ITEM 1. BUSINESS
HISTORY
IIC Industries Inc. (the "Company") was incorporated pursuant to the laws of the State of Delaware on October 14, 1958 under the name "Israel Investors Corporation." The Company registered itself as a closed-end "investment company" under the Investment Company Act of 1940, as amended (the "Act"), in 1959. As an investment company, the Company made investments in Israel or Israel related businesses. Pursuant to shareholder approval received in 1982, the Company determined to cease its activity as an investment company and to become an operating company with flexibility to enter into non-Israel related businesses. This decision was prompted by conflicts of interests caused by the fact that the Company's majority shareholder, Koor Industries ("Koor"), had substantial interests in a large number of businesses in Israel and that the Act precludes certain affiliated transactions. In September 1989, Koor sold its interest in the Company to CP Holdings Limited, a private United Kingdom company. In anticipation of the Company's transition to an operating company, substantially all of the Company's investments were converted into short-term deposits and the Company's name was changed to IIC Industries Inc. The Company filed an application on November 23, 1990, with the Securities and Exchange Commission ("SEC") to deregister as an investment company registered under the Act. On October 6, 1992, the SEC approved the deregistration application and the Company was deregistered as an investment company.
GENERAL
The Company is presently operated as a holding company with subsidiaries in three principal operating geographic areas: (1) Investor RT, a Hungarian holding company ("Investor"), which through its subsidiaries, engages in a variety of commercial activities in Hungary; (2) The Israel Tractors and Equipment Company Limited ("Israel Tractor"), an Israeli corporation, which distributes tractors and related heavy machinery in Israel and (3) Balton C.P. Limited, an English holding company with African subsidiaries ("Balton") engaged in the trading business in several African countries.
The Company's holdings in Balton and Investor were acquired as part of the Company's transition to an operating company and in connection with the Company's deregistration application. The Company acquired 51% of Balton and made certain loan advances to Balton in May 1991 for approximately $3.5 million in total acquisition costs (of which $1.5 million has been refunded). In addition, in January 1992, the Company purchased a 60% interest (equivalent to 70% after adjusting for treasury stock and unpaid shares) in Investor for approximately $34 million, with an option to purchase an additional 20% for $11.3 million. The option was never exercised, but in December 1994, in settlement of various claims against the sellers, the Company acquired an additional 23% interest for the sum of approximately $900,000. At December 31, 1997, the Company owned a 99% interest in Investor.
Through its subsidiaries, the Company is principally engaged in the following lines of business: (1) the sales and service of vehicles; (2) the export/import and processing/storage of agricultural products; (3) other industries including retail and wholesale consumer products; (4) the distribution of tractors and other heavy equipment; and (5) the sale of agricultural, communications and electrical equipment. The first three of the aforementioned lines of business are conducted through subsidiaries of Investor, while the distribution of agricultural, communications and electrical equipment is conducted through Balton and its subsidiaries. The distribution of tractors and heavy equipment is conducted through Israel Tractor.
Between February 1995 and January 1996, Investor, through its 78% owned subsidiary, Interag, has 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 itself purchased to date an additional interest of 5.5% equity interest in Danubius Hotel for approximately $4.2 million and an additional 7.8% of Interag for $1 million.
INVESTOR
General -------
Investor was founded by the Hungarian Trade Ministry in 1989 in order to function as a quasi- owner of certain state owned trading companies. In July 1990, it was converted into a company with share ownership.
Investor is primarily a holding company with subsidiaries engaged in a variety of activities in Hungary. Investor's principal subsidiaries are Agrimpex RT ("Agrimpex"), in which Investor has a 63% interest, and Interag RT ("Interag"), in which Investor has a 78% interest. In addition, Investor has minority investment positions in several Hungarian companies engaged in various businesses including trading, financial services, banking and consulting. In 1997, Interag continued the rationalization of certain unprofitable operations.
At December 31, 1997, Investor and its subsidiaries, and Danubius Hotel employed a total of 7,049 persons.
Agrimpex --------
Agrimpex, a Hungarian company, imports and exports a wide variety of agricultural products (excluding livestock) operating through a domestic and foreign business network, including agents and commercial representatives in various countries throughout the world. The main products traded include cereals (wheat, corn and barley), vegetable oils, oil seeds, sugar, legumes and proteins.
With respect to export transactions, Agrimpex deals with a large number of Hungarian domestic suppliers, including agricultural cooperatives, individual farmers and other business organizations and is therefore not dependent on any single supplier or small group of suppliers. Agrimpex trades exports with parties located in the republics of the former Soviet Union, Switzerland, Poland, Rumania, etc. With respect to imports, Agrimpex trades principally with parties located in Brazil, Germany, Austria and East Asia.
Agrimpex has a 50% interest in Harmashatarhegyi Udvarhaz (the other 50% is owned by Interag), a company which operates a restaurant in Budapest, and a 48% interest in a transportation company, Agrovagon Kft., as well as minority interests in other companies.
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 included four flour mills, four compound feed plants, a rice mill and extensive storage facilities in silos and warehouses. Its main business involves the production and supply of flour which is sold through retail outlets in the area and the sale of animal feed to local farmers. In addition, Agrimill also assists Agrimpex in sourcing agricultural products for export.
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 included flour mills, one compound feed plant, one corn flaking plant,a port facility on the Danube and extensive storage facilities in silos and warehouses. Its main business is in the production of flour and animal feeds, which are sold on the local domestic market.
At the beginning of 1996, Agrimpex was reorganized, so that the company itself became a holding company and the trading activity was transferred into a newly formed and 100% owned company called Agrimpex Commodities Kft. (Limited Liability Company). The objective was to establish a realistic structure for the group in the view of the previous years investment policy and to limit the exposure from the trading activity. In 1997 Agrimpex Commodities suffered significant losses due to poor management in a time of difficult market conditions. In January 1998, the Board of Agrimpex changed the complete management of the company.
In October 1996, Agrimpex entered into a joint venture with a 51% ownership to improve its possibilities in getting goods for trade in the northern part of Hungary. The new company, Agrimont supplies the farmers with basic inputs for the production and is authorized to purchase the crop, which is traded by Agrimpex afterwards. Agrimont had a difficult year in 1997 due to unfavorable market conditions.
At the beginning of 1997, it became apparent that the Managing Director of Agrimill Rt and two of his Deputies were involved in irregular transactions that has 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 both directly and indirectly by the managers for their own personal benefit. The full extent of the transactions is not yet determined, while a full independent investigation is being carried out. The three managers concerned have subsequently been relieved of all responsibilities within the group. They paid back HUF 70 million unconditionally and the court suspended any further claim until the criminal case will be finished.
The losses incurred due to these irregularities and difficult market conditions led to a reorganization of Agrimill and Viktoria involving a redundancy program and the rationalization of production facilities to improve utilization and efficiency. Two flour mills and three compound feed plants were mothballed.
In November 1997, the Danube port and a silo were contributed to a joint venture, DP Invest, as contribution in kind with the result that the Company acquired a 50% interest in DP Invest. (See details of this business in the next section.)
Interag -------
Interag now operates as a holding company. Following a significant reorganization in 1993, the operations of Interag and its subsidiaries are now primarily involved in car dealerships, service and repair of vehicles and property management. Interag is also involved in trading of food products utilizing a cold storage facility and the distribution of power products. In addition, Interag has certain small minority investments.
The car business operates through several dealer points and service operations, mainly in Budapest. Interag acts as a dealer for Suzuki, Daewoo and Peugeot. The Lada dealership ceased in 1997.
In February 1995, Interag concluded the purchase of a 17.3% interest in Danubius Hotel and to date has increased its holdings to approximately 29% at a total cost of approximately $19.5 million.
Danubius Hotel, a company listed on the Budapest Stock Exchange, owned and/or managed, ten major hotels comprising approximately 2,000 rooms. An additional eleven hotels comprise the smaller Beta Hotels Chain. It owns the Hilton Hotel in the historic old town of Budapest and two hotels, the Grand and Thermal, on Margaret Island, a famous island on the River Danube in Budapest. Hotel Gelbert, which was only managed by Danubius, was bought in 1996 and shareholding in another spa hotel, Helia, was increased so that full control has been achieved as well.
The Danubius Hotel chain, including several spa hotels, is the foremost of its kind in Hungary and attracts many tourists from Western Europe and further afield. Its occupancy rate of 65.7% in 1995 increased to 68.4% in 1996, and to 69.5% in 1997.
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 acquiring a controlling stake in the HungarHotels chain. After an official tender, an 85% share was acquired by Danubius in beginning of 1997. The purchase price was HUF 8.1 billion or equivalent to approximately $45 million. HungarHotels chain consists of fourteen hotels, of which seven hotels are in Budapest. The capacity consists of 1,105 rooms in 4-star hotels and 2,346 rooms in 3-star hotels. During 1997, Danubius acquired an additional 14% of the shares so as of today it owns nearly 100% of the shares.
In 1997, Interag directly acquired a 50% ownership in a company, ATI Depo which is involved in the public warehousing business. The Company operates one freehold warehousing site and nine rented ones. The rented ones belong to DP Invest, which has similar identical ownership structure (50% Hungarian Investment & Development Bank, 50% Investor Group through Interag and Agrimpex). DP Invest is a real estate holding company, whose holdings are rented by ATI Depo.
Because of a syndicate agreement with the co-owner, the Investor Group exercises the management control over ATI Depo. The basic consideration of the group management was to develop this warehouse network establishing new logistic centers utilizing the locations of the warehouses all over the country.
Governmental Regulation -----------------------
Hungary made all current account items convertible on January 1st, 1996 when the Foreign Exchange Law came into force. Accordingly, on January 2nd, 1996, the IMF acknowledged that Hungary was in compliance with Article VIII of the Articles of Association.
Many liberalization measures have already been adopted or their timing has been accepted by the Hungarian Government. The underlying principle has remained the same as at the time of the establishment of the foreign exchange law: first, transactions with longer maturities, then-- when the relatively significant interest differentials between Hungary and its partners have decreased- transactions with shorter maturaties have been or will be liberalized. Companies with foreign participation may keep their initial hard currency share capital in the currency of the investment. Dividends, net of withholding tax and consideration received on the sale of shares may be repatriated in the original currency of investment without restrictions or the need for approval. Businesses can convert Forints into another currency to import goods provided sufficient Forint funds are available. Services rendered within Hungary should be paid for in Forints and Hungarian companies may not conduct trade among themselves in foreign currency.
Hungarian companies which are not established in duty-free zones are obliged to keep their books in local currency only. With the modification of the foreign exchange law, a new foreign exchange accounting system was set up commencing on April 1, 1995, in which companies can keep their foreign exchange revenues from exports and from which they can transfer foreign exchange for their rising costs. This system extends the previous entitlement by which a Hungarian company with foreign participation or a wholly foreign-owned Hungarian company may keep the cash portion of the foreign partners' share capital in a separate convertible currency bank account. Money in the convertible currency account can always be converted into local currency.
Restrictions are not imposed on foreign ownership of Hungarian businesses. As a foreign owner of a Hungarian company, the Company is entitled to receive dividends or refunds of its capital in a convertible currency, without restrictions. As such, it may have such dividends or refunds converted into United States currency by the Hungarian central bank, and then repatriated. Dividends of Hungarian companies may only be paid from retained earnings as determined in accordance with Hungarian statutory accounting regulations. Such retained earnings are different from the Company's consolidated retained earnings due to a number of differences in accounting standards used.
Foreigners may acquire real estate with the prior consent of the County Public Administration Office. However, any registered company with foreign participation may acquire real estate only to the extent it is needed for undertaking the company's commercial activities.
Any legal entity or private entrepreneur engaged in foreign trade activity must notify the Ministry of Industry and Trade at the commencement of such activity. Approximately 95% of products and services may be imported freely into Hungary. Although in theory every product and service may be exported and imported, certain strategic items require a special import or export license, procured from the Ministry of Industry and Trade. In addition, there are certain items, such as armaments, precious metals and their alloys, cars, medicines, radioactive materials, cereals and some consumer goods that may be imported and exported only by Hungarian companies with a license or an ad hoc permission. The business of Investor is affected by this system in the case of cars and cereals for which both Interag and Agrimpex, respectively, have obtained the required licenses from the Hungarian government.
Companies incorporated in Hungary are subject to a corporate income tax on their worldwide profits. Foreign companies carrying out taxable activities in Hungary are subject to corporate income tax on their net profits derived from Hungarian sources. The corporate tax rate until the end of 1996 consisted of two levels of taxation: an 18% rate on profits and a 23% rate on dividends paid. The two level tax was a significant change from the rate that that had previously existed until the end of 1994. However, because of the method of taxation, the total corporate rate was 33.3%.
For 1997, the 23% supplementary tax was abolished, and profits will be subject to a linear tax levied at 18%. A typical dividend tax at 20% was introduced, which is subject to the provisions of the double taxation treaties.
Dividend tax is not payable on:
o distributions to Hungarian resident companies- unless the distribution is made in cash;
o dividends reinvested by foreign shareholders directly into existing or new Hungarian companies;
o increase in share capital if the capital was increased from 1995 or 1996 profits and the decision is made before May 31st, 1997 and reported to the Court of Registration before June 30th, 1997, and the increase is maintained for three calendar years; or
o 1997 and 1998 dividends, if the source of the dividend payment is pre-1995 profits. For 1998, the 1997 tax regulations are prolonged.
Business Conditions in Hungary ------------------------------
Investor conducts business primarily in Hungary and as such is significantly affected by the general business and political conditions in that country. Prior to the economic reforms which began in 1968, Hungary had a socialist, centrally-planned economy based on physical output targets and central administrative directives. In 1968, a new system of economic management was initiated, aimed at developing a more market-oriented economy. Fundamental economic reforms introduced in recent years include privatizing state-owned enterprises, instituting external trade reforms, creating a two-tier banking system, modernizing the infrastructure, developing a Western European-style tax system and implementing laws on banking, accounting and bankruptcy. The Government also has liberalized prices and wages, reduced government subsidies and granted state-owned businesses greater freedom in decision-making. In addition, customs-free zones have been established for joint ventures between Hungarian enterprises and foreign companies.
The Government's economic strategy with the implementation of the stabilization program, introduced in March 1995, was to reach sustainable economic growth, accompanied by an improving external and internal equilibrium. In 1997, the positive results of the Government's package are obvious, especially with respect to the external and internal balance and to privatization.
The current account at December 31, 1997 had a $981 million deficit (2.1% of GDP), a reduction of $697 million from 1996. The account trade deficit for 1997 was $1.734 billion, a reduction of $911 million from 1996. The gross foreign currency debt amounted to $21.7 billion in 1997, as compared to $25.87 billion in 1996.
Privatization, one of the most important elements of the transformation process, is nearing its completion. Foreign direct investment was $2.1 billion in 1997 and $1.98 billion in 1996. In the last two years, the strategic sectors of telecommunications and the energy sectors, were the main areas of privatization. Bank privatization has started and has made important steps, including the selling of the last large bank, the Commercial and Credit Bank (KHB). The process of privatization should be completed by end of 1998.
During 1997, the conditions of a balanced macroeconomic growth gained momentum in Hungary's economy. In 1997, the GDP increased 4.0%. Industrial production rose 11.2% in volume terms in 1997, with industrial output sales rising 34.5%. Domestic sales declined 1.2% compared to the same period in 1996. The highest increase was registered in the engineering sector (77.9% increase from 1996 to 1997). Industrial output increased 16.1% in 1997. Due to large investment projects of the state and local governments, output of the construction sector rose 9.8% in volume terms in 1997. The consumer prices rose 18.3% in 1997 compared to 23.6 % in 1996.
Regarding the outlook for the coming years, developments in the economy conform expectations concerning the continuing improvement of the domestic and external financial position of the country and the moderate but steady increase in GDP. Economic activity is expected to increase in dynamism, leading to a GDP growth rate of approximately 4.5% in 1998 and accelerating in the years following.
The annual average rate of inflation in 1998 is expected around 15%. According to expectations, inflation can be reduced by as much as 4-5 % in each of the next few years.
Political Conditions in Hungary -------------------------------
During the late 1980s, the political system in Hungary underwent dramatic changes. In 1989 non-communist political parties were established and initial steps were taken toward the first free elections in the country since 1947. On October 23, 1989, the country's name was changed from "The Hungarian People's Republic" to the "Republic of Hungary" and a new constitution was adopted. Under its new constitution, Hungary has instituted a multiparty democratic government.
The former opposition parties (socialists and liberals) won the second free elections in June 1994. The coalition government is aware of the short-term difficulties associated with the transformation of Hungary's economy, such as lower GDP and high unemployment and is committed to establishing a market economy and further integration of Hungary into the Western European and international economies. In 1998, an election is scheduled for May.
Hungary is pursuing political as well as economic integration with Western Europe, including membership in the European Community ("EC"). The timing of Hungary's accession to full EC membership will depend on political developments and the continued restructuring and development of Hungary's economy, and will require the approval of all EC member nations. Hungary is among the six countries with which the EC started detailed negotiations in April 1998. Hungary will become a full member of NATO in 1998.
ISRAEL TRACTOR
General -------
Israel Tractor is a corporation organized under the laws of the state of Israel. It is engaged in the sale of tractors and other heavy equipment such as construction equipment, diesel engines and trucks, and spare parts for such equipment. Israel Tractor is the exclusive dealer in Israel for Caterpillar and Bobcat tractors and Navistar trucks and is also a dealer for Ingersoll Rand equipment. Israel Tractor also services the machinery it sells. Israel Tractor believes that it has good relationships with all of its suppliers.
Israel Tractor serves a large number of customers in Israel, approximately 55% of whom are in the construction business and 18% of whom are in the mining business. For the year ended December 31, 1997, approximately 71% of the total sales was Caterpillar tractors, 11% was Navistar trucks, and Bobcat and Ingersol-Rand equipment was 9% each. Israel Tractor faces competition from other distributors of tractors and other heavy equipment, as most manufacturers of such equipment operate in Israel through dealers.
Israel Tractor's current agreement with Caterpillar was entered into in April 1992. The agreement may be terminated without cause, which may occur upon six months notice by either party,
or for cause by Caterpillar upon the occurrence of certain events (such as bankruptcy, insolvency, cessation of business by the dealer, or default on financing agreements with Caterpillar). Israel Tractor's current agreement with Navistar is on an annual basis commencing in January 1997 and expiring in December 1997. This agreement may be terminated prior to expiration by mutual consent of the parties, upon 60 days' written notice by either party, or for cause by Navistar upon the occurrence of certain events (such as default in the payment of obligations to Navistar, insolvency or change of corporate control or management of the dealer).
At December, 1997, Israel Tractor employed 330 persons.
Political and Economic Conditions in Israel -------------------------------------------
As a corporation organized and operated in Israel, Israel Tractor is subject to certain general business conditions applicable to Israeli businesses. The principal offices and workshop facilities of Israel Tractor are located in Israel and are directly affected by economic, political and military conditions in that country.
Since its war of independence in 1948, Israel has sought peace with its Arab neighbors. A breakthrough took place due to the courageous step taken in 1977 by the late President of Egypt, Anwar Sadat, who agreed to negotiate directly with and recognize Israel. The talks led to the Camp David Agreement in 1978 and to the signing of a peace agreement with Egypt in 1979. The second step occurred after the Gulf War with the collapse of the Soviet Union communist regime, and the setting up of a new political order, which lead to bilateral talks between Israel, Syria and Jordan and the Palestinians.
The following is the time line of major events and agreements:
October 30, 1991 Opening of the Madrid peace conference between Israel and the Palestinians, Jordan, Syria and Lebanon
September 13, 1993 Declaration of Principles between Israel and the PLO in Washington
May 4, 1994 The Cairo agreement on "Gaza Strip and Jericho First"
July 15, 1994 Israel-Jordan Declaration, in Washington
August 29, 1994 Early empowerment to the Palestinians
October 16, 1994 Peace Treaty between Israel and Jordan
On September 9th, 1993, after almost two years of talks since the Madrid Conference, a breakthrough was achieved between Israel and the PLO, representing the Palestinians. Yasser Arafat, Chairman of the PLO, sent a letter to Prime Minister Rabin in which he declared the following:
o Recognition of Israel's existence and its right to live in peace and security; o Acceptance of United Nations resolutions 242 and 338; o Commitment to solve the conflict by peaceful means;
o Cessation of all types of terror; o Assumption of responsibility over all factions of the PLO; o Confirmation that those articles of the Palestinian Charter calling for the destruction of Israel and denying its right to exist would no longer be valid; and o Obligation to submit to the Palestinian National Council an approval of the need for changes in the Palestinian Charter.
Due to the above, Israel agreed to recognize the PLO as the Palestinian representative to the peace talks.
In September 1993, Israel and the Palestinians signed a Declaration of Principles which dealt with matters relating to the transfer of power to the Palestinians.
The Gaza Strip and Jericho agreement of May 4, 1994 involves various topics relating to the Gaza Strip area and sixty-five square kilometers of the Jericho area. The civilian administration in the Gaza Strip and Jericho will be disbanded and its responsibilities passed on to the Palestinian authorities, in twenty-five sectors of which the major ones are education, tourism, agriculture, water, transportation, electricity, health, finances, commerce. Early in 1997, an additional agreement was signed regarding the Hebron area and the civilian administration was transferred to the PLO. However, in recent months, little process has been made in the peace process.
Economic relations between the State of Israel and the Palestinian Authority have been agreed upon within the scope of the Paris Agreement, signed in April 1994. This agreement applies initially to the Gaza Strip and Jericho and later on will apply to the entire West Bank for the interim period.
Both sides agreed on the establishment of a Joint Economic Committee to supervise the implementation of the agreement. The fact that there is no physical border between Israel and the Territories, and a situation of near free movement, led to an agreement establishing a relationship between the parties on this point.
The dramatic developments in the political sphere, with the signing of the Accord of Principle between Israel and the PLO in September 1993 and the Peace Treaty with Jordan in October 1994, are opening new doors and opportunities for business and economic activity. The changing political relations are already spilling-over, transforming Israel's economic relations both with its immediate neighbors and with the rest of the world.
The performance of the Israeli economy for the first half of the 90's has been exceptionally good, culminating in a GDP growth rate of 6.5% in 1994, putting it first among OECD countries. The second half of the decade is expected to show a vigorous though slightly slower growth accompanied by reduced inflation. The Government debt as a percentage of GDP has been cut in half, from close to 180% to 88% in 1994, and the foreign debt as a percentage of GDP has been cut by two thirds from close to 80% to below 25% in 1994.
Two important elements stand behind such a development. The ongoing peace process between Israel and its neighbors (see above) and the large wave of immigration that shook the economy into action in 1990. Since 1990, some 600,000 new immigrants have arrived, mostly from the former Soviet Union (CIS) increasing the population of Israel by an additional 12% and the labor market by
even more due to the immigrant's high participation rate. The exceptionally high level of skills and education of this wave of immigrants with double the proportion of university post-graduates than that of the established population, has made the Israeli labor force one of the most highly skilled in the world. Two thirds of the immigrants arrived during the first two years, 1990-91, after which the flow decelerated to a constant stream of approximately 75,000 new immigrants a year, thus easing the problem of economic integration for Israel. The impact on the Israeli economy has been to propel it to a fast track both with a one time jump and with long term effects.
The immediate impact was felt in the residential construction sector which became a locomotive for the economy for almost three years. Housing starts, doubled in 1990 and doubled again in 1991, thus quadrupling its number compared to the eighties level. Later, the strain put on an already deteriorating infrastructure brought about a dramatic expansion in activity which saw a 26% rise in expenditures in 1992, followed by a further rise of 34% in 1993 and 20% in 1994. This activity includes road construction, water and sewage works, electric and telecommunication facilities, among others. This has had a beneficial effect on the trade of Israel Tractor.
1997 was a year of contrasting economic developments. A particularly favourable development was the rise of only 7% in the consumer price index, the lowest since the 3.9% increase recorded in 1969. In addition, the current account deficit fell by some two billion dollars, from $5.3 billion in 1996 to $3.5 billion in 1997, a reasonable level of 3.5% of GDP. On the other hand, the year was notable for a serious slowdown in the GDP growth rate, to only 2.1% in 1997 compared with 4.5% in 1996 and an annual average of 6% during the years 1992 to 1995. This slowdown was accompanied by a large rise in the unemployment rate to an average of 7.8% in 1997, compared with 6.7% in 1996.
These developments were heavily affected by the policy of severe monetary restraint as reflected by an average real interest rate of 5.3% and 7% in 1996 and 1997, respectively. Fiscal constraint also increased, resulting in an aggregate budget deficit of only 2.4% of GDP in 1997 compared with 3.6% in 1996. These trends are expected to intensify in 1998. The policy of very strict monetary and fiscal constraint will continue, in order to hold down inflation at a lower level of 5-7% in 1998, with the possibility of declaring a target of 2-3% by the year 2000.
The government's economic policy is based on the priority of reducing inflation to Western European levels (currently 1% to 2%). Under this policy concept, the achievement of this objective will make it possible to subsequently reach a higher pace of growth. Targeting these low levels of inflation will lead to a persistently severe policy of monetary and fiscal constraint during the coming years. This will prevent growth in infrastructure investment, and the exchange rate adjustment necessary for remedying the appreciation of the shekel.
As a result of the above, the Israeli economy in 1997 was in a slowdown. the high interest rates, reduction in the budget and the standstill in the peace negotiations, reduced investments in fixed assets from 8.8% in 1996 to 5.9% in 1997. Government construction decreased from 3.4% in 1996 to 1.8% in 1997 and as a result, there was a considerable drop in infrastructure work, housing construction, consumption and tourism.
BALTON
General -------
Balton is a management and holding company serving its African subsidiaries which operate in Nigeria, Zambia, Ghana, Kenya, Tanzania, Uganda and Cote D'Invoire. These subsidiaries are located in and organized under the laws of the jurisdiction where they operate. The subsidiary in Cote D'Invoire was first registered in 1997 and commenced trading on April 7th, 1997. Balton manages 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 Zambia Ltd. ("Amiran Zambia"), Dizengoff Ghana Ltd. ("Dizengoff Ghana"), Amiran Kenya Ltd. ("Amiran Kenya"), Balton Tanzania, Ltd; previously, Tanzania Transcontinental Trading Co. Ltd. ("Balton Tanzania") Balton BV-DWA Nigeria Ltd. ("Balton (Nigeria)"), Balton (U) Ltd. Uganda ("Balton Uganda") and Balton SNES ("Balton Cote D'Ivoire").
The principal products traded by Balton and its subsidiaries are agri-chemicals and agricultural implements, radio communication, telecommunications, air conditioning and electrical equipment. Balton has dealership concessions with Motorola Communications and Radius Equipment which it holds on behalf of its subsidiaries in Nigeria, Ghana, Kenya and Uganda. The current distribution agreements with Motorola Communications are for a one-year period expiring in December 1997, renewable for successive one-year periods and may be terminated by either party upon 60 days' written notice. In addition, Balton Nigeria is involved in the installation of water supply equipment and Balton Tanzania is involved in the manufacture of animal foodstuffs.
During the first quarter of 1994, Balton Nigeria commenced preliminary work for the construction and installation of a water treatment plant and related facilities in Katsina, Nigeria, pursuant to a contract with the Nigerian Ministry. Work on this contract continued during 1995 and 1996 but at a slower pace than specified by the contract agreement due to insufficient funding from the client. A substantial portion of the work has been subcontracted. By November 1996, the original period for completion of the total contract expired and the work completed amounted to approximately 20% of the total contract. The Nigerian Ministry has agreed that the company complete the project at a remaining, revised, contract price of $76 million. Completion of this project is subject to the political and economic risks associated with doing business in Nigeria, and is dependent upon the Nigerian Ministry's ability to fund the contract. See Note D of Notes to Consolidated Financial Statements.
Roughly 50% of the goods supplied by Balton are from Israeli suppliers, although virtually all irrigation and air conditioning equipment is from Israel. Balton's other sources of supply come from a diverse group of suppliers worldwide. The bulk of Balton's customers are located in the African countries where it conducts business. The Company's business is not dependent on a single customer or small group of customers. Approximately 30% of sales by Balton's subsidiaries are for cash, with the balance on credit terms with an average of 90 days.
At March 31, 1998, Balton and its subsidiaries and associated companies, employed a total of approximately 630 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 United States dollar. During 1997, there were significant devaluations in Kenya and Ghana and foreign currency exchange losses have been incurred in the year. See Note N of Notes to Consolidated Financial Statements. 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 1997 in the African countries where Balton transacts business. Further, the economies of African countries generally are heavily dependent upon international trade and, accordingly, may be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also may be adversely affected by economic conditions in the countries with which they trade.
With respect to any African country, there is the possibility of nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war) which could affect adversely the economies of such countries or the value of the Company's investments in those countries.
FINANCIAL INFORMATION ABOUT INDUSTRY AND GEOGRAPHIC SEGMENTS
For disclosure regarding the Company's business segments and geographic areas, see Note P of Notes to Consolidated Financial Statements filed under Item 8 of this Annual Report on Form 10-K (the "Report").
ITEM 2.
ITEM 2. PROPERTIES
Israel Tractor operates from substantial workshop facilities in three locations in Israel which are adequate for its purposes: it owns the freehold on one piece of land in Holon on which is situated a building and leases two pieces of property - one property located in Kiriat Bialik under a lease from the Israel Land Administration which expires in 2023; the second property in Beersheba pursuant to a lease with the Israel Land Administration whose term is 49 years and expires in 2028.
Investor currently operates from an office building (located in Budapest) ,which is owned by Interag. Investor and Interag use 384 square meters of office space which is adequate for their current needs and the remaining part of the building (over 2500 square meters) is being rented to subsidiaries of Danubius, HungarHotels and Agrimpex. Interag continues to own or lease several properties which, following the reorganization of Interag are now utilized, principally by third parties, for retail operations. The other office building (total square meters of 2,900) comprising the former headquarters is being refurbished and sublet.
Completion of the sale of certain properties to Shell under the agreement of 1993 was completed in March 1997, by the sale of the remaining three sites.
Agrimpex leases office space in Budapest. Its Agrimill subsidiary owns a head office in Bekescsaba, 18 sites in Bekes County and one in Budapest, which include 4 flour mills, 1 rice mill, 4 compound feed plants, and 9 silo or warehouse facilities. Agrimill's facilities in the aggregate are situated on 496,600 square meters of land and include 113,900 square meters in building space.
Viktoria operates from a head office in Kecskemet, and owns twelve sites in Bacs-Kiscun County, which includes four flour mills, one compound feed plant, one corn flaking plant and substantial silos and warehousing facilities.
ATI Depo and DP Invest lease office space in Budapest. Warehousing sites owned and used by them are located in Budapest, Gyor, Szabadbattyan, Pecs, Miskolc, Bala and Szajol.
Balton leases office and warehouse space in the African countries where it operates. Balton leases 6 properties under long term leases (i.e. for terms of ten years or more) in various locations in Nigeria (ranging in space from 240 square meters to 4,100 square meters). Also, Balton leases four properties in Nairobi, Kenya under annual leases; an office and warehouses in Accra, Ghana pursuant to a long term lease; two locations for office, factory and warehouse space in Lusaka, Zambia, pursuant to long term leases; an warehouse and factory in Dar es Salaam, Tanzania pursuant to leases with the Government, and an office and warehouse in Kampala, Uganda under an annual lease.
Balton is currently developing its own site in Nairobi, Kenya and on completion of the development will vacate all four leasehold properties. It has purchased a property in Kampala, Uganda, which is presently undergoing refurbishment and upon completion it will vacate the present leasehold properties. Also, it is presently finalizing ownership title to the office and warehouse space it utilizes in the Cote D'Ivoire.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 annual meeting of stockholders was held on October 30,1997. At that meeting, the following proposals were submitted to the Company's stockholders: (1) election of the Company's current Board of Directors and (2) ratification of Grant Thornton LLP as independent accountants of the Company for the fiscal year ended December 31, 1997.
At the meeting, the Company's nominees for directors were elected. For Bernard Schreier 1,285,079 shares were voted for and 2,395 shares were voted against; for Gideon Schreier 1,285,079 shares were voted for and 2,395 shares were voted against; for Michael Wreschner 1,285,577 shares were voted for and 1,897 shares were voted against; for Leonard Goldfine 1,285,577 shares were voted for and 1,897 shares were voted against; for Wilfred Wyler, 1,285,559 shares were voted for and 1,915 were voted against; and for Alfred Simon 1,285,577 shares were voted for and 1,897 shares were voted against. The appointment of Grant Thornton LLP as the Company's independent accountants for the fiscal year ended December 31, 1996 was approved with 1,284,804 shares were voted for, and 1,428 shares being voted against.
A special meeting of stockholders was held on March 3, 1998. At that meeting, the Company's stockholders voted an amendment to the Company's Certificate of Incorporation to increase the authorized Common Stock of the Company from 1,800,000 shares to 7,200,00 shares and change the par value per share from One Dollar to Twenty-Five Cents. The shareholders voted 1,066,632 shares for, and 642 shares voted against. As a result, the Company effected a 4-for-1 stock split, which was distributed on March 16, 1998 to shareholders on record at the close of business on March 3rd, 1998.
PART II
ITEM 5.
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 - ------ ---- ---
- ----
1st quarter $10 1/4 $8 1/2
2nd quarter $9 1/4 $8 1/2
3rd quarter $9 $8 3/4
4th quarter $10 $9
- ----
1st quarter $9 3/4 $9
2nd quarter $11 3/4 $9 3/4
3rd quarter $11 $10 3/4
4th quarter $11 1/4 $10 1/4
- ----
1st quarter $11 3/4 $10 1/2
As of March 31, 1998, there were 1550 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 1995, 1996 or 1997.
On March 3rd, 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 3rd, 1998. The above share prices have been retroactively restated to reflect the stock split.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the Company as at and for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 which should be read in conjunction with the Consolidated Financial Statements (including the notes thereto) and Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 1997, the income from the Company's Hungarian and African 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 is not freely convertible and which floats against a basket of two currencies (the U.S. dollar and the European Currency Unit) underwent devaluations against the U.S. dollar at the rate of 24 % during 1997. Since the beginning of 1998, the Hungarian currency has been further devalued by approximately 4 % against the U.S. Dollar. Since the functional currency for Investor is the Forint, these devaluations have resulted in certain currency translation adjustments directly impacting stockholders' equity. See Notes A(8) and N of Notes to Consolidated Financial Statements filed under Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and required financial statement schedules of the Company are located beginning on page of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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:
Name Age Position with the Company - ---- --- -------------------------
Bernard Schreier 79 Chairman of the Board, President and Director
Fortunee F. Cohen 70 Secretary
Michael M. Wreschner 53 Director, Assistant Secretary
Leonard Goldfine 81 Director
Wilfred Wyler 90 Director
Alfred L. Simon 57 Director
Jozsef Ferenc Polgar 55 Chief Executive Officer of Investor
Zvi Borowitsh 60 Managing Director of Israel Tractor
Moshe Gershi 46 General Manager of Balton
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 a majority stockholder of the Company.
Fortunee F. Cohen has served as Secretary of the Company since October 25, 1989. Prior to her appointment as Secretary, Ms. Cohen was the director of Shareholder Relations of the Company.
Michael M. Wreschner has been a Director of the Company since October 25, 1989 and an Assistant Secretary of the Company since November 1991. Mr. Wreschner is an executive director of the CP Holdings Limited group of companies. CP Holdings Limited is an affiliate which wholly owns a majority stockholder of the Company.
Leonard Goldfine, has been a Director of the Company since October 6, 1976 and served as Vice President of the Company from December 8, 1982 to August 1985. In the past five years Mr. Goldfine has had the following positions: Director of Development Corporation for Israel (Underwriter for State of Israel bonds), Chairman of the Board and Director of Tensiodyne Corporation (a scientific materials testing company) (1986-1989).
Wilfred Wyler was elected as a Director of the Company on December 8, 1982 and is a senior partner in the certified public accounting firm of Wilfred Wyler and Co.
Alfred L. Simon has been a Director of the Company since September 4, 1990. He is currently a Managing Associate of American Capital Group (since June, 1988). Prior to his current position he was Vice President of corporate finance at Gruntal & Co., Incorporated (1985-1987).
The following executive officers of the Company's subsidiaries perform significant policy making functions for the Company:
Jozsef Ferenc Polgar is the Chief Executive Officer of Investor and Chairman of the Board of Interag. On March 31, 1994, Mr. Polgar was appointed a Director of Agrimpex and subsequently elected by the Board as Chairman of Agrimpex. Prior to his positions with Investor and its subsidiaries, Mr. Polgar was the General Manager of trade development and finance at the Hungarian Ministry of Trade (1975-1988) and head of the business department of Prometheus company (1970-1975).
Zvi Borowitsh has been the Managing Director of Israel Tractors since July 1989. Mr. Borowitsh is also the Chairman of Israel Quarrying & Mining Associations and an Assistant Professor of Earthmoving Technology and Management at Haifa Technion.
Moshe Gershi has been the General Manager of Balton since April 1991. In his prior positions he served as General Manager (January 1991 to June 1991), Director of corporate finance (January 1989 to January 1991) and Treasurer (January 1987 to December 1988) of Koor Trade Ltd. which, through its wholly-owned subsidiary Koor USA, Inc., was the principal shareholder (49.71%) of the Company's outstanding voting securities until July 25, 1989.
All Directors of the Company are elected by the shareholders for a one-year term and hold office until the next annual meeting of shareholders of the Company or until their successors are elected and qualify. The Board of Directors has appointed Messrs. Bernard Schreier, Wreschner and Goldfine to serve on the Investment and Finance Committee of the Board of Directors. Executive officers are appointed by the Company's Board of Directors for a one-year term and hold office until their successors are chosen and qualify, subject to earlier removal by the Board of Directors.
ITEM 11.
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 1997. No executive officer of the Company was paid compensation equal to or exceeding $100,000 in 1997.
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 $1.1 million in management fees for management services in 1997. CP Holdings beneficially owns approximately 75% 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 31, 1998, 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.
- ---------------
(1) Includes 4,142,004 shares of Common Stock beneficially owned by Kenyon Phillips Ltd ("Kenyon") and 68,000 shares of Common Stock beneficially owned by The Estate of Gideon Schreier.
(2) Includes 68,000 shares of Common Stock for The Estate's account and 4,142,004 shares of Common Stock beneficially owned by Kenyon.
(3) Includes 4,142,004 shares of Common Stock beneficially owned by CP through its wholly owned subsidiary Kenyon. Mr. Wreschner is a director 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 4,142,004 shares of Common Stock of the Company, constituting 73.9% 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, 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.
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 $1.1 million in management fees for management services in 1997.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
IIC INDUSTRIES INC. AND SUBSIDIARIES
(c) 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
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 28, 1998 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.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors IIC INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheets of IIC Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IIC Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
We have also audited Schedule II of IIC Industries, Inc. and Subsidiaries for the years ended December 31, 1997, 1996 and 1995. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
New York, New York April 28, 1998
IIC Industries, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, (dollar amounts in thousands, except share data)
The accompanying notes are an integral part of these statements.
IIC Industries, Inc.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, (dollar amounts in thousands, except share data)
The accompanying notes are an integral part of these statements.
IIC Industries, Inc.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, (dollar amounts in thousands, except share and per share data)
The accompanying notes are an integral part of these statements.
IIC Industries, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995 (dollar amounts in thousands, except share data)
The accompanying notes are an integral part of this statement.
IIC Industries, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, (dollar amounts in thousands)
IIC Industries, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, (dollar amounts in thousands)
The accompanying notes are an integral part of these statements.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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 majority-owned by 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 98.7%-owned Hungarian holding company which engages in a variety of commercial activities in Hungary, (2) Israel Tractor, a wholly-owned Israeli corporation which distributes tractors and related heavy machinery in Israel, and (3) Balton C.P. Limited ("Balton"), a 51%-owned English holding company with African subsidiaries engaged in the trading business in several African countries.
Investor's principal subsidiaries are Agrimpex RT ("Agrimpex" - 63%-owned) and Interag RT ("Interag" - 78%-owned). Agrimpex primarily imports and exports a wide variety of agricultural products, excluding livestock. Interag is a diversified company whose principal activities consist of a 28.9% interest in Danubius (see Note G), and the operation of motor dealerships, vehicle service and repair centers and a cold storage facility
2. 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.
3. Inventories
Inventories are stated at the lower of cost (specific identification for heavy machinery or first-in, first-out) or market values.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A (CONTINUED)
4. 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 - 50 Furniture and fixtures 10 - 20 Motor vehicles 15 - 25
5. 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. Other investments are carried at cost, less provision for permanent diminution in value.
6. 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.
7. Income Taxes
The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This statement requires the liability method of accounting for income taxes.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A (CONTINUED)
8. Foreign Currency Exchange
Investor uses the local currency, the Hungarian forint, as its functional currency and translates all assets and liabilities at year-end exchange rates, all income and expense accounts at average rates and records adjustments resulting from the translation in a separate component of stockholders' equity. The translation adjustments for 1997, 1996 and 1995 were $6.3 million, $7.0 million, and $6.7 million, respectively, which are reflected in stockholders' equity.
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, since most of the African subsidiaries operate in hyperinflationary economies. These subsidiaries translate monetary assets and liabilities at year-end exchange rates and nonmonetary assets and liabilities at historical rates. Income and expense accounts are translated at the rate of exchange prevailing at the date of transaction, except that depreciation is translated at historical rates. Gains and (losses) resulting from the translation of these entities are included in results of operations and are as follows: 1997 - $(291,000), 1996 - $179,000, and 1995 -$(634,000).
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: 1997 - $(2,162,000) , 1996 - $(442,000), and 1995 - $249,000.
9. Derivative Financial Instruments
Gains or losses resulting from changes in the market value of transactions entered into as hedges are deferred until the hedged transaction occurs. For transactions which do not qualify as hedges, gains and losses are recognized in the results of operations.
10. 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-to-one stock split, which was distributed on March 16, 1998 to shareholders on record at the close of business on March 3, 1998. In this report, all per share amounts and number of shares have been restated to reflect the stock split.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE A (CONTINUED)
11. 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 affect those estimates.
12. Reclassification
Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation.
NOTE B - ACQUISITION
On September 7, 1995, Agrimpex , a 63%-owned subsidiary of Investor, directly and indirectly, through its wholly-owned subsidiary, Agrimill, Rt., acquired a 93.5% equity interest in Viktoria Rt. for approximately $6.6 million. Viktoria Rt. is involved in the milling of animal feed and flour.
The acquisition was accounted for by the purchase method, and the excess ($3.4 million) of the fair value of the net assets acquired over the purchase price was allocated to reduce the value of the fixed assets acquired. The pro forma effect of this purchase on results of operations prior to acquisition is not material.
NOTE C - RESTRICTED CASH
In 1997, restricted cash deposits are $211,000 which relate to compensating balances with respect to short-term borrowings.
In 1996, restricted cash deposits are $8.4 million. The deposits are restricted as follows: $3.7 million to collateralize a repayment guarantee of the Katsina project (Note D); $3.3 million relating to compensating balances with respect to short-term borrowings; and $1.4 million relating to other guarantees.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE D - ADVANCES FROM CUSTOMERS
In 1994, Balton B.V. - DWA (Nigeria) Ltd. ("BV-DWA"), a wholly-owned subsidiary of Balton, contracted with the Nigerian Ministry for the construction and installation of a water treatment plant and related facilities in Katsina, Nigeria. In 1996, the original contract period expired. During 1996 and 1995, the Company recognized revenues of $11.3 million and $9.9 million, respectively, related to the project. Prior to 1996, no profit was recognized since the project was in its early stages. The parties have agreed, in principle, that phase one of the project has been completed and that BV-DWA will continue the project, subject to the revised terms and conditions at a contract price of $76 million. During 1997, the Company recognized revenue of $1.3 million related to the project. The revenue recognized is low compared to the previous years due to the extended negotiation period over the revised terms and conditions. No profit has been recognized in 1997.
Unaffiliated entities have been subcontracted for the construction work. The original contract price was divided into a U.S. dollar element and a Nigerian naira element. Balton received $21.5 million and BV-DWA received $8.2 million from the Nigerian Ministry. The advance receipts to Balton and BV-DWA were made in order to facilitate payments to the subcontractors of $20.1 million. All of the receipts were covered by repayment guarantees to the Nigerian government in the event the contract was terminated, in which event, the amount of the repayment is subject to arbitration. Furthermore, all of the payments to the subcontractors were covered by repayment guarantees to Balton and BV-DWA.
Of the original advances, $7.0 million was received for the U.S. dollar element and $400 thousand at current rates of exchange for the Nigerian naira element at the end of phase one of the project. Of these amounts, $5.7 million and $300 thousand, respectively, are held by the subcontractor. These remaining advances are not covered by repayment guarantees to the Nigerian Ministry.
NOTE E - INVENTORIES
Inventories at December 31 are as follows (in thousands):
1997 1996 ------- ------- Raw material $ 5,826 $23,127 Work in progress 519 452 Finished goods 38,514 37,599 ------- ------- $44,859 $61,178 ======= =======
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in thousands):
1997 1996 -------- -------- Land $ 5,728 $ 1,584 Buildings 18,732 22,276 Machinery and equipment 4,802 5,447 Automotive 9,782 10,352 Furniture and fixtures 6,480 5,693 Construction in progress 210 2,697 -------- --------
45,734 48,049 Less allowances for depreciation and amortization (16,149) (14,419) -------- --------
$ 29,585 $ 33,630 ======== ========
NOTE G - INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES
Significant investments in and advances to affiliated companies at December 31 are (in thousands):
% owned in 1997 and 1996 1997 1996 ------------- ------- ------- Danubius Hotel & Spa Rt. ("Danubius") 30 and 30 $24,378 $24,918 DP Invest Kft ("DP") 50 and 0 1,981 ATI Depo Rt ("ATI") 50 and 0 1,268 Harmashatarhegy Udvarhaz ("HU") 100 and 50 514 Agrovagon Kft. ("Agro") 48 and 48 150 538 Other 584 555 ------- ------- $28,361 $26,525 ======= =======
During 1997, Investor acquired a 50% interest in DP and ATI, which are public warehousing facilities by contributing certain facilities and other assets to DP and ATI. HU operates a restaurant in Budapest. During 1997, Interag acquired the remaining 50% share and HU is now consolidated within these financial statements. Agro is a rail car operator in Hungary, primarily serving agricultural cooperatives.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE G (CONTINUED)
Danubius ("Danubius"), a publicly quoted company on the Budapest Stock Exchange, owns a number of hotels in Hungary and specializes in spa facilities. At December 31, 1997, the quoted market value of the Company's effective investment in Danubius was approximately $73 million.
The following is summarized financial information of Danubius (in thousands) which was prepared in accordance with international accounting standards. There were no significant differences between international accounting standards and generally accepted accounting standards in the United States.
December 31, ------------------- 1997 1996 -------- -------- Current assets $ 30,767 $ 34,559 Noncurrent assets 150,850 116,683 Current liabilities 19,440 10,428 Noncurrent liabilities 50,409 26,462 Stockholders' equity 111,768 114,352
Year ended December 31, ----------------------- 1997 1996 -------- -------- Sales $111,633 $ 71,951 Net income 15,173 14,295 Company's share of equity in earnings 4,053 4,104
NOTE H - SHORT-TERM DEBT
The Company's short-term debt consists of notes payable to banks, primarily Hungarian banks, with a weighted average interest rate of approximately 20% and 24% in 1997 and 1996, respectively. Unused lines of credit totaled $37.8 million in 1997 and $33.1 million in 1996. The debt is collateralized by inventory, buildings and machinery.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE I - LONG-TERM DEBT
Long-term debt at December 31 is as follows (in thousands):
1997 1996 ------- ------- Israeli bank debt of 203 million Japanese yen payable in 1998, interest of LIBOR + 0.5%, guaranteed by IIC $1,556 $1,715
Hungarian bank debt for the purchase of fixed assets, interest of 20% - 21% 1,220 303
Hungarian State Municipalities loan for the purchase of eight properties; interest rate of 20% 120 199
Other 273 31 ------ ------
3,169 2,248 Less current maturities 1,661 88 ------ ------
$1,508 $2,160 ====== ======
The aggregate loan maturities are as follows: 1998 - $1,661,000; 1999 - $159,000; 2000 -$1,095,000; 2001 - $115,000; 2002 - $115,000; and thereafter - $24,000.
NOTE J - DUE TO AFFILIATES
At December 31, 1997 and 1996, amounts due to affiliates consist of management fees and expense reimbursements of $93,000 and $121,000, respectively, payable to CP; management fees of $256,000 and $386,000 in 1997 and 1996, respectively, payable to CP affiliates; and a loan due to a shareholder of Balton of $1,343,000. The loan has an interest rate of 1% above the twelve-month LIBOR rate.
NOTE K - GAIN ON SALE OF NONCURRENT ASSETS
During 1997 and 1996, Interag completed the sale of several parcels of land to Shell es Interag. The sales resulted in gains of approximately $1.8 million in 1997 and $1.5 million in 1996.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE L - RELATED PARTY TRANSACTIONS
Related party transactions include purchases and sales of goods, providing management services and purchases and sales of agricultural commodities among subsidiary companies. All significant intercompany transactions and balances have been eliminated.
The Company incurred management fees and other expenses payable to CP in the amount of $ 1.1 million during 1997, $1.2 million during 1996 and $994,000 during 1995, net of expense reimbursements.
During 1997 and 1996, 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 $292,000 and $425,000, respectively. The fee was used to cover administration, financing, and dealings with the major supplier.
NOTE M - 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 is $207,000 in 1997, $461,000 in 1996 and $599,000 in 1995. There are no significant noncancelable lease commitments.
Contingent Liabilities
The Company has given a guarantee to the bankers of Balton, amounting to $1.6 million. The guarantee is in respect of various outstanding letters of credit, given by the bankers of certain of Balton's creditors. The Company has also agreed to indemnify a co-guarantor for any losses accumulating to $510,000.
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 $281,000.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE M (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 N - 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 24% in 1997 and 21% in 1996. The African countries in which it conducts business have also undergone major currency devaluations.
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.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE N (CONTINUED)
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.
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.
At December 31, 1997, Israel Tractor had foreign currency forward contracts, with notional values of $2 million, to purchase and sell Israeli shekels. All of the contracts matured in January 1998.
Agrimpex engages in the commodities futures market to lock in prices in its agricultural business and decrease volatility related to fluctuations in spot market prices.
Current pricing models were used to estimate the fair values of foreign currency forward contracts, call options and commodity contracts. The counterparties to these contracts are creditworthy multinational commercial banks or other financial institutions, which are recognized market makers.
Based on borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of the Company's short-term and long-term debt approximates the carrying value.
The carrying value of financial instruments potentially subject to valuation risk except as noted above (principally consisting of cash, accounts receivable and accounts payable) approximates fair market value.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE O - INCOME TAXES
An analysis of the components of income tax expense is as follows (in thousands):
1997 1996 1995 ------- ------- ------- Current income tax expense Federal $ 23 $ 33 $ 225 State 9 20 63 Foreign 1,930 3,704 5,725 ------- ------- -------
1,962 3,757 6,013
Deferred income tax expense Foreign (443) 1,289 (358) ------- ------- -------
Income tax expense $ 1,519 $ 5,046 $ 5,655 ======= ======= =======
The foreign portion of income before taxes was $4.8 million in 1997, $20.6 million in 1996 and $21.9 million in 1995.
Taxes on income of foreign consolidated subsidiaries and affiliates are provided at the rates applicable to their respective foreign tax jurisdictions.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE O (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):
1997 1996 1995 ------- ------- -------- Deferred tax assets Impairment of investments $ 46 $ 111 $ 144 Reserves for guarantees and loss contracts 241 535 161 Bad debt and inventory reserves 474 825 693 Net operating loss carryforwards 1,225 537 1,369 Vacation pay 338 385 379 Other 9 37 228 ------- ------- -------
2,333 2,430 2,974
Valuation allowance (1,158) (834) (2,000) ------- ------- -------
Deferred tax assets 1,175 1,596 974
Deferred tax liabilities Deferred income on sales and services (1,392) (2,207) (382) Other (37) (86) ------- ------- -------
Net deferred tax (liabilities) assets $ (254) $ (697) $ 592 ======= ======= =======
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.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE O (CONTINUED)
Included in other liabilities and deferred credits are deferred tax credits of approximately $4.4 million which represent the liability for taxes due upon repatriation of foreign earnings of previous years prior to deregistration as an investment company.
The Company has available for income tax purposes net operating losses aggregating approximately $4.1 million expiring in the years ending 1997 to 2000.
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):
1997 1996 1995 ------- ------- ------- Income tax at U.S. Federal statutory rate $ 2,481 $ 7,263 $ 7,964 Effect of different foreign tax rates (549) (942) (1,612) State and local tax, net of Federal effect 6 13 40 Change in valuation allowance 324 Dividends received exclusion (Hungary) (784) (246) Nondeductible losses of subsidiaries 147 110 386 Currency exchange 175 (716) (613) Equity in earnings of affiliate (785) (597) Miscellaneous items (280) 102 333 ------- ------- -------
Income tax expense $ 1,519 $ 5,046 $ 5,655 ======= ======= =======
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.
The corporate tax rate in Hungary for 1997 is 18%. In 1996 and 1995, the tax rate was made up of two levels of taxation: an 18% rate on profits and a 23% rate on dividends paid. The two-level tax is a significant change from that which existed in 1994 of 36%.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE P - 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.
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.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE P (CONTINUED)
(a) See Note M regarding the settlement of claim with the former officers and directors.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE P (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.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE P (CONTINUED)
Operating income 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, and non-investment-related assets of the holding company, which are considered corporate assets not related to operations of any of the segments.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE Q - QUARTERLY FINANCIAL DATA (UNAUDITED)
During the fourth quarter of 1997 and 1996, Investor incurred inventory write-downs of approximately $1.5 million and $3.5 million, respectively, as a result of decreases in the market value of soya, wheat and other commodities.
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997, 1996 and 1995
NOTE R - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued several new pronouncements in 1997, including SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." SFAS No. 130 states that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131 requires disclosures regarding segments of an enterprise and related information that reflect the different types of business activities in which the enterprise engages and the different economic environments in which it operates. The adoption of these standards during the Company's fiscal year ended December 31, 1998 is not expected to have a material effect on the Company's financial statements.
IIC Industries, Inc. and Subsidiaries
SCHEDULE II - VALUATION ALLOWANCE ACCOUNTS Years ended December 31, 1997, 1996 and 1995 (amounts in thousands)
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 with Report of Independent Auditors
CONTENT
Report of Independent Auditors
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
To the Shareholders and Board of Directors Danubius Hotel and Spa Rt.
We have audited the accompanying consolidated balance sheet of Danubius Hotel and Spa Rt. and Subsidiaries as of December 31, 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements give a true and fair view of the consolidated financial position of Danubius Hotel and Spa Rt. and Subsidiaries at December 31, 1997, and of the consolidated results of their operations and their cash flows for the year then ended in accordance with International Accounting Standards.
Ernst & Young Budapest, Hungary March 13, 1998.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (All amounts in HUF 000,000's)
See accompanying notes to consolidated financial statements
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (All amounts in HUF 000,000's)
See accompanying notes to consolidated financial statements.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (All amounts in HUF 000,000's)
See accompanying notes to consolidated financial statements.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (All amounts in HUF 000,000's)
See accompanying notes to consolidated financial statements.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
1. GENERAL
Danubius Hotel and Spa Rt. ("Danubius" or "the Company") is a company limited by shares incorporated under the laws of the Republic of Hungary. The Company and its subsidiaries provide hospitality services in Hungary, with an emphasis on 4 and 5 star spa-hotels.
Danubius operated as a self-administered State enterprise (Danubius Hotel and Spa Company) controlled by an Enterprise Council until July 31, 1991. Effective July 31, 1991, Danubius was transformed into a company limited by shares and ownership was passed to the State Property Agency ("SPA"). In November 1992, a portion of Danubius' outstanding shares was publicly sold and such shares were listed for trading on the Budapest Stock Exchange.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING CONVENTION
Danubius Hotel and Spa Rt. and its subsidiaries maintain their official accounting records and prepare their financial statements for domestic purposes in accordance with the accounting regulations of Hungary. The accompanying financial statements have been prepared in accordance with International Accounting Standards and, as a consequence, reflect adjustments not recorded in the Hungarian statutory records.
The accompanying financial statements are prepared under the historical cost convention. In connection with the transformation of the state enterprise into a limited liability company at July 31, 1991 the Company valued certain non-current assets to their estimated market values based on independent valuations. These amounts became the accounting and tax bases.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of Danubius Hotel and Spa Rt. and its significant subsidiaries after elimination of all material inter-company transactions and balances.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
BASIS OF CONSOLIDATION (CONTINUED)
The Company's principal subsidiary undertakings at December 31, 1997 are as follows:
CASH AND CASH EQUIVALENTS
Cash equivalents are liquid investments with original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost or net realisable value after making allowance for any obsolete or slow moving items. Cost is determined by the weighted average method. Consumable items and materials are written off as incurred.
PROPERTY, PLANT AND EQUIPMENT
Valuation Process
Property, plant and equipment and other assets were included at July 31, 1991 at amounts determined by valuation.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
This valuation was performed as part of the process of transforming the Company to an Rt. The valuation of assets was performed by an independent valuer. The following methodologies were used in the valuation for the various categories of assets:
o The sales comparison approach was applied to the valuation of land.
o The depreciated replacement cost approach was applied to the valuation of buildings and structure.
Assets of Hungar Hotels, a subsidiary were revalued by an independent valuer as at January 1, 1996.
Depreciation
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method. The rates used by the Company are 2.5% for buildings, 2.5% to 6% for building and leasehold improvements and 12-25% for machinery and equipment.
Where the Group has the legal right to use a certain property the value of these rights is amortised over either the term in which the Group holds the rights, or six years where this term is undefined except for land handling rights on Margaret Island which are being amortised over 100 years.
Refurbishment
Significant refurbishment costs are capitalised and depreciated in accordance with the policy for buildings.
Management have been unable to identify the cost of assets replaced during refurbishment projects as the cost is included in the hotel valuation performed in 1991. The written down cost of these assets has not been removed from the fixed asset register. These fixed assets were mainly purchased prior to transformation into a company limited by shares and are carried at July 31, 1991 valuation. These replaced assets will continue to be depreciated in accordance with Company policy.
The expected period of major refurbishments is 20 years.
INVESTMENTS
Investments in which the Company has greater than 20% ownership but less than 50% (associated companies) are accounted for under the equity method. Other investments are carried at cost, less provision for any permanent diminution in value.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
GOODWILL
Negative goodwill arising on acquisition of subsidiaries is shown as deferred income and amortised over 20 years on a straight line basis.
INCOME TAXES
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are determined using the tax rate for the period in which those amounts are expected to be received or paid.
FOREIGN CURRENCY TRANSLATION
Transactions arising in foreign currency are translated into Forints at the rate of exchange prevailing at the date of the transaction. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Forints at the year end rates of exchange set by the National Bank of Hungary. The resulting foreign currency exchange gains and losses are recognised in the statement of income.
REVENUE RECOGNITION
Revenue is recognised on the basis of completed guest nights net of VAT.
PENSION SCHEMES
The Company operates a defined contribution pension scheme for employees. Pension costs are charged against profit in the period in which the contributions are payable. The assets of the fund are held in a separate trustee administered fund.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments approximate fair values due to either the short term duration or the proximity of interest rates of the various instruments to market rates.
3. RECLASSIFICATION OF PRIOR YEAR
Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 presentation.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
4. ACCOUNTS RECEIVABLE
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
7. PROPERTY, PLANT AND EQUIPMENT
The values of land and buildings occupied by the Company were determined with reference to a professional appraisal at April 30, 1991, on an open market existing use basis. Land and Buildings occupied by subsidiary companies are shown at cost except for Hungar Hotels where land and buildings are revalued by an independent valuer at January 1, 1997.
Effective August 1, 1991, ownership of land and buildings was passed to Danubius, except for the land on which the Margaret Island hotels are located. This land is not subject to "handling rights" or private ownership. The operation of the two hotels on Margaret Island is authorised by license from the XIII. Municipality of Budapest. Included in buildings there is HUF 538 million relating to the usage right of real estate on Margaret Island.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
8. OTHER NON-CURRENT ASSETS
The book value of the unconsolidated subsidiaries are:
9. OTHER PAYABLE AND ACCRUALS
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
10. LONG TERM DEBT
Loans include the followings:
o DEM 15 million long term loan with an interest rate of 6-month FIBOR + 1.25% secured by a mortgage on the Hotel Helia. o DEM 25 million long term loan with an interest rate of 6-month LIBOR + a margin of 0.75% to 0.95%, secured by mortgages on Thermal Hotel Buk and Thermal Hotel Sarvar. o DEM 12.5 million short term loan with an interest rate of 3-month FIBOR + 0.75% secured by a mortgage on the Budapest Hilton Hotel. The loan was paid back on January 6, 1998. o DEM 25 million long term loan with an interest rate of 3-month LIBOR + 0.95% secured by a mortgage on the Budapest Hilton Hotel.
11. NEGATIVE GOODWILL
Negative goodwill arisen on the following acquisitions:
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.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
12. MINORITY INTEREST
Minority interest represents the minority shareholders' proportionate share of the equity of subsidiaries.
13. INCOME TAXES
The effective income tax rate varied from the statutory income tax rate due to the following items:
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
14. SHARE CAPITAL
Registered share capital at December 31, 1997 consists of 8 million (1996: 8 million) authorised and issued ordinary shares, each of par value HUF 1,000.
The share capital of Danubius was issued effective with the transformation of Danubius Hotel and Spa Company into a company limited by shares on July 31, 1991. The transformation of share capital has been accounted for as a transfer of the Accumulated Funds balance and Revaluation Reserve at December 31, 1990 into Share Capital and Capital Surplus accounts.
Under the terms of Danubius' Articles of Association, the Company may also issue shares to employees from time to time as part of the Company's compensation arrangements.
15. CAPITAL CONTRIBUTION
In accordance with the Hungarian Privatisation Act of 1989 which allow 20% of the proceeds of certain shares sold by APV Rt. to be paid to the Company as a capital contribution the Company received HUF 1,076 million in 1997. The Company became entitled to the contribution based on agreements made with APV Rt. in 1997 relating to shares sold in 1992, 1993 and 1994. The Company is required to issue shares to the employees from this amount.
In addition to the capital contribution the Company received HUF 831 million late payment interest determined by reference to the date of the shares sold by APV Rt. As this amount did not derive from the ordinary activities of the Company the amount has been shown as an extraordinary income net of income tax of HUF 150.
Of the total amount of HUF 1,907 million, HUF 1,407 was received after deducting HUF 500 million owed to APV Rt., as more fully described in note 20.
16. COMMITMENTS
a) The acquisition of Hungar Hotels required HUF 2 billion to be spent on refurbishment of that hotel chain. (See note 19.) In 1997 the total capital expenditure was HUF 822 million and a further HUF 550 million committed. The Group also made commitments to spend HUF 45 million (1996: HUF 201 million) on refurbishment and renovations of hotel buildings and facilities during 1998.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
COMMITMENTS (CONTINUED)
b) On October 7, 1997 the Company entered into an agreement to acquire Danube Travel, a travel agency incorporated in London for GBP 230,000 and also to provide GBP 150,000 loan to Danube Travel. In 1997 GBP 115,000 was transferred and shown as other non current assets. The remainder has subsequently been paid.
17. CONTINGENT LIABILITY
a) The Company was reviewed by the tax and the social security authority during 1997. 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 has made a provision of HUF 24 million.
b) On April 1, 1995 a decision was taken to close down the operations of Hungaria Hotel und Restaurant GmbH (Munich Office), a subsidiary of Hungar Hotels. Hungar Hotels had guaranteed a total of approximately HUF 200 million in rental payments of Munich Office. HUF 250 million payments were made including guarantee payments and loan repayments on behalf of Munich Office which is shown as receivable by the Company. HUF 14 million had been collected and HUF 236 had been provided for as at December 31, 1997. Management expects to finalise the liquidation procedures in 1998.
18. RELATED PARTY TRANSACTIONS
The related parties of the Company are: The Investor group, the ultimate parent company of Danubius in Hungary and Hungarian Hotels Sales Office, an unconsolidated subsidiary.
Significant related party transactions are: Danubius operates the Hungarian Hotels Sales Office inc. in Los Angeles. This company arranges tourism in Hungary and books guests into Danubius Hotels as well as other Hungarian Hotels. This company is funded by retained commissions on bookings on an arms length basis and from funds transferred from Danubius. During 1997 HUF 10 million (1996: HUF 10 million) of costs were included in normal marketing costs in the books of Danubius. During 1997 HUF 61 million (1996: HUF 45 million) was paid to Investor group and HUF 24 million to CP Holding for management services and HUF 55 million rental fee to Investor group.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
19. ACQUISITION OF HOTEL HELIA RT.
On February 6, 1996 the Company entered into an agreement with OKHB to purchase 59.82% of the shares in Hotel Helia Rt. for HUF 1.1 billion, bringing the Company's total holdings in Hotel Helia Rt. to 73.36%.
Resulting from this share purchase, the Company commenced operating the Hotel Helia from January 1, 1996. A formal operating agreement was negotiated during the year. As a result, the Company commenced consolidating Hotel Helia Rt. into its consolidated financial statements.
On February 6, 1996 the Company signed a contract with municipalities for the option to purchase 447 million shares in the Hotel Helia which represented 26.57% of the Helia. The option period was 18 months with a purchase price of HUF 489 million and 6% annual price increase applying from February 6, 1996. The Company exercised the option and paid the purchase price on August 4, 1997.
20. ACQUISITION OF HUNGAR HOTELS
On January 6, 1997, the Company acquired from APV Rt. 85% of the shares of Hungaria Szalloda Rt. ("Hungar Hotels"), a company incorporated under the laws of Hungary and operating in the hotel industry, with a commitment to purchase the remaining 15% of the shares if they are not acquired by employees of Hungar Hotels within 300 days. The shares acquired have a nominal value of HUF 4.7 billion.
Under the purchase agreement, the significant undertakings of the Company were as follows:
o 50% of the shares must be offered to the public on the Budapest Stock Exchange within one year of the closing date; and o within three years of the closing date, a minimum of HUF 2 billion including 100% of the 1996 profit must be spent on refurbishment on hotels owned by Hungar Hotels.
On October 4, 1997 the Company agreed, as part of a complex agreement with the APV Rt., to amend the contract such that there is no longer an obligation for a public offering of 50% of the acquired shares. A purchase price differential of HUF 500 million was paid by the Company in respect of this. The agreement also included a property swap between APV Rt. and Hungar Hotels, the implementation of which was deferred into 1998.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
ACQUISITION OF HUNGAR HOTELS (CONTINUED)
The acquisition was made as follows:
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.
21. SUMMARY FINANCIAL INFORMATION OF ACQUISITIONS
Summary financial information for significant subsidiaries acquired during 1997:
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
Income Statement Included from - January 1,
Net Sales 8,209 Pro forma Operating profit 1,162 Net profit 1,074
22. TAXATION 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:
In certain cases, before dividends can be paid from Hungarian Accounting Law retained earnings, withholding tax of up to 20% must be paid. The rate of tax payable is dependent on the residency of the shareholder which may reduce this rate of tax.
23. LEGAL MATTERS
Prior to May 1995 Hotel Gellert was managed by the Company based on a verbal agreement with APV Rt. as the ownership right of the hotel was not clear. On May 15, 1995 the court decided that the ownership right of the hotel was due to the Company. As the result of that the Company paid HUF 1,419 million to APV Rt. The Land Registration Office was unable to complete the registration of the legal ownership right as the Gellert hotel and Gellert spa is built on the same land as the spa owned by Budapest Gyogyfurdoi es Hevizei Rt. (Budapest Spa). Budapest Spa is challenging the validity of the contract between the Company and APV Rt. at the court as a prepurchase right of Budapest Spa relating to Gellert hotel was not taken into consideration.
24. PENSION SCHEME The pension scheme is available for all employees after half year employment. The contribution expense was HUF 121 million (1996: 56 million) and charged against profit for the year in which the contribution is payable. The contribution is paid on 5% of the salary by the Group. The assets of the fund are held in a separate trustee administered funds.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
25. FINANCIAL INSTRUMENTS
Currency risk -------------
The Company's sales prices are primarily quoted in Deutschmarks or US dollars and income received in hard currencies or Hungarian forints.
The Group has DEM 77.5 million loans outstanding at year end. See note 10.
Management believes that its sales revenue is substantially protected against the effects of forint devaluation against hard currencies and has not therefore regularly entered into foreign currency hedging contracts or other derivative products.
Interest rate risk ------------------
Interest rates on loans are listed in note 10. 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.
26. BUSINESSES MANAGED FOR APV RT.
The ownership of the following businesses were retained by APV Rt. on the transformation of Hungar Hotels and as at December 31, 1997 are still being managed by Hungar Hotels in return for management fee:
Gambrius restaurant Savaria Hotel Nador Hotel (closed) Alba Regia Hotel (sold in 1998) Claudius Hotel Hungaria Hotel
The sales income amounting to HUF 749 million and cost of sales of the managed business units are not included in the accompanying financial statements. Any losses are charged to APV Rt. and profits paid to APV Rt. for the operation of these business units.
DANUBIUS HOTEL AND SPA RT. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (All amounts in HUF 000,000's, unless otherwise noted)
27. RECONCILIATION OF TOTAL SHAREHOLDERS' EQUITY AND NET INCOME FROM THE CONSOLIDATED HUNGARIAN STATUTORY FINANCIAL STATEMENTS TO THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS