NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
1. Background and basis of presentation
Composition of the group and the nature of its business:
The combined financial statements include the accounts of those entities
which were owned directly or indirectly by Finprogetti S.p.A. or its
affiliates at December 31, 1994 that are to be included in a transaction
governed by the Stock Purchase Agreement (dated July 17, 1995) between
Finprogetti S.p.A. and De Tomaso Industries, Inc. A summary of these
entities is as follows:
- - 100% of Finprogetti International Holding S.A.
- - 80% of Grand Hotel Bitia S.r.l. (Principal asset consisting of land
not currently being developed - See Note 4)
- - 100% of Finprogetti Investimenti Immobiliari S.p.A. (which owns 25% of
Interim S.p.A.)
- - 75.25% of Immobiliare Broseta S.r.l. (67% directly held and 33% held
by Interim S.p.A., which was 25% owned by Finprogetti Investimenti
Immobiliari S.p.A.)
- - 100% of Pastorino Strade S.r.l.
- - 100% of Finprogetti Servizi S.p.A.
- - 100% of TIM S.r.l.
- - 95.5% of Finproservice S.p.A.
The interest in Grand Hotel Bitia S.r.l. was acquired during 1994, the
other entities were also owned during 1993.
The entities are engaged in financial activities (principally factoring and
lending) and real estate activities.
11
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
1. Background and basis of presentation (cont.)
Basis of presentation:
The individual entities included in the combined financial statements
maintain their accounting records in order to prepare financial statements
for local reporting purposes. Adjustments have been made to such financial
statements in order to present the combined financial statements in
conformity with generally accepted accounting principles in the United
States of America (US GAAP). The nature of the adjustments made are
summarized below:
- - To change the reporting period closing date of one affiliate from
October 31 to December 31.
- - To include in the individual entities financial statements the effect of
the fair value adjustments related to the acquisition by Finprogetti
S.p.A. or its affiliates of those entities that are substantially
wholly-owned.
- - To adjust the combined financial statements to comply with U.S. GAAP.
These adjustments principally include (a) the elimination of revaluation
of assets and interest on real estate not being developed and (b) the
accounting for deferred income taxes, the shareholders forgiveness of
the indebtedness of the combined entities to them, etc.
All significant transactions and balances with entities in the combined
financial statements have been eliminated.
Based on the presentation described above the equity section in the
accompanying combined balance sheet represents Finprogetti S.p.A.'s basis
in the carrying value of the net assets of the combined entities. The three
components of equity are (1) the cost of the Finprogetti S.p.A.'s
investment in the combined entities (2) the accumulated net losses of the
combined entities since dates of their respective acquisition by
Finprogetti S.p.A. or its affiliates, and (3) the cumulative translation
adjustment of the combined entities since date of acquisition.
As more fully described in Note 4 some of the combined entities have been
involved with material transactions, primarily financing transactions, with
Finprogetti S.p.A. and its affiliates on terms determined by Finprogetti
S.p.A.
12
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
2. Significant accounting policies
Cash and cash equivalents: All liquid bank deposits with original terms to
maturity of less than three months are considered cash equivalents.
Receivables: The carrying value of receivables arising from financial
transactions are based on their original amounts recorded as follows:
- - Factoring transactions:
- Receivables acquired with recourse are recorded at their original
face value.
- Receivables acquired without recourse are recorded at their
purchased cost less an allowance for the estimate of
uncollectible amounts.
- - Lending transactions: Receivables are recorded at their principal amount
less the estimate of uncollectible amounts.
Assets of real estate activities: Real estate assets are carried at the
lower of cost or their estimated net realizable value. Interest incurred
for the development of real estate is capitalized during the periods of
development.
Concession rights: Concession rights are recorded at purchase cost.
Amortization is computed using the straight line method over the life of
the concession agreement (46 years).
Revenue recognition: Sales of real estate are recognized upon transfer of
ownership, which normally is the date on which the sales contract is
completed and risks of ownership have been transferred to the buyer.
Revenue from financial activities, consisting principally of factoring of
receivables and lending activities, are recognized on the accrual basis.
Deferred income taxes: Deferred income taxes are accounted for under the
liability method and reflect the tax effect of all significant temporary
differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements.
Foreign currency transactions: Receivables and payables denominated in
foreign currencies are recorded at the exchange rate in effect on the
relevant transaction dates. The amount of such receivables and payables are
adjusted to current exchange rates as of the balance sheet date, and any
resulting gain or loss is recognized as a credit or charge to income.
13
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
2. Significant accounting policies (cont.)
Foreign currency translations: The financial statements of the foreign
entity are translated into the Italian Lire using the year-end exchange
rate for balance sheet items and the average exchange rates for the year
for statement of income items. The translation differences resulting from
the change in exchange rates from year to year have been reported
separately as a component of owner's equity.
Termination indemnities: In accordance with Italian severance pay statutes,
employees' benefit are accrued for service to date and are payable
immediately upon separation. The termination indemnities calculated in
accordance with local civil and labor laws are based on each employee's
length of service, employment category and remuneration. The termination
liability recorded in the balance sheet is the amount to which the employee
would be entitled if the employee separates immediately.
Statements of cash flows: Short-term borrowings arise primarily under the
entities' short-term lines of credit with its banks. These short-term
obligations are payable on demand. The cash flows from these items are
included under the caption "Net change in short-term borrowings" in the
combined Statement of Cash Flows.
Information expressed in US Dollars: The combined financial statements are
stated in Italian Lire, the currency of the country in which the majority
of the combined entities are incorporated and operate. Translations of Lire
amounts into US Dollars amounts are included solely for the convenience of
the readers and have been made at the rate of Lire 1,622 to one US Dollar,
the appropriate rate of exchange at December 31, 1994. Such translation
should not be construed as a representation that the Lire amounts could be
converted into US Dollars at that or any other rate.
3. Receivables
The average weighted interest rate on receivables from financial activities
was 18.5% in 1994 and 1993.
Included in receivables from related parties at December 31, 1994 is an
amount of Lire 4,892 for which an allowance of Lire 1,743 was provided in
order to reduce it to its estimated net realizable value.
14
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
4. Assets of real estate activities
Assets of real estate activities are all held for sale, including those
under development. A summary of these assets is as follows:
December 31,
1994 1993
Building ready for sale 18,449 22,250
Real estate under development:
Buildings 8,522 8,152
Industrial areas 3,109 2,986
Land not currently being developed 9,639 -
39,719 33,388
During 1995 a portion of real estate was sold for an amount of Lire 525.
Since management did not forecast any other significant sales of real
estate in 1995 all assets of real estate activities have been classified as
a non-current asset.
A combined entity (Finprogetti Investimenti Immobiliari S.p.A.) entered
into an operating lease contract for a portion of the building ready for
sale that expires in 1998 with an annual rent revenue of Lire 1,230 (see
Note 7).
The real estate ready for sale is covered by a mortgage due to financial
institutions (See Note 7).
The building and industrial areas under development are mortgaged in favor
of a financial institution as a guarantee of a loan of Lire 6,000 granted,
but not yet utilized for the development of those assets.
The combined entity that owns the land not currently being developed was
acquired by Finprogetti S.p.A. in 1994. This acquisition was consummated by
an exchange of a receivable of Finprogetti S.p.A. towards the seller and
the assumption of debt of the entity acquired towards the seller. The value
of the land (the entity's principal asset) was adjusted to its fair value
at the date of acquisition, which approximated the fair value of the
consideration given by Finprogetti S.p.A. As part of the acquisition, an
option was granted to an entity designated by the seller to acquire it at
any time up to June 30, 1996 for Lire 10,600, approximately the carrying
value of the land. Management believes that the exercice of such option is
not likely to occur.
15
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
4. Assets of real estate activities (cont.)
The development of the land has been suspended as the project originally
prepared by that entity before acquisition by Finprogetti needs substantial
modification in order to comply with the new regional regulations.
5. Bank borrowings
Under lines of credit arrangements with a number of banks the combined
entities may borrow up to Lire 19,500. Such credit lines were fully
utilized at December 31, 1994. Finprogetti has released letters of
patronage of Lire 14,400 and issued guarantees of Lire 5,100 to the banks
towards the aggregate amount of Lire 19,500 of lines of credit granted. The
lines of credit arrangements do not have termination dates and are
periodically reviewed. Amounts outstanding could become payable on demand
by the credit institutions. At December 31, 1994 and 1993 the weighted
average interest rates for these lines of credit were 10.5% and 11%,
respectively.
6. Payables to related parties
All of the payables to related parties, except for one amount, are with
Finprogetti S.p.A. and arise principally from financing transactions.
A summary of these payables is as follows:
December 31,
1994 1993
Current loans without interest:
Financial activities 1,662 1,971
Real estate activities 7,213 11,000
Current loans bearing annual interest at 13%
Financial activities 388 354
Real estate activities 760 762
Current account bearing annual interest at 9%, 264 996
for real estate activities -------- ---------
Total current 10,287 15,083
Long-term loan without interest for real estate
activities 1,500
16
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
6. Payables to related parties (cont.)
The above current loans are due at December 31, 1995 and may be renewed
upon agreement between the parties.
In 1995 all the loans without interest have been transferred from
Finprogetti S.p.A. to De Tomaso Industries, Inc. in connection with the
sale agreement dated July 17, 1995.
The current portion of payables to related parties have been presented in
the combined balance sheet as follows:
December 31,
1994 1993
Financial activities 2,050 2,325
Real estate activities 8,237 12,758
10,287 15,083
The long-term loan of Lire 1,500 is due in 1998 and is subordinated to the
full reimbursement of the second mortgage loans transferred from
Finprogetti to a combined entity in 1994 (see Note 7).
7. Long-term debt
Long-term debt were all granted by a financial institution, related to the
real estate activities, and consisted of the following:
<CAPTION>
December 31,
------------
1994 1993
First mortgage originally Lire 10,000, repayable quarterly from 1991 to
1999, bearing annual interest at variable rates. (12.2% at December 31,
1994) 6,634 7,594
Second mortgage, repayable quarterly from March 1996 to 1998, bearing
interest at variable rates. (11.05% at December 31, 1994) 2,000 -
Second mortgage, repayable quarterly from March 1996 to 1998, bearing
interest at variable rates. (11.05% at December 31, 1994) 7,000 -
Second mortgage, repayable in 1995, bearing interest at variable rates.
(11.05% at December 31, 1994) 500 -
-------- -------
Total 16,134 7,594
Less current portion (1,588) (960)
------- ------
Long-term portion 14,546 6,634
====== =======
17
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
7. Long-term debt (cont.)
The three second mortgages were assigned by Finprogetti S.p.A. to a
combined entity in 1994. These mortgages, upon assignment, became all
payable in 1995. The mortgage of Lire 500 was repaid in 1995. In August
1995, the financial institution agreed to modify the terms of the other two
loans as presented in the above tabulation.
The two second mortgages amounting to Lire 9,000 are also secured by a lien
on 100% of the shares of a combined entity (Pastorino S.r.l.) and by the
assignment to the financial institution of the receivables to be generated
from the operating lease described in Note 4.
Maturities of long-term debt over the next five years are as follows:
1995 1,588
1996 4,834
1997 4,998
1998 3,386
1999 1,328
16,134
8. Income taxes
The provision for income taxes of Lire 16 and Lire 14 in 1994 and 1993,
respectively, represent the taxes currently payable for those combined
entities that generated income for tax purposes. There was no utilization
in 1994 and 1993 of the operating loss carryforward because most entities
continued to incur operating losses.
Tax years for the Italian entities are open to inspection by the tax
authorities from 1989 for income taxes and from 1990 for Value Added Taxes.
One of the combined entities received an assessment in 1993 for a total of
Lire 384 million, related to certain non-deductible costs of the year 1987,
for which appeal has been made. It is management's opinion, based on
experts' advice, that no material liabilities will be incurred by the
company in connection with this assessment.
18
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
8. Income taxes (cont.)
At December 31, 1994 the combined entities have net operating tax loss
carryforwards available to offset future taxable income at the national
income tax rate of 36%, which expire as follows:
1995 2,877
1996 1,542
1997 600
1998 1,086
1999 2,977
9,082
At December 31, 1994 and 1993 no deferred taxes have been reported in the
combined financial statements because all of the temporary differences gave
rise to deferred tax assets which are not likely to be realized. Therefore,
a valuation allowance was provided to reduce the deferred tax assets to
zero.
The components of the net deferred tax assets and the related valuation
allowance is as follows:
December 31,
1994 1993
Net operating tax loss carryforwards 3,360 2,198
Allowance for doubtful accounts 1,265 177
Other 529 349
5,154 2,724
Valuation allowance (5,154 (2,724)
Net deferred taxes 0 0
9. Commitments
In connection with the requests for early reimbursement of value added
taxes, a combined entity, as it is common practice in Italy, provided
guarantees to the Italian tax authorities in favor of a Finprogetti S.p.A.
affiliate not included in the combined financial statements for an amount
of Lire 1,663 and Lire 1,624 at December 31, 1994 and 1993 respectively. In
addition, another combined entity provided for a guarantee to a bank in
favor of the same related party for Lire 3,200. This guarantee was
cancelled in May 1995 when the loan was repaid by the related party.
19
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
10. Contingencies
Several of the combined entities are parties to litigation and claims which
have arisen in the normal course of business (primarily in the factoring
and lending activities of the combined entities) and have not been finally
settled. Management is of the opinion, based on advice from its legal
advisors, that such litigation and claims will not result in any material
liability to the entities.
11. Financial instruments
Off-balance sheet risks:
One of the combined entities entered into forward foreign exchange
contracts with banks to hedge certain foreign exchange transactions. At
December 31, 1994 the entity had foreign exchange contracts outstanding of
Lire 4,613 at fixed exchange rates to fully hedge risks in German Marks and
Eurolire. The contracts generally have fixed maturities with none exceeding
three months.
Concentration of credit risks:
Financial instruments that potentially subject the combined entities to
significant concentrations of credit risk consist principally of cash
deposits and receivables without recourse. Cash deposits are maintained
with major banks. At December 31, 1994 and 1993, concentration of credit
risk is limited. No individual customer or customers belonging to the same
group exceeds 10% of the amount of receivables.
Fair Value of financial instruments:
The following methods and assumptions were used by the entities in
estimating their fair value disclosures for financial instruments:
- - Cash and cash equivalents - The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
- - Long and short-term debt
- The carrying amounts of the entities' borrowing under their short-term
credit arrangements approximate their fair values.
- The fair values of the entities' debt are estimated using discounted
cash flows analyses, based on the entities current borrowing rates for
similar types of borrowing arrangements.
- Certain related parties loans are non-interest bearing.
20
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
11. Financial instruments (cont.)
- - Foreign currency exchange contracts - The fair values of the entities
foreign currency exchange contracts are equal to the quoted market
prices of comparable contracts.
The estimates of the fair values of the financial instruments of the
combined entities at December 31, 1994 are as follows:
Carrying Fair
amount value
Cash and cash equivalents 387 387
Bank borrowings 19,359 19,359
Related parties loans 11,787 10,853
Long-term debt 16,134 16,134
12. Subsequent Events
Prior to July 17, 1995, the following subsequent events occurred:
- - The ownership interests of the combined entities were transferred
between entities owned by Finprogetti S.p.A., but the percentage of
effective ownership by Finprogetti S.p.A. remained unchanged.
- - On April 3, 1995 TIM S.r.l. acquired the TIM trademark from an entity
that was previously a related party of TIM for a purchase price of Lire
300.
- - Claims for tax reimbursement of Finprogetti S.p.A. amounting to Lire
5,300 were transferred in to a combined entity (Finprogetti
Investimenti Immobiliari S.p.A.) at a transfer price of Lire 5,150.
On July 17, 1995 the Stock Purchase Agreement between Finprogetti S.p.A.
and De Tomaso Industries was effected and Finprogetti's equity interests in
the combined entities were transferred to De Tomaso Industries, Inc. in
exchange for 2,035,786 shares of De Tomaso Industries, Inc. In addition, as
more fully described in Note 6, the non-interest bearing loans of the
combined entities payable to Finprogetti S.p.A. were also transferred to De
Tomaso Industries, Inc. As part of the purchase agreement Finprogetti
S.p.A. will arrange for other investors to invest Lire 15,000 in De Tomaso
Industries, Inc. to provide it with additional equity capital and to have
an option to invest an additional Lire 5,000.
21
FINPROGETTI S.p.A.
Combined Ownership Interest in Certain Entities (Note 1)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 1994 and 1993
(All amounts in millions of Italian Lire, except as otherwise noted)
12. Subsequent Events (cont.)
On July 25, 1995 a combined entity (Finprogetti International Holding S.A.)
acquired 100% of the shares of Lita S.p.A., a company that manufactures
metal tubes, which has annual sales of approximately Lire 15,500 and net
assets of Lire 2,542 for a bargain purchase price of Lire 615.
22