LINAMAR HUNGARY RT. INTERIM REPORT FOR THE YEAR ENDED DECEMBER 31, 2004 LINAMAR HUNGARY RT. Orosháza, 5901 Csorvási út 27.
To the Shareholders LINAMAR HUNGARY RT. Page 4.1 Sales for the year ended December 31, 2004 were HUF 20,717 million. This is a slight decrease compared to sales of HUF 20,886 million for the previous year. The sales decrease of 0.8% is the net result of a HUF 400 million decrease in the agricultural equipment and general machinery segment and an increase of HUF 230 million in the automotive component and precision machining segment. The net earnings for the year of 2004 were HUF 541 million compared to HUF 298 million for the previous year, an increase of 81.9%. The increase is mainly related to foreign exchange. Last year the Company experienced an exchange loss on loans of HUF 471 million; in the current year the Company recorded an exchange gain on loans of HUF 340 million causing a significant improvement in earnings. On July 25 th General Motors, announced the cancellation of the CVT transmission program. Linamar Hungary Rt. has not been producing any regular CVT production components for the year to date. Therefore Linamar Hungary Rt. and its parent company, Linamar Corporation entered into commercial negotiations with its customer and negotiations were finished in December, 2004. The financial settlement of this agreement served to partially offset some of the losses on this program. The management of LINAMAR HUNGARY RT. has ensured that all of the data and information that is necessary to properly evaluate the Company s position has been included in this interim report and that all of the data and information is true and factual. János Ivanics General Manager György Furár Chief Financial Officer
LINAMAR HUNGARY RT. Notes to the Financial Statements For the year ended December 31, 2004 and 2003 (NON AUDITED) Page 4.2 1. Management prepared these financial statements in accordance with generally accepted accounting principles using the historical cost basis of accounting and approximations and estimates based on professional judgement. These interim financial statements contain all adjustments that management believes are necessary for a fair presentation of the Company's financial position, results of operations and changes in cash flows. 2. The accounting policies used in preparing these interim financial statements are consistent with those used in preparing these financial statements. These statements should be used in conjunction with the Company's most recent annual financial statements. Beginning with the second quarter of 2004, the Company is presenting its financial statement (balance sheet, profit and loss statement and cash-flow report) in the format presented in its 2003 Annual Report. 3. The share capital of the Company as at December 31, 2004 was 8,580,000 units (December 31, 2003 8,016,000). 4. Segmented Sales Information Year Ended December 31 2004 2003 Export Sales Automotive Components and Precision Machining Europe EU Member Countries 10,674,882 7,843,162 North America 1,489,929 1,603,062 Europe non EU Member Countries 24,422 565,484 Other Export 526,191 398,568 Total Automotive Components and Precision Machining Export Sales 12,715,424 10,410,276 Agricultural Equipment and General Machinery Segment Europe EU Member Countries 3,396,436 3,078,451 North America 1,507,850 1,590,293 Europe non EU Member Countries 143,377 500,385 Other Export 77,935 - Total Agricultural Equipment and General Machinery Segment Export Sales 5,125,598 5,169,129 Total Export Sales 17,841,022 15,579,405 Domestic Sales Automotive Components and Precision Machining 2,368,982 4,444,440 Agricultural Equipment and General Machinery Segment 507,046 862,590 Total Domestic Sales 2,876,028 5,307,030 Total Sales 20,717,050 20,886,435
MANAGEMENT'S ANALYSIS AND OTHER REQUIRED DISCLOSURE Page 4.3 Explanation of the main changes in the balance sheet The tangible fixed assets have decreased by HUF 1,015 million from December 31, 2003, resulted from the lower level of investments in new automotive and precision machining programs. Accounts receivable decreased by 9.6% to HUF 2,961 million compared to the year of 2003. The decrease in accounts receivable balances is mainly related to the more effective collection of receivables. Cash, bank balances and short-term deposits increased by 20.5%, from HUF 841 million to HUF 1,013 million due to the large payments from customers received in December. The level of inventories was 25.5% higher at December 31, 2004 compared to the previous year. Inventories increased from HUF 3,333 million to HUF 4,185 million. Most of the HUF 852 million increase occurred in the agricultural and general machinery segment, where the inventories increased as a result of the material price increase and due to the higher volume of orders for the first half of 2005. The Company s short-term bank loans decreased by 65.4% from HUF 3,668 million to HUF 1,270 million compared to last year. The decrease was in connection with a financial decision, where a new long-term loan for operating funds was taken in the second quarter with favourable terms and conditions and the proceeds were used to reduce short term debt. A new long-term loan of HUF 984 million was taken to finance the repayment of a loan for operating funds in the fourth quarter. Also, the customer payments received in December due to the effective collection were used for repayment of short-term loans. The current portion of long-term debt contains the government supported interest-free loans of HUF 23.7 million repayable in 2005, which is a significant decrease compared to HUF 1,788 million of last year. During 2004 repayments were made and a loan was extended in the amount of HUF 984 million. The Company's long-term debt increased from HUF 943 million to HUF 2,834 million. The increase resulted from the receipt of long-term loans for operating funds in the second and fourth quarter and a loan for capital investment taken during the year. Accounts payable increased by 21.5%, from HUF 2,775 million to HUF 3,371 million. This increase results from the extended supplier payments and is related to higher inventory levels.
Page 4.4 Explanation of the main changes in the statement of earnings Sales LINAMAR HUNGARY RT. s sales decreased by 0.8% to HUF 20,717 million in 2004 compared to sales of HUF 20,886 million in 2003. Changes by business segment, as discussed below, can be seen under item 4 of the Notes to the Financial Statements. Automotive component and precision machining sales increased by HUF 230 million, or 1.5%, compared to the same period of 2003, while agricultural and general machinery sales decreased by HUF 399 million, or 6.6%. Segmented Sales are as follows: 72.8% automotive component and precision machining and 27.2% agricultural equipment. The automotive component and precision machining export sales increased by HUF 2,305 million or 22.1%, mainly as a result of the increasing proportion of Common Rail systems parts and components, increased production of components due to the higher demand in the industrial generators market, and a new project for transmission components which is in a ramp-up phase. Domestic automotive component and precision machining sales were HUF 2,369 million, which decreased by HUF 2,075 million compared to the same period last year. The main reason for the decrease is that the sales from domestic automotive jobs in the ramp-up phase could not compensate for the sales loss regarding the customer s cessation of releases on the CVT project. Domestic agricultural sales decreased by 41.2% from HUF 863 million to HUF 507 million compared to last year. The lower demand resulted both from the modified government incentive system due to the EU accession and from the more competitive import due to the strong HUF. Cost of sales LINAMAR HUNGARY RT. s cost of sales increased from 86.5% of sales to 89.6%. The higher level of cost of sales resulted mainly from two factors. First, in the agricultural and general machinery segment, the raw material price increases (primarily steel) at the beginning of the second quarter caused extra costs which continued and only a proportion of it could be passed on to the Company s customers with a delay in time. The negative impact of the raw material price increase effected the automotive segment as well from the mid-year point onward. Second, the impact of the cessation of CVT orders meant fixed costs continued without the corresponding revenue. In particular, the depreciation of the CVT equipment not used and the continuing labour cost on this project were significant unrecovered expenses for the Company, partially offset by the financial compensation received from the customer.
Page 4.5 Selling, general and administrative costs In 2004 selling, general and administrative costs amounted to HUF 1,702 million or 8.2% of sales, compared to HUF 1,717 million or 8.2% of sales for 2003. The selling, general and administrative costs remained at the level of previous year. Profit from operations Operating earnings of HUF 861 million last year decreased to HUF 252 million this year. Operating earnings as a percent of sales decreased from 4.1% to 1.2%. The increase in cost of sales had the most significant impact upon operating earnings due to higher material costs and costs associated with the cancelled CVT program. Exchange gain (loss) The Company experienced an exchange gain of HUF 264 million in 2004, compared to an exchange loss of HUF 297 million in the same period of 2003. The exchange gain was mainly related to the Euro denominated loans of the Company as a result of the strengthening of the Forint. In 2004 HUF 340 million exchange gain, while in 2003 HUF 471 million exchange loss was accounted for on loans. Net earnings The Company's net earnings for the year of 2004 were HUF 541 million, or 2.6% of sales an increase of 81.9% compared to the HUF 298 million in the year 2003, or 1.4% of sales. The most significant impact upon net earnings was the exchange gain. Explanation of the main changes in the cash-flow statement In the year ended December 31, 2004, the purchases of fixed assets amounted to HUF 1,311 million. The cash payments during the period related to purchases of fixed assets totalled HUF 1,460 million. These investments mainly related to the automotive components and precision machining business segment.
Page 4.6 Information on shares Share options, previously issued under the Company s Share Option programme and representing 564,000 units, were exercised in December 2003. In December of 2003, the Company s Board of Directors decided in favour of a closed share capital increase to satisfy the required issuance of shares under the Company s share option program. After the registration in the Court of Registry on February 19, 2004 the Company s share capital increased by 564,000 units, each of HUF 100 nominal value, to HUF 858,000,000. The Company does not currently hold any of its own shares and has not held any in the past. The Company, fulfilling its obligations by law, started the dematerialization procedure for its shares. The dematerialization of the shares of Linamar Hungary Rt. was done on December 1, 2004. During the procedure altogether 885 share certificates were not submitted. There is a possibility for the owners of the non-submitted shares to give these printed shares to Linamar Hungary Rt. In this case the Company transfers the dematerialized shares to the owner s account. Nullified shares can be submitted to György Furár CFO at Linamar Hungary Rt. (5900 Orosháza, Csorvási út 27.) on workdays, from 8:00 to 16:00 o clock (Phone number: 06-68/411-203, e-mail: gyorgy.furar@linamar.com). As per the decision of the Board of Directors the sale of dematerialized shares, which subsitute the nullified, non submitted shares for dematerialization, may begin on March 01, 2005 and lasts until May 31, 2005. Commitments As at December 31, 2004, the Company has outstanding commitments for fixed assets under purchase orders and contracts of approximately HUF 87 million. Major events The building expansion of 5,700 square meters and the building of a new 1,200 square meters office area at PPM Division have both been completed, and the opening ceremony was held on January 29, 2004. The Company held its Annual General Meeting on March 26, 2004. At the extraordinary General Meeting held on September 17, 2004 the Company amended its Articles related to the dematerialization and appointed a new member to the Supervisory Board. Other information Organizational structure On January 5, 2004 the following organizational changes came into effect. Orosháza Automotive Division and Linamar Products Division have been consolidated under the name of Linamar Products Division (LPD).
Page 4.7 Orosháza Agricultural Division and Linamar Hungary Rt.'s Corporate Office have been consolidated under the name of OROS Division. Senior officers Mr. George W. Sims, chairman of the Supervisory Board resigned from the Supervisory Board and at the extraordinary General Meeting held on September 17, 2004 Mr. Keith Wettlaufer Chief Financial Officer, Treasurer & VP Strategic Development of Linamar Corporation, was appointed to the Supervisory Board until May 31, 2005. Senior management On January 5, 2004 the following changes came into effect. The mandate of István Prozlik, Operations Manager of LPD has been withdrawn and he now works in another position at Linamar Hungary Rt. The new Operations Manager of LPD is Gábor Fehér. Effective January 31, 2004 the Operations Manager of OROS Division, István Borsos, no longer works for Linamar Hungary Rt. Share Option Program There are no outstanding share options under the share option program of the Company.
Page 4.8 PK1. General information about financial data Audited Consolidated Yes X X No Accounting principles Hungarian IFRS X Other
Page 4.9 PK2. Consolidated companies Name Equity/Registered Interest held Voting right 1 Classification 2 Capital (%) - - - - - 1 Voting rights for decision making at the consolidated company s General Meeting 2 Full (L); Jointly Managed (K); Associated (T)
Page 4.10 PK3. Balance Sheet (expressed in thousands of Hungarian Forints) Year Ended December 31 2004 2003 Change % ASSETS Non-Current Assets Property, plant and equipment 10,482,828 11,465,864 (8.6) Intangible assets 33,568 65,639 (48.9) 10,516,396 11,531,503 (8.8) Current Assets Inventories 4,184,947 3,333,420 25.5 Trade receivables 2,960,897 3,275,133 (9.6) Due from related parties 306,058 297,173 3.0 Recoverable value added tax 497,666 905,165 (45.0) Other current assets 343,510 133,357 157.6 Cash and cash equivalents 1,013,036 840,647 20.5 9,306,114 8,784,895 5.9 Total Assets 19,822,510 20,316,398 (2.4) SHAREHOLDERS EQUITY Share capital 858,000 801,600 7.0 Capital reserve 5,026,774 4,500,562 11.7 Accumulated profit 5,421,288 4,879,797 11.1 11,306,062 10,181,959 11.0 LIABILITIES Non-Current Liabilities Long-term bank borrowings 2,834,471 943,256 200.5 Deferred government grants 163,516 172,540 (5.2) 2,997,987 1,115,796 168.7 Current Liabilities Short-term bank borrowings 1,269,970 3,667,519 (65.4) Current portion of long-term bank borrowings 23,700 1,787,844 (98.7) Trade payables 3,230,654 2,669,894 21.0 Due to related parties 140,453 105,049 33.7 Other current liabilities 853,684 788,337 8.3 5,518,461 9,018,643 (38.8) Total Liabilities 8,516,448 10,134,439 (16.0) Total Equity and Liabilities 19,822,510 20,316,398 (2.4)
Page 4.11 Statement of Changes in Shareholders Equity for the year ended December 31, 2003 and 2004 (Expressed in Thousands of Hungarian Forints) Share Capital Capital Reserve Accumulated Profit Total Reserves Balance as at 31/12/2002 801,600 4,500,562 4,582,127 9,884,289 Capital Increase - - - - Result for the period - - 297,670 297,670 Balance as at 31/12/2003 801,600 4,500,562 4,879,797 10,181,959 Share Capital Capital Reserve Accumulated Profit Total Reserves Balance as at 31/12/2003 801,600 4,500,562 4,879,797 10,181,959 Capital Increase 56,400 526,212-582,612 Result for the period - - 541,491 541,491 Balance as at 31/12/2004 858,000 5,026,774 5,421,288 11,306,062
Page 4.12 PK4. Profit and Loss Statement (expressed in thousands of Hungarian Forints except per share figures) Year Ended December 31 Change % Three Months Ended December 31 2004 2003 2004 2003 Sales 20,717,050 20,886,435 (0.8) 4,879,265 4,582,083 Cost of Sales 18,557,953 18,075,850 2.7 4,494,268 4,168,619 Gross Profit 2,159,097 2,810,585 (23.2) 384,997 413,464 Selling expenses 783,963 732,944 7.0 247,089 227,671 General expenses 501,368 474,301 5.7 214,317 177,839 Administrative expenses 416,880 510,095 (18.3) 50,474 51,810 Other operating income/expenses 226,851 275,561 (17.7) 11,910 50,696 Government grants (21,750) (43,118) (49.6) 10,875 (10,875) Profit from Operations 251,785 860,802 (70.7) (149,668) (83,677) Exchange (loss) / gain from financial operations - net 471,381 (346,208) (236.2) 141,133 (138,208) Interest expense - net (181,675) (216,924) (16.2) (49,649) (58,945) Profit before Tax 541,491 297,670 81.9 (58,184) (280,830) Income taxes - - - - - Net Income 541,491 297,670 81.9 (58,184) (280,830) Earnings per Share Basic HUF 63 HUF 37 HUF (7) HUF (35)
Page 4.13 PK5. Cash-Flow Report (expressed in thousands of Hungarian Forints) Year Ended December 31 2004 2003 Net Income 541,491 297,670 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,119,033 1,813,315 Provision for warranty and other obligations (59,740) 115,417 Net (gain)/loss on sale of property, plant and equipment 66,159 (33,515) Changes in operating assets and liabilities: Increase in inventories (851,527) (572,330) (Increase)/decrease in accounts receivable 314,236 (744,085) (Increase)/decrease in due from related parties (8,885) 25,884 (Increase)/decrease in tax receivable 407,499 (340,632) Increase in other current assets (210,153) (104,611) Increase in accounts payable 709,149 1,561,788 Increase/(decrease) in due to related parties 35,404 (724,899) Increase in other current liabilities 116,063 116,822 Net cash provided by operating activities 3,178,729 1,410,824 Cash-flows from investing activities Purchase of property, plant and equipment and intangibles (1,459,703) (2,828,444) Proceeds on sales of property, plant and equipment 141,229 58,974 Net cash used in investing activities (1,318,474) (2,769,470) Cash-flows from financing activities Proceeds from issue of shares 582,612 - Repayments of long-term debt-interest free loan (68,140) (68,140) Proceeds from new long-term loans 2,222,706 917,777 Proceeds from other short-term loans 1,874,494 3,115,403 Repayment of other short-term loans (4,272,043) (2,092,184) Repayments of long-term loans investment loan (2,027,495) (487,653) Net cash provided from /(used in) financing activities (1,687,866) 1,385,203 Net increase in cash and cash equivalents 172,389 26,557 Cash and cash equivalents at the beginning of the period 840,647 814,090 Cash and cash equivalents at the end of the period 1,013,036 840,647
Page 4.14 PK6. Significant off-balance sheet items 1 Description (HUF million) Value Casting die 10.0 Robots 14.2 Flame cutting machine 7.1 Strain relief furnace 15.0 Machining center 40.7 1 Any financial liabilities of material importance in respect of financial evaluation not reflected in the balance sheet (e.g. surety, guarantees given, liabilities under lien, etc.)
Page 4.15 RS1. Ownership structure, Ratio of Holdings Description of owner Total equity Opening Closing at 1 st January % Qty % Qty Domestic institution/company 6.78 543,265 17.25 1,479,897 Foreign institution/company 87.59 7,021,214 64.23 5,510,810 Domestic individual 1.74 140,927 10.03 860,729 Foreign individual 0 0 0 0 Employees, senior officers 3.89 310,594 8.43 723,144 Treasury shares 0 0 0 0 Government held owner 0 0 0 0 International Development 0 0 0 0 Institutions Other 0 0 0 0 TOTAL 100.00 8,016,000 100.00 8,580,000 Notes: 1. All of Linamar Hungary Rt.'s shares are listed on the Budapest Stock Exchange. 2. Each shares entitles the shareholder to one vote.
Page 4.16 RS2. Volume (qty) of treasury shares held in the year under review 1 January 31 March 30 June 30 September 31 December Company - - - - - Subsidiaries - - - - - TOTAL - - - - -
Page 4.17 RS3/1. List and description of shareholders with more than 5% (at the end of the period) in reference to listed series Name Nationality 1 Activity 2 Quantity Interest (%) Remarks Linamar Corporation K C 5,030,800 58.63 strategic investor Each share entitles the shareholder to one vote. Linamar Corporation s headquarters are located in Guelph, Ontario, Canada, along with a significant percentage of the Company s manufacturing capacity. Linamar Corporation is a global manufacturer of precision machined components, assemblies and castings primarily for automotive industry. 1 Domestic (B), Foreign (K) 2 Custodian (L), Government (Á), International Development Institute (F), Institutional (I), Corporate (C), Individual (M), Employee, Senior Officer (D) RS3/2. List and description of shareholders with more than 5% (at the end of the period) in reference to the total share capital The listed series corresponds to the total share capital, information can be found on the RS3/1 table.
Page 4.18 TSZ2/1. Changes in the headcount (number of persons) employed by the End of reference period Current period opening Current period closing Company 1,701 1,701 1,620 Group n.a. n.a. n.a.
Page 4.19 TSZ3. Senior officers, strategic employees Type 1 Name Position Beginning of assignment End/ termination of assignment No. of shares held IT Frank J. Hasenfratz Chairman of the Board 04.15.1999 05.31.2005 315,000 IT Linda Hasenfratz Director 04.15.1999 05.31.2005 97,000 IT Tibor Antalpéter Independent Director 04.15.1999 05.31.2005 - IT Márton Havasi Director 04.15.1999 05.31.2005 58,944 IT Csaba Havasi Director 04.15.1999 05.31.2005 - IT János Ivanics General Manager, 01.16.1992 05.31.2005 250,200 Member of the Board FB Keith Wettlaufer Chairman of the 09.17.2004 05.31.2005 - Supervisory Board FB Rezső Bándy Dr. Member 04.15.1999 05.31.2005 - FB Sándor Csontos Member 04.15.1999 05.31.2005 - SP György Furár Chief Financial 06.30.1997 UNDEFINED 2,000 Officer SP Zoltán Laskai Human Resources 03.06.2002 UNDEFINED - Manager Own share property (pcs) TOTAL: 723,144 1 Employee in strategic position (SP), Board Member (IT), Supervisory Board Member (FB)
Page 4.20 Company address: 5900 Orosháza Csorvási út 27. Fax: 68-412-988 ST1. Extraordinary reports published in the period under review Date Place of Subject matter, brief summary publication 02.12.2004 Magyar Tőkepiac Extraordinary briefing, that Mr. István Borsos does not work anymore at Linamar Hungary Rt. 02.12.2004 Magyar Tőkepiac Interim Report for the quarter ended December 31, 2003 02.17.2004 Magyar Tőkepiac Linamar Hungary Rt. s information about the change in ownership structure. 02.19.2004 Magyar Tőkepiac Linamar Hungary Rt. s information about the change in ownership structure. 20.02.2004 Magyar Tőkepiac The Registry Court registered Linamar Hungary Rt. s share capital raise. 02.23.2004 Magyar Tőkepiac Notice of the Annual General Meeting 26.02.2004 Magyar Tőkepiac Extraordinary briefing about the Memorandum and Articles of the Company 02.27.2004 Magyar Tőkepiac Extraordinary briefing about change of shares in the top management 03.29.2004 Magyar Tőkepiac Resolutions of the Annual General Meeting 03.29.2004 Magyar Tőkepiac Publication of Statutory Report 03.31.2004 Magyar Tőkepiac Extraordinary briefing about three members of Linamar Hungary Rt. s Board of directors sold their Linamar Hungary Rt. shares 04.28.2004 Magyar Tőkepiac Briefing about completion of the Annual Report 04.29.2004 Magyar Tőkepiac Publication of the Annual Report 05.13.2004 Magyar Tőkepiac Interim Report for the I. Quarter ended March 31, 2004. 08.13.2004 Magyar Tőkepiac Interim Report for the II. Qarter ended June 30, 2004 08.16.2004 Magyar Tőkepiac Notice of the Extraordinary General Meeting 09.21.2004 Magyar Tőkepiac Resolutions of the Extraordinary General Meeting 09.21.2004 Magyar Tőkepiac, Napi Gazdaság, Cég közlöny Information about the dematerialization of the Company s printed shares
11.12.2004 Magyar Tőkepiac Interim Report for the III. Qarter ended September 30, 2004 Page 4.18 12.03.2004 Magyar Tőkepiac, Napi Gazdaság 12.03.2004 Magyar Tőkepiac, Napi Gazdaság 12.17.2004 Magyar Tőkepiac, Világgazdaság 12.23.2004 Magyar Tőkepiac, Világgazdaság Resolution of the Board of Directors Announcement on the conversion of printed securities issued by the Company into dematerialized shares. Disclosure of change in share ownership of a person having special relationship with Linamar Hungary Rt. Disclosure of change in share ownership of a person having special relationship with Linamar Hungary Rt.