Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
The following discussion
of our financial condition and results of operations should be read in conjunction with our financial statements and the related
notes and other financial information appearing elsewhere in this Current Report on Form 10-K. In addition to historical financial
information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in the forward-looking statements. Readers are also urged to carefully review
and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business.
All amounts are set forth in euros.
The following discussion
and analysis relates to the results of the Company and should be read in conjunction with the financial statements and the related
notes thereto and other financial information contained elsewhere in this Form 10-K. For further discussion and analysis related
to the results of the Company, please see our Form 10-K for the fiscal year ended November 30, 2011 filed with the SEC on March
14, 2012 and Form 10-Q for the quarter ended May 31, 2012 filed with the SEC on August 8, 2012.
Overview
Southern States Sign
Company is a hospitality company that owns and develops hotels and spas in Italy. We operate through our wholly owned subsidiary,
Conte Rosso &Partners S.r.l. (“CR&P”) and, as a result, are classified as property investment specialists.
We intend to develop
our presence in Italy and abroad with a target of owning 3,000 rooms within the next 3 to 5 years.
We are currently undergoing
advanced negotiations with respect to investments in Rome, Bari and Florence in Italy, as well as in New York, and have started
searches for investment opportunities in Milan, Florence, Paris and London. We are also planning to invest in high-growth potential
countries such as Albania and some selected African countries.
In addition to the
items discussed above, we plan to continue to refresh our hotel room product, pursue third-party development partners for additional
hotel and restaurant concepts and renovate select facilities to improve our product offerings.
Recent Developments and Events
On September 13, 2012,
David Ben Bassat, agreed to sell 11,851,852 shares of his common stock in the Company to Antonio Conte and Maddalena Olivieri,
and to cancel 3,148,148 of his shares of common stock and return them to our treasury. Following this transaction, Mr. Conte held
a majority of issued and outstanding shares of the Company. For more information see Item 1. – “Business” of
this annual report.
On November 1, 2012,
the Company entered into the Exchange Agreement with CR&P, pursuant to which the CR&P Shareholders transferred all of the
issued and outstanding capital stock of CR&P to the Company in exchange for 21,250,000 newly issued shares of our common stock
(the “Share Exchange”), resulting in CR&P becoming a wholly owned subsidiary of the Company. For information regarding
the Exchange Agreement, see Item 1. – “Business” of this annual report.
Critical Accounting Policies and Estimates
We believe the following
accounting policies and estimates are most critical to aid in understanding and evaluating our reported financial results.
Basis of consolidation
All majority-owned
subsidiaries in which CR&P has both voting share and management control are consolidated. All significant intercompany accounts
and transactions are eliminated. Subsidiaries over which control is achieved through other means, such as stockholders agreement,
are also consolidated even if less than 51% of voting capital is held. The equity attributable to non-controlling interests in
subsidiaries is shown separately in the consolidated financial statements.
Basis of presentation
The consolidated financial
statements for the fiscal years ended December 31, 2012 and 2011 are prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”).
The Euro is the functional
currency of all companies included in these consolidated financial statements.
The amounts
presented have been rounded to the nearest thousand.
Acquisitions
Assets acquired and
liabilities assumed in business combinations are recorded on our consolidated balance sheets as of the respective acquisition dates
based upon their estimated fair values at such dates.
The results of operations
of businesses acquired by us have been included in the consolidated statements of income (loss) since their respective dates of
acquisition. In certain circumstances, the purchase price allocations are based upon preliminary estimates and assumptions. Accordingly,
the allocations are subject to revision when we receive final information, including appraisals and other analyses. There were
no contingent payments, options, or commitments specified in any of the following acquisition agreements.
Cash and cash equivalents
Cash and cash equivalents
comprise cash balances, cash on current accounts with banks, bank deposits and other highly liquid short-term investments with
original maturities of less than three months.
Accounts receivable & Allowance
for doubtful accounts
Accounts receivable
represents trade obligations from customers that are subject to normal trade collection terms, without discounts. The Company periodically
evaluates the collectability of its accounts receivable and considers the need to record or adjust an allowance for doubtful accounts
based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates.
The Company has determined that as of December 31, 2012 and 2011 no allowance for doubtful accounts was required, except the allowance
of € 70,000 allocated to trade receivables classified as held for sale in 2011. The Company does not require collateral to
support customer receivables.
Investments
Investments in unconsolidated
affiliates over which we exercise significant influence, but do not control, including joint ventures, are accounted for using
the equity method.
Investments in unconsolidated
affiliates over which we are not able to exercise significant influence are accounted for under the cost method.
Property, plant and equipment
Property, plant and
equipment are stated at acquisition cost less accumulated depreciation and adjustments for impairment losses. Property, plant and
equipment also includes assets under construction and plant and equipment awaiting installation.
Subsequent expenditures
are capitalized only when they increase the future economic benefits embodied in an item of property, plant and equipment. All
other expenditures are recognized as expenses in the consolidated statement of income as incurred.
Capitalization ceases
when construction is interrupted for an extended period or when the asset is substantially complete.
Where funds are borrowed
specifically for the purpose of acquiring or constructing a qualifying asset, the amount of interest costs to be capitalized in
a period on that asset is the actual interest cost incurred on the borrowing during the period.
Depreciation is charged
on a straight-line basis over the estimated remaining useful lives of the individual assets. Depreciation commences from the time
an asset is put into operation. Depreciation is not charged on assets to be disposed of or on land. The range of the estimated
useful lives is as follows:
|
-
|
Buildings and constructions: 33 years
|
|
-
|
Machinery and equipment: 2 – 20 years
|
Long-Lived Assets
We evaluate the carrying
value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net
book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.
If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value
over the estimated fair value will be charged to earnings.
Fair value is based
upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals,
and, if appropriate, current estimated net sales proceeds from pending offers.
We evaluate the carrying
value of our long-lived assets based on our plans, at the time, for such assets and such qualitative factors as future development
in the surrounding area and status of expected local competition.
Assets and liabilities held for resale
In connection
with the strategy of concentrating in the portfolio of hotel, power, and plantations investments, in the periods presented we
entered into various negotiations with potential purchasers to sell. These sales are concluded at the end of September 30,
2012. As a result we have classified these assets and liabilities as available for sale as of December
31, 2011. In the statement of operations we have reclassified the net effect of the income and expenses related to the available
for sale assets and liabilities as a loss from discontinued operations for the year ended December 31, 2011.
The realized value
of these assets are higher than the net asset carrying value and that resulted in a gain on discontinued operations, as shown in
the statement of operations for the year ended December 31, 2012.
Goodwill and Other Intangible Assets
We evaluate goodwill
for impairment on an annual basis, and do so during the last month of each year using balances as of the end of September and at
an interim date if indications of impairment exist. Goodwill impairment is determined by comparing the fair value of a reporting
unit to its carrying amount in a two-step process with an impairment being recognized only where the fair value is less than carrying
value. We define a reporting unit at the individual property level.
When determining fair
value in step one, we utilize internally developed discounted future cash flow models, third party appraisals and, if appropriate,
current estimated net sales proceeds from pending offers. Under the discounted cash flow approach we utilize various assumptions,
including projections of revenues based on assumed long-term growth rates, estimated costs and appropriate discount rates based
on the weighted-average cost of capital. The principal factors used in the discounted cash flow analysis requiring judgment are
the projected future operating cash flow, the weighted-average cost of capital and the terminal value growth rate assumptions.
The weighted-average cost of capital takes into account the relative weights of each component of our capital structure (equity
and long-term debt) and is determined at the reporting unit level. Our estimates of long-term growth and costs are based on historical
data, various internal estimates and a variety of external sources, and are developed as part of our routine, long-term planning
process. We then compare the estimated fair value to our carrying value.
If the carrying value
is in excess of the fair value, we must determine our implied fair value of goodwill to measure if any impairment charge is necessary.
The determination of our implied fair value of goodwill requires the allocation of the reporting unit’s estimated fair value
to the individual assets and liabilities of the reporting unit as if we had completed a business combination.
We perform the allocation
based on our knowledge of the reporting unit, the market in which they operate, and our overall knowledge of the hospitality industry.
Leasing
All lease agreements
of the Company and its subsidiaries as lessees are accounted for as finance leases. The Company recognizes the asset and associated
liability on its balance sheet. Finance leases are capitalized at the beginning of the lease at the lower of the fair value of
the leased property and the present value of minimum lease payments. Each installment of the lease is apportioned between the liability
and finance charges so as to achieve an equal reduction in capital due for each payment made at constant rate on the remaining
financial balances.
Derivative financial instruments
The Company uses derivative
financial instruments principally for the management of exposure to variable interest rates on long-term financing. All derivative
financial instruments are classified as assets or liabilities and are accounted for at trade date. The Company measures all derivative
financial instruments based on fair values derived from market prices of the instruments. Changes in the fair value of a derivative
that is significant and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset
or liability, are recorded in the income statement.
At December 31, 2011
there was only one derivative instrument hedging the risk of variable interest rates (an “interest rate cap”), the
notional amount of which was €4 million. This derivative instrument hedged the risk from change of interest rate on a mortgage
loan facility with “bullet” repayments originally of € 8 million of which € 6.6 million was outstanding as
of December 31, 2011. This loan facility referred to a non-hospitality business, divested on September, 2012.
At September 30, 2012
(the date of the divestment of the non-hospitality-businesses subsidiaries), the Company has recorded in the nine months income
statement the change in fair value of the derivative instrument mentioned above as loss of € 27,000 on the hedged liability.
Shareholders loans
Shareholders loans
to the Group are all non-interest bearing. Italian law provides that the shareholders loans to a limited liability company ("S.r.l.")
are not preferred and their repayment is subordinated to other categories of debt. As a result all shareholder loans are classified
as non-current liabilities.
Severance indemnity fund
According to Italian
accounting principles reflecting local law and applicable employment contracts, certain post-employment benefits accrue during
the period of employment. Under U.S. GAAP, post-employment benefits are defined either as de fined contribution plans or defined
benefit plans.
In defined contribution
plans, the company's obligation is limited to the payment of contributions to the Government or to a fund. Defined benefit plans
are pension, insurance and healthcare programs which cover the company's obligation, even implicitly, to provide the benefits due
to former employees. The liabilities associated with defined benefit plans are determined on the basis of actuarial assumption
(discounting) and accrued in the financial statements over the employment period required to obtain the benefits.
The severance indemnity
fund required by Italian law is a liability similar to a defined benefit plan, which, however, according to Italian accounting
principles, is not subject to discounting. Given the small number of Group employees any difference between the present provisions
in the financial statements prepared in accordance with Italian GAAP and discounted value of these benefits is considered to be
immaterial.
Revenue Recognition
Our revenues are derived
from rent we receive according to rental agreements we have in place with a hotel management company. The majority of our rent
is fixed and payable monthly. The fixed agreements with set increasing rental rates are recognized on a straight line basis. We recognize
additional revenue that is variable based on a percentage of the operating profit of our rented hotels only when the contingency
of baseline target has been met.
Taxes
Income taxes
We account for income
taxes to recognize the amount of taxes payable or refundable for the current year and the amount of deferred tax assets and liabilities
resulting from the future tax consequences of differences between the financial statements and tax basis of the respective assets
and liabilities. We recognize the financial statement effect of a tax position when, based on the technical merits of the uncertain
tax position, it is more likely than not to be sustained on a review by taxing authorities. These estimates are based on judgments
made with currently available information. We review these estimates and make changes to recorded amounts of uncertain tax positions
as facts and circumstances warrant.
Results of Operations
For the year ended December 31, 2012
and the year ended December 31, 2011
€/000
|
|
For the year ended
December 31, 2012
|
|
|
For the year ended
December 31, 2011
|
|
|
|
Audited
|
|
|
Audited
|
|
Revenue from operations
|
|
|
4,420
|
|
|
|
4,747
|
|
Direct operating and selling, general and administrative costs
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
(929
|
)
|
|
|
(1,514
|
)
|
Selling, general and administrative costs
|
|
|
(441
|
)
|
|
|
(1,409
|
)
|
Amortization and depreciation
|
|
|
(2,355
|
)
|
|
|
(2,725
|
)
|
Total direct operating and selling, general and administrative costs
|
|
|
(3.725
|
)
|
|
|
(5.648
|
)
|
Operating income/(Loss)
|
|
|
695
|
|
|
|
(901
|
)
|
Interest income
|
|
|
33
|
|
|
|
|
|
Interest expenses
|
|
|
(2,345
|
)
|
|
|
(2,851
|
)
|
Other income
|
|
|
|
|
|
|
1,156
|
|
Gain on business combination (bargain purchase)
|
|
|
|
|
|
|
2,476
|
|
Loss from continuing operations, before income taxes
|
|
|
(1,617
|
)
|
|
|
(120
|
)
|
Income taxes
|
|
|
(725
|
)
|
|
|
(4
|
)
|
Loss from continuing operations, net of income taxes
|
|
|
(2,342
|
)
|
|
|
(124
|
)
|
Net income/(loss) from operations of discontinued operations, after taxes
|
|
|
(1,418
|
)
|
|
|
(4,774
|
)
|
Net income/(loss) on disposal of discontinued operations, after taxes
|
|
|
11,881
|
|
|
|
118
|
|
Net profit/(loss) from discontinued operations
|
|
|
10,463
|
|
|
|
(4,656
|
)
|
Consolidated net income/(loss) for the period
|
|
|
8,121
|
|
|
|
(4,780
|
)
|
Less net loss attributable to non-controlling interests in the consolidated subsidiaries
|
|
|
32
|
|
|
|
742
|
|
Net income/(loss) attributable to the Company
|
|
|
8,153
|
|
|
|
(4,038
|
)
|
Revenues
Revenues for the year
ended December 31, 2012, decreased approximately €327, or 7%, compared to the year ended December 31, 2011. This decrease
is mainly dependent on the following events, both referred to the subsidiary Terme di Galzignano:
|
·
|
launch of the new management lease agreement of the hotel business, which provides the lower initial
fee to facilitate the start-up of the new management policy;
|
|
·
|
partial unavailability of some rooms for renovation.
|
Direct Operating Costs
Direct Operating Costs
for the year ended December 31, 2012, decreased approximately €584, or 39%, compared to the year ended December 31, 2011.
This decrease is mainly due to the elimination of the direct management activity of the hospitality business of Terme di Galzignano,
and the transfer of such management activities to a specialized management company, under an operating lease agreement.
Selling, General and Administrative
Costs
Selling, General and
Administrative costs for the years ended December 31, 2012 and 2011 were approximately €441 and €1,409, respectively.
Such expenses consist primarily of salaries and personnel related expenses, occupancy expenses, sales travel, consulting costs
and other expenses. This decrease is mainly due to the elimination of the direct management activity of Terme di Galzignano hospitality
business as mentioned above.
Amortization and Depreciation
Amortization and depreciation
for the years ended December 31, 2012 and 2011 were approximately €2,355 and €2,725, respectively. Such expenses consist
primarily of depreciation of properties, plant and equipment held by Conte Rosso & Partners and the subsidiaries Ripa Hotel
& Resort and Terme di Galzignano. The decrease of approximately €370 was mainly due to the revaluation of the useful life
of the assets.
Interest Income
Interest income for
the years ended December 31, 2012 and 2011 was approximately a gain of €33 and a gain of €0, respectively. These items
are immaterial in the two periods being compared.
Interest Expense
Interest expense for
the years ended December 31, 2012 and 2011 was approximately € 2,345 and € 2,851 respectively. The decrease was essentially
due to re-negotiation of conditions of the capital lease agreement of Ripa Hotel.
Other Income
Other Income for the
years ended December 31, 2012 and 2011 was approximately € 0 and € 1,156, respectively. The amount shown in 2011 was
due to the preliminary sale agreement of some lodges to be built within the Terme di Galzignano resort where the Green Hotel, currently
not operating, is planned to be transformed into a lodge residence.
Gain on business combination (bargain
purchase)
Gain on business combination
(bargain purchase) for the years ended December 31, 2011 was approximately € 2,476 which was substantially due to the
acquisition of 97.25% equity stake in Terme di Galzignano SpA.
Discontinued operations
During the fiscal year
ended December 31, 2012, we sold the non-hospitality subsidiaries to a related party (owned directly and indirectly by Mr. Conte)
for a gain of € 11,881, net of taxes. The net loss from discontinued operations was €1,418, for that period. We have
no continuing involvement with these subsidiaries.
During the fiscal year
ended December 31, 2011, we sold the Via Gereschi (Pisa) property for a gain of € 23, net of taxes, and the Todi (Perugia)
property for a gain of € 95, net of taxes. The net loss from discontinued operations was €4,774, for that period. We
have no continuing involvement with either property.
Income Taxes
Income taxes for the
years ended December 31, 2012 and 2011 were approximately € 726 and € 4, respectively. The decrease is mainly due to
the taxable income recognized in continuing operations during 2012.
Liquidity
and
Capital Resources
For the year ended December 31, 2012
and the year ended December 31, 2011
As of December 31,
2012, we had cash and cash equivalents of approximately € 441, negative working capital of approximately € 4,058 and
retained earnings of approximately €7,359.
Cash Flows from Operating Activities
Net cash used in operating activities was
approximately € 4,908 for the year ended December 31, 2012 compared to approximately € 10,678 for the year ended December
31, 2011.
The net cash used in
operating activities for the year ended December 31, 2012 reflects a net income of approximately € 8,121, a net loss from
operations on discontinued operations of approximately € 1,418 and a depreciation and amortization of approximately €2,355,
offset by a gain on disposal of discontinued operations of approximately € 11,881. Changes in assets and liabilities included
a decrease in trade receivables of approximately € 1,507, an increase in related party receivables of approximately €
20,610, an increase in other receivables of approximately € 190, a decrease in advanced payments on purchases of property of
approximately € 6, a decrease in other assets of approximately € 52, a decrease in trade payables of approximately €639,
an increase in related party payables of approximately € 6,989, an increase in other payables of approximately €1,327,
an increase in VAT taxes receivable of approximately € 2,429 and an increase in other liabilities of approximately €
6,034. The net cash provided by operating activities of discontinued operations was approximately € 192.
The net cash provided
by operating activities for the year ended December 31, 2011 reflects a net loss of approximately €4,780, a net loss from
operations on discontinued operations of approximately € 4,774 and a depreciation and amortization of approximately €2,725,
offset by a gain on disposal of discontinued operations of approximately € 118. Changes in assets and liabilities included
a decrease in trade receivables of approximately €613,000, an increase in related party receivables of approximately €388,000,
an increase in other receivables of approximately €350, an increase in advanced payments on purchases of property of approximately
€2,756, a decrease in other assets of approximately €452, an increase in trade payables of approximately €5,120,
a decrease in related party payables of approximately €445, an increase in other payables of approximately €352, a decrease
in VAT tax receivable of approximately €1,351 and a decrease in other liabilities of approximately €1,328.
Cash Flows from Investing Activities
The net cash provided
by investing activities for the year ended December 31, 2012 of approximately € 55 consist primarily of the cash inflow (approximately
€ 5,867) due to the discontinued operation (divestment of non-hospitality business), offset by the cash out flow used in continuing
operations referred to the purchases of intangible assets (approximately € 1,248), the payment for purchase of properties,
plant and equipment (approximately € 4,428) and other investing changes (approximately € 138 of cash outflow).
The net cash used in
investing activities for the year ended December 31, 2011 of approximately € 26,879 consist primarily of the cash outflow
(approximately € 27,870) for purchase of properties, plant and equipment basically due to the impact of the acquisition and
the consolidation of the subsidiary Terme di Galzignano for the first time in 2011, and other investing change (approximately €
693 of cash outflow), offset by a cash inflow provided by operations on discontinued operations of approximately € 1,686.
Cash Flows from Financing Activities
Net cash used in financing
activities for the year ended December 31, 2012 was approximately €4,983, which was mainly due to net financing on discontinued
operations. Net cash provided in 2011 was approximately € 16,309, which was mainly due to the acquisition of long term debt
referred to the acquisition of Terme di Galzignano.
Future Liquidity Needs
We have evaluated our
expected cash requirements over the next twelve months, which includes, but is not limited to, interest payments, capital repayments,
capital expenditures and working capital requirements. Whilst we are able to manage certain aspects of these cash requirements
the level of income, rate of repayment of related party receivables and cost of debt, where variable, are outside our control.
We are also planning, but as yet have no contractual commitments, to make acquisitions and whilst we wish to effect at least some
of these acquisitions through the issue of shares there can be no certainty that the vendors will accept such consideration and
we may wish, to in any case, to effect such acquisitions using cash. Further, we plan to put in place new borrowings to finance
the assets to be acquired or take-on existing borrowings secured on the assets planned to be acquired.
Based on existing assets,
expected related party receivables repayments, business level, debt and interest rates we believe our current resources are sufficient
for at least the next twelve months.
However, to implement
the business plan for the expansion of our assets we will require additional financing in the future. The timing of our need for
additional capital will depend on the timing of the completion of the planned acquisitions, the terms of such acquisitions and
whether existing lenders are willing to continue to provide finance upon a change of control of such assets.
We are in the process
of developing two properties which will require capital expenditure – the Green Park Hotel being converted to apartments
and the expansion of the Masseria Hotel.
While the first part
of the Masseria development has already started and will be completed by April 2013, the second part, with the creation of additional
24 rooms, will take place in Q1 2014. It is expected that the first part of the development will cost additional €400 ($520).
A development loan is currently being negotiated for this amount. The terms of the loan are expected to be interest only during
the development period and then bullet repayment to be effected by the entering into of a longer term mortgage financing secured
on the property. At present no internal capital is expected to be required for this expansion. The last part of the development
will cost approximately €600 ($780).
The development of
the Green Park Hotel should start in the second half of 2014. It is expected that the Green Park Hotel conversion will cost approximately
€4.4 million ($ 5.7 million) to be spent over a period of 1½ years from commencement in 2014.
In each case no work,
beyond planning and negotiation of finance, has been undertaken and no work will start until the required financing has been agreed
and contracted with lending institutions.
Commitments and contingencies
The Company and certain
subsidiaries are defendants in legal actions in the normal course of business. Based on the advice of legal counsel, management
believes that the amounts recognized and recorded as debt provisions or asset negative adjustments are sufficient to cover probable
losses in connection with such actions.
The risk provisions
or negative adjustments are recognized when in accordance with the opinion of legal counsel the liability is probable and measurable.
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
|
23
|
Balance Sheets as of December 31, 2012 and 2011;
|
24
|
Statements of Operations for the years ended December 31, 2012 and 2011;
|
25
|
Consolidated Statement of Stockholders’ Equity (Deficit) for the years ended December 31, 2012 and 2011;
|
27
|
Statements of Cash Flows for the years ended December 31, 2012 and 2011; and
|
28
|
Notes to Financial Statements.
|
29
|
bompani
audit
00153 ROMA
Piazza Albania, 10
Tel. 06 57264302
Fax 06 57250015
e-mail: roma@bompaniaudit.com
www.bompaniaudit.com
Wide Certificate
ISO 9001: 2008 n. 9175.bomp
Report of Independent Registered Public
Accounting Firm
To the Board of Directors of
Southern States Sign Company
Rome, Italy
We have audited the accompanying consolidated
balance sheets of Southern States Sign Company (including its wholly-owned subsidiary, Conte Rosso & Partners S.r.l., formerly
All Real Estate S.r.l.), expressed in euros as of December 31, 2011 and 2012 and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for the years ended December 31, 2011 and 2012. 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
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. 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 consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Southern States Sign Company (including
its wholly-owned subsidiary, Conte Rosso & Partners S.r.l., formerly All Real Estate S.r.l.) as of December 31, 2011 and 2012
and the results of its operations and its cash flows for the years ended December 31, 2011 and 2012 in conformity with accounting
principles generally accepted in the United States of America.
BOMPANI AUDIT S.r.l
/s/ Remo Simonetti
Remo Simonetti
€’000
SOUTHERN STATES SIGN COMPANY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2012 & 2011
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
Audited
|
|
|
2011
Audited
|
|
ASSET
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash
|
|
€
|
441
|
|
|
€
|
312
|
|
Net receivables
|
|
|
4,701
|
|
|
|
3,194
|
|
Related parties receivables
|
|
|
22,043
|
|
|
|
1,432
|
|
VAT Tax receivables
|
|
|
1,628
|
|
|
|
2,565
|
|
Other current assets
|
|
|
340
|
|
|
|
150
|
|
Available for sale assets
|
|
|
-
|
|
|
|
57,153
|
|
Total current assets
|
|
|
29,153
|
|
|
|
64,806
|
|
Non - Current Assets:
|
|
|
|
|
|
|
|
|
Net properties, plant and equipment
(Including Capital Leased properties € 36,805 and € 38,082, respectively)
|
|
|
69,171
|
|
|
|
67,097
|
|
Goodwill
|
|
|
1,541
|
|
|
|
1,541
|
|
Other non-current assets
(Including Related Parties non-current receivables € 8,890 and € 0, respectively)
|
|
|
10,535
|
|
|
|
342
|
|
Total non - current assets
|
|
|
81,247
|
|
|
|
68,980
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
€
|
110,400
|
|
|
€
|
133,786
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
€
|
2,970
|
|
|
€
|
2,890
|
|
Current maturities of long term loans and capital leases
|
|
|
11,221
|
|
|
|
9,276
|
|
Trade payables
|
|
|
7,774
|
|
|
|
8,300
|
|
Related parties payables
|
|
|
7,014
|
|
|
|
25
|
|
Others current liabilities
|
|
|
4,232
|
|
|
|
1,697
|
|
Available for sale liabilities
|
|
|
-
|
|
|
|
42,294
|
|
Total current Liabilities
|
|
|
33,211
|
|
|
|
64,482
|
|
Non - current liabilities:
|
|
|
|
|
|
|
|
|
Long term loans and capital leases
|
|
|
42,188
|
|
|
|
43,369
|
|
Shareholder's loans
|
|
|
626
|
|
|
|
219
|
|
Other non-current liabilities
|
|
|
70
|
|
|
|
651
|
|
Total non - current Liabilities
|
|
|
42,884
|
|
|
|
44,239
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
27
|
|
|
|
25
|
|
Additional Paid in Capital
|
|
|
26,059
|
|
|
|
25,978
|
|
Retained earnings/(Accumulated loss)
|
|
|
7,359
|
|
|
|
(936
|
)
|
Equity
attributable to owners of Southern States Sign Company
|
|
|
33,445
|
|
|
|
25,067
|
|
Non-Controlling interests in the consolidated subsidiaries
|
|
|
860
|
|
|
|
(3
|
)
|
Total Stockholders' Equity
|
|
|
34,305
|
|
|
|
25,064
|
|
Total Liabilities and Stockholders' Equity
|
|
€
|
110,400
|
|
|
€
|
133,786
|
|
€’000
SOUTHERN STATES SIGN COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012 & 2011
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Audited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
Revenue from operations
|
|
|
4,420
|
|
|
€
|
4,747
|
|
Direct operating and selling, general and administrative costs
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
929
|
|
|
|
1,514
|
|
Selling, general and administrative costs
|
|
|
441
|
|
|
|
1,409
|
|
Amortization and depreciation
|
|
|
2,355
|
|
|
|
2,725
|
|
Total direct operating, selling, and administrative costs
|
|
|
3,725
|
|
|
|
5,648
|
|
Operating Profit/(Loss)
|
|
|
695
|
|
|
|
(901
|
)
|
Interest income
|
|
|
33
|
|
|
|
|
|
Interest expenses
|
|
|
(2,345
|
)
|
|
|
(2,851
|
)
|
Other income
|
|
|
-
|
|
|
|
1,156
|
|
Gain on business combination(bargain purchase)
|
|
|
-
|
|
|
|
2,476
|
|
Profit/(Loss) from continuing operations, before income taxes
|
|
|
(1,617
|
)
|
|
|
(120
|
)
|
Income taxes
|
|
|
725
|
|
|
|
4
|
|
Profit/(Loss) from continuing operations, net of income taxes
|
|
|
(2,342
|
)
|
|
|
(124
|
)
|
Net loss from operations of discontinued operations, after taxes
|
|
|
1,418
|
|
|
|
4,774
|
|
Net income on disposal of discontinued operations, after taxes
|
|
|
11,881
|
|
|
|
118
|
|
Net profit/(loss) from discontinued operations
|
|
|
10,463
|
|
|
|
(4,656
|
)
|
Consolidated net profit/(loss) for the period
|
|
|
8,121
|
|
|
|
(4,780
|
)
|
Less net loss attributable to non-controlling interests in the consolidated subsidiaries
|
|
|
32
|
|
|
|
742
|
|
Net profit/(loss) attributable to owners of Southern States Sign Company
|
|
|
8,153
|
|
|
|
(4,038
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share of Common Stock
|
|
|
|
|
|
|
|
|
Loss from
continuing operations
|
|
€
|
(0.07
|
)
|
|
€
|
0
|
|
Loss from
discontinued operations
|
|
€
|
0.31
|
|
|
€
|
(0.14
|
)
|
Net loss
|
|
€
|
0.24
|
|
|
€
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
34,260,659
|
|
|
|
33,101,852
|
|
€’000,
except per share amounts
SOUTHERN STATES SIGN COMPANY
STATEMENT OF COMPREHENSIVE INCOME/(LOSS)
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Audited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
Net income for the period
|
|
€
|
8,153
|
|
|
€
|
(4,038
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency Translation differences
|
|
|
6
|
|
|
|
0
|
|
Total comprehensive income for the period
|
|
€
|
8,159
|
|
|
€
|
(4,038
|
)
|
SOUTHERN STATES SIGN COMPANY
Consolidated
Statement of Stockholders’ Equity (Deficit)
€’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional Paid
|
|
|
Retained
|
|
|
Equity
attributable
to non-
controlling
|
|
|
TOTAL
|
|
|
|
Share
|
|
|
Amount
|
|
|
In Capital
|
|
|
earnings
|
|
|
interests
|
|
|
EQUITY
|
|
Balance at December 31, 2010
|
|
|
33,101,852
|
|
|
€
|
25
|
|
|
|
73
|
|
|
€
|
3,337
|
|
|
€
|
342
|
|
|
€
|
3,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,038
|
)
|
|
|
(742
|
)
|
|
|
(4,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of Shareholders loan
|
|
|
-
|
|
|
|
-
|
|
|
|
25,905
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in percentage of controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(235
|
)
|
|
|
397
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
33,101,852
|
|
|
€
|
25
|
|
|
€
|
25,978
|
|
|
€
|
(936
|
)
|
|
€
|
(3
|
)
|
|
€
|
25,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to Consultants
|
|
|
200,000
|
|
|
|
1
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Southern State Sign Company
|
|
|
6,849,409
|
|
|
|
1
|
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Percentage of Controlling Interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
895
|
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit (Loss) for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,153
|
|
|
|
(32
|
)
|
|
|
8,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
40,151,261
|
|
|
€
|
27
|
|
|
€
|
26,059
|
|
|
€
|
7,359
|
|
|
€
|
860
|
|
|
€
|
34,305
|
|
€’000
SOUTHERN STATES SIGN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Audited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net Income/(loss)
|
|
€
|
8,121
|
|
|
€
|
(4,780
|
)
|
Net loss from operations on discontinued operations
|
|
|
1,418
|
|
|
|
4,774
|
|
Net gain from discontinued operations
|
|
|
(11,881
|
)
|
|
|
(118
|
)
|
Net Income/(loss) from continuing operations
|
|
|
(2,342
|
)
|
|
|
(124
|
)
|
Depreciation and amortization of non-current assets
|
|
|
2,355
|
|
|
|
2,725
|
|
Other non-cash adjustments
|
|
|
922
|
|
|
|
1,816
|
|
Cash flows from operations before changes in assets and liabilities
|
|
|
935
|
|
|
|
4,417
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Change in trade receivables
|
|
|
(1,518
|
)
|
|
|
(613
|
)
|
Change in related parties receivables
|
|
|
(20,610
|
)
|
|
|
389
|
|
Change in other receivables
|
|
|
11
|
|
|
|
350
|
|
Change in advance payment on purchase and other current assets
|
|
|
(6
|
)
|
|
|
2,756
|
|
Change in other assets
|
|
|
(52
|
)
|
|
|
(452
|
)
|
Change in trade payables
|
|
|
(639
|
)
|
|
|
5,120
|
|
Change in related parties payables
|
|
|
6,989
|
|
|
|
(445
|
)
|
Change in other payables
|
|
|
1,327
|
|
|
|
352
|
|
Change in tax
receivable and payable
|
|
|
2,429
|
|
|
|
(1,351
|
)
|
Change in other liabilities
|
|
|
6,034
|
|
|
|
(1,328
|
)
|
Net cash provided by/(used in) operating activities of discontinued operations
|
|
|
192
|
|
|
|
1,483
|
|
Net cash provided by/(used in) Operating Activities (A)
|
|
|
(4,908
|
)
|
|
|
10,678
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of intangible assets
|
|
|
(1,248
|
)
|
|
|
(9
|
)
|
Payment for purchase of properties, plant and equipment
|
|
|
(4,428
|
)
|
|
|
(27,870
|
)
|
Proceeds from sale of associates and other company
|
|
|
2
|
|
|
|
6
|
|
Other investing change
|
|
|
(139
|
)
|
|
|
(693
|
)
|
Net cash provided by investing activities of discontinued operations
|
|
|
5,867
|
|
|
|
1,686
|
|
Net cash provide by/(used in) investing activities (B)
|
|
|
54
|
|
|
|
(26,879
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net reimbursements/borrowings from bank overdrafts
|
|
|
80
|
|
|
|
(3,549
|
)
|
Net proceeds from/repayment of issuance of long-term debt
|
|
|
764
|
|
|
|
17,241
|
|
Net proceeds from/repayment of issuance of shareholders loan
|
|
|
804
|
|
|
|
4,939
|
|
Net cash provided by/(used in) financing activities of discontinued operations
|
|
|
3,335
|
|
|
|
(2,322
|
)
|
Net cash provided by Financing Activities (C )
|
|
|
4,983
|
|
|
|
16,309
|
|
Net Increase/(decrease) in Cash and Cash Equivalents (A+B+C)
|
|
|
129
|
|
|
|
108
|
|
Cash and cash equivalents at beginning of the year
|
|
|
312
|
|
|
|
204
|
|
Cash and cash equivalents at end of the year
|
|
€
|
441
|
|
|
€
|
312
|
|
SOUTHERN
STATES SIGN COMPANY
Notes to audited Consolidated Financial
Statements
For the years ended December 31, 2012
and 2011
(Euros, amounts in
thousands, unless otherwise indicated)
NOTE 1. ORGANIZATION
Southern States sign Company (“SOST”) is a
corporation incorporated in the state of Nevada. SOST operates through its wholly owned subsidiary, Conte Rosso &
Partners S.r.l. (“CR&P,” and together with SOST, the “Company”), which is a company incorporated
in Italy. Operations are carried out through its subsidiary, CR&P, and mainly consists of investment in the hospitality
industry.
On November 1, 2012,
the Company entered into the Exchange Agreement with CR&P, pursuant to which the CR&P Shareholders transferred all of the
issued and outstanding capital stock of CR&P to the Company in exchange for 21,250,000 newly issued shares of our common stock,
resulting in CR&P becoming a wholly owned subsidiary of the Company. For information regarding the Exchange Agreement, see
Item 1. – “Business” of this annual report. The transaction was accounted for as a reverse acquisition into a publicly traded shell corporation, and
accordingly, no goodwill was recorded. As a result of the reverse acquisition, the historical financial statements of Southern
State Sign Company for the periods prior to the date of the transaction are not presented.
As of
December
31, 2012 the consolidated operating subsidiaries are the following (those entities which are indented represent subsidiaries of
the entity under which they are indented):
Subsidiaries
|
|
|
|
|
% of voting
|
|
|
|
|
|
Name of Company
|
|
%
Ownership
|
|
|
capital
of subsidiary
owned by its parent
|
|
|
Location
|
|
Principal
activity
|
Southern States Sign Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A. Conte Rosso & Partners
S.r.l.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Aral Immobiliare
S.r.l.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Investment Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. C.R.&P. Service
S.c.a.r.l.
|
|
|
35.75
|
|
|
|
35.75
|
|
|
Italy
|
|
Group’s Exclusive financial services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Galzignano Terme Golf
& Resort S.p.A.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Masseria Santo Scalone
Hotel & Resort S.r.l.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Primesint S.r.l.
|
|
|
70.00
|
|
|
|
70.00
|
|
|
Italy
|
|
Investment Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Ripa Hotel & Resort
S.r.l.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality business
|
NOTE
2.
Summary of significant accounting policies
Basis of consolidation
All majority-owned
subsidiaries in which CR&P has both voting share and management control are consolidated. All significant intercompany accounts
and transactions are eliminated. Subsidiaries over which control is achieved through other means, such as stockholders agreement,
are also consolidated even if less than 51% of voting capital is held. The equity attributable to non-controlling interests in
subsidiaries is shown separately in the consolidated financial statements.
Basis of presentation
The consolidated financial
statements for the fiscal year ended December 31, 2012 and 2011 are prepared in accordance with generally accepted accounting principles
generally accepted in the United States of America (“US GAAP”).
The Euro is the functional
currency of all companies included in these consolidated financial statements.
The amounts
presented have been rounded to the nearest thousand.
Fair value
We disclose the fair
value of our financial assets and liabilities based on observable market information where available, or on market participant
assumptions. These assumptions which are subjective in nature involve matters of judgment, and, therefore, fair values cannot always
be determined with precision. Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (an exit price). “US GAAP”
establishes a valuation hierarchy for prioritizing the inputs and the hierarchy places greater emphasis on the use of observable
market inputs and less emphasis on unobservable inputs. When determining fair value, an entity is required to maximize the use
of observable inputs and minimize the use of unobservable inputs. The three levels of the hierarchy are as follows:
Level
One—Fair values based on unadjusted quoted prices in active markets for identical assets and liabilities;
Level Two—Fair values
based on quoted market prices for similar assets and liabilities in active markets, quoted prices in inactive markets for identical
assets and liabilities, and inputs other than quoted market prices that are observable for the asset or liability;
Level Three—Fair values
based on inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. Valuation
techniques could include the use of discounted cash flow models and similar techniques.
We utilize the market
approach and income approach for valuing our financial instruments. The market approach utilizes prices and information generated
by market transactions involving identical or similar assets and liabilities and the income approach uses valuation techniques
to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). For instances in which
the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been
determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of
the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair
value assets and liabilities within the fair value hierarchy.
The carrying values
of cash equivalents, accounts receivable, financing receivable – current, accounts payable and current maturities of long-term
debt approximate fair value due to the short-term nature of these items and their close proximity to maturity
Acquisitions
Assets acquired and
liabilities assumed in business combinations are recorded on our consolidated balance sheets as of the respective acquisition dates
based upon their estimated fair values at such dates.
The results of operations
of businesses acquired by us have been included in the consolidated statements of income (loss) since their respective dates of
acquisition. In certain circumstances, the purchase price allocations are based upon preliminary estimates and assumptions. Accordingly,
the allocations are subject to revision when we receive final information, including appraisals and other analyses. There were
no contingent payments, options, or commitments specified in any of our acquisition agreements.
Cash and cash equivalents
Cash and cash equivalents
comprise cash balances, cash on current accounts with banks, bank deposits and other highly liquid short-term investments with
original maturities of less than three months.
Accounts receivable & Allowance
for doubtful accounts
Accounts receivable
represents trade obligations from customers that are subject to normal trade collection terms, without discounts. The Company periodically
evaluates the collectability of its accounts receivable and considers the need to record or adjust an allowance for doubtful accounts
based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates.
The Company has determined that as of December 31, 2012 and 2011, € 0 and € 3,120 respectively, is the allowance
for doubtful accounts that was required. The Company does not require collateral to support customer receivables.
Investments
Investments in unconsolidated
affiliates over which we exercise significant influence, but do not control, including joint ventures, are accounted for using
the equity method.
Investments in unconsolidated
affiliates over which we are not able to exercise significant influence are accounted for under the cost method.
Property, plant and equipment
Property, plant and
equipment are stated at acquisition cost less accumulated depreciation and adjustments for impairment losses. Property, plant and
equipment also includes assets under construction and plant and equipment awaiting installation.
Subsequent expenditures
are capitalized only when they increase the future economic benefits embodied in an item of property, plant and equipment. All
other expenditures are recognized as expenses in the consolidated statement of income as incurred.
Capitalization ceases
when construction is interrupted for an extended period or when the asset is substantially complete.
Depreciation is charged
on a straight-line basis over the estimated remaining useful lives of the individual assets.
Depreciation commences
from the time an asset is put into operation. Depreciation is not charged on assets to be disposed of or on land. The range of
the estimated useful lives is as follows:
|
-
|
Buildings and constructions: 33 years
|
|
-
|
Machinery and equipment: 2 – 20
years
|
Long-Lived Assets
We evaluate the carrying
value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net
book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.
If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value
over the estimated fair value will be charged to earnings.
Fair value is based
upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals,
and, if appropriate, current estimated net sales proceeds from pending offers.
We evaluate the carrying
value of our long-lived assets based on our plans, at the time, for such assets and such qualitative factors as future development
in the surrounding area and status of expected local competition.
Assets and liabilities held for sale
In connection with
the strategy of focusing on hotel ownership we divested all of our non-hotel assets to a related party at cost. In the December
31, 2011 balance sheet, all assets and liabilities related to this spin off was shown as assets held for sale. All of these sales
were concluded at the end of December 31, 2012.
The realized value
of these assets was higher than the net asset carrying value.
Goodwill and Other Intangible Assets
We evaluate goodwill
for impairment on an annual basis, and do so during the last month of each year using balances as of the end of September and at
an interim date if indications of impairment exist. Goodwill impairment is determined by comparing the fair value of a reporting
unit to its carrying amount in a two-step process with an impairment being recognized only where the fair value is less than carrying
value. We define a reporting unit at the individual property level.
When determining fair
value in step one, we utilize internally developed discounted future cash flow models, third party appraisals and, if appropriate,
current estimated net sales proceeds from pending offers. Under the discounted cash flow approach we utilize various assumptions,
including projections of revenues based on assumed long-term growth rates, estimated costs and appropriate discount rates based
on the weighted-average cost of capital. The principal factors used in the discounted cash flow analysis requiring judgment are
the projected future operating cash flow, the weighted-average cost of capital and the terminal value growth rate assumptions.
The weighted-average cost of capital takes into account the relative weights of each component of our capital structure (equity
and long-term debt) and is determined at the reporting unit level. Our estimates of long-term growth and costs are based on historical
data, various internal estimates and a variety of external sources, and are developed as part of our routine, long-term planning
process. We then compare the estimated fair value to our carrying value.
If the carrying value
is in excess of the fair value, we must determine our implied fair value of goodwill to measure if any impairment charge is necessary.
The determination of our implied fair value of goodwill requires the allocation of the reporting unit’s estimated fair value
to the individual assets and liabilities of the reporting unit as if we had completed a business combination.
We perform the allocation
based on our knowledge of the reporting unit, the market in which they operate, and our overall knowledge of the hospitality industry.
Leasing
All lease agreements
of the Company and its subsidiaries as Lessees are accounted for as capital. The Company recognizes the asset and associated liability
on its balance sheet. Capital are capitalized at the beginning of the lease at the lower of the fair value of the leased property
and the present value of minimum lease payments. Each installment of the lease is apportioned between the liability and finance
charges so as to achieve an equal reduction in capital due for each payment made at constant rate on the remaining financial balances.
Derivative financial instruments
The Company uses derivative
financial instruments principally for the management of exposure to variable interest rates on long-term financing. All derivative
financial instruments are classified as assets or liabilities and are accounted for at trade date. The Company measures all derivative
financial instruments based on fair values derived from market prices of the instruments. Changes in the fair value of a derivative
that is significant and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset
or liability, are recorded in the income statement.
As of December 31,
2011 there was only one derivative instrument hedging the risk of variable interest rates (an “interest rate cap”),
the notional amount of is € 4 million. This derivative instrument hedges the risk from change of interest rate on a mortgage
loan facility with “bullet” repayments originally of € 8 million of which € 6.6 million is outstanding. This
derivative was divested as part of our plan to focus on hotels only as of September 30, 2012.
Shareholders loans
Shareholders loans
to the Group are all non-interest bearing. Italian law provides that the shareholders loans to a corporation ("S.r.l.")
are not preferred and their repayment is subordinated to other categories of debt. As a result all shareholder loans are classified
as non-current liabilities.
Revenue Recognition
Our revenues are derived from rent we receive
according to rental agreements we have in place with a Hotel Management Company. The majority of our rent is fixed and payable
monthly. The fixed agreements with set increasing rental rates is recognized on a straight line-basis. We recognize additional
revenue that is variable based on a percentage of the operating profit of our rented hotels only when contingency of the baseline
target has been met.
Taxes
Income taxes
We account for income
taxes to recognize the amount of taxes payable or refundable for the current year and the amount of deferred tax assets and liabilities
resulting from the future tax consequences of differences between the financial statements and tax basis of the respective assets
and liabilities. We recognize the financial statement effect of a tax position when, based on the technical merits of the uncertain
tax position, it is more likely than not to be sustained on a review by taxing authorities. These estimates are based on judgments
made with currently available information. We review these estimates and make changes to recorded amounts of uncertain tax positions
as facts and circumstances warrant.
We are subject to income
taxes under the tax laws of Italy. The Company accounts for uncertainty in income taxes in accordance with Topic 740, “Income
Taxes,” of the Accounting Standards Codification (“ASC 740”). ASC 740 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance with generally accepted accounting principles
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in an income tax return. ASC 740 also provides guidance on recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. During the years ended December 31, 2012 and
2011, the Company recognized no adjustments for uncertain tax positions.
The Company recognizes
interest and penalties relating to uncertain tax positions in income tax expense. There is no interest or penalties relating to
tax positions during the years ended December 31, 2012 and 2011.
The Company is also
subject to examination in Italy where it has filed tax returns for the years 2009 through 2011.
Stockholder’s equity
As of December 31,
2012, after the reverse merger with Southern State Sign Company was consummated on November 1, 2012, 39,526,261
shares were outstanding.
As of December 31,
2011, the share capital was one share, fully paid €98,000. Mr. Antonio Conte and Ms. Maddalena Olivieri each contributed 50%
of the share capital of CR&P. In accordance with Italian law, this share is registered with the Register of Companies at the
Italian Chamber of Commerce. In the last quarter of 2011, Mr. Conte waived repayment of a shareholder’s loan of € 25.9
million, which consequently has been recognized as Additional Paid-In Capital.
After the reverse merger,
the former shareholders of CR&P owned 84.17% of the outstanding shares of SOST.
NOTE 3.
Related
parties receivables and payables
Related parties current
receivables and payables relate to the majority shareholder, Mr. Antonio Conte, both directly and indirectly. As of December 31,
2012 the amounts of related parties current receivables and payables mainly refers to CR&P Service, S.r.l., a subsidiary incorporated
in 2012 that manages Group’s cash facilities in cash pooling also for other companies owned by Mr Conte but not consolidated
in CR&P (related parties). During the fiscal year 2012, the operations of CR&P Service, S.r.l. did not generate any material
impact on the consolidated equity and statement of operations of CR&P.The amount shown as non-current receivables as at December
31, 2012 relates to a receivable from Masoledo, S.r.l., owned by Mr. Conte, referred to the sale of the non-hotel business.
The amount shown as
receivables at December 31, 2011 relates primarily to Mr. Antonio Conte.
NOTE 4. ASSETS HELD FOR SALE
The following are the assets held for resale
referred to the non-hospitality businesses:
€’000
Assets held for sale
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Roma - Via Bruxelles, building
|
|
|
-
|
|
|
€
|
3,235
|
|
Petrochemical and power plant (ENITAL S.r.l.)
|
|
|
-
|
|
|
|
14,284
|
|
Porto Cervo (OT), Sardinia, Building
|
|
|
-
|
|
|
|
833
|
|
Porto Rotondo (OT), Sardinia, Building
|
|
|
-
|
|
|
|
421
|
|
Fregene (RM) - Via Capo d'Orlando, building
|
|
|
-
|
|
|
|
1,456
|
|
Trieste - Loc. Villa Opicina, industrial building
|
|
|
-
|
|
|
|
2,523
|
|
Milano, via Azario, building
|
|
|
-
|
|
|
|
7,205
|
|
Anzio (RM) - Loc. via della Cannuccia, building
|
|
|
-
|
|
|
|
2,428
|
|
Pisa, via San Martino, building
|
|
|
-
|
|
|
|
2,700
|
|
Other discontinued assets, net
|
|
|
-
|
|
|
|
22,068
|
|
Total
|
|
|
-
|
|
|
€
|
57,153
|
|
The properties mentioned above and the
related liabilities of a total amount of € 42,294 have been divested by CR&P in September, 2012.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, included
in continuing operations, comprises :
€’000
Property, plant and equipment
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Hotel Ripa building, plant and equipment
|
|
€
|
42,654
|
|
|
€
|
41,623
|
|
Terme di Galzignano golf, building, plant and equipment
|
|
|
39,229
|
|
|
|
40,420
|
|
Via Buozzi, Rome, building
|
|
|
3,300
|
|
|
|
3,300
|
|
San Giuliano Milanese (Milan), Via Benaco, building
|
|
|
555
|
|
|
|
550
|
|
Ostuni (BR) - Hotel Masseria Santo Scalone building
|
|
|
5,013
|
|
|
|
-
|
|
Other properties, plant and equipment
|
|
|
-
|
|
|
|
1,259
|
|
Less accumulated depreciation
|
|
|
(21,580
|
)
|
|
|
(20,055
|
)
|
Total, net
|
|
€
|
69,171
|
|
|
€
|
67,097
|
|
The properties owned
by the Company as of December 31, 2012 has been recently tested for impairment, by committing a specialized appraisal firm, which
provided updated appraisals of their fair value. The methodologies applied in those appraisals mainly consists in the market value
method and the discounted future cash flows method. The appraisals show fair value amounts of each property significantly higher
than the relevant carrying amount.
NOTE 6. MAJOR ACQUISITIONS AND DIVESTMENTS
In line with the strategy
to expand operations in the hospitality area, on January 1, 2011 the CR&P acquired 97.25% of Terme di Galzignano S.p.A (“TdiG”).
The cost of acquisition of TdiG was €23,266 million. It was paid with cash of €4.90 million and assumption of €18,276
million of debt.
The primary asset of
TdiG is a resort spa located in the Euganean Hills, a few miles from Padua. The complex consists of four four-star hotels, a nine
hole golf course with putting green, driving range and clubhouse, a revitalizing center and spa, six indoor and outdoor pools,
two sports pools, six tennis clay courts, a jogging and shopping center. The complex is surrounded by 350,000 square meters of
parkland.
The balance sheet effects
of the acquisition are summarized below:
The purchase price
allocation for the acquisition of Terme di Galzignano S.p.A. is as follows;
€’000
|
|
January 1, 2011
|
|
Current maturity of long-term debt
|
|
€
|
6,539
|
|
Long-term debt
|
|
|
11,737
|
|
Cash payments
|
|
|
4,990
|
|
Total purchase price
|
|
€
|
23,266
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Property, plant and equipment
|
|
€
|
25,580
|
|
Net working capital
|
|
|
1,205
|
|
Less Bank overdrafts
|
|
|
848
|
|
Less Provisions
|
|
|
195
|
|
Less Gain on bargain purchase
|
|
|
2,476
|
|
Total
|
|
€
|
23,266
|
|
The gain of €2,476
million on bargain purchase is recognized in the statement of operations for the year ended December 31, 2011.
Guinean Energy Enterprises S.A. (Republic
of Guinea) incorporation
Guinean Energy Enterprises
S.A. was incorporated in April 2012 and the Group has a 95% indirect interest (71.25 calculating as equity ratio method) in its
issued share capital held through West African Enterprises Ltd., the Group’s african sub-holding.
The Guinean Energy
Enterprises S.A. was established to seek to exploit opportunities in the Republic of Guinea and in particular opportunities in
oil palm plantations, construction and operation of power plants, real estate development and construction and operation of hotels.
As of September 30, 2012, this subsidiary was divested.
In line with the strategy
to expand operations in the hospitality area, on September 29, 2012 the Company acquired 100.00% of Masseria Santo Scalone Hotel
& Resort S.r.l. (“Masseria”) from a related party (Masoledo, S.r.l., owned by Mr. Conte and his family). The cost
of acquisition of Masseria was €23,266 million. It was paid with cash of €4.90 million and assumption of €18,276
million of debt.
The primary asset of
Masseria is a resort spa located in Ostuni, Pulia, in the south of Italy. The complex is restructuring.
The balance sheet effects
of the acquisition are summarized below:
The purchase price allocation for the
acquisition of Masseria Santo Scalone Hotel & Resort S.r.l.. is as follows;
€’000
|
|
May 29, 2012
|
|
Current maturity of long-term debt
|
|
€
|
2,898
|
|
Related parties payable
|
|
|
300
|
|
Cash payments
|
|
|
10
|
|
Total purchase price
|
|
€
|
3,208
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Property, plant and equipment
|
|
€
|
4,903
|
|
Net working capital
|
|
|
(1,705
|
)
|
Cash
|
|
|
10
|
|
Total
|
|
€
|
3,208
|
|
There is no Goodwill
recognized on the acquisition of Masseria.
Antonio S.r.l. spin-off
It has been decided
to split the subsidiary Antonio S.r.l. (“Antonio”) into two entities so that each can focus on its own operations.
Antonio has transferred its industrial property assets and operations into a newly created company, CRP Immobiliare S.r.l. (“CRPI”),
focused on industrial operations, and has distributed the shares of this new company to the existing shareholders of Antonio on
a pro rata basis.
As a result CRPI will
acquire total assets with a book value as at December 31, 2011 of €15.15 million and liabilities of €10.12 million. The
equity of CRPI (assets less liabilities transferred) will amount to €5.03 million.
Set out below are details
of assets and liabilities transferred:
TRANSFERRED ASSETS
|
|
€/000
|
|
Tangible assets
|
|
|
|
Cars
|
|
|
44
|
|
|
|
|
|
|
Investment in suibsidiaries, associates and other companies
|
|
|
|
|
Comunicazioni Globali S.r.l.
|
|
|
3
|
|
Sacomar S.r.l. in liquidazione
|
|
|
5
|
|
Investimenti Immobiliari S.r.l.
|
|
|
5
|
|
Aros S.r.l.
|
|
|
100
|
|
Intermedia Finance S.p.A.
|
|
|
372
|
|
Life insurance policy
|
|
|
250
|
|
Total Investment in suibsidiaries, associates and other companies
|
|
|
735
|
|
|
|
|
|
|
Assets held for resale
|
|
|
|
|
Properties held for resale
|
|
|
4,933
|
|
|
|
|
|
|
Receivables
|
|
|
|
|
Receivables from Aral rl
|
|
|
5,464
|
|
Receivables from I.IMM.RI SRL
|
|
|
3,757
|
|
Receivables from Aros Srl
|
|
|
215
|
|
Total receivables
|
|
|
9,436
|
|
|
|
|
|
|
TOTAL TRANSFERRED ASSETS
|
|
|
15,148
|
|
TRANSFERRED LIABILITIES Financial debt
|
|
€/000
|
|
Long term debt
|
|
|
1,501
|
|
Bank overdraft
|
|
|
496
|
|
Total financial debt
|
|
|
1,997
|
|
|
|
|
|
|
Other current liabilities
|
|
|
|
|
Shareholder loans
|
|
|
1,129
|
|
Payables to Ripa S.r.l.
|
|
|
475
|
|
Payables to Preneste Re srl
|
|
|
5,654
|
|
Total other current liabilities
|
|
|
7,258
|
|
|
|
|
|
|
Other non-curent liabilities
|
|
|
|
|
Advance payment on property
|
|
|
169
|
|
Notes paybles
|
|
|
700
|
|
Total other non-current liabilities
|
|
|
869
|
|
|
|
|
|
|
TOTAL TRANSFERRED LIABILITIES
|
|
|
10,124
|
|
|
|
|
|
|
TOTAL TRANSFERRED EQUITY
|
|
|
5,024
|
|
Divestment of all non-hospitality businesses
In September 2012,
the Company divested all of it non-hotel assets to a related party company controlled by the shareholders. The total assets and
liabilities divested was $ 52.9 million and $ 44.7 million, respectively.
NOTE 7. GOODWILL
The table below shown
the breakdown of goodwill related to continuing operations
:
€’000
|
|
Owned and leased hotel
|
|
|
Others owned properties
|
|
|
Total
|
|
Balance as of January 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Activity during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Activity during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
In the fiscal years
ended December 31, 2012 and 2011, the company did not have any new goodwill or any impairment on existing goodwill.
NOTE 8. OTHER NON-CURRENT ASSETS
The table below shown
the breakdown of other non-current assets, related to continuing operations:
€’000
|
|
December 31, 2012
|
|
December 31, 2011
|
|
Related parties non-current receivables
|
|
€
|
8,890
|
|
|
|
-
|
|
Investment in other companies
|
|
|
13
|
|
|
|
15
|
|
Other financial assets
|
|
|
-
|
|
|
€
|
4
|
|
Accruals and deferred costs
|
|
|
375
|
|
|
|
323
|
|
Other intangible assets
|
|
|
1,257
|
|
|
|
-
|
|
Other non-current assets
|
|
€
|
10,535
|
|
|
€
|
342
|
|
NOTE 9. BANK OVERDRAFTS AND LONG-TERM
DEBT
Amounts of financial
debt (related to continuing operations) due to non-related parties are:
€’000
Mortgage & Capital Leases
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Mortgage loan on property
|
|
€
|
23,836
|
|
|
€
|
21,795
|
|
Leases
|
|
|
29,573
|
|
|
|
30,850
|
|
Total
|
|
€
|
53,409
|
|
|
€
|
52,645
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Current portion of debt
|
|
€
|
11,221
|
|
|
€
|
9,276
|
|
Long term debt
|
|
|
42,188
|
|
|
|
43,369
|
|
Total
|
|
€
|
53,409
|
|
|
€
|
52,645
|
|
BANK OVERDRAFT
The following tables
sets out the main terms and conditions and the outstanding overdraft balances as of December 31, 2012 and 2011 of the financial
debts referred to continuing operations:
€’000
Company
|
Type
of debt
|
Object
|
Collateral
|
Maturity
(year)
|
Interest
rate
|
Installments
frequency
|
Outst.
balance as of Dec. 31, 2012
|
Outst.
balance as of Dec. 31, 2011
|
CONTE
ROSSO & PARTNERS, S.R.L.
|
BANK
OVERDRAFT
|
Cash
facility
|
-
|
n.a.
|
-
|
-
|
2,051
|
2,018
|
TERME
DI GALZIGNANO, S.r.l.
|
BANK
OVERDRAFT
|
Cash
facility
|
-
|
n.a.
|
-
|
-
|
297
|
288
|
TERME
DI GALZIGNANO, S.r.l.
|
BANK
OVERDRAFT
|
Cash
facility
|
-
|
n.a.
|
-
|
-
|
102
|
97
|
TERME
DI GALZIGNANO, S.r.l.
|
BANK
OVERDRAFT
|
Cash
facility
|
-
|
n.a.
|
-
|
-
|
217
|
197
|
TERME
DI GALZIGNANO, S.r.l.
|
BANK
OVERDRAFT
|
Cash
facility
|
-
|
n.a.
|
-
|
-
|
304
|
290
|
|
|
|
TOTAL
|
|
|
|
2,970
|
2,890
|
Outstanding non-current loans
as of December 31, 2012 and December
31, 2011
€’000
Company
|
Type of debt
|
Object
|
Collateral
|
Outst. balance as of Dec. 31, 2012
|
Outst. balance as of Dec. 31, 2011
|
CONTE ROSSO & PARTNERS, S.R.L.
|
CAPITAL LEASE
|
Building purchase
|
Headquarter property, via B.Buozzi, Rome, Italy
|
2,665
|
2,762
|
CONTE ROSSO & PARTNERS, S.R.L.
|
UNSECURED LOAN
|
Cash facility
|
-
|
688
|
1,000
|
ARAL IMMOBILIARE, S.r.l.
|
MORTGAGE LOAN
|
Building purchase
|
Building, Porto Cervo (Olbia), Italy
|
438
|
455
|
MASSERIA SANTO SCALONE, S.r.l.
|
MORTGAGE LOAN
|
Building purchase
|
Hotel and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
2,388
|
-
|
MASSERIA SANTO SCALONE, S.r.l.
|
MORTGAGE LOAN
|
Building purchase
|
Hotel and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
510
|
-
|
PRIMESINT, S.r.l.
|
CAPITAL LEASE
|
Building purchase
|
Building, Via Benaco, San Giuliano (Milan), Italy
|
342
|
343
|
RIPA HOTEL & RESORT S.r.l.
|
CAPITAL LEASE
|
Building purchase
|
Hotel property in Rome, Italy
|
26,712
|
27,748
|
RIPA HOTEL & RESORT, S.r.l.
|
MORTGAGE LOAN
|
Building purchase
|
Bulding, via San Martino, Pisa, Italy
|
-
|
451
|
RIPA HOTEL & RESORT, S.r.l.
|
MORTGAGE LOAN
|
Building purchase
|
Bulding, via San Martino, Pisa, Italy
|
-
|
717
|
RIPA HOTEL & RESORT, S.r.l.
|
MORTGAGE LOAN
|
Building purchase
|
Bulding, via San Martino, Pisa, Italy
|
-
|
379
|
TERME DI GALZIGNANO, S.r.l.
|
MORTGAGE LOAN
|
Building purchase
|
Hotel property in Galzignano (Padova), Italy
|
14,362
|
13,793
|
TERME DI GALZIGNANO, S.r.l.
|
MORTGAGE LOAN ("bullet" reimbursement plan)
|
Cash facility
|
Hotel property in Galzignano (Padova), Italy
|
5,304
|
5,000
|
|
|
|
TOTAL
|
53,409
|
52,645
|
The following table sets out the significant
term and future payments of long-term loans:
|
|
|
|
|
|
|
|
€’000
|
|
|
|
|
|
|
|
|
|
Installments maturity as of December 31
|
|
Company
|
|
Type of debt
|
|
Object
|
|
Collateral
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
CONTE ROSSO & PARTNERS, S.R.L.
|
|
CAPITAL LEASE
|
|
Building purchase
|
|
Headquarter property, via B.Buozzi, Rome, Italy
|
|
€
|
99
|
|
|
€
|
103
|
|
|
€
|
108
|
|
|
€
|
113
|
|
|
€
|
118
|
|
CONTE ROSSO & PARTNERS, S.R.L.
|
|
UNSECURED LOAN
|
|
Cash facility
|
|
-
|
|
|
333
|
|
|
|
355
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
MASSERIA SANTO SCALONE, S.r.l.
|
|
MORTGAGE LOAN
|
|
Building purchase
|
|
Hotel and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
|
|
177
|
|
|
|
186
|
|
|
|
194
|
|
|
|
203
|
|
|
|
212
|
|
MASSERIA SANTO SCALONE, S.r.l.
|
|
MORTGAGE LOAN
|
|
Building purchase
|
|
Hotel and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
|
|
510
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PRIMESINT, S.r.l.
|
|
CAPITAL LEASE
|
|
Building purchase
|
|
Building, Via Benaco, San Giuliano (Milan), Italy
|
|
|
21
|
|
|
|
22
|
|
|
|
23
|
|
|
|
24
|
|
|
|
25
|
|
RIPA HOTEL & RESORT S.r.l.
|
|
CAPITAL LEASE
|
|
Building purchase
|
|
Hotel property in Rome, Italy
|
|
|
594
|
|
|
|
621
|
|
|
|
649
|
|
|
|
678
|
|
|
|
709
|
|
TERME DI GALZIGNANO, S.r.l.
|
|
MORTGAGE LOAN
|
|
Building purchase
|
|
Hotel property in Galzignano (Padova), Italy
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
|
|
|
|
TOTAL
|
|
€
|
3,113
|
|
|
€
|
2,666
|
|
|
€
|
2,353
|
|
|
€
|
2,397
|
|
|
€
|
2,444
|
|
The following table sets out the amounts
of the assets held and used by capital lease:
|
|
Asset Balances at
|
|
|
Asset Balances at
|
|
Class of property
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Building
|
|
€
|
42,580
|
|
|
€
|
42,580
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(5,775
|
)
|
|
|
(4,498
|
)
|
|
|
|
|
|
|
|
|
|
Net balance
|
|
€
|
36,805
|
|
|
€
|
38,082
|
|
The following table sets out the schedule
of the undiscounted and discounted future minimum lease payments:
Minimum lease payments (future and net present value)
|
Year ending December 31:
|
|
€’000
|
|
2013
|
|
€
|
2,012
|
|
2014
|
|
|
2,012
|
|
2015
|
|
|
2,012
|
|
2016
|
|
|
2,012
|
|
2017
|
|
|
2,012
|
|
Later years
|
|
|
23,071
|
|
Purchase option
|
|
|
11,967
|
|
Net minimum lease payments
|
|
|
45,098
|
|
Less: Amount representing interest
|
|
|
(15,525
|
)
|
Present value of net minimum lease payments
|
|
€
|
29,573
|
|
As of December 31, 2012, there are no unused
credit lines.
NOTE 10. SHAREHOLDER’S LOANS
In order to strengthen
the Group’s capital position and taking into account future financial commitments to enable the real estate investment and
development projects to be progressed, in the last quarter of 2011, Mr. Conte waived repayment of shareholder’s loans of
€ 25.9 million.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company and certain
subsidiaries are defendants in legal actions in the normal course of business. Based on the advice of legal counsel, management
believes that the amounts recognized and recorded as debt provisions or asset negative adjustments are sufficient to cover probable
losses in connection with such actions.
The risk provisions
or negative adjustments are recognized when in accordance with the opinion of legal counsel the liability is probable and measurable.
NOTE 12. INCOME TAXES
Tax losses carryforwards
Under Italian
tax law the operating loss carryforwards available for offset against future profits can be used indefinitely. Operating
loss carryforwards are only available for offset against national income tax, in the limit of 80% of taxable annual income
(this restriction does not apply to the operating loss incurred in the first three years of the Company’s activity,
which are therefore available for 100% offsetting).
Our operating losses
carried forward and available for offset against future profits as of December 31, 2012 and December 31, 2011 is €651 and
€9.264, respectively.
Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Components of the Company’s
deferred tax asset are as follows as of December 31, 2012 and December 31 2011:
€’000
|
|
2012
|
|
|
2011
|
|
Deferred tax asset – net operating loss carryovers
|
|
|
179
|
|
|
|
2,548
|
|
Less Valuation allowance
|
|
|
(179
|
)
|
|
|
(2,548
|
)
|
Net deferred tax asset
|
|
€
|
-
|
|
|
€
|
-
|
|
The Company periodically
evaluates whether it is more likely than not that it will generate sufficient taxable income to realize the deferred income tax
asset. The ultimate realization of this asset is dependent upon the generation of future taxable income sufficient to offset the
related deductions. At the present time, management cannot presently determine when the Company will be able to generate sufficient
taxable income to realize the deferred tax asset; accordingly, a valuation allowance has been established to offset the asset.
The reconciliation
of income tax benefit attributable to continuing operations computed at the Italian statutory tax rates to the income tax benefit
recorded is as follows:
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Income tax at Italian statutory rate of 27.5%
|
|
€
|
2,369
|
|
|
€
|
1,110
|
|
Increase in valuation allowance
|
|
|
(2,369
|
)
|
|
|
(1,110
|
)
|
Income tax benefit
|
|
€
|
-
|
|
|
€
|
-
|
|
NOTE 13. SUBSEQUENT EVENTS
On February 8, 2013, Primesint, S.r.l. (the
“
Primesint
”), a partially owned subsidiary of the Company, entered into a preliminary agreement with ES Group
S.r.l. (the “
ES Group
”), pursuant to which the Primesint has committed to purchase from ES Group, either directly
or through a special purpose vehicle, the business of the Radisson Blu ES. Hotel (the “
Radisson
”), which shall
include the tangible and intangible goods and contractual and employment agreements of the Radisson, no later than April 30, 2013,
for an aggregate purchase price of 4,500,000.00 euros.
On February 8, 2013,
the Primesint also entered into a preliminary agreement with Mavip S.r.l. (“
Mavip
”), pursuant to which the Primesint
has committed to purchase from Mavip, either directly or through a special purpose vehicle, the underground premises of the Radisson
no later than April 30, 2013, for an aggregate purchase price of 3,025,000.00 euros (the “
S1 Agreement
”).
The S1 Agreement also grants the Buyer the option to purchase from Mavip all rights related to the financial lease agreement, dated
as of January 26, 2007, by and among Mavip and a group of Italian leasing companies including Unicredit Leasing s.p.a., Ubi Leasing
s.p.a. and Medioleasing s.p.a., for an aggregate purchase price of 5,000,000.00 euros plus taxes as required by law.
On March 10, 2013,
Ripa Hotel & Resort Srl, a wholly-owned subsidiary of the Company and Ku Hotels entered into amendments to the April 4, 2009
management agreement and lease agreement. The amendment to the management agreement provides that Ku Hotels shall pay to Ripa an
annual rent of €240,000 for the years of 2013 and 2014, €360,000 for the years of 2015 and 2016 and €480,000 for
the year of 2017 to lease and manage the business operations of the Ripa Hotel. The amendment to the lease agreement provides that
Ku Hotels shall pay an annual rent to Ripa of €1,800,000 for the years of 2013 and 2014, €2,000,000 for the years of
2015 and 2016 and €2,400,000 for the year of 2017 to lease the property on which the Ripa Hotel business is conducted.
On March 10, 2013,
Ripa and Ku Hotels entered into an agreement, pursuant to which Ku Hotels is obligated to perform future maintenance on the leased
property in the amount of €2,500,000 as consideration for amending the April 4, 2009 agreements.
On March 25, 2013,
Aral Immobiliare, S.r.l., a wholly owned subsidiary of the Company, finalized a statutory merge of its 100.00% owned subsidiary
Ripa Hotel & Resort, S.r.l., with no impact on the consolidated financial statement for the fiscal year ending December 31,
2013.