operating loss of
$100 thousand from approximately an operating profit of $300,000 in 1998.
The decrease in net sales and gross profit was primarily due to the
restructuring of the agricultural commodity business. The decrease in operating
income was primarily to market conditions.
Other Industries
----------------
o Net sales for 1999 increased by approximately $6 million, or approximately
143%, as compared to 1998.
o Gross profit for 1999 increased by approximately $1 million, or
approximately 37% to approximately $3.7 million (representing 36% of net
sales for such year) from approximately $2.7 million in 1998 (representing
64% of net sales for such year).
o Operating loss for 1999 increased by $900,000.
25
<PAGE>
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: Tractor and Heavy Equipment Segment
---------------------------------------------------
o Net sales for 1999 decreased by approximately $3.6 million, or
approximately 6.2% as compared to 1998, due to a reduction in demand for
the Company's products.
o Gross profit for 1999 decreased by $1.4 million, or 8.9%, to $14.3 million
(representing 26% of net sales for such year) from $15.7 million in 1998
(representing 27.2% of net sales for such year). This decrease was due the
reduction in Sales.
o Operating income for 1999 did not increase from 1998.
Balton: Agricultural, Communications and Electrical Equipment Segment
---------------------------------------------------------------------
o Net sales for 1999 increased by $1.2 million, or approximately 1.8%, as
compared to 1998 principally due to higher demand for the products.
o Gross profit for 1999 increased by $400,000, or approximately 2.7%, to $19
million (representing 27.5% of net sales for such year) from $18.6 million
in 1998 (representing 27.4% of net sales for such year). This increase was
due to the increase in sales.
o Operating income for 1999 increased by $1.3 million to $7.7 million,
(representing 11.1% of net sales for such year) from $6.4 million in 1998.
This increase was due to the increase in sales or gross profit.
26
<PAGE>
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 millions) (In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries, Inc. $-- -- $-- -- $(0.5) (7.9) $(0.6) (16.7)
(parent company)
Israel Tractor & $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
====== === ===== ==== ==== ==== ==== =====
<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 millions) (In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $0.6 10.3 $0.4 7.4
(parent company)
Israel Tractor & $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>
27
<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)
Tractor and heavy
equipment 57.8 28.4 15.7 32.3 0.7 67.7 28.2 19.1 39.6 2.3
(Israel Tractor)
Agricultural,
communications and 68.0 33.3 18.6 38.2 6.4 51.0 21.3 14.8 30.6 4.4
electrical equipment
(Balton) ----- ---- ---- ---- ---- ------ ---- ----- ---- -----
$203.7 100 $48.7 100 $5.1 $239.6 100 $48.3 100 $3.9
====== ==== ===== ==== ==== ====== ==== ===== ==== =====
</TABLE>
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 Tractors' products and the reorganization of Investor's
agricultural commodity trading business.
Gross Profit - Gross Profit on a consolidated basis in 1998 increased by only
$263,000 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
reorganization 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.
28
<PAGE>
Interest Income - Interest income decreased in 1998 by approximately $900,000,
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 $200,000, 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 currencies 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 Noncurrent Assets - Gain on sale of noncurrent assets in 1998
decreased by approximately $2.1 million, to approximately $410,000. 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 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 $465,000, 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.
Income Taxes - Income taxes in 1998 increased by approximately $700,000, 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.
29
<PAGE>
Investor
- --------
The operations of three of the Company's segments are conducted in Hungary
through Investor. During 1998, Investor continued to reorganize 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 $100,000 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 $100,000 in 1998 and a loss of
$100,000 in 1997.
The increase in net sales arose from increased marketing in the
motor vehicle 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 $800,000, or approximately
160%, to an operating income of $300,000 from approximately an
operating loss of $500,000 in 1997.
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 reorganization of the milling
companies.
30
<PAGE>
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 $300,000 in 1997
(representing 16% of net sales for such year).
o Operating loss for 1998 increased by $200,000.
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 $700,000
(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.
31
<PAGE>
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.
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.
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 U.S. income tax liability subject to certain limitations set out
in the Tax Reform Act 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 U.S.
Federal income tax 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 U.S. Federal income tax, 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 U.S. 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 1999. At
December 31, 1999, the Company and its wholly owned Israel Tractor subsidiary,
had working capital of $20.9 million, including cash and cash equivalents of
$6.3 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.
32
<PAGE>
At December 31, 1999, Balton, Investor and Israel Tractor had outstanding
short-term indebtedness of approximately $4.8 million, $9.2 million and $8.0
million, respectively. At December 31, 1999, Investor and its subsidiaries, had
credit lines of $16 million which are considered adequate for the present
purposes of the business. At December 31, 1999, Balton, Investor, and Israel
Tractor had unused lines of short-term credit of $13 million, $5.6 million, and
$1.1 million, respectively.
The Investor Group made capital expenditures of approximately $1.5 million in
1999 for the purchase of property, vehicles and equipment from internally
generated funds. In 1999, Balton and Israel Tractor made capital expenditures of
approximately $1.1 million and $640 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
an adverse affect on Investor's financial condition. See Note A(10) of Notes to
Consolidated Financial Statements.
Inflation in Israel was moderate in 1999 and therefore did not significantly
affect operations in that country. There was no further devaluation of the
Israeli shekel against the U.S. Dollar in 1999.
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, and as amended by SFAS No. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect that the adoption of SFAS No. 133 will have a significant impact on the
Company's results of operations.
33
<PAGE>
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 1999, 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 until the
end of 1999 was subject to a programmed devaluation and floated against a basket
of two currencies (the U.S. dollar and the European Currency Unit, Euro)
underwent devaluations against the U.S. dollar at the rate of 15% during 1999.
Since the beginning of 2000, the Hungarian currency is subject to a programmed
devaluation solely against the Euro and has been further devalued by
approximately 8% against the U.S. dollar. Since the functional currency for
Investor is the Hungarian 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. 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.
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.
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 2000, although there can be no assurances that interest
rates will not significantly change.
34
<PAGE>
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
A change in independent accountants has previously been reported. See the
Company's Current Report on Form 8-K filed on November 3, 1999.
35
<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 81 Chairman of the Board, President and Director
Fortunee F. Cohen 72 Secretary
Michael M. Wreschner 55 Director, Assistant Secretary
John E. Smith 51 Director
Wilfred Wyler 92 Director
Alfred L. Simon 59 Director
Jozsef Ferenc Polgar 57 Chief Executive Officer of
Investor
Zvi Borowitsh 62 Managing Director of Israel
Tractor
Moshe Gershi 48 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.
36
<PAGE>
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.
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 Tractor 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. Schreier, and Wreschner 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.
37
<PAGE>
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 1999. No executive officer of the
Company was paid compensation equal to or exceeding $100,000 in 1999.
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 $1.31 million in management fees
for management services in 1999. CP Holdings beneficially owns approximately
77.8% of the Company's Common Stock.
The Company has not granted restricted stock or options to purchase Common Stock
to its officers or employees.
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, 2000,
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.
38
<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 4,427,471(1) 77.8%
Heriots
Stanmore Common
Middlesex HA7 3HG England
- ------------------------------------------------------------------------------------------------------
The Estate of Gideon Schreier 4,495,471(2) 79.0%
Kensworth House
The Lynch, Nr Kensworth
S Beds LU6 3QZ, England
- ------------------------------------------------------------------------------------------------------
Michael M. Wreschner 4,427,471 (3) 77.8%
10 Raleigh Close
Hendon
London NW4 2TA, England
- ------------------------------------------------------------------------------------------------------
John E. Smith 4,427,471 (3) 77.8%
10 Bearswood End
Beaconsfield, Buckinghamshire HP9 2NR England
- ------------------------------------------------------------------------------------------------------
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/ 4,427,471 (5) 77.8%
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
- ------------------------------------------------------------------------------------------------------
Zvi Borowitsh -0- __
8 Hamanor Street
P.O.B. 214 Holon
58101 Israel
- ------------------------------------------------------------------------------------------------------
All directors and officers as a 4,495,567 79.0%
group (6 persons + 1 estate)
- ------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
(1) Represents 4,427,471 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
4,427,471 shares of Common Stock beneficially owned by CP through its
wholly owned subsidiary Kenyon.
(3) Represents 4,427,471 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 4,427,471 shares of Common Stock
of the Company, constituting 77.8% 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 $1.31 million in management fees
for management services in 1999.
During 1999 and 1998, Israel Tractor purchased machinery and equipment, which at
the request of the supplier, were channeled through CP. For the rendering of
this service, CP received a fee of 2% of the purchases, or approximately
$279,000 and $287,000, respectively. The fee was used to cover administration,
financing and dealings with the major supplier.
See also Note H to the Consolidated Financial Statements.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
IIC INDUSTRIES INC. AND SUBSIDIARIES
(a)(1) Financial Statements Page
-------------------- ----
Financial Statement Index
Report of Independent Auditors..............................F-1
Report of Independent Certified Public Accountants..........F-2
Consolidated Balance Sheets as at
December 31, 1999 and 1998..................................F-3
Consolidated Statements of Income for the
years ended December 31, 1999, 1998 and 1997................F-5
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997........F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997........F-7
Notes to Consolidated Financial Statements..................F-9
(a)(2) Financial Statement Schedules
Schedule II - Valuation Allowance Accounts..................F-33
(b) Reports on Form 8-K:
-------------------
A change in independent accountants has previously been reported. See the
Company's Current Report on Form 8-K filed on November 3, 1999.
(c) DANUBIUS HOTEL & SPA, RT. AND SUBSIDIARIES
<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>
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 14, 2000 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 14, 2000
- --------------------- President and Director
Bernard Schreier (Principal Executive Officer)
/s/ Michael M. Wreschner Director April 14,2000
- ------------------------ (Principal Financial Officer
Michael M. Wreschner and Chief Accounting Officer)
/s/ John E.Smith Director April 14, 2000
- ----------------
John E. Smith
/s/ Wilfred Wyler Director April 14, 2000
- -----------------
Wilfred Wyler
/s/ Alfred L. Simon Director April 14, 2000
- -------------------
Alfred L. Simon
</TABLE>
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
IIC Industries, Inc.:
We have audited the accompanying consolidated balance sheet of IIC Industries
Inc. (the "Company") as of December 31, 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The accompanying
consolidated balance sheet of the Company as of December 31, 1998, and the
related consolidated statements of income, stockholders' equity, and cash
flows for the years ended December 31, 1998 and 1997, were audited by other
auditors whose report thereon dated March 25, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. 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 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IIC
Industries Inc. as of December 31, 1999, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles in the United States.
We have also audited Schedule II of the Company for the year ended
December 31, 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein for the
year ended December 31, 1999. The information in Schedule II for the years
ended December 31, 1998 and 1997, was audited by other auditors whose report
thereon dated March 25, 1999, expressed an unqualified opinion, in all
material respects, on the information required to be set forth therein.
KPMG Hungaria Kft.
Budapest, Hungary
April 14, 2000
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
IIC INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheet of IIC Industries,
Inc. and Subsidiaries as of December 31, 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
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 auditing standards generally accepted
in the United States. 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 the consolidated results of
their operations and their consolidated cash flow for each of the two years in
the period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.
We have also audited Schedule II of IIC Industries, Inc. and Subsidiaries for
the years ended December 31, 1998 and 1997. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
/s/GRANT THORNTON LLP
New York, New York
March 25, 1999
F-2
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------- -------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 9,563 $ 10,957
Accounts receivable, net of allowances for doubtful 38,524 34,797
accounts of $2,680 in 1999 and $3,023 in 1998
Inventories, net 32,554 32,603
Other current assets 9,688 8,143
--------- ---------
Total current assets 90,329 86,500
RESTRICTED CASH 367
DUE FROM AFFILIATE 3,150 2,000
PROPERTY AND EQUIPMENT, NET 26,135 34,738
INVESTMENTS 46,809 40,585
OTHER ASSETS 6,741 2,648
--------- ---------
$ 173,164 $166,838
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1999 and 1998
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---------- --------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $21,564 $ 18,492
Bank loans 19,018 11,609
Current maturities of long-term debt 3,005 355
Accrued expenses and other payables 11,597 13,813
Due to related parties 1,947 3,247
Advances from customers 2,609 4,655
--------- ---------
Total current liabilities 59,740 52,171
LONG-TERM DEBT, less current portion 1,197 3,281
DUE TO AFFILIATES 2,046 1,738
OTHER LIABILITIES 6,434 6,477
MINORITY INTERESTS 14,851 14,738
--------- --------
84,268 78,405
--------- --------
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 106,816 101,055
Accumulated other comprehensive loss (39,722) (34,424)
Less treasury stock - at cost (649,752 shares) (2,725) (2,725)
--------- --------
88,896 88,433
--------- --------
$ 173,164 $166,838
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
(dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Net sales $179,111 $203,710 $239,617
Cost of sales 131,483 155,059 191,229
--------- -------- --------
Gross profit 47,628 48,651 48,388
Selling, general and administrative expenses 42,388 43,543 44,461
--------- -------- --------
Operating income 5,240 5,108 3,927
--------- -------- --------
Other income (expense)
Interest income 815 1,253 2,186
Dividend income 31 13
Equity in earnings of affiliates 4,290 4,361 4,156
Foreign currency loss (4,299) (2,563) (2,453)
Gain on sale of noncurrent assets 2,340 410 2,486
Interest expense (1,475) (2,776) (4,753)
Rental income 3,191 1,950 1,585
Other, net (2,242) (1,504) (1,342)
--------- -------- --------
2,620 1,162 1,878
--------- -------- --------
Income before income taxes and
minority interest 7,860 6,270 5,805
Income taxes 1,915 2,207 1,519
--------- -------- --------
Income before minority interests 5,945 4,063 4,286
Minority interests (184) (434) 1,087
--------- -------- --------
NET INCOME $5,761 $ 3,629 $ 5,373
====== ======== ========
Basic net income per common share $1.01 $0.64 $0.94
===== ==== ====
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-5
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(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, 1997 $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
Comprehensive income (loss):
Net income 5,761 5,761
Foreign translation adjustment (5,298) (5,298)
--------
463
------- ------- --------- -------- ------- ---
BALANCE AT DECEMBER 31, 1999 $1,586 $22,941 $106,816 $(39,722) $(2,725) $88,896
======= ======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $5,761 $ 3,629 $ 5,373
-------- ------- -------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 3,032 3,428 3,555
Amortization 22 25 67
Equity in (earnings) of affiliates, net
of dividends (4,290) (4,361) (4,156)
Minority interest 184 434 (1,087)
Gain on sale of noncurrent assets (2,340) (410) (2,486)
Foreign currency loss 4,299 2,563 2,453
Changes in operating assets and liabilities, net of
effects of acquisition and dispositions of
businesses:
Accounts receivable (5,061) 2,165 3,122
Inventories (967) 7,983 12,012
Other assets (1,385) 405 64
Accounts payable and accrued expenses (1,084) 4,426 (3,932)
Advances from customers (2,237) 372 (7,018)
-------- ------- -------
Total adjustments (9,827) 17,030 2,594
-------- ------- -------
Net cash (used in) provided by operating activities (4,066) 20,659 7,967
-------- ------- -------
Cash flows from investing activities
Purchase of subsidiaries, net of cash acquired (375) (3,668) (359)
Purchase of property and equipment (3,273) (5,092) (5,264)
Purchase of investments (3,868) (12,993) (3,730)
(Purchase) sale of other assets (50) (1,984) 234
Advances (to) from affiliates (758) 1,944 158
Proceeds on disposal of property and equipment 1,210 1,600 2,733
Proceeds on disposal of investments 1,109 717 2,549
Restricted cash 367 (156) 8,145
Redemption of notes and loan receivable __ 94 389
-------- ------- -------
Net cash (used in) provided by investing activities (5,638) (19,538) 4,855
-------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1999, 1998 and 1997
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities
Purchase of share capital by subsidiary $(1,123)
Issuance of long-term debt 850 $ 1,240 $ 911
Principal payments on long-term debt (78) (2,641) (100)
Net receipts (payments) of short-term bank loans 8,845 (11,799) (6,766)
-------- --------- -------
Net cash provided by (used in) financing
Activities 8,494 (13,200) (5,955)
-------- --------- -------
(Decrease) increase in cash and cash
equivalents during the year before
effect of exchange rate on cash (1,210) (12,079) 6,867
Effect of exchange rate on cash (184) 255 (1,297)
------- --------- -------
(Decrease) increase in cash and cash
equivalents during the year (1,394) (11,824) 5,570
Cash and cash equivalents at beginning of year 10,957 22,781 17,211
------- --------- -------
Cash and cash equivalents at end of year $9,563 $ 10,957 $22,781
====== ========= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $1,598 $ 2,336 $ 5,976
Income taxes 3,109 2,170 3,457
</TABLE>
Non-cash investing and financing activity:
During 1999, Investor sold a 50% equity ownership share of ATI Depo and
DP Invest, which were wholly-owned subsidiaries. The sales price was $4.5
million, which is shown as a long-term receivable in other assets as of
December 31, 1999. The net book value of the net assets sold was $2.3
million, which includes cash given up of $343 thousand.
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
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" -
64%-owned) and Interag Rt. ("Interag" - 79%-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-9
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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 Assets
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, 1999.
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-10
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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. Further, Investor records adjustments resulting from the
translation as a separate component of stockholders' equity and
comprehensive income. The translation adjustments for 1999, 1998 and
1997 were approximately $5.3 million, $2.3 million and $6.3 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.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: 1999 - $ (3,331,000); 1998 -
$(951,000); and 1997 - $(291,000).
F-11
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A (CONTINUED)
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: 1999 - $(968,000); 1998 - $ (1,612,000);
and 1997 - $(2,162,000).
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 $(39,722,000),
$(34,424,000) and $(32,083,000) as of December 31, 1999, 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-12
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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 1998 financial statements have been
reclassified to conform to the 1999 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,
as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not
expect that the adoption of SFAS No. 133 will have a significant
impact on the Company's results of operations.
F-13
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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. The parties agreed, subject to the revised terms and conditions,
at a contract price of $76 million. The parties also agreed to an extension
of time of three years. A further extension is now being negotiated. During
1999, 1998, and 1997, the Company recognized revenues of $2.6 million, $1.3
million, and $1.3 million, respectively. The revenue recognized is low
compared to the previous years due to the extended negotiation period over
the revised terms and conditions. Profit of $192,000 has been recognized in
1999. No profit was recognized in 1998 or 1997. Of the original advances,
$1.3 million remains outstanding and is shown as part of Advances from
Customers as of December 31, 1999.
F-14
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE C - INVENTORIES
Inventories at December 31 are as follows (in thousands):
1999 1998
--------- --------
Raw material $ 4,950 $ 5,380
Work in progress 517 536
Finished goods 27,087 26,687
------- --------
$32,554 $ 32,603
------ ========
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
1999 1998
-------- --------
Land $7,141 $ 7,281
Buildings and improvements 16,576 23,874
Machinery and equipment 4,140 5,241
Automotive 8,639 8,980
Furniture and fixtures 8,220 7,403
Construction in progress 36 159
-------- ---------
44,752 52,938
Less allowances for depreciation and amortization (18,617) (18,200)
-------- ---------
$ 26,135 $ 34,738
======== =========
F-15
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE E - INVESTMENTS
Significant investments in and advances to affiliated companies at December
31 are (in thousands):
<TABLE>
<CAPTION>
% owned in
1999 and 1998 1999 1998
--------------- ------- ------
<S> <C> <C> <C>
Danubius Hotel & Spa Rt. ("Danubius") 38 and 37 $44,991 $40,370
Other 1,818 215
------- -------
$46,809 $40,585
======= =======
</TABLE>
Danubius, a publicly quoted company on the Budapest Stock Exchange, owns a
number of hotels in Hungary and the Czech Republic, which specialize 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 and 1999, the Company purchased
another 3.78% equity interest for approximately $6.65 million and Israel
Tractor purchased a 4.2% equity interest for approximately $8 million.
During January 2000 and March 2000, the Company purchased another 2% at a
cost of approximately $3.1 million.
At December 31, 1999 and 1998, the quoted market values of the Company's
effective investment in Danubius was approximately $54.9 million and $61.5
million, respectively.
F-16
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE E (CONTINUED)
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.
December 31,
--------------------------------
1999 1998
---------- ---------
Current assets $22,910 $ 24,507
Noncurrent assets 133,560 144,543
Current liabilities 18,150 18,018
Noncurrent liabilities 27,220 34,151
Stockholders' equity 111,100 116,881
Year ended December 31,
--------------------------------
1999 1998
---------- ----------
Sales $104,275 $ 113,463
Net income 14,015 16,700
Company's share of equity in earnings 4,989 4,343
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-17
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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 13.4% and 14% in 1999 and 1998, respectively. Unused lines
of credit totaled $19.7 million in 1999 and $19.8 million in 1998. The debt
is collateralized by inventory, buildings and machinery. At December 31,
1998, the Company held restricted cash deposits as a compensating balance.
NOTE G - LONG-TERM DEBT
Long-term debt at December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- ------
<S> <C> <C>
Israeli bank debt of 203 million Japanese yen
payable in 2000, interest of LIBOR + 0.5%,
Guaranteed by IIC $1,994 $1,741
Hungarian bank debt for the purchase of fixed assets,
Either interest of LIBOR + 0.5%, or BUBOR + 0.2% 1,163 1,388
Due to CP, payable in 2002, interest of LIBOR +3% 800
Hungarian State Municipalities loan for the purchase
of eight properties; interest rate of 20% 37
Other 245 470
------ ------
4,202 3,636
Less current maturities 3,005 355
------ ------
$1,197 $3,281
====== ======
</TABLE>
The aggregate loan maturities are as follows: 2000 -$3,005,000; 2001 - $397,000;
and 2002 - $800,000.
F-18
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE H - OTHER
Due from affiliate
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 deposits aggregating $3.15 million in 1999 and 1998 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, 1999, due to related parties consisted of a fee of $280,000
payable to a supplier, which was channeled through CP (See Related party
transactions), fees of $635,000 payable to the Directors of Israel Tractor,
and $1,032,000 due to a shareholder of Balton.
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.
Due to affiliates
At December 31, 1999 and 1998, amounts due to affiliates consist of
management fees and expense reimbursements of $694,000 and $383,000,
respectively, payable to CP; management fees of $9,000 in 1999 and 1998,
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 $828,000 during 1999 and $1.1 million during both 1998 and
1997, net of expense reimbursements.
F-19
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE H (CONTINUED)
During 1999, 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 $279,000, $287,000 and $292,000 during 1999,
1998 and 1997, respectively. The fee was used to cover administration,
financing, and dealings with the major supplier.
Gain on sale of noncurrent assets
During 1999, Investor sold a 50% equity ownership share of ATI Depo and DP
Invest, which resulted in a gain of approximately $2.2 million
During 1998, Investor sold non-operational fixed assets, which resulted in
a gain of approximately $500,000.
During 1997, Interag completed the sale of several parcels of land to Shell
es Interag. The sales resulted in gains of approximately $1.8 million.
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 $795,000 in 1999, $724,000
in 1998 and $207,000 in 1997. 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 $2.2 million.
F-20
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE I (CONTINUED)
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.
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 15 % in 1999. Several of the African countries have
undergone major currency devaluations 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-21
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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. The Company held no derivative financial instruments at December
31, 1999.
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-22
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE K - INCOME TAXES
An analysis of the components of income tax expense is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current income tax expense
Federal $ 23
State $ 4 $ 44 9
Foreign 1,566 2,301 1,930
------ ------- -------
1,570 2,345 1,962
Deferred income tax expense
Foreign 345 (138) (443)
------ ------ -------
Income tax expense $1,915 $2,207 $ 1,519
====== ====== =======
</TABLE>
The foreign portion of income before taxes was $7.4 million in 1999, $7.4
million in 1998 and $4.8 million in 1997.
Taxes on income of foreign consolidated subsidiaries and affiliates are
provided at the rates applicable to their respective foreign tax
jurisdictions.
F-23
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Deferred tax assets:
Impairment of investments $ 12 $ 26 $ 46
Reserves for guarantees and loss contracts 25 200 241
Bad debt and inventory reserves 38 138 474
Net operating loss carryforwards 263 1,253 1,225
Vacation pay 258 327 338
Other 37 184 9
------ ------- --------
633 2,128 2,333
Valuation allowance - (1,130) (1,158)
------ ------- --------
Deferred tax assets 633 998 1,175
Deferred tax liabilities:
Deferred income on sales and services (835) (1,114) (1,392)
Other (37)
------ ------- --------
Net deferred tax liabilities $ (202) $ (116) $ (254)
====== ======= ========
</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. For the remaining deferred tax
assets, management assert that is more likely than not that the results of
future operations will generate sufficient taxable income to realize these
deferred tax assets.
F-24
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE K (CONTINUED)
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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income tax at U.S. Federal statutory rate $2,672 $2,580 $2,481
Effect of different foreign tax rates (48) (690) (549)
State and local tax, net of Federal effect 4 29 6
Change in valuation allowance 268 324
Dividends received exclusion (Hungary)
Nondeductible losses of subsidiaries 147
Currency exchange (166) 894 175
Equity in earnings of affiliate (809) (851) (785)
Expiration of loss carryover in excess of valuation allowance 505
Miscellaneous items (243) (23) (280)
------ ------ ------
Income tax expense $1,915 $2,207 $1,519
====== ====== ======
</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-25
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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, 1999, 1998 and
1997 (in thousands).
F-26
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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-
vehicles products ment Ment Corporate nations dated
-------- -------- ------- --------- --------- ------- --------
--------------------------------(amounts in thousands)---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
----
Revenue
Sales to unaffiliated
customers $14,667 $30,751 $54,212 $69,243 $ 10,238 $179,111
Operating income (loss) 250 (128) 723 7,698 (3,303) 5,240
Interest income 29 378 794 67 336 $(789) 815
Interest expense 17 95 674 1,478 (789) 1,475
Depreciation and
amortization 60 715 1,179 659 441 3,054
Equity in earnings of
affiliates 4,290 4,290
Capital expenditures 252 570 640 1,103 708 3,273
Identifiable assets 2,901 16,473 55,736 48,564 2,681 126,355
Net worth 1,914 11,902 49,017 14,345 11,718 88,896
</TABLE>
F-27
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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-
vehicles products ment ment Corporate nations dated
-------- -------- ------- --------- --------- -------------------
---------------------------------(amounts in thousands)----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
----
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
affiliates 4,361 4,361
Capital expenditures 39 331 783 2,176 1,763 5,092
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-28
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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-
vehicles products ment ment Corporate nations dated
-------- -------- ------- --------- --------- -------------------
--------------------------------(amounts in thousands)----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
----
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
amortization 103 1,349 1,118 506 546 3,622
Equity in earnings of
affiliates 4,156 4,156
Capital expenditures 252 446 1,252 2,866 448 5,264
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-29
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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-
Hungary Israel Africa and other nations dated
-------- -------- ------ --------- ------- ---------
---------------------------(amounts in thousands)---------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenue
Sales to unaffiliated customers $55,656 $54,212 $54,097 $ 38,303 $(23,157) $179,111
Transfers between geographic
areas 38,303 (38,303)
------- ------- ------- -------- -------- --------
$55,656 $54,212 $92,400 $ - $(23,157) $179,111
======= ======= ======= ======== ======== ========
Operating (loss) income $(2,692) $ 723 $ 7,698 $(489) $ 5,240
Interest income 449 794 67 294 $(789) 815
Interest expense 791 95 674 704 (789) 1,475
Depreciation and amortization 1,216 1,179 601 58 3,054
Equity in earnings (loss) of
affiliates 5,181 4,290
Capital expenditures 1,530 640 1,065 38 3,273
Identifiable assets 28,256 55,736 40,715 32,329 (30,681) 126,355
Net worth 28,214 49,017 31,851 9,989 (30,175) 88,896
</TABLE>
F-30
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
England Elimi- Consoli-
Hungary Israel Africa and other nations dated
-------- -------- -------- --------- ------- --------
----------------------------(amounts in thousands)-----------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
----
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 amortization 1,633 1,115 649 56 3,453
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-31
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE L (CONTINUED)
<TABLE>
<CAPTION>
England Elimi- Consoli-
Hungary Israel Africa and other nations dated
-------- -------------------------------------------------- -------
---------------------------------(amounts in thousands)---------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
----
Revenue
Sales to unaffiliated customers $120,883 $67,754 $19,531 $ 31,449 $239,617
Transfers between geographic
areas 31,449 (31,449)
-------- ------- ------- --------
$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-32
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
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 1999 quarters ended:
Net sales $47,159 $40,922 $51,108 $39,922
Gross profit 11,649 11,137 13,050 11,792
Income (loss) before income taxes and 2,470 1,504 4,152 (266)
minority interest
Net (loss) income 1,531 1,906 3,045 (721)
Net (loss) income per share $0.27 $0.33 $0.54 $(0.13)
======= ====== ======= =======
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
======= ======= ======= =======
</TABLE>
F-33
<PAGE>
IIC Industries, Inc. and Subsidiaries
SCHEDULE II - VALUATION ALLOWANCE ACCOUNTS
Years ended December 31, 1999, 1998 and 1997
(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>
1999
Doubtful accounts $ 3,023 $163 $ (65) $(441) $ 2,680
Inventory reserves 2,520 151 (12) (100) 2,559
Investments 734 (98) (10) 626
Loan provisions 309 1 (41) (7) 262
Customer credits and discounts 462 (35) 427
Warranty 347 (1) (16) 330
-------- ------- ----- ----- --------
$ 7,395 $315 $(217) $(609) $ 6,884
======== ======= ===== ===== ========
1998
Doubtful accounts $ 3,043 $ 317 $ (47) $ (290) $ 3,023
Inventory reserves 3,151 813 (71) (1,373) 2,520
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
-------- ------- ----- -------- --------
$ 10,215 $ 1,258 $(289) $ (3,789) $ 7,395
======== ======= ===== ======== ========
1997
Doubtful accounts $ 3,358 $ 260 $ (370) $ (205) $ 3,043
Inventory reserves 4,000 1,423 (2,272) 3,151
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 $ 2,574 $ (424) $ (3,256) $ 10,215
======== ======== ======== ======== ========
</TABLE>
F-34
<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 ("the Company") as at December 31, 1999, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the year then ended.
The consolidated balance sheet at December 31, 1998 and the consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the two years in the period ended December 31, 1998 were audited by other
auditors who issued an unqualified opinion. Such financial statements were
prepared in accordance with International Accounting Standards, which were the
basis for data included herein.
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 whether due to error in the financial statements or anything
misleading therein. 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 above financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1999 and the
result of its operations, the changes in shareholders' equity and cash flows of
the Company for the year then ended in accordance with International Accounting
Standards.
February 28, 2000
KPMG Hungaria Kft.
Victor Kevehazi
Partner
F-35
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(All amounts in HUF 000,000's)
<TABLE>
<CAPTION>
At December 31,
Notes 1999 1998
------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Cash and bank 4 920 1,448
Accounts receivable 5 2,382 2,043
Inventory 6 279 304
Other current assets 7 2,204 1,572
--------------- ---------------
Total current assets 5,785 5,367
Property, plant and equipment 8 33,431 31,393
Other non-current assets 9 294 262
--------------- ---------------
Total non-current assets 33,725 31,655
=============== ===============
Total assets 39,510 37,022
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable 1,098 1,149
Advance payments from guests 146 95
Other payable and accruals 10 1,694 1,356
Current portion of long-term debt 11 1,646 1,346
--------------- ---------------
Total current liabilities 4,584 3,946
Long-term debt 11 3,665 4,613
Negative goodwill 12 3,202 2,866
--------------- ---------------
Total long term liabilities 6,867 7,479
--------------- ---------------
Total liabilities 11,451 11,425
Minority interest 13 6 72
Shareholders' Equity:
Share capital 14 9,076 8,000
Capital reserve 7,280 8,010
Treasury shares 14 (1,703) (819)
Retained earnings 13,400 10,334
--------------- ---------------
Total shareholders' equity 28,053 25,525
=============== ===============
Total liabilities and shareholders' equity 39,510 37,022
=============== ===============
</TABLE>
The notes set out on pages 7 to 25 are the integral part of the consolidated
financial statements.
F-36
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(All amounts in HUF 000,000's)
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1999 1998 (*)
--------- -------------- --------------
<S> <C> <C> <C>
REVENUE
Rooms 14,991 14,352
Food and Beverage 7,605 7,320
Spa 1,552 1,545
Interest income 266 398
Other revenues 17 2,128 1,997
-------------- --------------
Total revenue 26,542 25,612
COSTS AND EXPENSES
Rooms 2,963 2,883
Food and Beverage 5,190 5,178
Spa 444 454
Administrative and General 18 9,563 9,106
Interest expense 313 384
F/x loss on foreign currency loan 61 901
Depreciation 2,363 1,280
Other expenses 19 1,471 1,242
-------------- --------------
Total Costs and Expenses 22,368 21,428
Income before minority interest and income taxes 4,174 4,184
Minority interest 13 (-) (2)
-------------- --------------
Income before taxes 4,174 4,182
Corporate income tax expense 20 (772) (717)
Profit for the year 3,402 3,465
-------------- --------------
Dividend proposed (336) (-)
-------------- --------------
Net income 3,066 3,465
============== ==============
Basic earnings per share (expressed in HUF per share): 21 365 433
</TABLE>
(*) See Note 3
The notes set out on pages 7 to 25 are the integral part of the consolidated
financial statements.
F-37
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF 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, 1998 8,000 7,329 - 7,550 22,879
Transfer: Capital Contribution 15 681 (681) -
Net Income 3,465 3,465
Increase in treasury shares (819) (819)
------------- ------------ ----------- ------------- ------------
DECEMBER 31, 1998 8,000 8,010 (819) 10,334 25,525
Issue of employee shares 14 1,076 (968) 108
Stock exchange costs of employee shares
issue (12) (12)
Net Income 3,066 3,066
Gain on treasury shares transactions 14 250 250
Increase in treasury shares (884) (884)
------------- ------------ ----------- ------------- ------------
DECEMBER 31, 1999 9,076 7,280 (1,703) 13,400 28,053
============= ============ =========== ============= ============
</TABLE>
The notes set out on pages 7 to 25 are the integral part of the consolidated
financial statements.
F-38
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
<TABLE>
<CAPTION>
Year ended December 31,
Note 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Income before taxes and dividend 4,174 4,182
Adjustments for:
Interest income (266) (398)
Interest expense 313 384
Depreciation and amortisation 2,206 1,450
Unrealised foreign exchange loss on loans 899 949
Provision for write down of investments 16 -
Gain on sale of fixed assets (18) (8)
Minority interest in income - 2
Changes in assets and liabilities:
Accounts receivable and other current assets (884) (240)
Inventory 25 53
Accounts payable and other current liabilities 320 (14)
------ -------
Cash generated from operations 6,785 6,360
Dividend proposed (336) -
Interest paid (310) (478)
Corporate income tax paid (854) (950)
------ -------
NET CASH FLOW PROVIDED BY OPERATIONS 5,285 4,932
------ -------
Ch flows from investing activities:
Purchase of property, plant and equipment (3,173) (2,347)
Cash acquired on purchase of Gama 45 s.r.o 10 -
Cash paid on acquisition of subsidiaries net of cash acquired 28 (1,023) (13)
Interest received 315 439
Proceeds from disposal of investment 20 34
Cash outflow from other non-current assets (66) (93)
Proceeds on sale of property, plant and equipment 189 23
------ -------
NET CASH FLOW PROVIDED BY (USED IN) INVESTING (3,728) (1,957)
------ -------
Cash flows from financing activities:
Net increase / (repayment) of long-term debt (1,547) (3,912)
Purchase of treasury shares (884) (819)
Net cash flow effect of employee shares issue 96 -
Gain on treasury shares 250 -
------ -------
NET CASH FLOW PROVIDED BY / (USED IN) FINANCING (2,085) (4,731)
------ -------
Decrease in cash (528) (1,756)
Cash at beginning of year 1,448 3,204
------ ------
CASH AT END OF YEAR 920 1,448
====== ======
</TABLE>
F-39
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
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 ("APV
Rt."). In November 1992, a portion of Danubius' outstanding shares was
publicly sold and such shares were listed for trading on the Budapest
Stock Exchange.
Danubius 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 in January 1997. Danubius acquired further
14.78% of the shares from the employee consortium in September 1997 (see
Note 26).
Danubius group was reorganised into a more efficient structure on 1
January 1999 (see Note 27).
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
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 consolidated 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 consolidated financial statements are prepared in Hungarian Forint
(HUF) and are presented in millions of forints.
The consolidated 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.
The accounting policies have been consistently applied by the Group
enterprises and, except for the changes in accounting policy disclosed on
page 10, are consistent with those used in the previous year.
F-40
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
BASIS OF CONSOLIDATION
Subsidiaries are those enterprises controlled by the Company. Control exists
when the Company has the power, directly or indirectly, to govern the financial
and operating policies of an enterprise so as to obtain benefits from its
activities.
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.
The Company's principal subsidiary holdings at 31 December 1999 are as follows:
<TABLE>
<CAPTION>
Proportion of Shares held at
Name Principal Activity Country of 31 December 1999 31 December 1998
Incorporation
<S> <C> <C> <C> <C>
Hungaria Szalloda-Ingatlankezelo
Rt. (formerly Hungaria Szalloda Rt.) Property management Hungary 99.9% 99.9%
Danubius Szallodauzemelteto es
Szolgaltato Rt. (formerly Hotel
Helia Rt.) Hotel operator Hungary 100% 100%
Hullam Kozos Vallalat Hotel operator Hungary 100% 53%
Danubius Beta Hotels Kft. Hotel operator Hungary 100% 100%
Hotelreservierung und Reiseservice
fur Ungarn Gmbh Travel Agency Germany 100% 100%
Gama 45 s.r.o Hotel operator Czech Republic 100% -
</TABLE>
CASH AND CASH EQUIVALENTS
Cash equivalents are liquid investments with original maturities of three months
or less.
F-41
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
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 6% 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 31 July 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.
F-42
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
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 l, 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. The
resulting foreign currency exchange gains and losses are recognised in the
statement of income.
REVENUE RECOGNITION
Revenue is recognised on an accrual basis and 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.
CHANGE IN ACCOUNTING POLICY
In 1999 the Company changed its accounting policy in respect of
depreciation rates for buildings at the reorganisation of the group (see
Note 27). Lands and buildings were apported into Hungaria
Szalloda-Ingatlankezelo Rt. (Property management company) and fixed assets
at hotel units were sold to Danubius Szallodauzemelteto es Szolgaltato Rt.
(Management company) at net book value on 1 January 1999. Continuing the
depreciation of buildings with the prior depreciation rate of 2.5% on the
'new' gross value (net book value) would have extended their useful life
resulting in a longer depreciation period. Additionally, the individual
hotel units were reviewed by the management, which indicated, that the
buildings have various technical conditions. Therefore the management
revised the depreciation rates for buildings from 2.5% to an average rate
of 6%, which resulted in increase of approximately HUF 734 million
depreciation charge for the year.
Small-value fixed assets are charged to the income statement. The Company
increased the limit of THUF 20 to THUF 30 per each asset in 1999 to
reflect the devaluation of Hungarian Forint against hard currencies in the
recent periods.
F-43
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
SEGMENT REPORTING
Segment information is presented in respect of the Company's business
segments. The primary format, business segments, is based on the Company's
management and internal reporting structure and consists the following
segments: hotel operations, property management and other services.
Segment results, assets and liabilities include items directly
attributable to a segment as well as those that can be allocated on a
reasonable basis.
USE OF ESTIMATIONS AND ASSUMPTIONS
Preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and
assumptions affecting the reported data on assets and liabilities, income
and expenses, in the reporting period. Actual results may differ from
these estimates and assumptions.
3. PRESENTATION OF INCOME STATEMENT
The Company changed the presentation of income statement to reflect its
operations in line with hotel business specialities. The Company used the
Uniform System of Accounts for the Lodging Industry for the preparation
both 1999 and 1998 income statements and comparatives have been restated
for 1998 reporting period.
4. CASH AND CASH EQUIVALENTS
1999 1998
------ ------
Cash in hand and at bank 805 1,341
Marketable securities 115 107
------ ------
920 1,448
====== ======
The maturity period of the marketable securities is three months or less.
5. ACCOUNTS RECEIVABLE
1999 1998
------ ------
Trade receivables 1,370 1,022
Receivable from non-consolidated subsidiaries 52 55
Prepayments and accrued income 453 536
Income taxes recoverable 416 243
Other receivable 353 299
Provision for doubtful receivables (262) (112)
------ -------
2,382 2,043
====== =======
6. INVENTORY
1999 1998
------ ------
Food and beverages 187 194
Materials 92 110
------ -------
279 304
====== =======
F-44
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
7. OTHER CURRENT ASSETS
1999 1998
------ -------
Short-term state securities 2,204 872
Other short-term securities - 700
------ -------
2,204 1,572
====== =======
Short-term current assets are state treasury bonds with maturity over three
months.
8. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Furniture, Capital
Buildings and Fittings and projects in
Land Improvements Equipment progress Total
------------ ---------------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Cost/Valuation:
January 1, 1999 4,869 26,414 4,852 786 36,921
Additions 40 1,507 1,626 - 3,173
Acquisition of Gama 45 113 1,329 139 - 1,581
Cost of disposals (2) (17) (175) (143) (337)
------- --------- --------- --------- --------
December 31, 1999 5,020 29,233 6,442 643 41,338
======= ========= ========= ========= ========
Depreciation:
January 1, 1999 - 2,725 2,803 - 5,528
Charge for year - 1,464 899 - 2,363
Acquisition of Gama 45 - 118 62 - 180
Relating to disposals - (1) (163) - (164)
------- --------- --------- --------- --------
December 31, 1999 - 4,306 3,601 - 7,907
======= ========= ========= ========= ========
Net book value:
December 31, 1998 4,869 23,689 2,049 786 31,393
======= ========= ========= ========= ========
December 31, 1999 5,020 24,927 2,841 643 33,431
======= ========= ========= ========= ========
</TABLE>
The values of land and buildings occupied by the Company were determined
with reference to a professional appraisal at 30 April 1991, on an open
market existing use basis. Land and Buildings occupied by subsidiary
companies are shown at cost except for such assets from Hungar Hotels
where land and buildings were revalued by an independent valuer at 1
January 1997.
Effective 1 August 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 495 million relating to the usage right of real
estate on Margaret Island.
F-45
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
9. OTHER NON-CURRENT ASSETS
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Investment in non consolidated subsidiaries 179 145
Loans given to employees 56 76
Other investments, unquoted 59 41
---------------- ----------------
294 262
================ ================
</TABLE>
The book values of the non-consolidated subsidiaries are:
<TABLE>
<CAPTION>
Name Principal activity 1999 1998
---------------- -----------------
NBV Share % NBV Share %
<S> <C> <C> <C> <C> <C>
Danube Travel Travel agency 61 100 77 100
Marcali Szalloda Kft. Hotel 51 50 1 50
Kastelykert Kft. Hotel 43 100 43 100
Solar Kemping Hotel 19 100 19 100
Hungaria Hotel and Reisen
GmbH (Hannover) Travel agency 3 100 3 100
Hotel Kastely Kft. Hotel 2 50 2 50
--- ----
179 145
=== ====
</TABLE>
The above subsidiaries are immaterial to the Group and accordingly have not been
consolidated.
DANUBE TRAVEL
Danube Travel, a travel agency incorporated in London was acquired in 1997 for
GBP 230,000 and also the Company provided a GBP 150,000 interest free loan to
Danube Travel, which is due to be repaid by 2004. Investment in Danube Travel
was written down by HUF 16 million in 1999 due to permanent diminution in value.
MARCALI SZALLODA KFT.
The Company contributed an amount of HUF 50 million to Marcali Szalloda Kft. and
the local municipality of Marcali apported land of HUF 49 million in 1999.
Danubius group is considering a hotel construction in Marcali.
KASTELYKERT KFT.
The Company owns 100% of Kastelykert Kft., which owns a residence in Buk. The
foundation of this subsidiary aimed to develop the residence, however the
property is not marketable due to administrational restriction. Kastelykert Kft.
is a dormant company and the Company management believes that valuation at cost
is a reasonable basis.
F-46
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
10. OTHER PAYABLE AND ACCRUALS
1999 1998
------- --------
Payroll 305 308
Social security 184 235
Taxes payable 386 340
Dividends payable 336 -
Other provisions 54 45
Accrued expense 295 234
Other payable 134 194
----- -----
1,694 1,356
===== =====
11. LONG TERM DEBT
1999 1998
------- --------
1 year 1,646 1,346
1 to 2 years 2,958 1,632
3 to 5 years 696 2,961
over 5 years 11 20
------- ------
Total long term debt 5,311 5,959
Amounts maturing in
less than one year (1,646) (1,346)
------ ------
3,665 4,613
====== ======
Outstanding loans include the following:
o DEM 20 million long term loan provided by Bank Austria Creditanstalt, 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 provided by Magyar Kulkereskedelmi Bank Rt.
(MKB), with an interest rate of 3-month LIBOR + 0.75% secured by a
mortgage on the Budapest Hilton Hotel.
o DEM 10 million long term loan provided by Kereskedelmi es Hitelbank Rt.
(K&H), with an interest rate of 6-month LIBOR + 1.25% secured by a
mortgage on the Hotel Helia.
F-47
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
12. NEGATIVE GOODWILL
Negative goodwill arisen on the following acquisitions:
1999 1998
-------- --------
Hungar Hotels 2,993 2,993
Hotel Helia 154 154
Gama 45 s.r.o. (see Note 28) 493 -
Accumulated amortisation (438) (281)
------- ------
3,202 2,866
======= ======
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 1999, HUF 7.6 million of negative goodwill
arose on the additional purchases of Hungar Hotels and Hullam shares. The
entire amount was brought into income in 1999 (1998: HUF 9 million on
additional purchases of Helia and Hungar Hotels).
13. MINORITY INTEREST
1999 1998
------- --------
Hungar Hotels 6 8
Hullam Kozos Vallalat - 64
-- ---
6 72
== ===
Minority interest represents the minority shareholders' proportionate
share of the equity of subsidiaries. The Company acquired the minority
interest in Hullam Kozos Vallalat (47%) in 1999.
1999 1998
-------- --------
Opening balance 72 91
Income attributable to minority shareholders - 2
Share in subsidiary acquired from minority
shareholders (66) (21)
---- ----
6 72
==== ====
F-48
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
14. SHARE CAPITAL
1999 1998
------ ------
Ordinary shares 8,000 8,000
Employee shares 1,076 -
------ ------
9,076 8,000
====== ======
Registered share capital at December 31 1999 consist of 8 million (1998:
8 million) authorised and issued ordinary shares and 1.076 million issued
employee shares, each of par value HUF 1,000.
According to the shareholders' resolution on the Annual General Meeting
in April 1998 the privatisation refund received from APV Rt. (see Note
15) was used for the employee share issue. The employee share issue
increased the Company's share capital by HUF 1.076 million in 1999, which
was funded as 90% from capital reserve of the Company and 10% of
employees' cash contributions. All the employee shares are intended to be
transformed into ordinary shares on the Annual General Meeting of the
Company in April 2000. The conversion rate will be determined based on
the weighted average share price traded on the Budapest Stock Exchange
during the preceding month of this decision.
Danubius has its own shares of 374,523 pieces at cost of HUF 1,703
million (1998: HUF 819 million). These shares are shown as a component of
shareholders' equity. The Hungarian Companies act requires these shares
to be sold within one year from the date of purchase. The unrealised gain
of HUF 250 million on treasury shares sold and subsequently repurchased
was recorded as capital reserve in 1999.
15. 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 (see Note 14).
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. 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 26.
F-49
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
16. 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:
December 31, December 31,
1999 1998
------------ ------------
Hungarian Accounting Law retained earnings 14,903 11,479
====== ======
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.
17. OTHER REVENUE
1999 1998
------- -------
Rental income 503 575
Telecommunications 431 474
Sport/ fitness 94 89
Travel agency revenues 90 119
Income from other hotel services 268 260
Profit from treasury bonds sold (interest plus gains) 300 230
Negative goodwill amortisation 158 166
Gain on fixed assets sale 18 8
Other revenues 266 76
----- ----
2,128 1,997
===== =====
18. ADMINISTRATIVE AND GENERAL EXPENSES
1999 1998
-------- -------
Payroll and related costs 4,140 3,932
Utility costs 1,049 1,061
Maintenance expenses 905 1,024
Management fees to CP Holding 244 81
Management fees to hotel chains (Hilton, Radisson SAS) 289 337
Marketing expenses 480 477
Bank and insurance fees 344 287
Commissions and discounts provided 317 150
Professional and membership fees 299 203
Telecommunication charges 273 248
Rental expense 246 243
Security costs 111 94
Miscellaneous expenses 866 969
----- -----
9,563 9,106
===== =====
F-50
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
19. OTHER EXPENSES
1999 1998
------ ------
Local taxes 453 291
Tourism contribution (tax) 436 431
Property taxes 165 129
Increase in provision for doubtful debts 128 -
Foreign currency losses 76 72
Other 213 319
----- -----
1,471 1,242
===== =====
20. INCOME TAXES
The effective income tax rate varied from the statutory income tax rate
due to the following items:
1999 1998
------ ------
Income before tax and minority interest 4,174 4,184
===== =====
Tax at statutory rate of 18% 751 753
Effect of IAS adjustments (5) (12)
Other differences, net 26 (24)
----- -----
Income tax expense 772 717
===== =====
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.
1999 1998
----- ------
Provision 235 203
Depreciation 286 662
Total temporary differences 521 865
Less: valuation allowance (521) (865)
----- -----
Total temporary differences with a future tax benefit - -
===== =====
F-51
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
21. EARNINGS PER SHARE
The calculation of basic earnings per share is based on the net income
attributable to ordinary shareholders of HUF 3,402 million (1998: HUF
3,465 million) and a weighted average number of ordinary share
outstanding during the period of 8,404,476 (1998: 7,993,458).
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Issued ordinary shares at the beginning of the year 8,000,000 8,000,000
Own shares held at the beginning of the year (230,898) (-)
---------- ---------
Qualifying ordinary shares at beginning of the year 7,769,102 8,000,000
Effect of own shares repurchased during the year (82,002) (6,542)
Effect of employee shares issued 717,376 -
---------- ---------
Weighted average number of ordinary shares 8,404,476 7,993,458
========== =========
</TABLE>
Employee shares are not saleable, however they are entitled to dividend
payment as ordinary shares. No diluted earnings per share was calculated
as the conversion of the employee shares into ordinary shares at market
value in 2000 will have no dilution effect.
22. 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 26). Total spending to satisfy this commitment by the end of
1999 was HUF 2,675 million (1998: HUF 1,893 million).
b) The Group has also made commitments to spend HUF 908 million (1998:
HUF 289 million) on refurbishment and renovations of the remaining
hotel buildings and facilities during 2000.
23. 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.
F-52
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
24. 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 are 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.
25. PENSION SCHEME
The pension scheme is available for all employees after half-year
employment. The contribution expense was HUF 179 million (1998: 164
million) and charged against profit for the year in which the
contribution is payable. The contribution is paid on 5% of the employee
salary. The assets of the fund are held in a separate trustee
administered funds.
26. 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 had 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.
F-53
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
ACQUISITION OF HUNGAR HOTELS (CONTINUED)
The acquisition was made as follows:
HUF 000,000
-----------
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
========
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 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.
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.
27. DANUBIUS GROUP REORGANISATION
Management decided in 1998 to reorganise the Danubius Group into a more
efficient structure. The reorganisation involved Danubius., Hotel Helia
and Hungar Hotels. Danubius was transformed into a holding company, Hotel
Helia become a hotel operator and Hungar Hotels a property management
company respectively.
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 Hotel Helia on January 1, 1999 (except for
Margitsziget and Gellert hotels) at net book value. The Court of
Registration registered the share capital increase effective January 12,
1999. Hungar Hotels name was changed to Hungaria Szalloda-Ingatlankezelo
Rt.
The other fixed assets, inventories and receivables were sold at book
value by Danubius and Hungar Hotels to Hotel Helia in January 1999. Hotel
Helia name was changed to Danubius Szallodauzemelteto es Szolgaltato Rt.
F-54
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
28. ACQUISITION OF GAMA 45 S.R.O
Effect on the consolidated financial statements:
BALANCE SHEET AT JUNE 30, 1999 GAMA 45 S.R.O
Fixed assets 1,399
Current assets 54
Long term liabilities (896)
Other short term liabilities (15)
------------
Net assets 542
Less: Purchase consideration 7
Acquisition costs (legal, accounting and consulting) 42
------------
Negative goodwill 493
============
The Company acquired 100% shares in Gama 45 s.r.o (a standalone Czech
hotel in Marien Bad) from Ceskoslovenska obchodni banka for USD 30,000
(HUF 7 million) on December 14, 1999. Danubius also paid the loan of USD
6.6 million owed by Gama 45 s.r.o to the referred bank for USD 3.57
million. The realised gain of USD 3 million was taken into account as part
of Gama 45 s.r.o's equity for goodwill calculation as the Company revised
a loan agreement to USD 3.57 million with Gama 45 s.r.o.
Long term liabilities in Gama 45 s.r.o's balance sheet represent the USD
3.57 million loan liability to the Company, which is due to be repaid by
2004 and bears interest at the rate of 7.5%. This loan was eliminated for
consolidation after accounting for negative goodwill.
The cash outflow on the Gama 45 s.r.o acquisition amounted to HUF 935
million, which consists of the purchase consideration, the loan repayment
and acquisition costs less cash acquired.
No financial information was available in respect of Gama 45 s.r.o. other
than the balance sheet as at 30 June 1999, which was used as basis for
consolidation. Such results were considered immaterial.
F-55
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
29. BUSINESSES MANAGED FOR APV RT.
The ownership of the following businesses was retained by APV Rt. on the
transformation of Hungar Hotels:
Claudius Hotel
Hotel Expo
Hungaria Hotel and
Savaria Hotel
The Company managed these entities until June 30, 1999, when APV Rt.
terminated the operational agreement as they were sold. Sales income
amounting to HUF 413 million (1998: HUF 632 million) and cost of sales of
the managed business units are not included in the accompanying financial
statements. Any losses were charged to APV Rt. and profits paid to APV Rt.
for the operation of these business units.
30. RELATED PARTY TRANSACTIONS
1999 1998
------ ------
Management fee to CP Holding 244 81
Rental fee to Interag Rt. 155 130
Services provided by Interag Rt. 26 54
Service provided by Investor Rt. 15 26
----- ----
Expenses total 440 291
===== ====
Related party receivables and liabilities are not significant as at
December 31, 1999.
F-56
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
31. SEGMENT REPORTING
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
Hotel Property Other Elimination Consolidated
Operation Management Services
<S> <C> <C> <C> <C> <C>
Revenue 25,805 327 410 - 26,542
Inter-segment revenue 708 5,264 5,847 (11,819) -
- ------------------------------------------------------------------------------------------------------------------
Total revenue 26,513 5,591 6,257 (11,819) 26,542
==================================================================================================================
Segment result 37 - 3,365 - 3,402
Current assets 4,081 5,588 5,862 (9,746) 5,785
Non-current assets 5,646 26,448 27,742 (26,111) 33,725
Current liabilities 5,329 3,473 3,604 (7,822) 4,584
Non-current liabilities 1,174 969 2,686 2,038 6,867
- ------------------------------------------------------------------------------------------------------------------
Net assets 3,224 27,594 27,314 (30,073) 28,059
==================================================================================================================
</TABLE>
There are no comparatives available for 1998, as the above segmentation is
a result of the 1999 group reorganisation (Note 27). Inter-segment revenue
consists of property rental fees paid by hotel units to Property
management company, re-invoicing of fixed assets purchased by Holding
company on behalf of Property and Management companies and dividends paid
by subsidiaries after their 1999 results within the group.
Current assets and current liabilities primarily consist of inter-company
rental fees and dividends receivable/payable at the year-end. Non-current
assets elimination is basically the equity consolidation.
GEOGRAPHICAL SEGMENTS
The Group operations are performed in Hungary therefore geographical
segment reporting is impracticable. The operation of Czech hotel (Gama 45
s.r.o) will effect 2000 segment reporting as the subsidiary was acquired
in December 1999.
F-57
<PAGE>
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in HUF 000,000's)
32. 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 40 million loans outstanding at year-end (see Note 11).
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.
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.
33. SUBSEQUENT EVENTS
The Company decided to liquidate Solar Camping (100% owned subsidiary) on
February 21, 2000. The assets held by Solar Camping will recover the cost
of the investment recorded in the Company's financial statements.
F-58
<PAGE>
Exhibit 21.1
- ------------
IIC INDUSTRIES INC.
------------------
List of Subsidiaries
--------------------
Israel Tractor 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)
Boma Kft. (Hungary)
Interag Rt. (Hungary)
Kompakt Auto Kft.
Interag Autohaz Kft.
Motor Pedo, Kft.
Frigoland Kft.
H.H.H. Udvarhaz Kft.
Balton C.P. Limited (England)
Amiran Zambia Ltd. (Zambia)
Telkor Communications Systems, Ltd. (Zambia)
Ghana Smartcomm Ltd. (Ghana)
Bamiri Limited (Kenya)
Amiran Communications, Ltd. (Kenya)
Dizengoff Ghana Ltd. (Ghana)
Amiran Kenya Ltd. (Kenya)
Balton Tanzania 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,563
<SECURITIES> 0
<RECEIVABLES> 38,524
<ALLOWANCES> 2,680
<INVENTORY> 32,554
<CURRENT-ASSETS> 90,329
<PP&E> 26,135
<DEPRECIATION> 18,617
<TOTAL-ASSETS> 173,164
<CURRENT-LIABILITIES> 59,740
<BONDS> 0
0
0
<COMMON> 1,586
<OTHER-SE> 87,310
<TOTAL-LIABILITY-AND-EQUITY> 173,164
<SALES> 179,111
<TOTAL-REVENUES> 179,111
<CGS> 131,483
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 42,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,475
<INCOME-PRETAX> 7,676
<INCOME-TAX> 1,915
<INCOME-CONTINUING> 5,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,761
<EPS-BASIC> 1.01
<EPS-DILUTED> 1.01
</TABLE>
